The Bubble King Inflates America
The self-described "king of debt" has given us a dangerously over-leveraged economy
In the years since I wrote this short disquisition, the main players in the most recent speculative episode […] have met their all but inevitable fate, and the larger economic consequences have been made strongly and sadly evident. The list of those who have descended abruptly from the heights is long, and only a few need be mentioned. […] Mr. Donald Trump is said not to be broke; he was, however, described in recent news accounts as having a negative net worth.
That was John Kenneth Galbraith writing in 1993. In his Short History of Financial Euphoria—published more than thirty years ago—he had already identified Trump as the living embodiment of short-sighted financial speculation.
Trump figures in the book as one of the most bombastic representatives of the speculative manias of the 1980s, when investors poured money into doomed propositions such as the aptly-named “junk bonds,” overpriced real estate (of the sort Trump built and christened with his name in big letters), perilously over-leveraged savings and loans associations, and other high-risk financial endeavors.
Galbraith singles out the “Trump Shuttle”—Trump’s ill-fated “adventure into aviation” in the early ‘90s—as a particularly glaring example of an obviously bad idea that nonetheless somehow managed to attract financing from some of the largest and most prestigious banks in the country. “What in the world were they doing?” Galbraith asks. “Who […] thought it wise to back these admitted adventurers with hundreds of millions of entrusted dollars?”
It’s a question we ought still to be asking ourselves—not least because Trump has now been “entrusted” not only with hundreds of millions of other people’s dollars—but with the management of the entire U.S. and therefore global economy.
And he has treated it so far much the way he treated “Trump Shuttle” and his other doomed ventures of the ‘80s and ‘90s: namely, as a short-lived speculation that may be used to enrich himself (at least in the near term) at everyone else’s expense.
Galbraith, in his book, identifies a couple tell-tale recurring features of speculative manias that sound all-too familiar today.
(1) Debt. Every episode of financial euphoria, he writes, is fueled ultimately by excessive leverage—too much debt backed by too few solid assets. This in turn eventually generates a financial panic, as people realize that the revenue to pay off this debt is not forthcoming.
“All crises have involved debt that, in one fashion or another,” Galbraith writes, “has become dangerously out of scale in relation to the underlying means of payment.”
People are persuaded to undertake this obviously risky level of debt-financing by a few other recurring features of human psychology:
(2) The conflation of money with intelligence. If some people are getting rich from investing in a particular asset, no matter how intrinsically valueless it may be (ahem, crypto), it suddenly seems like they must know what they are doing—and so the speculative bubble becomes self-perpetuating.
(3) The “shortness of financial memory.” This feature of the human psyche—Galbraith argues—allows people to represent fundamentally old ideas (such as offering high interest rates for high-risk loans, a.k.a. junk bonds) as if they were a bold new innovation in the financial market. In reality, he claims, there is nothing new under the sun, when it comes to finance.
(4) Excitement over new technology. “Something seemingly exciting and innovative [has] captured the public imagination,” as Galbraith describes the classic speculative episode. “There was an investment opportunity rich in imagined prospects but negligible in any calm view of reality.”
It should be obvious from this resumé alone that something like crypto matches every one of the elements of Galbraith’s definition of a speculative asset. Indeed, the crypto “bubble” has been around long enough by this point that it has already managed to pop and re-inflate multiple times over—with some people getting rich and many others losing fortunes in the process.
Trump and his family are, of course, among those who have enriched themselves through minting “crypto” tokens that have fluctuated wildly in value.
The more pressing question for the future of our economy now, though, is how much of the rest of our current economic success is attributable to nothing more than a speculative mania.
Certainly, the current investing spree in generative AI bears many of the earmarks of Galbraith’s definition of a financial bubble. Much of the construction of the data-centers powering this industry is almost entirely debt-financed—some of it by large companies that can afford to burn money; but much of it also by mid-sized firms that would collapse into ruin if investors suddenly lose confidence that AI really will yield the enormous sums they are anticipating.
Too much debt secured by too few assets, in short.
Investors are also clamoring to get in on “something seemingly exciting and innovative.” Many of the boldest claims made about the new technology come from people with insider knowledge of the generative AI models. They are working with a complex and poorly-understood new technology, and so the general public is ill-equipped to question any of their pronouncements about its prospects. We have no ability on our own to check their work.
We are at risk of succumbing, then, to the perilous delusion that because AI appears to be succeeding so far, the people promoting it must know what they’re doing. The conflation of money and intellect again.
If we step back for a moment, though, and take a more sober view of the industry, AI starts to appear much more like something “rich in imagined prospects”—autonomous agents! AI superintelligence by 2027! humanoid robots!—“but negligible in any calm view of reality,” as Galbraith put it.
Many of the more far-fetched sci-fi scenarios involving AI, after all, depend on highly questionable assumptions, such as: (1) the rate of AI advancement that occurred circa 2022-3 will continue indefinitely, and will include several more qualitative breakthroughs in capacity in the near future; (2) advances in robotics that can manipulate the physical environment somehow correspond to advances in AI language models (in reality, there is no reason to assume this is so; we may well witness progress in both fields in the coming years, but there is no reason to think they necessarily proceed in tandem).
Trump, of course, has not hesitated to try to cash in on the mania for AI, no matter how speculative—no more than he hesitated to enrich himself by creating Trump-branded crypto tokens or NFTs.
Indeed, it seems our current president has never met a speculative bubble he didn’t like. Most recently, his personal business invested in the unproven proposition of nuclear fusion—despite the fact that energy scientists have long struggled (albeit with some promising recent breakthroughs) to sustain a fusion reaction at scale that emits more power than it consumes.
Likewise, Trump has moved to head off any possible AI regulation that could dampen prospects for the industry—lest it take some of the air out of the stock market that he regards as a direct referendum on his presidency.
His ongoing war against the Federal Reserve has to also be understood as an effort to prolong the speculative mania.
From the first years of this country’s history—as Galbraith reveals—demagogic politicians have fought against the idea of an independent central bank precisely because they fear it could rein in speculation. The first and second national banks of the United States lost their charters, in Galbraith’s telling, largely because they tried to head off financial crises by preventing state-chartered banks from issuing their own paper currency far in excessive of their actual reserves.
This restraining influence from the central banks made them ripe targets for populist politicians, who accused them of causing the financial panics that they were actually trying to anticipate, by calling in the excess loose money that private banks were dumping on the market—and which were not backstopped by any tangible assets.
The 19th century British satirist Thomas Love Peacock devoted an entire novel—Crotchet Castle—to the subject of American private banks that minted their own paper currency, without having any reserves to guarantee them. As he sardonically put it in another novel—not all countries are so blessed as to have discovered this variety of “safe and economical currency, which is produced by a man writing his name on a bit of paper, for which other men give him their property, and which he is always ready to exchange for another bit of paper, of an equally safe and economical manufacture.”
Trump’s current efforts to destroy the independence of the Federal Reserve must be interpreted against the backdrop of this history. His constant attacks on Jerome Powell are just the latest episode in this ongoing battle between the people who manage to enrich themselves through financial speculation—and the regulators who try to pop such bubbles before they can become dangerously engorged.
In the days before Christmas, Trump declared on social media: “I want my new Fed Chairman to lower Interest Rates if the Market is doing well, not destroy the Market for no reason whatsoever. I want to have a Market the likes of which we haven’t had in many decades [….] Anybody that disagrees with me will never be the Fed Chairman!”
He was responding to the fact that the stock market often hesitates when it receives news of economic growth—because it might keep inflation elevated and therefore prompt the Fed to raise interest rates (or at least maintain them at current levels). Hence “good news is [often] bad news” on the stock market.
So what Trump really means here is that he wants a new Fed chair who will be willing to over-heat the market without limit—even if it risks causing inflation or fueling dangerous levels of speculation.
It’s Andrew Jackson’s war against the central bank all over again. And we are even hearing the same populist rhetoric people used in the 19th century. While the speculative mania is still going strong, demagogues can blame financial regulators for trying to restrain excessive euphoria. They can call them mean paternalists and elitists who want to prevent anyone else from getting rich.
(People today often similarly defend the crypto industry on the grounds that it supposedly creates “access to new sources of wealth” for people who are boxed out of traditional financial markets. Nota bene, though: people defended the subprime mortgage industry on the exact same grounds circa 2007.)
It’s only when the bubble pops that people suddenly change their minds about the regulators. They are often still mad at them, to be sure—except now, instead of accusing them of being kill-joys, they ask why they didn’t regulate more? Why did they allow this bubble to inflate in the first place? Why didn’t they puncture it earlier, before too much of the global economy became dependent on it?
This pattern will almost certainly repeat itself in the near future. At some point, if and when the air comes out of the AI-driven stock market—people will ask why the Fed didn’t raise interest rates more aggressively—just as people like Trump are attacking them now for not lowering them even faster than they have, because they want to keep the euphoria going as long as possible.
It should be obvious by now, then, why Trump wants so desperately to keep the bubble afloat. He is profiting from the speculative mood directly, through his family businesses—plus he regards the AI-heavy stock market as an index of his popularity and political success.
And indeed, whatever happens to the rest of us, he will almost certainly make out of this speculative episode okay—just as he did from the earlier manias of the 1980s in which he played so prominent a role.
Even if the market for these various speculative assets eventually crashes, he will probably be able to cash out early enough to leave the rest of us holding the bag.
As Thomas Love Peacock describes a character in Crotchet Castle, mentioned above: “he applied his science-illumined genius to the blowing of bubbles, the bursting of which sent many a poor devil to the jail, the workhouse, or the bottom of the river, but left [him] rolling in riches.”
Trump has described himself before as the “king of debt”—which, as we’ve seen—is the core ingredient of every speculative bubble. Being the king of debt makes him also the king of bubbles. And our latest bubble, which he has worked so assiduously to inflate, is almost certain—like all the bubbles past, in which he had a hand—to leave many of the rest of us in poverty, and Trump himself “rolling in riches.”