The mother of all evil is speculation – Gordon Gekko
If you are familiar with economic crises, you will realize that no matter the industry whatever happens in a bubble is caused by speculation, from the tulip mania in 1637, the dotcom crash in the 2000s and the real estate bubble in 2008. Speculation has been one thing that has driven a lot of market to its peak then to the humpty dumpty great fall which crashes the economy.
This post will be looking into a bubble I am sure a lot of us haven’t heard about before and that’s the Souk al-Manakh bubble of 1982 in Kuwait. We know Kuwait is a country relatively smaller than the US in land mass and population but did this country go about a bubble so large to cost a nation $90,000 in debt which is valued at $240,000 in 2019 based on inflation. The Souk al-Manakh bubble was a worth $266 billion as at 1982 estimated in quadrillions based on inflation in 2019.
What Happened?
The country just found the black gold (Crude oil). To be sincere, the black gold the been the major rise and fall of several countries in the world but as for Kuwait, the bubble of Souk al-Manakh isn’t an oil bubble but a stock exchange market bubble. After the country found oil in February 22nd 1938, things changed as money began to flow in and oil producing countries became rich (do not forget that Kuwait still control about 7% of the world’s oil reserve). The country was making money as they drilled out more oil and since there was demand, the country kept on making money and as usual for a country with good government, the money will trickle down to the citizens.
Since the country had excess cash, people wanted to invest this money somewhere as they wanted to become relevant in the society as well and be able to make deals with the royal family, elite groups and high ranking officials. The royal family, high ranking officials and the elite groups made most of the money but the citizens weren’t giving up on trying.
The government created Kuwait’s first stock market called the Boursa in the year 1977. The only issue with this stock market was that it was mainly a place for the wealthy to display how much money they had to invest and not a place for everyone to invest. Also, the government limited the number of Kuwait companies and the market didn’t accept new IPOs except the Sheik accepted it but the Sheik wasn’t going to accept IPOs because of the fear of out of control speculations which could collapse the market.
Since the people wanted a place to dump the excess money, another exchange was created a year after called the Souk al-Manakh. The stock market allowed everyone to trade in companies outside Kuwait. The Souk al-Manakh was like an unregulated market while the Boursa was the regulated market. What can you say, people were pumping money into the Souk, oil price was rising, the stock market kept on increasing at double its percentage hourly and millionaires were made from all angles. Some stocks doubled in a month while others increased as much as 1700% in few weeks. The Souk al-Manakh which was the unofficial Kuwait market became the third world largest equity market after the United states and Japan
Did the Kuwaitis have too much money to keep buying stocks? Not really, the government had a law which allowed people to buy as many shares of stocks as they wanted as they could buy infinite stocks. The Souk al-Manakh also helped them by allowing people to buy stocks with post-dated cheques without checking if the investors was making up to what was written on the post-dated cheque. The Souk al-Manakh believed in this law and allow this because the Kuwaiti law goes against defaulting on debt.
At the unset, this worked well because most people made the money and profit before the date on the cheque and were able to pay. And since they made profit before the date on the cheque, they could buy any stock no matter the price. Soon companies that didn’t have any revenue or income, customers or products started to get listed on the Souk al-Manakh Stock exchange and this was where the problem started (greed). Soon news started to spread that the companies listed on Souk al-Manakh stock exchange market aren’t legit and were crap. Soon people started depositing bounced post-dated cheques and there the problem started. The problem became immerse when the finance minister said the government won’t be stepping in to help the people rather, people should pay for their sins in accordance with Islamic tradition. Panic came in and the market crashed followed by a recession based on personal debt up to $90,000 per head.
It could have been easily paid since Kuwait was an oil producing state but unfortunately, the price of oil had plummeted as oil price was dropping at 80% in its 8th year. Souk al-Manakh financial problem on the economy caused the country to shut down its official exchange Boursa in 1984 and built a new stock exchange market for everyone called the Kuwait stock exchange market. There was a heavy recession in the country and it was felt in the east real well.