When Will We Learn? Speculation is no Way to Build a Real Economy

History repeated itself last year in financial markets: several high-flying ventures that once generated a frenzy among financial speculators, came crashing back to earth in the face of higher interest rates, fears of recession, and a rush to the exits by more prescient investors. In this commentary, originally published in the Toronto Star, Centre for Future Work Director Jim Stanford reviews five speculative bubbles that popped in 2022. The most dangerous, from a macroeconomic perspective, is the accelerating downturn in Canadian housing prices – as rising debt charges squeeze prospective buyers. A major downturn in housing will have big impacts on real employment and spending.

The common lesson from these fallen Icaruses, is that economic policy should focus on the slow concrete work of real production, investment, and innovation – not jumping on the latest speculative bandwagon.

Five Ponzi Schemes That Crashed to Earth in 2022

By Jim Stanford

Economic storm clouds were abundant as 2022 drew to a close: galloping inflation, soaring interest rates, looming recession. Adding to the gloom, several high-flying ventures are crash landing in real time. These schemes once seemed like fountains of newfound wealth, but now are destroying value as fast as they magically created it.

Promoters claimed these faddish assets represented clever new business models. But now it’s clear they were held aloft by old-fashioned speculative lust. Like classic Ponzi schemes, they succeeded only so long as the supply of new suckers exceeded the outflow of sellers.

Amidst this overheated frenzy, last year’s jump in interest rates was like crying “fire” in a crowded theatre. Greed turned to fear, smart investors rushed for the exits – and the self-fulfilling logic of the herd shifted into reverse. The hopes of millions who believed these scams are now being crushed, as trillions in paper wealth disappear before their eyes.

Here are five of the most spectacular collapses:

Gig Platforms: On-demand digital platforms have roiled labour markets and perplexed regulators – so slow to realize that managing workers via smart phone doesn’t mean they’re not entitled to the minimum wage. Despite the massive and involuntary subsidy extracted from underpaid gig workers, most of these businesses have never made a dollar in profit. Uber, the biggest platform, has lost a cumulative $32 billion. With flows of cheap venture capital now drying up, most platforms are doomed. Uber shares have lost 60% of their peak value.

Tesla: Unlike gig work, electric vehicles are a genuinely novel and valuable innovation. But stock markets coated this idea with so much speculative froth that the real business was lost in the hype. Throw in an egomaniac CEO, and you have a recipe for financial disaster. At peak in late 2021, Tesla’s market value exceeded the combined worth of every other automaker in the world – even though it produces only 1% of new vehicles. Elon Musk’s tantrums and higher interest rates are draining Tesla’s battery fast; its shares have lost 75% of their peak value.

Shopify: This Canadian high-flyer also possessed the germ of a good idea: supporting online marketing by small businesses. But this hardly justified Shopify (with just 10,000 employees) becoming the most valuable publicly traded company in Canada: worth more at peak than any bank, telecom, miner, or manufacturer. Shopify’s rise made a few people rich, but didn’t serve the company well – distracting from the needed work of reinforcing the company’s core business. Like past Canadian high-tech darlings Nortel and Blackberry, Shopify now faces an uphill battle to salvage small bits of its past success; its shares have lost 80% of their peak value.

Cryptocurrency: Crypto is a class of its own among speculative failures: it is the only asset on this list that has absolutely no inherent value whatsoever. Crypto doesn’t produce anything. Its worth depends wholly on faith – which never lasts long. A potent mix of financial hype and libertarian ideology convinced some (mostly young, male) investors that crypto would revolutionize money. High interest rates, cascading losses, and old-school fraud (confirmed by the FTX collapse) proved them wrong. Bitcoin, the biggest cryptocurrency, has lost 75% of its peak value.

Houses: OK, there’s nothing novel about a roof over your head. But a decade of ultra-low interest rates, inflows of absentee money, and speculative greed turned houses into speculative assets, not places to live. This is the most dangerous mania for Canada’s macroeconomy – because real estate is so expensive ($8 trillion in total in Canada), and now accounts for a vastly disproportionate share of national investment, GDP, and (illusory) wealth. Canadian home sales fell 39% in November from a year earlier.

These meltdowns have differing locations, dimensions, and proximate causes, yet are fundamentally similar. They all flew too close to the sun, soaring on speculative greed and cheap private credit. Even on the way up, they distracted and disrupted real work, investment, and innovation. On the way down, their crash landings will exacerbate the coming recession.

Let’s make a collective economic New Year’s resolution: to focus on the more boring but productive tasks of working, building, and accumulating… and swear off future flirtations with enticing but illusory speculative schemes.