Thursday, January 27, 2011

False Dawn & Confidence Building

Money and finance people, who I will unceremoniously lump as stockbrokers, imagine that the stock market is a magic indicator and a reliable precursor as to what will become of the "underlying real" economy and conventionally wisdom says that the market leads the economy by six to nine months in the olden days.

This notion is interesting for study as pure logic or pure economics or simply pure human behaviour. This is also interesting as a study of human folly.

This is fundamental economics. IF THE ECONOMY IS DOING WELL, which means that firms are hiring because there is demand and they are likely to make good profits, then naturally the stocks of these firms will enjoy higher value as the expected return is higher. There is already a hive of activities on the ground as evidenced by the increasing traffic of people and goods and vehicles, and meetings and negotiations. When this is observed, punters will quickly surmise before the accountants have audited the books that business firms will report good profits, and they buy the stocks ahead of the results. In simple English, when people expect profits to be higher in the foreseeable future, they buy stocks which resulted in an increase in the price of stocks today. Expectations about the future have an impact on events now.

This is human folly. Punters and stockbrokers (and nowadays unfortunately including politicians, central bankers, commercial bankers, merchant or investment bankers) are keen to see a sustainable rise in stock prices, ostensibly to augur well the underlying real economy but more likely to profit themselves monetarily (and momentarily) for the purpose of raising funds for their own private projects collude to induce a "rally" in the stock market by talking and raising expectations. This exercise is now being legitimised as "policy" on the rationale of "building market confidence", thereby provided a path for all lies to be justified on the basis of it being good to the general public as it builds optimism. In recent years, during dull periods in the economy, several such "rallies" have been concocted and they have come and go as quickly as bubbles (a word applied to the market for good reasons), without causing as much a dent on the underlying real economy.

Extended folly. This folly is now extended even to the sacred realm of investment. Of course, this folly was started by Mr. and later Lord Keynes who thought it morally imperative that the government should "invest" even if "digging holes in the ground and filling them up again" just to create jobs when masses of people are unemployed. There is of course between a welfare state of giving free cash and food to hungry people and undertaking a policy where everybody pretend they are working when in fact they are being paid for pointless activities. Such pointless activities in modern times have evolved by cleverly to doing shoddy work by contractors who do bad jobs on overspecified government projects. While some would argue that at least something is built, but that something can be a white elephant or, in budgetary terms, a capital expenditure that can incur an unsustainable stream of heavy operating expenditure when instead a stream of profits should have been flowing. This folly has now gone to private investments. Although the "private" part of the investment may in fact still be government or quasi-government, especially after a period of a dull economy and government overspending has caused a dwindling of the small and medium size businesses and a corresponding rise of government-sponsored monopolies that systematically crowded out the private sector in a series of raids on privately profitable businesses ostensibly for social benefit but resulted in private individual privilege. The problem with private investments, especially when we are talking about the robustness of an economy, is that if you can count the private investments, then the private investments are likely to be lumpy, one-off and probably having more of an enclave character than pervasive effect on the economy. Do not be surprised if the general public does not understand those big private investment numbers in the way that the propaganda masters would like to convince their bosses how well things should be going on the ground.

At the personal level, the folly is common. Individuals, wanting to make it big in life, try to give the impression that they are already doing well by borrowing money to dress well, entertain well, drive well and live well. Many a time, the ruse doesn't work and these individuals often find themselves in debt, and thereby resorting to lying and cheating to "avoid trouble" and end up causing misery to everyone who is unfortunately to encounter such characters.

So, what is to be done properly in real life for the economy?

The government must be unobtrusive, in the sense that it is doing good work in keeping the government machinery humming but everybody just assume that that is the way the world works (when in fact it is just another piece of machinery that needs constant maintaining and upgrading). When the people take the government for granted, then they can begin to dream to kill their boredom by cooking up some activities which will engage them and the general public. Bankers are so bored that they welcome any new ideas to try to see whether they work. This dullness and boredom come when credit expansion is slow and there is no digression into collateral-creating expansion which is self-serving and mindless. Then, bankers and ideas people have the time to sit down and dry run the proposals to make sure that they are sensible at least on paper.

In the present world of smoke and mirrors, everybody is running madly around seeing their own reflections in hazy conditions, filled with fear and uncertainty but plenty of activity. They should realise the room is empty despite the smoke and mirrors and they should sit down quietly and do some real work.

1 comment:

semuanya OK kot said...

As Prof. Krugman reminds us, it is "digging holes" - and later, killing foreigners in WW2 -
that got USA out of the hole called the Great Depression.

As to creating the disaster in the first place, regarding the exceptions made for capital and for the economic ideas cooked up to serve it - such as the fraud of market efficiency - see Prof. Roby Rajan, Tyranny of Economics, 2005. After the 2008 Recession, the political and economic servants of the lords of capital are no longer trying to be subtle, only to
drown out dissenting voices. So far, they have done well in the plan to turn us all into serfs.