Arthur Cordell replied to my general inquiry at the start of this thread with a well reasoned answer. I have been ruminating on his wisdom for several days, seeking to find what is causing my discomfort. Perhaps more important is the surge of mutual fund money keeping stock prices high. This could turn out to be a sad turn of events. Sort of like a land boom that goes bust. Boomers are worried about their futures...governments seem to be saying 'you are on your own.' So every available personal surplus goes to mutual funds (who play against each other) thereby driving up (or maintaining) stock prices. Market players see stocks rise and feel they were right to get in early, latecomers afraid of being left behind are now throwing money into the market. What will cause the bubble to burst? Probably an exogenous event: mideast sparks that threaten oil prices, sudden demise of Greenspan. Or, it could take some time. Consider a decade or so from now as people begin to convert mutual funds to cash for their 'golden years.' All of a sudden markets are no longer rising but are falling. Seeing this boomers rush to convert their mutual funds so they too can enjoy their 'golden years.' Busts are made of this. (TL) This answer is reminiscent of Galbraith, who may not be the most profound economist writing but who has a certain focus of awareness that a "crash" is possible, nay even probable. I have been reading a guy named Krugman, of which I will post an essay soon, who postulates that the problem economists have not been able to provide a satisfactory answer to is "Why do recessions exist or happen?" The best answer he can give is that people take money out of the economy in the form of savings and that this percentage is culmative, leading to an imbalance which eventually creates a condition of less demand from consumers due to lack of money in circulation. Keynes and Friedman, he argues, both devised ways to inject money into the marketplace when this condition happens. One by public works and government stimulus and the other by a constant addition to the money supply by a fixed annual percentage. Perhaps, Arthur you could give me your thoughts on two quick questions: 1. Is Krugman's assessment correct among economists? 2. Does mutual funds and RRSP's and other investment instruments act as "savings" in the manner that Krugman indicates? A follow-up question is, "If this is common knowledge, what is the reasoning behind the government transfer of emphasis on private pension plans dependent on the stock market over universal pensions such as CPP?" Respectfully Thomas Lunde
