What Pokémon teaches us about manic bubbles and monetary policy

Throughout the spring of 2021, the prices of Pokémon trading cards and boxed sets were soaring. Sales of the cards exploded to nearly 600 percent over the previous year’s level. Not only did this take place during the franchise’s 25th year anniversary, but also amid pandemic mitigation policies where individuals around the world began rediscovering their childhood collections. Noticing the prices and wanting to jump into the hype, nostalgic individuals joined the trading community armed with stimulus payments, CARES Act unemployment boosts, Payroll Protection Program (PPP) funds, and lockdown savings.

Professional card graders responded to the surge in prices and trading interest, providing valuations for cards of varying qualities. These valuations, indicative though they were, provided a basis for speculative fervor and led to growing participation in the mania. …

When central banks adopt expansionary policies, interest rates tend to fall. Business owners may misinterpret the monetary policy-driven decline in interest rates for an increased propensity to save. The latter suggests a declining bear-term time preference among consumers, and consequently a higher propensity to consume in the future. Producers responding to this interpretation of falling interest rates (or firms that compete with those that do) are inclined to initiate new projects or invest in longer term production processes in anticipation of future consumption. As the expansionary policy continues, firms bid up factors of production. Over time, asset prices in familiar markets (such as that of stocks and bonds) and in more speculative activities (such as involving collectibles and engaging in gambling) rise.

This, however, is an artificial boom. It grows out of monetary policy and not consumers’ shifting inclinations towards future consumption. Monetary-policy-fueled booms end when the credit expansions end. This results in the characteristic cluster of error: the sudden appearance of precipitously falling prices, stalled projects, and firms going out of business.