I spent many hours playing SimCity when I was younger. In the game, when you plan and build your city it is easy to rapidly expand and quickly build up a massive city. Almost every time I did this, my cities would go into financial crisis and go bankrupt. Rapid expansion was a sure-fire way to ruin my city. The cities seemed to function well at first but the growth was not sustainable. To grow so quickly I had to borrow money and the interest added up too quickly. I ran out of money, my roads would crumble, my citizens would move, and I was left bankrupt. On the other hand, when I was more patient and took my time to slowly grow my cities, they would usually be very successful and could grow very large.
This situation is often reflected in our economy. Companies expand rapidly then get into financial crises. The government grows rapidly and gets into a financial crisis. Congress recently raised the national debt cap to over $11 trillion! That’s an obscene amount of money, even for a nation as well-to-do and large as the United States. The surge in oil prices and subsequent decline showed that speculation about oil prices, which basically meant people purchased oil futures in the hopes that oil prices would rise; of course, oil prices rose as people continued to speculate higher and higher prices in their greed for better returns on their investments. Demand for oil did play a minor role in driving up oil prices but it was only a very small part. We’ve had increases in oil demand for years without a concomitant surge in oil prices. Adjusting for inflation, oil prices have been quite stable since the 1950s. It was speculation more than anything else.
The housing market followed a similar SimCity growth trend. Housing prices were increasing exponentially. People who owned homes were quite excited to see their equity increase. People started buying homes on the speculation that prices would continue to rise – that they could receive huge returns on their investments. Many people purchased homes they couldn’t afford. It was speculation about housing prices that increased their prices beyond sustainability. People had access to too much money at too low interest rates. Lenders gave money to risky borrowers because they could turn a large profit. All of these forces collided, causing a huge housing meltdown. It was like John Henry working himself to death trying to beat the new technology. In this case, the housing market worked itself to death not to prove that they were relevant in the face of new technology but to make more money.
Just like in SimCity, this rapid growth was not sustainable. People were too greedy, too speculative. They turned the housing market and the oil market into nothing more than gambling. People were speculating on the specualtions then using those second-level speculation “funds” to fund more projects or investments. The citizens of the U.S. cannot really blame anyone but themselves. We became greedy. We did not follow sound conservative financial advice; instead we went after what seemed like the easiest and largest profit. It turned out to be too good to be true. In the end, the surest way to build wealth and to grow the economy is not by gambling – by speculation – about the future. The surest way to grow net worth is to live within our incomes as individuals, families, and a nation.