How One Flower Killed an Empire

One of the worst economic collapses ever — and perhaps the single-worst example of what we now refer to as a “bubble” — struck a major Western European economy during a time of unprecedented prosperity and material excess.

When this bubble collapsed, a panic ensued that reverberated through the all the domestic markets, causing secondary meltdowns in related sectors as well as the financial industry.

The country — Holland, a financial superpower at the time — was thrown into a depression that lasted years.

It wasn’t real estate, oil, or the dot-com craze that sent the Dutch Empire of the 17th century into an economic cataclysm whose effects are still remembered vividly in European urban centers today.

It was a single flower: the tulip.

Known as “Tulip Mania,” the demand for the flower initially started to rise in the late 16th century when Flemish botanist Carolus Clusius discovered the tulip’s ability to resist Holland’s harsh climate.

Unlike anything the contemporary European upper class of the era knew, these flowers turned into luxury goods as a result of demand.

Their rarity, however, which was a natural side effect of their slow growth rate, kept the market out of balance and prices rising as speculators began to view the flower as a commodity.

By the mid 1630s, Tulip Mania was in full swing, and rationality had gone completely out the door.

Extreme Conditions Create Extreme Situations

Perhaps the most uplifting story to surface during this historical bull market came when an estate belonging to seven orphans — consisting of 70 tulip bulbs — sold for 53,000 guilders; a single bulb, a rare Violetten Admirael van Enkhuizen bulb that was about to split in two, sold for 5,200 guilders.

5,000 guilders during the Dutch golden era was enough to buy an upscale downtown townhome.

Translate that into modern terms, and these seven orphans managed to sell into the mania and make the modern equivalent of about $10 million.

Another story alleged that a single bulb was exchanged for the following items: four fat oxen, eight fat pigs, 12 fat sheep, two barrels of wine, four barrels of beer, two tons of butter, half a ton of cheese, a bed, a suit of clothes, and a silver drinking cup.

To modern eyes, imagining all of this livestock and assorted merchandise changing hands over the sake of one flower bulb doesn’t really do the situation justice.

Thankfully, there’s a fairly accurate chart, created from auctioneers’ records, that tracks the manic bull market… as well as the post-peak implosion.

In the financial industry, it’s a legendary pattern, a first of its kind.

And the very tip of that spike came during a single event on a single day.

One day in 1637, a scheduled auction in the city of Haarlem only attracted half the expected audience… Demand had peaked.

And the sell-off was just as dramatic as the ascent.

Tulip Mania’s subsequent bust was one of the reasons the Dutch golden era came to an end in the late 1640s.

Its peak, in fact, coincided with the peak of Dutch influence on global geo-politics. After that craze was over and its aftermath had set in, that particular nation was never the same… and never as powerful.

In the three-and-a-half centuries since the world’s first major financial bubble made its impact on the Dutch Empire, many things have changed.

Irrational market patterns, however, were not among them.

You Can’t Rush Evolution

The central issue isn’t the inherent value or lack of value behind a commodity; it’s the emotional attachment to the expectation of future gain.

Just think about this: For those orphans to have sold 70 tulip bulbs for the modern equivalent of $10 million, somebody had to buy them.

And even though the tulip started off as a pricey luxury, by the time they were trading hands for the cost of a house, you can bet it was speculators driving the market, not the casual consumers.

Which means when trends are strong enough, even the seasoned industry professionals with money to burn will dive into the mania right alongside everyone else — experts and laymen alike.

Every history lesson is more than just a story, though. It’s also a means of predicting the future — at least with regard to human behavior.

What was true of human emotional responses to certain stimuli 358 years ago is still true today. There’s no getting around that. Evolution of the human brain simply cannot adapt rapidly enough to problems like this.

So knowing that, and knowing what the bubble curve looks like, what can we say about today’s financial landscape?

Well, here’s a second chart to look at. See if you can spot the parallels:

The chart above tracks something far more profound than a commodity — something Americans spend more money on than anything else.

And I mean anything else. As of this year, Americans spend more money on their educations than they do on their homes on a per-capita basis.

And unlike a home, you cannot live in a diploma; a diploma cannot be improved and then sold; it will not naturally appreciate with time.

It is, essentially, a tool without use — unless it’s used to find work and progress.

Unfortunately, the cost of these tools is also the fastest-growing, outstripping housing, rises in average wages, even the cost of health care.

We Will Get Fooled Again

Today, however, as most of us are keenly aware, more and more undergraduate degrees are seen as little more than a prologue to graduate school — where actual industry-specific training occurs and value is finally returned to those countless hours and dollars invested.

The disparity between value returned and value invested, however, is an ever-widening gap.

Many undergraduate and graduate students today do not foresee themselves getting out of debt — ever.

Many have already taken to moving back home just to keep up with payments on student loans, whose underlying commodity — the degree — is essentially worth its weight in paper.

If you happen to be a college or graduate school student or a prospect for either of these, I’m not trying to dissuade you from going.

That’s not the point at all.

Think Big Picture

The point is, just like Tulip Mania, education has become the bubble of our time — even bigger and more deeply impacting than the real estate bubble, which we saw burst catastrophically in 2008.

And just like Tulip Mania, when the costs and long-term debts associated with getting that diploma so far outweigh the benefits that the curve is no longer sustainable…

There will be collapse across a wide range of industries.

Today, American students owe more than $1.2 trillion. For many, default and bankruptcy will be the only way out.

And following them will be the banks backing those loans. Sound familiar?

A tulip brought one empire to its knees. Today, it’s a piece of paper — costing its buyer about $90k on average.

Never mind pulling your kids or yourself out of school. What are you going to do when this bubble bursts?

The key, as I’ve been repeating like a broken record for the last few weeks, is to make yourself independent of the system that has fueled this pattern.

You need to build liquidity and invest in hard assets with real value and real, usable practicality.

It’s not hard once you get started, but taking the first step is the most important move of all.

Fortune favors the bold,

Alex Koyfman

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