Hi Harry, At 09:16 24/01/02 -0800, you wrote: (HP) <<<< You'll recall my discussion of a collectible market - the one that isn't controlled by the price mechanism. (The price mechanism is the engine of the free market, constantly bringing changes in supply/demand back to an equilibrium.)
In a collectible market, when the price goes up, there is no rush to market to supply the demand and return to equilibrium. In fact when the price goes up, it encourages collectors to stay away from the market, which phenomenon raises their determination to keep away from the market in expectation of further increases. In a collectible market income doesn't matter. Price is everything. I pointed out that the land market is a collectible market - a major reason for the land component being between 50% and 70& of the cost of housing. However, the top end of the stock market also acts like a collectible market, which is why we have a price/earnings ratio that's out of kilter, causing some concern to market analysts. >>>> Yes, I agree. However, I wouldn't put share prices and land prices in quite the same sort of collectible basket. At least, not in England anyway where, by a variety of policies and legal devices (e.g. leaving one's stately mansion "to the nation" -- but carrying on living in it!), the overall pattern of land ownership has hardly changed in the last 1,000 years. (HP) <<<< What happens in the market has little effect on the economy, though what happens in the economy usually has considerable effect on the market. One recalls what happened to the economy in the 80's during "the worst stock market crash since the depression". The answer was nothing. Whatever the ups and downs of the stock market, they don't matter (except to the participants). The crucial question must be -- are the goods still leaving the factories, or are they slowing and stopping? >>>> Yes, I agree again. Share prices are mainly an effect of the economy, not the cause (at least, not an important one). I wasn't suggesting that there is a "law" that says that p/e ratios must inherently revert to an average of about 14 (or 7% return on capital). But, as I see it, a 7% return corresponds to a 2-3% growth in productivity (that is, allowing for taxation and intermediate financial inefficiencies) which seems to be the maximum that is possible overall in any economy. Although, during a boom, share prices are pushed up considerably by speculation and expectation of very large profits, a growing proportion of stock market investment comes from pension funds. These longer-term expectations are much more modest than speculators'. <<<< I could add more to this but let me simply say that mostly the people who "run" the economy haven't a clue why the economy behaves the way it does. They really don't know why the economy has been in "boom" and they don't know why the boom has faltered. I will say that it has nothing to with the stock market, nothing basically to do with the currencies or the banks (these react to an existing economic condition) - but everything to do with why production slows and stops. >>>> As mentioned in my other posting today (reply to private FWer message) a great deal of the present recession is a result of stock overhang (in this case, optic fibre cable -- and also memory chips) which is more reminiscent of the recessions immediately after WWII (and indeed, trade recessions of the 19th century). But I don't have figures to justify this. When Greenspan was talking of "exuberance" last year he was referring to share speculation, but more fundamentally he should have referred to investment exuberance -- both within the new high-tech industries, but also within the "traditonal" industries of steel- and car-making where there is still a considerable amount of surplus production capacity. So when you say that politicians and economists haven't a clue as to how the economy behaves, I would suggest that it's because they don't pay enough attention to the actual physical over-investment that occurs during boom times. This is not directly measurable at the time it is happening (except by detailed and exhaustive surveys of the whole manufacturing economy) and only shows up later. But even if it were immediately measurable, it's doubtful that the corporations concerned would individually modify their behaviour anyway for fear of losing market share -- the "tragedy of the commons" and all that. Keith Hudson __________________________________________________________ �Writers used to write because they had something to say; now they write in order to discover if they have something to say.� John D. Barrow _________________________________________________ Keith Hudson, Bath, England; e-mail: [EMAIL PROTECTED] _________________________________________________
