08.19.07
Credit Bubble
Many may not understand the impact behind the recent fall-out on the sub-prime loan but it is a classical bubble case. Bubbles are best understood as objects that take up volume and continue to do so until they burst. Before they burst, everybody think it will keep growing and continue to need more real estate, i.e., volume. Once they bursts, nobody realizes how much volume it had taken up because these bubbles were hidden deep below. Overtime, the bubbles with impact the layer above and subsequently, it would reach a point that the structure collapses and everybody realized what is happening.
In this case of sub-prime loan, we are giving people money that they are unlikely to pay back. This easy credit creates a situation of over-supply (in this case of houses) against a somewhat artificial or more appropriately, hollow demand. When this demands disappears, the supply chain collapses. The funny part about economy dependency is that when you give people easy money, the money circulates around for all kinds of unrelated things like sport players’ transfers fee, mergers and acquisition, stock markets investments, etc. Once the easy money flow disappears, the rest of the unrelated things are impacted. Fortunately, in some cases, the value is huge but not substantially huge until it kills off everything else, so the impact diminishes as it propagate down these unrelated economic activities. Unfortunately, in some cases, it gets blown out of proportion. It is not so long ago that we were all killed by money being paid for 3G licenses across the globe.
I will not be surprised if this current spate of bad news about the subprime loan fall-out eventually impact the sports’ transfer market. The key here is not on the locality of the fallout but the actual value of the fallout. Given that central banks are putting tens of billions to fill in the cashflow gap, you do get the feeling this is of the same magnitude as the 3G fallout. As such, it is not hard to imagine a worldwide recession being felt in the next one to two years, especially after China, who has been the last bastion of strong economy, loses it immunity when the Olympics begin!