Monday, 30 April 2012

...About the Tulip Bubble.

You may know that tulips are heavily associated with the Dutch people, along with strange last names. They have fields of the flower planted all over the country, but the flower is actually of Turkish origin. It was brought to Europe from the Ottoman Empire as gifts to the European rulers and aristocrats. The flower hit The Netherlands smack dab in the middle of their golden era which took place during most of the 17th century. At this time The Netherlands became the centre of world trade and was prospering from it. The Dutch East India company had secured a monopoly for the Asian trade market, their systems of canals were ideal for ship navigation (the main method of transportation), they had started the world's first national and centralized bank, and invented the stock market. They were close to the regions we know today as Britain, France, and Germany with no Alps in the way and products could easily make their way all over Europe from there. They had possession of Manhattan Island (known as New Amsterdam then) and today's neighbourhood of Harlem is named after a city in the Netherlands. Antwerp is still an important hub for the diamond trade.

These guys knew their Dutch history.
What does all this have to do with tulips? When they first arrived on the scene people went ape-shit for them. Tulip bulbs were bought with huge sums of money, often at prices that would have bought you a nice piece of land with all the fixings. But what really made the prices soar was its vulnerability to the Tulip Breaking Virus. This virus changes the pigmentation of the petal streaking it with ribbons of white or other colours producing some dazzling looks. No one knew it was a virus and experts of all kinds popped up claiming they could tell if a bulb would 'break' or not. There was no real way of telling if it would 'break' until it bloomed, and since they only bloomed in mid-spring, bulbs were bought and sold year round. The winter made transporting the bulbs impossible as it would kill the flower. So contracts were bought and sold between people based on what speculators were saying about the future prices of tulips. This has led to the modern day practice of future contracts. 

For Sale. 4200 guilders - a real steal. 
Its hard to say what exactly caused the bubble to burst and as we have seen in the past few years it doesn't take much. One reason is the plague. It hit areas that held tulip bulb auctions and buyers stopped showing up. Sellers had no buyers and if you've taken any Economic 101 classes you know this isn't good. Also, the Dutch government changed the rules about buying contracts. If you held a contract to buy 100 bulbs from Vendor X in the spring, you had to buy them, its a contract after all. The policy change made the futures contracts into option contracts. Now, if you held a contract for 100 bulbs you didn't have to buy them and could cancel the contract as long as you paid a small fee (about 3.5% of the original deal). Holders of contracts just paid the fees to cancel them instead of risking getting the plague. Sellers got out of the business since they were losing money with all the cancelled contracts. Eventually no one was buying or selling tulips and a lot of people lost a lot of money over it. And as we have seen over the past few years it sorta wrecks everything when a bunch of people have debt and no money to pay it off. This snowballed and is probably the reason why we aren't enjoying a smoke and a pancake while watching the latest ep of The Big Bang Theory.

I'm glad he's not my neighbour.
And that is what I learned today.

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