How many times have we heard politicians recently tell us that "the
fundamentals are sound"? On hearing it, we are supposed to picture expansive
landscapes full or wheat, oats or corn, and cows in green pastures that sweep
off into the distance. Or we are supposed to picture workers with secure jobs
doing their thing on assembly lines, or trucks and trains moving the stuff they
produce to distant consumers, or families able to pay their mortgages and happy
in their homes. The picture is supposed to be one of productivity and the
expansion of material goods, of supply meeting demand and of nobody being left
out if he or she wants to participate by putting effort into the economy.
After all, it goes back to the 18th Century and Adam Smith, doesn't it?
But are those really the fundamentals? In reading the business pages, one has
increasingly come across words like credit, leverage and derivatives. One
learns that a typical commercial bank lends about $10 to $11 for every $1 of
capital on its books, but that investment banks have typically invested $22 for
every $1 and even as much as $30 to for every $1. One also learns that the
financial markets of today are highly sophisticated, consisting of very bright
minds, very powerful information technology and vast amounts of data.
In an earlier posting, I suggested that the economic world consists of two
parts, a highly supplicated upper world equipped with technology that permits
it to do things ordinary mortals would never dream of, and a nether world,
consisting of ordinary mortals – people who either have or want ordinary jobs,
urban and farm families who want decent houses and cars, and so forth. It is
the latter that politicians and economists have traditionally thought of when
they referred to the soundness of the fundamentals. But, judging from what has
happened to financial markets recently and the impact this will have on the
well-being of the goods and services economy, it may well be that the upper
world has become fundamental. If it goes down the tube, everything else seems
to follow. The assembly lines begin to shut down, crops are left in the
fields, and the cows head for the hills.
Don't feel badly, Adam Smith, you may have had it right in your day, but a lot
has happened since then.
Ed
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