Alpaca Economics

Who wants to talk about economic armageddon?  Not me, I want to know,

What if the alpaca bubble bursts, as did the emu, ostrich and llama bubbles?

That’s from a front-page (!) article on alpacas in the New York Times.  But seriously, alpacas do make for an amusing illustration of bubble economics.

Alpaca fleece is very nice but five pounds, a year’s worth of production from one alpaca, is worth only $200 while alpacas sell for about $20,000.  The price of alpacas is supported not by their earnings but by the prospect of capital gain, specifically the hope that more people, "attracted by the lifestyle," will enter the alpaca business driving up demand.  A Ponzi scheme with a cute face.
Alpaca
The Ponzi scheme has some prospect of continuing a little while longer because export and import controls make it difficult to bring new alpacas into the country.  Furthermore, a breeding registry uses DNA analysis to prevent competition from "riff-raff."  Breeders like to think that the registery is about improving quality.  More likely it’s about holding down supply and creating a bubble focal point.

Why does the price of a highly valued art work by a famous artist plummet when it is revealed to be a forgery?  Can the aesthetic value drop by nearly as much as the price? I doubt it, despite what my art-loving co-blogger may argue.  The price drops because the artist’s name is a focal point for buyers – the buyers aren’t buying because of the aesthetic pleasure of the object so they can’t buy on taste alone.  Instead they must buy what they think others will buy.  Who knows how the intial craze begins?  But once it does the artist’s name is a focal point that brings on the inflating returns.  The alpaca registry does the same thing for alpaca buyers – it coordinates the buyers on the bubble object even if alpaca fleece from non-registered alpacas is just as soft.

My guess is that the alpaca bubble will burst quite soon.  Why?  Because when the rubes in the street know what an alpaca is, someone is about to be fleeced.