Lottery Mania Behavioral Quirk Also Causes Bubbles
What do the millions of Americans lining up for the record $540-million Mega Millions jackpot have in common with rogue traders on Wall Street? Plenty, as it turns out. Mega Millions punters are fixating on what they’ll do with their winnings. This economically regressive and socially destructive behavior also drives the gambling business. In financial markets the same impulse creates bubbles and encourages excessive risk-taking.And from the Christian Science Monitor's little gem of a column, The Circle Bastiat (we'll be posting another of their columns today or tomorrow):
Humans love to daydream. And lotteries cause them to ponder the wonderful things they could buy if they won (in this columnist’s case, a $329,000 Bentley Mulsanne, described by Top Gear as “the archetypal Marmite car”). This behavior was described in Charles Mackay’s 1841 investment classic “Extraordinary Popular Delusions and the Madness of Crowds” and is an important driver of both lottery participation and market conduct....MORE
...The word millionaire was coined in 1720 during John Law’s ‘Mississippi Bubble” to describe those making vast fortunes in Law’s Mississippi Company stock that rose from 150 livres to 10,000 in the matter of months. But just as quickly, the stock and the currency wildly inflated by Law’s Banque Royale, crashed and Law was forced into exile.
Like Ben Bernanke, Law believed France’s economic problems as being one of not enough money. He started small with his privately owned Banque Générale, within a year all royal revenues were to be paid in the Banque’s notes and these notes were to be cashed on sight at government offices, making these offices essentially branches of Law’s bank.
Two years into Law’s system, the livre was devalued again, by 40 percent. Despite the devaluations, Law’s reputation continued to rise and by the end of 1718, the state took over Law’s bank, which became the Banque Royale. A nomadic gambler just three years before, Law suddenly had immense power, controlling the monopoly on coining money, the collection of tax revenues, as well as tobacco and salt revenues. His Mississippi Company (Compagnie du Mississippi) would buy up the debt of the French government, a proposal John T. Flynn compares to Roosevelt’s plan to extinguish America’s debt by having the Social Security Board purchase it.
Law inflated the money supply through the Banque Royale, he created jobs through public-works projects; he attempted to release the hoarded savings back into business with the promotion of Mississippi Company shares; he exploited France’s colonial empire, relieved the debt-ridden government of its debts, and was making money for himself and his patrons.
Law’s system unraveled a mere four years after it began. People fled Law’s paper for the safety of gold and silver, despite Law’s attempts to demonetize and confiscate specie. Ultimately, Law’s system would only serve to forestall France’s bankruptcy, not solve it. Law himself would die near poverty a decade later.
What were once Law’s millionaires are now Bernanke’s billionaires. “Law is the precursor of the inflationist redeemers,” Flynn explained. “Like all the inflationist salvations, his career was short.”...
---The main island is surrounded by three smaller ones: Armoed (‘Poverty’) Droefhyt (‘Sadness’) & Wanhoop (‘Despair’). The cartouche below the map completes the description of Geks-Kop: ‘Lying in the sea of shares discovered by Mr Law & inhabited by a collection of all kinds of people to whom is given the general name shareholders’.-via the Madame Pickwick Art Blog
The coat of arms over the map enshrines the tragic year of 1720. The scenes on either side further illustrate folly & its consequences. The wheeled land-vessel shown on the right is but one of the many other far-fetched schemes popular at the time. The flag it flies reads Na Vianen (‘To Vianen’) the location of a notorious madhouse. The mob on the left is storming the offices of John Law’s company in the vain hope of exchanging their worthless stocks for money.