When the Arab Spring was taking place, I expected nothing good to come from it. My study of history has taught me that revolutions rarely change things as advertised. It is far easier to unite people in opposition to something than to rally people around a positive program. So revolutions are usually brought about by a broad coalition of people who actually have widely disparate views of what they want after they bring the old order down. Once the existing order is brought down, there is inevitably a power vacuum. That power vacuum will eventually (usually after two or three years) be filled by the group that is best organized, most ruthless, and most patient. As things are unfolding in Egypt, it would appear that the Muslim Brotherhood best fits that description. Here is an article from the Jerusalem Post, written by an American academic who has been living in Egypt and observing events close up: http://www.jpost.com/MiddleEast/Article.aspx?id=269806.

Another article reports on a speech given May 1 by Egyptian cleric Safwat Higazi, a leader of the Muslim Brotherhood. Before a large crowd, he announced one of the goals of the organization. The Muslim Brotherhood is working to create a United States of Arabs, the capital of which will be Jerusalem. This is a bit problematic in that Jerusalem is currently the capital of the Jewish state of Israel, and the Jews are showing no interest in moving out. The article reports the cleric’s solution to this problem:

“The capital of the Caliphate—the capital of the United States of the Arabs,” he continued, “will be Jerusalem, Allah willing!”

Not long afterward, Higazi reiterated the campaign promise, but this time in more unequivocal language: “Our capital shall not be Cairo, Mecca, or Medina. It shall be Jerusalem, Allah willing. Our cry shall be: ‘Millions of martyrs march toward Jerusalem! Millions of martyrs march toward Jerusalem!’”

The crowd responded in kind: “Millions of martyrs march toward Jerusalem! Millions of martyrs march toward Jerusalem! Millions of martyrs march toward Jerusalem!”

Chilling stuff. You can read the entire article at http://www.jewishpress.com/news/israel/muslim-brotherhood-launches-presidential-campaign-the-capital-of-the-united-states-of-the-arabs-will-be-jerusalem/2012/05/10/.

Another article, this one an opinion piece, presents a survey of what is happening throughout the Middle East, focusing on each country’s attitude toward Israel. The events of the Arab Spring allowed pro-Islamist and anti-Israel sentiments to come forward in each state. But this just fits into a pattern of a resurgence of Islamic fundamentalism and an accompanying anti-Israel sentiment in almost all of the countries of the region. This article presents a helpful survey of the attitudes of most of the countries in the Middle East: http://www.jpost.com/Opinion/Op-EdContributors/Article.aspx?id=269795.

A final article is related to the tensions between Israel and Iran. Sayyed Hassan Nasrallah, the leader of the Hezbollah (the Muslim group that, with the help of Syria and Iran, has virtually gained control of Lebanon) made a speech a few days ago. The occasion for the speech was the completed reconstruction of an area in south Lebanon that was destroyed in the last conflict between the Hezbollah and Israel in 2006. He used this speech to warn Israel against any acts of provocation. He announced that the Hezbollah now have the technical ability to reach any part of Israel with missiles. He then made a very ominous statement:

“The days when we were forced from our homes and they were not forced from theirs are over,” Nasrallah said, to cheers from a crowd of supporters watching his speech.

“The days when we were afraid and they were not are over,” he said. “And we say to them: The time has come when we will remain and you will be the ones who disappear.”

You can read the entire article at http://www.jpost.com/MiddleEast/Article.aspx?id=269614.

Israel lives in a rough neighborhood.

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During my time at college, Gutenberg’s emphasis on introspection helped me clarify what things are important to me in life. While reading how other people throughout history approached their lives, I was challenged to articulate what I believe and how I wanted to live my life. For example, Plato’s account of Socrates’ defense in the Apology was memorably helpful. I was struck by Socrates’ emphasis on the importance of nurturing the human soul. He believed that one takes care of his soul by becoming humble about what he does not know and then pursuing the truth. To Socrates, success in life was not a socio-economic status, as people believed back then and still believe today. Rather, he thought that there was more value in furthering one’s own growth and that a successful person was someone with a “healthy” soul. The Apology, along with the other Socratic accounts, challenged our culture’s understanding of success and helped me better form my idea of what a successful life should look like. This reading, and other books like it in the Great Books curriculum at Gutenberg, was pivotal for bringing up issues that helped me form a better idea of what was actually important to me in life.

This clarification has not only changed my outlook on what is important in life, but it has also impacted the direction of my life post-college. Firstly, it has played a key role in helping me make life-changing decisions. An example of this would be my husband’s and my decision to remain in Eugene after I graduated. While we have discussed moving to Portland for better job opportunities, we have decided to remain here because we still want to be a part of our post-Gutenberg community. We want our friends and mentors from school to continue playing a role in our development as human beings. While staying in Eugene does restrict our level of income and career opportunities, we value our personal growth and the closeness of the relationships that we have here more than having expendable income.

Beyond helping me make some of those tough, life-changing decisions, my Gutenberg education has also redirected some of my interests in life. Since graduating from college, I have become increasingly interested in the history of ideas and application of sciences in the area of nutrition. As a teenager, when my mom started cooking organic and whole foods, I had balked at the idea of anything new on my plate. This basically limited my diet to highly processed, industrial food. After going to Gutenberg and reevaluating what was important to me, I found myself wanting to know and implement good nutritional practices. In the last few years, I’ve gone from being the “Captain Crunch eating teenager” that I used to be, to the “Michael Pollan reading, gardening, backyard chicken farmer” that I am now. I may not be reading Kant, Hegel, or Hume every day, but my experience at Gutenberg helped me reevaluate my own eating habits after reading about the food beliefs of others, and I now look forward to continuing my studies in food and nutrition.

When I first decided to attend Gutenberg College, I expected that it would be, at the very least, an interesting program. It turned out that Gutenberg was not only interesting, but also life changing. I became more aware of what I wanted in life through the challenge of many other peoples’ opinions. In turn, this awareness has impacted the decisions I have made since graduating and has influenced my interests in positive ways. I am sure that two years from now I will continue to have a great respect for the importance of the liberal arts and have even more positive changes to show as a result of my time at Gutenberg.

The irony is this: Paul was a creative genius. While he viewed himself as nothing more than a mouthpiece, in fact he is one of the most profound and insightful thinkers that I have ever read. (In the interests of full disclosure, I am an active member of the Paul of Tarsus fan club. And I am more familiar with Paul’s writings than any other writings in the history of ideas.) It never ceases to amaze me how profound, insightful, accurate, and thorough are his interpretation and application of the Scriptures upon which he bases his understanding of the gospel. It is not uncommon for me, when I have finally gotten to the bottom of an argument that Paul has made, to find myself exclaim, “Paul, you’re a genius!”

But as intelligent and capable as Paul was, he did not use what had been given him to impress. When one rightly understands Paul, one never gets the sense that Paul was trying to dazzle. He was never out to display his intellectual prowess and have people notice how brilliant he was. He was a humble man with one, simple goal: to explain as clearly as he could the gospel of Jesus to others. It was not his place, nor his ambition, to come up with something of his own. He only wanted to pass on to others what had been given to him. One never sees him taking any pride in what he knew and understood. His understanding was not his creation. He did not invent it. He did not discover it. It was a gift that had been given to him. His sole responsibility was to share what had been given to him with others.

I cannot help but think that the history of Christianity would have gone very differently had others coming after him been as humble and faithful as Paul was. Christianity was invented precisely because they were not. Too many, in the generations that followed Paul, were intent on being clever rather than faithful. Too many were tempted to interject into their teaching and theology insights of their own instead of passing on faithfully that which had been given to them by the apostles and the Scriptures. It was the ongoing series of “additions” and “creative insights” that gradually transformed the revelation of Jesus, the Messiah, into the Christian religion.

I admire Paul all the more when I understand what he did not do. He did not succumb to the evil desire to take pride in what he had. Paul, more than any other man except Jesus, possessed a deep and accurate grasp of the ultimate truth from God. I see no evidence that Paul ever tried to turn that fact into a basis of self-glorification. He cared deeply that people be persuaded of what he knew and understood—not out of some misplaced need to have people acknowledge him but rather out of a desire that others, too, might come to believe the truth. Paul was as confident as any man ever could be that he knew the truth; and if his truth was rejected, he grieved—not because he felt personally rejected or slighted but because of the folly of the one who rejected it

God, help me be as humble and faithful as Paul, who emulated your Son, Jesus!

First, from the first moment of our life, we are “creatures of the world” in a most profound and fundamental sense. Being of the world in this sense is normal and not to be repudiated. In Kierkegaardian terms, “we are the world” [italics mine] in the sense that our very nature and existence is made of the same created stuff of which the rest of the world is made. The problem comes when we make evil choices. We “creatures of the world” become “worldly creatures” when the active posture of our souls is “in and of the world” and against God.

Second, the human soul is “a contradiction.” God created the human soul to be simultaneously finite and eternal. Kierkegaard points out this tension at the center of our daily human experience: we are finite, limited, earthbound creatures who were created for and presently long for infinite or eternal things. In short, he states that the human soul is “at contradiction with itself.”

The writer of Ecclesiastes affirms and explains the nature of this paradox; he tells us that God created us as mortal, physical creatures with “eternity in our hearts.” God’s plan was to create a being “in His image” and to give this being the profound task of looking to Him to find the answer to this finite-eternal contradiction. We can see in the promise of the fulfilled gospel, made known through Jesus and His teaching, that God planned this painful contradiction from the beginning. God’s gracious salvation is the only solution to our deeply felt need and incompleteness. God will take us from being profoundly incomplete creatures to being those filled with His life and glory. The completion of our incomplete, unfulfilled natures involves the dissolution of the finiteness of the creature into the eternality for which the creature was originally created. In these terms, the God-given task that the writer of Ecclesiastes ponders poetically is the human creature’s “gaining his soul.”

How do we gain our souls in our everyday experience? Luke 21:19 offers an important clue. Jesus told his disciples they would “gain their souls” through hupomone—patience, endurance, perseverance. So we, too, must gain our souls through an enduring, continually proven “believing” in the gospel. Against the attractions and securities the world offers, we must count on the love and mercy of God to supply our needs in the trials of life.

We gain our own souls away from the world through patient, enduring faith in our God and the promise of His gospel. Ultimately, only two persons have active “contact” with our souls. We do, as active owners of our own souls. And God does, as the transcendent Creator and Sustainer of all existence. Our souls belong to us, but they are also God’s. Only the gospel of Jesus promises the transformation of soul that we are here calling “gaining the soul.”

The soul of every human creature has a telos, an end or purpose. The meaning of telos is illustrated by the relationship between an acorn and an oak tree: all the oak tree will ever be is contained in the tiny acorn; thus the telos of the acorn is to become the completed and mature oak tree. Similarly, the soul God gives each person at birth has a telos to become what God created it to become. For the chosen believer, that telos is to become a mature, glorious creature whose nature and character God is well pleased to keep eternally in fellowship with Him. “Gaining one’s soul” is the process by which humans, through perseveringly choosing to live life in light of the truth of the gospel, fulfill the telos for which God created them.

So, sadly, Hunger Games does not make the list. But my blog-hits will increase if I mention it a few more times. Hunger Games, that is. The book, Hunger Games, and the movie, Hunger Games. Did I mention Hunger Games?

Enough joking. Let’s get to the horror.

This Top Ten list is about dystopias. What is a dystopia? The evil brother of a utopia. In utopias, life is lovely; the prince and princess live happily ever after. In dystopias, life is short, nasty, and brutish; the prince is a bloated bureaucrat, and the princess a drug-addled insect.

Here’s a sad fact: All but one of these dystopias were written in the last 100 years.

10. Clockwork Orange, Anthony Burgess (1962). Orange makes my list for one reason–the language. Burgess invented a language to describe the ultra-violent adventures of his thugs.

Our pockets were full of deng, so there was no real need from the point of view of crasting any more pretty polly to tolchock some old veck in an alley and viddy him…

Translation: The thugs were not short of money, so there was no need for robbery; they would simply wreak havoc for fun.

I debated striking this book from my list because, well, it is ultra-violent and ultra-sexual. (Placing a book in my list doesn’t mean I actually endorse reading it.) Despite the grim subject, it’s a great dystopia for foreshadowing a society that prefers socializing criminals to redeeming them.

9. The Time Machine, H.G. Wells (1895). One of the earliest books of science-fiction, it launched two trends for future fiction: (1) time travel and (2) fears of a dying Earth.

8. Animal Farm, George Orwell (1945). The first of three “children’s books” on my list (although none are really for children). Each animal in Animal Farm represents a different character in Stalin’s rise during the Russian Revolution. What begins as a revolution culminates in totalitarianism where “all animals are equal, but some animals are more equal than others.”

7. The Giver, Lois Lowry (1993). A children’s book that poses a very adult question: Is ignorance bliss? The year is 2065, and society has chosen a philosophy: “Sameness.” Jonas (age 12) is selected to become the one person allowed to see and memorize the past. But in memorizing the past, Jonas realizes that his society is happy because they are ignorant of the past. What ought he do? Remain in his shallow life or run away to a full life? (Thanks, N.R., for recommending The Giver.)

6. Lord of the Flies, William Golding (1955). A children’s adventure story, an anthropological discourse, a retelling of the Garden of Eden. Your first exposure to the dystopia genre probably happened your junior year when you read this classic. –Sigh, poor Piggy.

5. The Children of Men, P.D. James (1992). The sperm count for males has–for unexplained reasons–dropped to zero. Now, 27 years later, the last human born was just killed in a pub brawl. A team of dissidents (“The Five Fishes”) approach the main character, Theo, with a mission: Help smuggle a pregnant woman to safety.

4. Fahrenheit 451, Ray Bradbury (1953). Every year, some politico cites Fahrenheit 451 in his screed against library censorship. Ironically, the screed demonstrates the politico hasn’t read Fahrenheit 451. The enemies in Fahrenheit are not censors, but us. We the people chose info-slush over Hamlet, Moby Dick, and Paradise Lost.

One of Fahrenheit’s keenest insights is this: Great books disturb the soul. In the most moving scene, the hero (Montag) forces his wife, Mildred, and her friend to listen to a poem. The friend bursts into tears but is unable to explain why she was so moved. Mildred screams at Montag for reading, “See–see what happens!”

3. The Road, Cormac McCarthy (2006). Father and son crawl across a post-apocalyptic landscape avoiding starvation, cannibalism, and rape. They seek the sea, while keeping “the fire”–the hope where the good are rewarded and the evil punished. The Road is a primordial search for spiritual goodness in the desert.

2. 1984, George Orwell (1949). Written at the height of totalitarianism, with the brilliant first line: “It was a bright cold day in April, and the clocks were striking thirteen.” 1984 foretold a world where truth is banished, history burned, and Big Brother searches for the tiniest hint of “thoughtcrime.”

1. Brave New World, Aldus Huxley (1932). Huxley admired 1984 but suggested that future dictators would smarten up. Brave New World tells what will happen under smarter dictators: Soft hedonism would replace blunt force.

[Orwell] foresaw rule by terror. What I believe is that, in the future, dictators will find, as the saying goes, “You can do everything with bayonets but sit on them.” If you want to preserve your power indefinitely, you have to get the consent of the ruled. And this they will do, partly by drugs … and these new techniques of propaganda … by bypassing the rational side of man and appealing to his subconscious and his deeper emotions.

Anyone who lived in the shadow of Hitler and Stalin fears 1984. Their children ought to fear Brave New World. To see the Huxley interview in 1958 by the (recently deceased) Mike Wallace, click here.

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These top ten lists were inspired by the occasional debates among Gutenberg students about their favorite great books. Which is a better novel, Tolstoy’s Anna Karenina or Dostoevsky’s Brothers Karamzov? Which is Shakespeare’s best play, Hamlet or King Lear? Who do you more identify with, Plato or Aristotle?

Yes, we have such debates. We are bookish, nerdy, and classicist. Just like others who studied the classics–folks like Winston Churchill, James Madison, Dorothy Sayers, Oliver Wendell Holmes, Hannah Moore, C.S. Lewis, John Milton, Søren Kierkegaard, William Gladstone…

Silent Spring, published in 1962, questioned the indiscriminate spraying of DDT, an insecticide, in the U.S. It questioned the logic of releasing large amounts of chemicals into the environment without understanding where these chemicals go and what their effect on human health and the environment is. The result was the rise of the environmental movement, and DDT was ultimately banned in 1972.

Since it was published in 1962, Silent Spring has received mixed reviews by scientists. In an editorial in the New York Times titled, “Fateful Voice of a Generation Still Drowns Out Real Science,” John Tierney expresses as clearly as anyone the view of scientists who do not agree with Rachel Carson. As he sees it, the human costs of banning DDT were horrific in poor countries when malaria increased after the ban. He believes the DDT ban brought about by Carson’s book substantially increased human deaths. In his view, banning DDT was reprehensible, and the science expressed in Silent Spring is bad science.

While I agree it was wrong to ban DDT (Rachel Carson also did not agree with the ban), I do not agree with the position articulated by John Tierney and others scientists. I will explain why.

DDT was used extensively during World War II to de-louse soldiers, and it was used to control mosquito populations, especially in malarial zones. It was cheap, effective, and considered safe. DDT is effective against the species of mosquito that carry malaria. How then could anyone object to using DDT to try to eradicate malaria or to the science that developed and tested it?

I will begin by listing the detrimental features of DDT when it is used to try to eradicate mosquitoes that carry malaria:

• DDT is a wide-spectrum insecticide. It kills the good insects as well as the bad. For instance, it kills virtually all species of aquatic insects that are the primary food source for fish. On land, it kills virtually all insects, such as bees, that pollinate plants. In short, it can disrupt food supplies.
• DDT and its break-down product, DDE, last for decades in soils and streams. Once applied, it can remain viable for decades.
• DDT “bio-accumulates” as it passes up the food chain. DDT sprayed at a low concentration in water is taken up by algae and passed up through zoo-plankton to fish and then to mammals and birds. DDT that is eaten is stored in fat tissues and in the milk of mammals. Birds and mammals, including man, can have concentrations of DDT in fat tissues and milk that are ten to a hundred times higher than the initial concentration sprayed. For instance, in 2005, the Center for Disease Control reported that DDT was still found in the blood of virtually all U.S. citizens, although at a lower concentration than the previous decade, even though DDT was banned in 1972. Also, the levels of DDT in salmon in the Columbia River are high enough that pregnant women are warned not to eat more than one serving per month of Columbia River salmon.
• DDT is classified as moderately toxic in acute toxicity (one-dose) tests for humans and the environment. To test for “safe” levels of DDT in water, varying concentrations of DDT are added to a series of aquaria with an equal number of fish in each. The experiment is aimed at determining the DDT concentration when fifty percent of the fish die. This is DDT’s “D50” concentration. A safety margin is added to the D50 concentration, and the resulting concentration is established as the safe concentration of DDT in water. This is the standard method for determining safe levels for any chemical in water. For humans, similar tests were conducted with rats in cages.
• DDT has been linked to diabetes in chronic (continuous low doses) toxicity tests (e.g., http://www.ehponline.org/docs/2009/0800281/abstract.html).
• DDT is less successful in eliminating the mosquitoes that carry malaria in the tropics, where they can breed year-round. Using DDT in the tropics thus leads to strains of mosquitoes that are resistant to DDT.

John Tierney and a number of scientists believe the benefits of DDT spraying outweigh these detrimental effects. I am not so sure. While I acknowledge that spraying DDT can lead to short-term declines in the mosquitoes carrying malaria, I am not sure that even the short-term benefits are worth it. Spraying DDT will cause increased reproductive problems, and high levels of DDT in mother’s milk will increase infant health problems. DDT can also potentially disrupt food supplies.

Furthermore, the long-term effects of continued DDT spraying will result in mosquitoes developing a resistance to DDT; it will no longer be effective. And that is a very serious problem. DDT should be saved in reserve for periodic serious outbreaks of malaria. It should not be used to try to eradicate malaria; not only will it  not be successful, but it will become ineffective against malarial mosquitoes when we do need to use it.

In the end, I believe that which side of this issue you are on depends largely on your philosophy of science. To the proponents of spraying, like John Tierney, science has made great strides in understanding nature. We have the necessary knowledge to control nature for the benefit of man. The scientific tests which isolate the levels of DDT from all other factors to determine the acute toxicity levels are viewed with objectivity and certainty. With this information, then, we can confidently move forward.

I am not so optimistic. I believe that nature is more complex than we can ever know. I am not so confident that we really understand the effects of DDT on humans or the environment. While I acknowledge that the acute (one-dose) toxicity tests are useful to get a general idea of the toxicity of a chemical, I find the chronic (long-term low-dose) toxicity tests less compelling. Over what range of concentrations should the tests be run and for how long? However, my biggest concern with chronic toxicity tests is that they don’t test the interaction between DDT and other pesticides. What is the interaction between DDT and other pesticides at low, long-term doses? Thousands of chemicals have been developed and used daily since World War II. How do they interact with each other? Also, what compounds do they break down into, and how do these chemicals interact with each other? We have little or no information about most of these interactions. Without this understanding, it seems to me that our knowledge is pretty limited with regard to pesticides and their effects. In short, as an ecologist, I do not believe that these simple reductionistic laboratory tests can deliver the knowledge necessary for us to confidently control nature for our benefit.

Hoover was philosophically opposed to federal interference in the economy. He believed that the appropriate role for the federal government was to encourage and help facilitate private industry to take steps on behalf of the public good. He was amazingly good at doing this. But his efforts were wholly inadequate to stem the tide of the massive economic downturn that developed in the early 1930s.

As a result, Hoover was forced to reconsider his theoretical commitments and begin a series of experimental efforts to free the American economy from the grip of the deepening Depression. Kennedy writes,

In his ongoing effort to liquefy the credit system Hoover would soon show himself capable of the most pragmatic, far-reaching economic heterodoxy. The effort would test all his powers of creativity and command and would in the end carry him and the country into uncharted economic and political territory. From this phase of the crisis dates the onset of a period of experimentation and institutional innovation that would continue into the New Deal. (p. 82)

Kennedy identifies several main reasons why Hoover and Roosevelt had difficulty coping with the Great Depression. Some of them were specific to that particular event, but some of them were universal problems. One of those universal problems is fully in play with respect to our current recession—namely, that our understanding of the economy always lags behind the current state of the economy.

It has often been said that generals are always fighting the last war. In other words, generals are always fighting wars based on their knowledge of the last war, which does not take into account technological and political changes that have taken place in the interim. A similar phenomenon can be observed in economics.

An economy is a very complex beast. Every person who buys or sells anything is contributing to the complex network of economic relationships. It is so complex that no one knows exactly what is happening everywhere in the economy at any given point in time. In that economy, everyone has considerable freedom to act as he chooses. This is even true in a highly controlled economy like that of the Soviet Union. In the Soviet Union, this freedom took the form of a black market so big that the Soviet authorities were afraid to stop it, fearing that if they did, the entire Soviet economy would fail. In a less controlled economy, each participant has even greater freedom.

As technology develops and as each entrepreneur seeks to gain an economic advantage, they innovate. Every innovation is like a small economic experiment to see what will happen. Thousands of such experiments are launched every day in a country like ours. Many will be tried and soon abandoned, but others will take off and become significant and powerful phenomena. As a result of all these innovations, the economy today is not the same as it will be a year from now, and it will be even more different ten years from now.

Meanwhile, our ability to understand the economy lags behind. It takes time to become aware of all the consequences of the various innovations. If you think about the changes that the shift from checks to credit cards and then to Internet purchases has caused in your behavior, you get a small glimpse of how significant these consequences are. For just one example, think about how easy it has become to steal someone’s identity and all that can happen when one’s identity is stolen. This reality changes behavior, which, in turn, changes the economy.

Some of these innovations create far-reaching changes in the fundamental make-up of the economy. So what once were truisms that could be counted on are no longer sound guides for action. When I was taking an introductory economics class in the late seventies, our textbook said that we would never face another major economic downturn because we had so many macroeconomic tools at our disposal. The book declared the economy to be in a state of “fine-tuning.” Two years later economists characterized the U.S. economy as being in “stagflation”—a stagnant economy accompanied by high inflation. This had previously been thought to be an impossible combination.

So as long as there are technological and cultural changes that have an impact on the society, there will be economic change. And as long as there is economic change, there is the possibility of fundamental change such that old economic models require significant updating in order to account for those changes.

In my next post, I will talk about the implications of this observation.

When looking at bubbles, two questions immediately come to mind: Are there any features common to all bubbles, and can they be avoided or lessened in severity? I would contend that the answer is yes to the first question and no to the second.

What is common to bubbles is their structure. According to a model propounded by Charles Kindleberger, a historical economist and author of over thirty books, every bubble goes through a series of phases: “displacement,” “monetary expansion,” “euphoria,” “financial distress,” “sell off,” and “discredit.” The displacement occurs prior to the bubble, the financial distress occurs at the peak, and discredit is the period after the crash. I will explore what these terms mean and how they are related below.

What differs between bubbles is their cause. Thus while every bubble seems to have a displacement, no two displacements are the same. For this reason, bubbles are hard to predict or prevent.

To better understand the structure of bubbles, consider the various phases. The first phase, “displacement,” consists of a shock or sudden change in the economic system. Examples are things like wars, agricultural shock, technological innovations, changes in international trade practices, or changes in banking practices. These shocks can occur in innumerable ways, but in each case there is some change in the demand and supply of goods or services (either physical or financial). As a result of the shock, earning potential suddenly develops in some segment of the economy. A coordinate drop in some other segment of the economy typically accompanies the event. Where earning potential is good, activity increases.

A simple increase in economic activity, however, is not enough to cause a bubble. The economic activity must be accompanied by new money, the “monetary expansion” phase of a bubble’s structure. Money, it turns out, is a rather slippery concept. For instance, if I deposit $100,000 in a bank, that is money. Most banks will take that deposit and lend out some part of it, say $80,000 to Joe Borrower. Joe, now has money. How much money do we now have, $100,000 or $180,000? As another example, suppose Joe has a credit card with a credit limit of $5000. Is that money? Different economists define money in different ways, but any extension of credit by a lender increases the amount of money that people feel they can use. And there are many, many ways to extend credit.

(One interesting and creative way to extend credit occurred in Kuwait in the 1980s. The laws and practices in Kuwait at that time allowed individuals and companies to write a postdated check due at the end of the year. The person receiving the check would accept it believing that when the date came around, money would be in the account. The check was seen as collateral upon which one could write his own check or borrow money to invest in a collection of Kuwaiti companies. At one point, the outstanding value of these checks reached $90 billion. These “future” checks proliferated, and it seemed as if everyone was becoming very rich. The problem was that those writing the checks had overextended themselves without having hard resources to back them up. Thus a great deal of “money” was created, and the stock market boomed, but eventually the whole scheme collapsed and crashed, and the Kuwaiti stock market closed down.)

There is a catch, however, to money creation through credit. Increasing money through credit only works if we all feel confident—that is, if we believe our money is safe and secure, and we are content to leave it in our banks and stocks portfolios. If that confidence is lost, problems ensue. What, for instance, would happen if I became worried about my $100,000 deposit? I might walk up to the bank and ask for my $100,000 in cash. Would the bank gulp and say, “Well, Joe Borrower has most of that money at the moment, and he is paying it back over the next few years. Can you wait?” Probably not. The bank would actually take cash from other people’s deposits to pay me back. But if fear spreads and everyone wants his cash at the same time, then the bank is sunk. It does not keep enough resources on hand to meet all of its obligations. The same basic principle is at work with all extension of credit. Extending credit has inherent risk. The more credit is extended, the greater the risk. In a bubble situation, credit is extended based on the expectation that prices or values are going to rise so that those who are borrowing will be able to pay the money back when expected. The demand for cash is high, and people are more willing to pay higher interest rates for it. The lenders oblige.

After a displacement and with a new or expanded source of money, investment in the product du-jour tends to rise. People see how rates and prices are going up, and they indulge in their speculative side. This phase of the bubble is called “euphoria.” This phase is not based on business and market basics. The speculation typically does not accurately take into account the real market value of the probable dividends from the investments. Rather, it is driven by a realization that one’s neighbor is making out like a bandit. If my neighbor can do it, then so can I. If a speculator is lucky or very insightful, then he might get away with it. But even if he does, many others will not.

Eventually, despite the general optimism, some knowledgeable insiders begin to get nervous. They recognize that the prices of their stocks or investments are not supported by the value of the products in question (merchandise, land, companies, or financial products.) At this stage, some investors will begin to take their money out of the market by selling their assets. Often, the less scrupulous will simultaneously be selling their stock while encouraging others to buy, thus maintaining the prices in the short run. This is the “financial distress” phase.

Once someone begins to sell, others who are watching the situation decide that they also want to get out while the getting is good. Initially, enough people hoping to make some money are still investing, and thus those who sell can get a good price. But once everyone starts to see a slide, the rush to get out ramps up. The prices plummet because no one is willing to buy at the high price. The market crashes, and those who did not pull their money out quickly enough lose a great deal.

Most of the investors lose their investment. But now consider what happens to those who have been extending credit, that is, banks and similar organizations. The lenders have been giving out credit, but the bankrupt borrowers are now in no position to pay back their loans. The lenders have a hard time meeting their obligations to those to whom they owe money. They lose as much or more than the investors. As a result, for a period of time after a crash, lenders are highly reluctant to lend. Credit becomes scarce and difficult to come by. This phase is referred to as “discredit.” I have seen this in the recent recession. For example, I have been bombarded over the years by offers from credit card companies to open up a new card. Although these offers have continued after the crash of 2008, the credit amounts offered by these companies have dropped significantly. They are much more careful.

This cycle of displacement followed by a boom and a crash has been repeated many times over the years. Some bubbles have been localized, others international. Some have had minimal impact on the economy as a whole, others have lasted decades. Whatever their character, one thing remains constant: their inevitability.

They are inevitable because their sources are ultimately found in the complexity of our society and in human nature, neither of which change. Because our economy is so complex and events so unpredictable, displacements will continue to occur. Each displacement will be different in some crucial way from those of the past. No laws or regulations will be able to prevent them or lessen their impact. When they do occur, our speculative nature is given the opportunity to act. People never tire of looking for a get-rich quick scheme. Why work hard if you can make a living moving money around? The lure is like the lure of playing the lottery. When the Megamillions jackpot grows, so does the rate at which people buy tickets. Similarly, as prices or stocks rise, our speculative nature takes hold and we are drawn into the maelstrom. Those that drive the rise sometimes make a great deal of money. Others are ruined. Still others who never partook in the mania in the first place often suffer dire consequences through the downturn in the economy. The damages far outweigh the benefits.

In my next post, I will examine one or more specific bubbles, including the recent housing bubble.