Somehow the S&P 500 hit a new high this week. “The markets”, apparently, think this group of companies is worth 16 percent more now than a year ago, despite the fact that unemployment has more than doubled, and US GDP has fallen more than 9 percent.*
I find it much more pleasant to contemplate a different kind of bubble. My new hobby, homebrewing, involves lots of bubbles. Yeast eats the sugar, produces alcohol and CO2. The cool part, though, is how the bubbles organize themselves into perfect geometric patterns, their surface tension keeping them distinct for a time until the bubbles merge to make bigger, less homogeneous, bubbles which merge into bigger and bigger bubbles until they pop.
Look closely at my one gallon carboy and you’ll see a beautiful process taking place before your eyes, order degenerating into disorder. It’s science. It’s art.
Perhaps I’m getting irrationally exuberant over the cider bubbles. Back to the stock market…
Paul Krugman theorizes that the rising stock market is being driven by (a) lots of money sloshing around with few profitable alternatives, and (b) increased investment into tech companies with monopoly power. In other words, he argues, it is rational even if surprising. Economist like these sorts of arguments; resorting to irrationality is too easy. (Not necessary wrong, mind you.)
Whether he knew it or not, Krugman’s “where else are you going to put your money?” draws on the scholarship of Cliff Clavin who, decades earlier when asked to explain why people drink cold beer on a hot day, argued convincingly “what else you gonna do with it?” And I can almost imagine the yeast and the sugar debating whether the CO2 really has to form bubble. “What else you gonna do with it?” And it works for a while until the bubble is too big to endure the pressure to pop.
Krugman’s explanation is not very reassuring. Clavin’s makes me thirsty. Why does cider take so long to finish?
[Update: Don’t miss the sequel to this post: The (Surface) Tension is Unbearable.]
Further scholarly reading:
– Adam Rogers (2014). Proof: the Science of Booze. HoughtonMifflin.
– Federal Reserve Bank of St Louis (FRED).
* GDP decline is for the year that ended in June.