The Beauty of Knowing (8): The Curious Case of the Balloon Deflating with a bang
Everything seems to be random and chaotic in this random and chaotic world. But under all this there is always one recurring motif, or a kind of pattern. Whatever happens things keep wanting to be stress free in a sort of equilibrium condition. This balance of energy is happening everywhere and all the time. You name it, this phenomenon explains it: from the homeostasis of our body to the various elemental cycles of our planet to the climatic patterns causing currents and cyclones to radioactivity to even the Big Bang! Everywhere something goes from a higher position to a lower position to even things out, sort of.
What has all this to do with economics? And more importantly the bubble bursts they keep speaking about? Well, everything! For example, we shall take the definition literally, only replacing bubble with a similar substitute.
Basically, when air is dumped into a ballon, the pressure inside the system is higher than the surroundings. Keep it like that for a while, and slowly it starts to deflate. Because air is flowing from high pressure to low pressure zone. See, didn’t I say? Now then, keep dumpings more and more air into the balloon, and at one point it deflates with a bang! That is, it bursts. Now keeping all this in mind let us shift our focus to economic bubbles.
Imagine there is bowl in which there are three layers of differently coloured balls. Suddenly someone comes and takes a ball from the upper layer (say, red) and claims that this is very fantastic and proves its speciality in some way and goes about telling others about his discovery; what will happen? First, people get curious, and then a more curious thing called gossip or discourse does the rest. Suddenly everyone wants that red ball. Since it is in short supply the cost of it insanely rises. In no time, with such rapidity all the balls get sold out. But the buzz has not faded off! Someone jelous of another guy, from whom he wanted to purchase a red ball, but was not able to persuade him to sell it at a reasonable price, comes in and says, since all these balls have come from the same bowl, the second layer must be effective too, and there is a second thrill and flow of cash and before you know it the third layer has also gone the same way. Now there are no balls left in the bowl, but are all in the hands of the various owners who think they have a highly sought after pocession that they could cash in whenever they wanted to. Suddenly someone wants to sell a red ball for some reason or the other and quotes an insane price, but to his astonishment and dismay three is no one ready to shell out that much cash. With no other go he reduces the rate of his red ball seeing no way out. The guy who has bought it has a mouth and this tale has its day on the backs of gossip and discourse and behold! The positions have drastically changed. There is high supply but hardly any demand, for, the takers know that if they refuse to buy the price has to go down, and so it keeps going down till it is the same price as any other ball, causing such huge loss to those ‘lucky’ few who had managed to grab a ball when there was high demand. There, you see, this is an example of economic balloon having deflated with a bang! For, if the inflation had been steady, so would have been the deflation!
This is the fundamental idea behind any economic crisis. US has had two such serious instances. The former, very acute and prolonged, needed a guy in the stature of FDR to stop the bleeding, while the latter, which happened only recently, gave Obama quite a lot to think about.
The ball-example might seem ridiculous, but broaden the horizon and throw in a little spices like oppertunity cost (that which could be done instead of doing the thing that everyone is doing, though there have been symptoms in the form of diminishing returns) and extraneous variables (those things that no one wants to take responsibility for because everyone is doing it), you can find that even the most complex subjects like unemployment and global warming seem to be nothing but supply and demand precariously leading us to a bottle-neck. Man, I do hope the scenario doesn’t come to deflating with a bang!
The one thing that could be done to escape this confusion is to find a way to shield ourselves from the temptations that force themselves into our mind in the name of popular trends and opinions. It seems if ten people say something beautifully and do something differently the whole of others are infatuated it and do it or expected to do it! The way I try to escape is, I imagine myself a good while in the future (say, twenty years) and see if the decision I am taking now is going to give me satisfaction then. Then again, life is never simple, and that is why it is crazy interesting. Thing is, if causing problems are interesting for us, finding solutions are more so! To err is human; to remedy is also human!
