In the 1950’s there were large development projects and resorts built around the Salton Sea in Southern California as the lake was being branded alongside Palm Springs to be the getaway destination for Hollywoods elite. Through years of agricultural runoff, the lakes high salinity content, and with the lack of freshwater inflow, it was found to be an extremely toxic and the surrounding towns and cities soon were abandoned. Today you can visit those abandoned hotels and ghost towns along its shores that now lay in ruins. I’m sure at one time it seemed to be a developers dream, but eventually proving itself to be a malinvestment.
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Cash in my bank and savings account is earning zero percent. Inflation however you measure that is north of 1-2% so my purchasing power is declining. Staking crypto is a powerful paradigm here !
My example is a fraud from the past, where some of the biggest corporative players in USA just listed many Chinese companies on the US’s stock exchanges and promised the investors huge returns without any deep researches.
If anything seems too good to be true, it’s probably not.
Jan 2021 investing in Tesla stocks now would be a malinvestment in my opinion.
Year to date is has increased in value by 700% while the company’s profits increased by only 20%.
Also the insiders charts show that they have been selling constantly in the last year and currently hold almost nothing… therefore the majority of stocks are in retail hands.
Now… I’m not a financial advisor but translation is: strong experienced hands sold for the past year while weak inexperienced hands bought.
Without going into deeper details… nuff said !!
Physician run surgical centers can be a malinvestment. The amount of capital that is needed to be injected into the business to start it, and the amount of interest on loans to support the initial investment plus the overhead and total cost of buisness is at times much more that the profit that can be gained from the surgeries if there is not enough contributing physicians to bring patients
Dubai was a land full of grandiose, landmark projects, only to see the bubble burst. The office-space vacancy rate in prime locations was in 2009 according to some estimates at around 40%, other estimates arrived at a total 74% occupancy rate in residential and commercial space.
https://wiki.mises.org/wiki/Malinvestment#cite_note-Ulrich_Rise-23
Burj Dubai, the tallest building in the world (about 2,600 feet high with 160 stories) has been at its opening in January, 2010, described as mostly empty.
https://wiki.mises.org/wiki/Malinvestment#cite_note-Hawthorne_vacant-24
90% of its 900 apartments were still empty a year later.
I would have to say the Dotcom boom. Tech unicorns naturally inherit the highest valuations, therefore, claiming your company is one when it’s not, is a risky move. Taking on a fake moniker always results in your company becoming a victim of an overcooked market, as demonstrated by tech during the Dotcom bubble and banks during the Subprime bubble.
The biggest malinvestment right now imo are fiat currencies
The Spanish Housing Bubble:
https://thetseconomist.com/archive/december-2016/what-caused-the-spanish-housing-bubble/
This is an example of a malinvestment that led Spain to a huge raise on the real state prices and left many finished houses abandoned and many of the population were economically affected in a negative way, leading people to lose their homes because they were unable to pay their debt.
Incentives were created by real state companies for people to be able to buy a house, if they could not pay the first loan, they would modify the price (raise it) to offer a lower first loan and a lower interest rate, but making the final price bigger, in this way many people acquired houses they could not afford in the future.
The bad consequences of this bad investment are far from ending. If time does not correct the real state properties holdings, the government might have to invest as well in demolishing all the abandoned houses.
This has a negative impact on the environment as well.
Most Government programs at least in the US. As they are highly inefficient, very politically sensative, poorly run and commonly corrupt (working deals to help friends or making deals to get other bills passed - congressmen are like used car salesmen - no offense to used car salesmen).
* SEC/FDA/and varous other regulatory agencies - While good in theory to help regulate and protect. They go beyond that…
- Excusing personal responsability. They could be more of a advisory with 1/4th the staff/costs/paper work… And do a review of products
and why they recommend or are concerned. And leave ‘we the people’ to heed or ignore advice.
- Often very bias view points or complete lack of understanding of the science, technical, or any field they are supposedly “experts”
- They cause high costs in money and time to get simple processes approved.
* IRS - tax system is highly inefficient - thousands of pages of tax codes for private citizens (and worse for corporate)
- A simple Flat rate (25% should be a MAXIMUM for total governement taxation - federal, state, county, city [regadless of how many layers of taxes exist… Federal Income, Social Security, Medicare, State Income, AMT, capital gains, short term capital gains, sales tax, gas tax, [Europes VAT tax].) Taking nearly 50% is criminal. US tax increases the percentage of tax the more you are paid (even though you took years off working hard to contribute more to society or employment] Gov kills incentives to thrive, succeed and innovate). And the rich do offshore ban
king loop holes and other techniques to get around. [which are often not great until multi-millions]
- With a simple system, we could nearly eliminate the $11.8 billion/year for the IRS, also reduce the costs to those filing taxes.
- Eliminate loop holes for more income. Also avoid people leaving the US for tax reasons.
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The pension scheme is a malinvestment. It makes people to save money for the future with a promise to ease their finances after retirement. But in reality, when they retire the money saved has lost some of its original value. This makes the savers to reconsider options and compromise on their original plans.
Australia’s spectacular LNG malinvestment - MacroBusiness
Easy to explain above malinvestment:
Money invested in the Liquid Natural Gas project (by the government and Australian stock holders) to be sourced and shipped from North-West Australia, will not make positive returns. The project has increased the price of LNG for Australian consumers causing a double loss for the average investor.
Nakheel Tower in Dubai was a proposed 3,300-foot-tall skyscraper with 156 planned elevators. Nakheel was designed to be the visual and economic focal point of the man-made Palm Jumeirah, the fake series of islands off of Dubai that is now experiencing extreme erosion and other environmental problems.
Under Obama’s presidency, the FED had a zero interest rate policy to “save the economy”. In the immediate sense, it was working, which led to Obama’s re-election in 2012.
However, this actually created a trap for consumers to spend more, investors to invest more money, lengthening production periods (as if there were more savings), and directions, that would normally never occur in an non-intervened economy.
Overspending occurred, houses were bought, malinvestment ventures failed, and loans could not be paid back resulting in a huge transfer of wealth from the ppl to the FED (racketeers)
From 1990 to 2006 house prices in Ireland were sky-high the banks were lending a huge amount of loans and mortgages with low-interest rates but when the bubble burst during the 2008 - 2009 economic downturn house prices dropped by 50%. Banks fell into difficulty and people became unemployed. For ordinary people, it was a malinvestment as they found themselves in negative equity.
In the USA, the bailout of large investment brokerages and banks in the 2008 recession is a prime example. This wasn’t a distortion of just “low cost” (low interest rate) money, this was a case of “free money” - money “lent” to the institutions with loopholes for forgiveness that reflected the intent that these loans were never to be repaid. A similar distortion occurred ty the Federal Reserve buying derivatives that were worthless from large financial institutions This monetary policy “set up” the economy to create another round if malinvestments - derivatives and loans that had no economic rational (i.e. repayment) of being repaid. This also created a huge transfer of wealth from the moderate “retail” investor to the wealthy few that had large holdings in many of these institutions.
The 2008 Housing Crisis is an example of malinvesntments from banks. In order to have more "qualified’ loan recipients, the banks would provide loans at an adjustable rate (ARM) to people who could not afford them. After a period of time, the banks would increase the interest rate, thus making the mortgages higher causing many foreclosures. This ripple effect caused many banks to almost to close; until the government provided “loans” at the cost of the taxpayer to recover their losses. This is a misallocation of capital due to taxpayers having to cover for corrupt banks and terrible business practices.
I believe that what happened to Blockbuster is an example of mall investment and bad decisions.
Blockbuster’s CEO had the chance to double 10x shareholders profits and its market share if he just had better vision about what’s coming.
He didn’t accept to invest in Netflix so in 2010 Blockbuster went in bankrupt and Netflix is now a $28 billion dollar company.
We all know what happened next.
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Wirecard, publicly traded company
Investors jumped like crazy on the train to buy shares of the company astonished by its extremely rapid stock growth on kind of a gold rush.
No body could believe how a payment processor and financial services provider could grow so fast.
Once the company announced that €1.9 billion in cash was missing, on June 2020, it owned €3.2 billion in debt.
The customers of financial companies using its services suddenly saw the funds on their accounts frozen, not knowing what would happen to their capital.
The company started to be dismantled after selling its assets of its main business.
Research an investment (could be a public company, private company, government agency, infrastructure project, etc) that you believe meets the definition of a malinvestment (past or present) and argue why you think it’s a misallocation of capital (3-5 sentences).
The thing that comes first up in my mind, is the condition on the finance markets before the famous bank crisis in 2008.
Money was allow to flow into the system like crazy (Distorts incentives) that basically went straight into bankers pocket to spend in some crazy parties and jets. Investors could purchase stocks in their own company’s stock or their partner’s at well overvalued price.
As well, the money was lend out in illusions of wealth, even though the borrower could realistically not afford it (even babies could get good loans).