Episode 6 After the AI Bubble, Part 1

Across centuries, speculative bubbles have followed the same psychological and financial pattern, even as the underlying assets change.

From Dutch tulip futures in 17th-century Holland to the Mississippi and South Sea companies of the 18th century, episodes of extreme speculation have been fueled by new financial instruments, expanding credit, and promises of transformative wealth. Shares rise rapidly as ordinary people and elites alike chase returns, borrowing against rising asset values, until anticipated profits fail to materialize and the unwinding begins.

The canal and railroad booms of the 19th century add another dimension: bubbles that destroy fortunes but leave lasting infrastructure behind. Along the way, figures such as John Law and Isaac Newton illustrate how intelligence and influence offer no immunity from speculative fervor.

This first part builds a historical lens for examining modern technological enthusiasm, exploring how money creation, leverage, and collective psychology shape cycles of expansion and collapse.

Episode Show Notes

• Definition of a speculative bubble and its core characteristics
• The role of income expectations and asset price appreciation
• Borrowing, leverage, and collateral in bubble dynamics
• Dutch Tulip Mania and the rise of futures contracts
• The Mississippi Company and John Law’s monetary ideas
• The South Sea Company and speculative excess in Britain
• Isaac Newton’s losses in the South Sea Bubble
• Joint stock companies and mass participation investing
• Canal-building booms and bankruptcy cycles
• Railroad expansion and early “too big to fail” dynamics
• Money creation by banks and governments
• Historical parallels to modern financial crises, including 2008

Episode Timestamps

• 00:00 Introduction and framing the question of an AI bubble
• 03:00 Defining speculative bubbles
• 08:00 Dutch Tulip Mania and futures contracts
• 18:00 The Mississippi Company and John Law
• 28:00 The South Sea Bubble and Isaac Newton
• 38:00 Canal-building booms and speculative cycles
• 47:00 Railroads, expansion westward, and systemic risk
• 55:00 Closing and transition to Part 2

About the Podcast

Hosted by Kevin Carney and Emanuel Petrescu, two curious minds exploring ideas, culture, and everything in between. Curious Pundits is a conversational podcast where each episode starts with a topic that caught our attention and unfolds into thoughtful, unscripted discussion. We follow curiosity wherever it leads, across disciplines, opinions, and perspectives, without pretending to have all the answers.

Events and Entities

Events

Dutch Tulip Bulb Bubble (Tulip Mania)
Mississippi Bubble
South Sea Bubble
2008 Financial Crisis
Louisiana Purchase
Manifest Destiny
American War of Independence
Communist-era privatization coupons in Romania

Companies and Types of Businesses

Mississippi Company
South Sea Company
Banque Royale
Enron
Joint Stock Companies
Banks
Home Depot

People

John Law
Isaac Newton
George Carlin
Warren Buffett

Places

Holland
The Netherlands
North Holland
South Holland
Plymouth Colony
Scotland
England
United Kingdom
France
Louisiana
New Orleans
Labrador
Mississippi
Caribbean
Jamaica
Barbados
Appalachian Mountains
United States
Romania

Infrastructure

Canals
Railroads

Transcript

Emanuel: Hi everyone, and welcome to another episode of The Curious Pundits podcast.

My name is Emmanuel. 

Kevin: My name is Kevin. 

Emanuel: And today we’re going to talk about a topic, which is…

Kevin, you chose this one, correct? 

Kevin: After the AI bubble. 

Emanuel: You are going to be leading this because I may or may not have some opinions on the topic, but I’m curious to know what you have to say.

Before we dive right in, I would like to ask our listeners and our followers to go to curiouspundits.com, to like us, share, subscribe to our podcast on your favorite platform where you listen to these podcast, apple Podcasts, Spotify, YouTube, and so forth… helping us grow and become a bigger community of curious pundits.

That being said, after the AI bubble, or one needs to ask, is it an AI bubble, Kevin? 

Kevin: Please allow me to go back in history and describe the patterns I’ve seen relative to speculative bubbles. Now I use the phrase speculative bubble and bubble synonymously…

But to answer your question succinctly with a yes or no is going to create some level of controversy.

People are like, what do you mean AI is not a bubble? Oh yeah, absolutely. AI is totally a bubble.

But unless you have some understanding of the history of speculative bubbles, there’s no framework in which to fit this one. 

Emanuel: Let’s hit the teleportation button and get us back in history. 

Kevin: Even before we start the little walk through history, we have to come up with a definition of what is a speculative bubble, and the best definition I have found… and it’s not my own and I’m trying to think where I got this.

To provide a little more background… I am… possibly obsessed with the history of money and economic thought, and most of what I read for these past, I don’t know, 5, 6, 7, maybe 10 years, has been devoted to that topic.

So I picked up from someone that a speculative bubble is when the expectation of income, and or price appreciation exceeds anything reasonable.

So people buy speculative assets because it will pay them a stream of income. You buy a rental property because you get the rent. You buy a stock because it pays a dividend. You buy a bond because it pays interest. And possibly the value of that asset itself will appreciate over time and you can sell it for a profit and or… and this really gets us in trouble.

If you buy an asset that has a value of let’s say a $100,000 and then it grows to a value of $120,000, you can take that $20,000 to the bank and use it as collateral to borrow money for something.

And we’ve done this, not necessarily you and I, but humans have done this over and over again for a very long time.

So a bubble is when the degree to which we do that is beyond any reasonable expectation of what income will be generated and or what principal appreciation, or not principal… asset value appreciation can be reasonably expected.

And we just go off on these wild manias and bid the prices of things up to just these ridiculous valuations.

Now, let’s go back to the early 1600s in Holland.

Actually, there’s another bit of background I need to provide.

So these speculative bubbles all seem to have one of two common triggers.

One is that some new technology emerges that promises to change the world. Now the funny thing about these ones is that they actually do change the world over time, but a lot of people make and lose a ton of money in the intervening period while that’s happening.

So some new invention promises to change the world, or some new form of money is invented and it promises to change the world.

So everyone knows of the Dutch tulip bulb bubble, but the Dutch tulip bulb bubble wasn’t actually about tulip bulbs. It was about futures contracts.

So tulips have a relatively short growing season, and these are people that we would call Puritans.

They had this concept of leading an austere life, without any ostentatious displays of wealth. We see these pictures in history of these guys all dressed in black and wearing shoes with buckles and hats with buckles. Yeah. These were puritans. Like the early English colonies to… and I forget which one it was, it might have been Plymouth.

They were English people who went to live with the Puritans in Holland for a while, decided that the Puritans weren’t Puritan enough, and then they came to New England to start their own colony. Just to give you an idea of who it is that we’re dealing with here.

So no  ostentatious displays of wealth, but for whatever reason, they liked tulips.

I don’t know exactly where tulips came from or when they arrived in Holland… but they liked tulips. Tulips have a…

Emanuel: This is worth mentioning that tulips are still representative till this day of Holland and the Netherlands. 

Kevin: Oh yeah. The… Holland is actually two, I think they call them provinces, I don’t think they call them states, but two provinces in the north of the Netherlands. But the Netherlands, as we know it today, didn’t exist yet. So there was… I don’t even know if there were two Hollands… today there’s North Holland and South Holland. Back then it might have just been one Holland, I’m not sure.

But tulips have a relatively short growing and harvest season, and people wanted to know that they could at harvest time, go down and get tulips.

So somebody invented the futures contract and you would basically buy a futures contract, which was the right to show up within a certain range of dates and buy a certain quantity of tulips and or bulbs for a certain price.

And it was these futures contracts that got bid up to these astronomical values.

And what happens in these bubbles is… very few things are as deflating as seeing your neighbor get enormously rich by doing something really silly in some cases just outright stupid, right? You don’t want to miss out.

You saw this guy like… buy this piece of paper and then sell it for twice as much two weeks later, and you’re like, damn I need to get in on that.

And then as more and more people get into it, the demand for it, in this case, futures contracts on tulip bulbs, the demand increased and that in turn bid up the price.

This is like the characteristic mania side of a bubble.

And futures contracts for tulip bulbs at some point were trading for twice the value of a house, and that seems absolutely ridiculous to us in hindsight, but people were making money. So that’s what’s happening.

And then at some point they all follow a similar trajectory.

The mania, the panic, and the crash.

The panic occurs when somebody who may be an insider who has an insight of what the hell is going on, and basically is playing everybody else for a fool… or may be legitimately on for the ride, and at some point needs some cash. So they sell. And they sell, they cash out for a lot of money.

The neighbor says he sold, it must be time for me to sell… and as the balance of the number of people buying to the number of people selling tips, then the price of whatever it is starts to come down.

Now, this did not happen apparently in the Dutch tulip bulb bubble, but is a…

what I’m about to mention next is a characteristic of every other bubble that’s ever occurred… is on the upside, people are borrowing money to buy more of whatever it is.

So they’ve spent their savings, but now they want more. So they take out a mortgage on their house, they take out an unsecured loan, whatever, and they’re borrowing money to buy this thing.

And now the price of the thing is starting to decline. They have to make payments on these loans, and in order to do that, they start selling stuff and this accelerates the downward spiral.

So the typical trajectory for a bubble is the mania is on the upside. The panic is when people start to realize that I’ve got to sell some in order to make my loan payment that the bank requires of me. And then the crash is as more and more people sell, the value of whatever it is continues to slide, and now people who bought in near the top are basically losing their shirt.

So that’s basically what happened in the Tulip Bulb bubble.

The next two of major significance are the Mississippi bubble and the South Sea bubble that happened about a hundred years later.

So the tulip bubble was in the early 1600s. These are in like the 1710s to 1720s. 

Emanuel: Those ones. 

Kevin: The Mississippi Company bubble to me…

They’re both in my mind, really interesting.

Now, I want to give the ultimate qualifier that all of this is based on what I’ve read, what I’ve learned. I might learn new stuff tomorrow, next month, and I’ll change my understanding of how all this worked. 

Emanuel: So you haven’t actually bought yourself some futures on tulip, Dutch tulips in the 1600s.

Kevin: I did not. 

Emanuel: Just to clarify that. 

Kevin: Yeah. I missed out on all of them. Missed out, meaning I didn’t ride the upside. 

Emanuel: Warren Buffet missed a few, but he did pretty well. 

Kevin: Okay. So the Mississippi Company bubble in my mind is really interesting because… of a guy who actually almost merits his own episode.

His name is John Law, and I’m not going to sugarcoat it, he was just a straight up criminal, but he was a straight up criminal who was really good with numbers and abstract reasoning.

And he was like the first guy to like seemingly to latch onto the idea that how much money is in the economy matters.

So when I say he was a straight up criminal, he’s from Scotland, and whether he killed this guy in a dual or whether it was a straight up assassination for money… there’s uncertainty as to actually why he killed this guy.

But either way, dueling was illegal, killing people for money was illegal. He had to leave, right?

So he winds up in Holland, and he makes his living as a professional gambler because he’s really good with numbers.

But while he’s do… and calculating odds and all that kind of stuff, right?

And while he’s doing all this, he’s actually doing some very deep thinking about what is money and how does it work? And he becomes the first of what we generally call the monetarist economists. And these are people who believe that how much money is in the economy matters.

Now, this may justify another entire episode, but the short answer is yes, the amount of money in the economy matters. And he had a hard time like finding people to sell that idea to. In fact, at some point he tried to sell the idea, I think to some people in England.

The United Kingdom… actually, I don’t know how he got around that because the United Kingdom of Scotland and England had actually happened in the early 1700s. So he couldn’t… he couldn’t go back to Scotland, but by the same token, I don’t see how he could go back to England either. They were now one country.

So he’s still on the run and he is trying to pitch this idea to people and they’re like, I’m sorry, this is just too weird, get out of here.

And then at some point. The King of France is broke because of all the wars they had been involved with, and somehow this guy knows someone whom he met from gambling, who knows the King of France.

He basically gets an audience, pitches the idea, and the King of France buys into it. And the basic idea of the Mississippi Company was that, the French possessions in the New World, what at that point was called Mississippi and or Louisiana.

And just to give you some frame of reference, it has virtually nothing to do with the modern American state of Louisiana.

So Louisiana at that time was approximately one fifth of North America, and it extended all the way from New Orleans to Labrador. This would be in the like 1720s, so 80 years or so later, 80, 90 years later, when the United States government bought the Louisiana purchase from France, the Louisiana purchase, as big as it was, was smaller than the Louisiana that they were talking about back in 1718 ish. 

So the basic idea is that there is nothing but riches in Louisiana in the New World, and they were going to go there, exploit these riches, and they were all going to just make a fortune. 

Emanuel: Milk and honey. 

Kevin: I’m sorry. 

Emanuel: Milk and honey. 

Kevin: Milk and honey, yeah.

Gold nuggets. You just find them walking along the creekside.

So they became a joint stock company, which basically is a company that just simply issued shares in order to raise money, in order to do with what they wanted.

And I don’t know if this is the first time that ordinary people were allowed to participate in joint stock purchasing, but it seems to be the first time that they did so en masse. 

Like it wasn’t just the members of the aristocracy who were buying shares. It was… like we would… we’re no longer in a world of feudalism, but we would call these people peasants. The butcher, the baker, the candlestick maker, the housewife.

Like everybody… 

Emanuel: Hoy Polloy… I read this somewhere, I heard this term. So that’s what I…

Kevin: And some of these people made enormous amounts of money, like they became just fabulously rich. And it was the same dynamic.

The more demand there was for shares, the higher the price of the shares went. And that phenomenon I spoke about where… people would buy… now, it wasn’t dollars, but they’d buy like 10,000 livres worth and then a few months later that’s worth 15,000 livres. They would go back to the bank, borrow 5,000 livres on collateral and buy some more, and people just kept doing that. And it’s the standard bubble stuff.

Now in terms of…

Emanuel: This is how like government operates, big governments operates today as well, right?

Kevin: That’s another good episode. That’s actually, let’s come back a bit of a misconception. Yes. Governments simply create money. People say that they create money out of thin air, but it’s not quite that literal. They create money out of the laws of the nation. I know that sounds like a weird distinction, but it’s important.

People don’t realize that. Banks actually create money as well. And not only do banks create money, they create almost all the money.

So all of this stressing we have about government money creation is misplaced. We should really be concerned about bank created money because there’s so much more of it.

But that’s a deviation, right?

So back to the Mississippi Company bubble. So people are buying shares, they’re just going way up in value.

And then this guy, John Law, I don’t know who he actually pitched this to but it’s decided that a private bank will take over the debts of the Nation of France and it becomes the Banque Royale.

And John Law runs the Mississippi Company, he runs the Banque Royale and basically it’s a large scale debt for equity swap, done like for the Nation of France.

So France owes money to people and France basically transfers that debt to the Banque Royale, and then in exchange they get shares in the Mississippi company that the Banque Royale provides to them.

So the government of France… the Nation of France is riding the speculative bubble just like everybody else.

But the inevitable happens and at some point the anticipated rewards from the New World don’t show up and people are like how long is this supposed to take? 

Emanuel: I was about to ask you to detail some of the terms, because many people who watch us may not be from familiar with all the terms necessarily that we are accustomed to hearing in North America, but I wanted to make a note that.

The same thing happened after the communism themselves back home in Romania as well. After a few years, the government issue some some call it coupons with stakes, which shares in different state owned companies that were about to go private will, will be put to auction will be put to auction to that goes to say that 95% went to trash. Some people made money. The right people made money at the right time. Yeah. 

Kevin: That’s, not uncommon.

This is a… I don’t know… a 50,000 foot view, but… the… I’m looking for the right way to say this… but the relationship between banking and governments going back to the Middle Ages is incredibly tight and it’s… my favorite guy in terms of expressing this in common language that everybody can understand was George Carlin.

He says it’s a private club and you ain’t in it. And his point is valid. It’s a closed circuit of people who look out for each other’s interests. And we’ve been doing this for 5,000 years. 

Emanuel: If not more, but I do remember that from the money later as an adult, after 20 years or something, I was able to exchange that coupon with some money.

And I bought a very tall ladder. So I, my house back home is, it’s tall. I needed an external outside ladder that you couldn’t get from your everyday shop, probably something like Home Depot, but we didn’t have that back then. But I managed to find one. It was very, a little bit more expensive than a ladder, but I managed to change that so that at the end of the day, I wasn’t member of that private club, but I still got something out of it as well.

But back to the Mississippi bubble. 

Kevin: Oh yeah. People who bought low rode it up and sold high, made a fortune. The problem is that people kept buying in as it was going up, and some people bought at the peak not realizing it was the peak and they like lost everything.

It took the usual and ordinary trajectory when the anticipated income from the New World didn’t show up and continued not to show up. The selling started, it tipped the balance, if you will, sellers now outnumbered buyers and people still had to make payments on the loans they took out… with which to buy more shares, and that accelerated the rate at which it sold and the whole thing unwound.

They unwind relatively quickly. They can take four or five, six years to build up. And then they can deflate in six, seven months.

Now the South Sea bubble was happening around the same time in London rather than Paris. And as near as I can tell, and there may be something here that I haven’t gleaned, but the people who started the South Sea Company… same basic idea… we’re going to become fabulously rich from the wealth of the New World.

Now to the British… the New World included, the Caribbean, Jamaica, Barbados, as well as the American colonies and blah, blah, blah. But as near as I can tell, these guys were just straight up crooks.

Like the Mississippi Company looks like they really believed that this business venture could work.

Near as I can tell, the South Sea Company was a straight up fraud. It was an early version of Enron. But same thing… it didn’t work. The returns never materialized, et cetera, et cetera. 

Emanuel: Enron would deserve an episode on its own because even I know I knew about it back in the day when I was…

Kevin: Yeah, they were just straight up lying about important things like… Are you making any money?

Okay. So now we’re…

Emanuel: I don’t want to comment.

Kevin: We’re going to segue to the early to mid 1800s because this is the point in my mind at which bubbles start to get super interesting.

So the next set of bubbles are related to technology.

Now, if you go back to the late 1700s, the early 1800s, we moved goods and people on the water.

There were no significant roads, there were no… clearly, there were no like trains… there were no airports… like none of that stuff had happened yet.

So if you could… make it easier to either move goods easier or move more goods in a certain amount of time, this would have a positive economic benefit.

So we started building canals.

Now the reason I say that this is where it gets interesting is… a joint stock company would be formed, investors would put in their money and they would build out the canal as much as they could until they went bust… because again, they borrowed money to make all this happen and they have bank loans and the bank is calling the loan and they don’t have the money, so they’re technically insolvent, they get wound down in bankruptcy.

And then somebody else would come in and buy the assets of the company for pennies on the dollar and then pick up where they left off. So the canals eventually got built and the canals eventually became profitable.

But in the course of doing that, a lot of companies came and went, and a lot of investors made money on the speculative upside, lost their shirts on the bubble bursting downside, but the infrastructure doesn’t disappear. In the case of the Mississippi Company and the South Sea Bubbles, no permanent infrastructure necessarily got built through the course of those speculative ventures. 

Emanuel: I don’t believe you mentioned what the South Sea bubble was all about, what they were like selling, what they were speculating. 

Kevin: Anything and everything. This next part is going to sound harsh, but it’s not unnecessarily harsh. It was primarily about what slaves could produce.

Ultimately it was about slavery, right? But it wasn’t like the trading of human beings as much as the trading of the commodities that these human beings were going to produce. Sugar, tobacco, cotton, like it was all about that, right? But back in a day… now this is specifically the South Sea Company bubble.

Back in a day when you couldn’t hire a shipping company to move your stuff from point A to point B, you needed to own ships, right? So if you are a basic commodity and trading company and you don’t own a lot of ships, like something is out of whack here. And I’m surprised in hindsight that the, people who were close to the South Sea bubble didn’t see… what in hindsight looks like the fraud that I made mention of.

And in fact, one of my favorite details… it’s quite possible that the smartest person who ever lived, at least that we know about, was Isaac Newton. Do you know much about him? 

Emanuel: He played for the… I know about Newton. Yeah. Yes, arguably yes, I would. I have someone else as probably smart as Newton and is going to be very controversial, but going to leave it.

He deserved its own episode. He’s still around, he’s contemporary. 

Kevin: Let me tell one anecdote about Newton just to illustrate like how smart this dude was and then I’ll talk about how he fits into this story of the South Sea bubble.

So he’s in his early twenties, he’s like this math prodigy, and he was at some kind of social event at the university and someone said, Hey Isaac, how come planetary orbits are elliptical and not round? Which we knew from measuring planetary orbits. And he’s I don’t know man, that’s a good question. Let me think about that.

So he went away to think about that, and in order to answer the question, he had to first invent calculus. That’s how smart this dude was. 

So now it’s the 1710s, 1720s. He’s in his seventies, right? And he lost his shirt on the South Sea bubble.

And I just think it’s so funny that the smartest guy in the world capable of inventing calculus in order to explain why planetary orbits is elliptical was not capable of recognizing that the South Sea Company didn’t own enough ships for their business plan to be viable. I just think that’s fascinating.

Emanuel: It’s the human factor, probably the persuasion, the aura of the… salespeople that he was talking to probably back in the day. 

Kevin: Yeah. He saw his neighbors getting rich, doing something stupid and he wanted in on it, right? Just like everybody else. 

Emanuel: He did spend a lot of time on doing pseudo science as well.

On some alchemy stuff as far as I can…

Kevin: I know that he gets a bad rap for that, and I’m actually going to come to his defense. What we call metallurgy hadn’t really like grown into a proper discipline, but we knew… 

Emanuel: An industry. 

Kevin: That if you mix these two metals, if you miss mix… what was the two… like copper and tin in a certain proportion, you get bronze, right? We didn’t know about molecules and atoms and elements, right? So it’s not much of a stretch to think if you can mix copper and tin and get bronze, what do I have to do to lead to get gold?

That’s not like as weird a thought to them as it is to us, because we know things that they just straight up didn’t know. But yeah, he spent a lot of time trying to turn lead into gold with… obviously without success. 

Emanuel: If anyone deserves an episode on its own, it is definitely Sir Isaac Newton, for sure. 

Kevin: Yeah, I tend to agree. So anyway, now let’s go back to the canals, right?

And this is, not just a North American… It’s happening in England, it’s happening in Canada.

It’s happening in the American… they’re no longer the American colonies because it’s the early 1800s. So it’s happening in the United States, but it’s the same basic deal. Joint stock company shareholders used the money to build it out.

Money was borrowed to make it happen. It’s not pure equity. There is debt. Debt payments are due. No revenue coming in. The standard pattern, right? Filing for bankruptcy, being sold for pennies on the dollar. Another company comes in and picks up, and this pattern persists into the railroads. This is how the railroads got built too.

We have this notion that too big to fail is a fairly recent phenomenon. And the reason that we had to bail out the banks in 2008 is because they are a systemic part of the way we pay, make payments to each other. If I, for whatever reason, I pay you a hundred dollars and my deposit account goes down by a hundred, your deposit account goes up by a hundred.

The banks are integral to that payment settlement happening. If the banks go away, the payment mechanism goes away. And that’s true today. We haven’t figured out a way to save ourselves from that. Although I think we might in the next, I don’t know, 20, 30, 50 years… banks were not the first too big to, too big to fail, it was railroads.

And the story with the railroads… a lot of people don’t realize this, but when the Americans were at war with the British over a variety of issues, one of the issues was the ability to basically take Indian land. So England had signed treaties with the indigenous people and basically agreed the Appalachian Mountains is the border.

We, the British will stay east of that. The Indians will occupy west of that, and that’s the deal. And the Americans are like, yeah I don’t think so. And they were actually, in order to recruit soldiers to fight on the side of the Americans, they were promising them land that was currently in Indian territory.

So basically it’s… if we win the war, we’re going to go take this land and we’re going to give some to you. So that process continued and ultimately became something called Manifest Destiny. And we all know how that went, right?

So the powers that be, the government, the bankers, leading industrialists are all pushing people to move west as part of the expansion and people are like I’m a farmer, right? I can only sell my goods in a certain radius.

And they’re like, not a problem. We’re building the railroad. You will bring your produce to the rail station. We will transport it hundreds of miles and your market will be enormous.

Okay? I’m thinking like we’re more than half an hour in right now. I’m thinking this might be a good place to… close what I’m going to now call part one and then we will have a part two and I’ll pick it up where I left. 

Emanuel: Totally agree.

So for those of you who have beared with us so far and are interested in learning about part two, go to curiouspundits.com and then you’ll find links, you’ll find the transcript and our profiles on all the platforms where you like to listen to your podcast…. spotify, Apple music, and many others.

Until the next time, Emmanuel signing off. 

Kevin: This is Kevin and we’ll see you in the next episode.