Economic Bubbles and the Next Guy

It is becoming increasingly clear that the most important person in our local economy is more conceptual than real.

Let's call him "the Next Guy." Our exuberant economy has relied on his showing up and doing what's expected of him: paying more than the guy who came before him. The momentum that inflates a bubble is the expectation that he will continue to show up. He or she buys the house that's being flipped, or is first in line to buy the stock when a company goes public.

A bubble's excesses are all so obvious in retrospect. It is one of those objects best examined in the rear view mirror. But while it's happening, a bubble offers the comforting reassurance of a future that becomes a self-fulfilling prophecy, at least for a while. And it is all made possible by a steady stream of Next Guys.

But lately there are indications that the latest batch of Next Guys has gone MIA. She's not showing up at the open house. He's not buying the stock.

The topic of whether we are in a bubble has been a staple of conversation around here for a while. But the recent disappearance of the Next Guy indicates that we may be about to find out just how bubbly things have been. If you want to play with a common metaphor, you could say that the omen is not the death of the canary, but his failure to show up at the coal mine.

But if we are about to have a downturn, it will bring an interesting twist to the identity of the Next Guy. When markets retreat, we come to discover that all of us, not just the speculators, have played that role. For example, at some point each of us was the next to be hired. But as employers' prospects dim, they may no longer hire all of us. Instead, we become the next to be laid off. Such is the cruel nature of the economic cycle: it relies on the Next Guy on the way up, and turns many of us into the Next Guy on the way down.

With a Perspective, I'm Paul Staley.

Paul Staley lives in San Francisco.