Keith (and Karen),
Some points to chew over.
1. We cannot protect ourselves from guerilla attack without so constricting
our freedoms that the guerrillas will have won anyway.
2. Bush (and congress) cannot keep spending money the way they are without
seriously damaging (the somewhat unfounded) confidence in the dollar as a
stable reserve currency.
3. Things that happen in the stock market have little or no effect on the
economy.
I am reminded of the story of the young economist in the thirties who,
after graduating, took the bus home to his father who ran a successful
hamburger restaurant - Ed's Hamburgers.
Some 300 miles away from his father, the young man saw a roadside billboard
"Ed's Hamburgers - the best in the West".
About 250 miles to go and there were several billboards filled with lavish
praise for Ed's Hamburgers. This continued all the way home, where the
billboards sprouted everywhere.
The young man had a hard job getting into the restaurant. There was a line
waiting to get in who didn't take kindly to the pushy young man getting
ahead in the line.
Next morning at breakfast, the son explained economics to his father. "The
cost of all those signs will bankrupt you dad. You should cut expenses and
take them down. Don't you know there's a depression?"
So, the father took down all the expensive billboards and the young
economist was right. There was a depression, and father went broke.
It's an old story and makes the point.
If producers believe the experts, who know little, or the pundits who know
less, or the politicians who know nothing, and begin to cut back production
- there could be a problem.
For almost 50 years, I have been teaching that stock market antics don't
cause depression. In 1987, stock prices fell by almost one third ("the
worst since the Great Depression") so what happened to the economy?
Nothing.
When the economy is crumbling around the edges and people realize they own
a factory where half the machines are idle and lay-offs have decimated the
work force, they will want to sell. Trouble is that when lots of people
have factories in similar condition and they all want to sell, prices begin
to drop - perhaps precipitously.
The economic collapse precedes the stock market collapse.
Sorry to bring it back, Keith, but we are in the middle of a "collectible"
psychology. The reason you have, and hang on to an empty Rosalie beer can
(present price $10,300) is because you think it might increase. There is no
income attached to the beer can, but you don't care. The price is everything.
This led to my comment about price/earnings ratios which have reached
extraordinary levels. I referred to the analysts' bleating about this.
"Investors" didn't seem to care about earnings as they bid prices higher.
This is on all fours with the owners of the beer cans (there appear to be 3
Rosalies in mint condition. Now say someone found in his attic a crate of
mint condition Rosalies and took them down to the local collectible store
where he sold them for $5 a can.
What would you do as a collector? The magic that provided you with a
$10,300 can has disappeared with a pop. You have a $5 beer can.
Let me repeat how I first came across a Rosalie beer can. One was sold at
auction for $4,000. Before the lucky bidder left the room, he was offered
$10,000. He refused. That was more than 20 years ago. Over these decades
the beer can has only just risen to $10,300.
He should have made the deal, but he didn't. If you think about why he
didn't take it, also why the $10,000 was offered, you'll get a grasp of the
collectible market.
It's a market without the price mechanism control that makes the free
market so effective.
I talked about this with regard to the land market, which is a collectible
market. Wow, look at those housing prices soar! It seems impossible for the
modern neo-classical economist to divide the two components of housing -
the building and the land.
The house price drops every year as with all products that get older. The
land price rises every year because it's a collectible. It also suffers the
possibility of an "inexplicable" crash - as with the stock market and the
Rosalie beer can.
Even the London Economist seems filled with people unacquainted with real
life. A recent issue cover story pointed out that "real estate" all over
the world is holding up the world's economies.
Our economic well-being rests sturdily on a beer can!
Harry
_____________________________________
Keith wrote:
>The London and NY SE share prices both dropped steeply yesterday as if on
>cue after reading my FW posting of yesterday! Last night the business
>editor of BBC TV was saying that the LSE traders were totally flummoxed by
>what is going on and in a state of panic at times. They've never
>experienced anything like it. He said that few of them can remember the
>last time there was a recession (1972 onwards). Those traders who can
>remember have long retired to their country houses.
>
>My two reactions to that were:
>
>1. I can't remember much about everyday life in those days either! More
>specifically, the recession finished off my environmental magazine,
>"Towards Survival". I'd built it up over about three years and it had
>several thousand subscribers in 14 countries, but I was still subsidising
>it out of my full-time salary in industry and when paper and mailing costs
>went up four times within about 18 months this was beyond my financial
>abilities to keep going.
>
>It was this event that launched me into politics and I joined the Liberal
>Party. Because of my reputation in the environmental movement I went to the
>top pretty quickly. Within a year I was on the Midland Executive, and a
>year later was on the National Executive. There I found myself sitting with
>highly-ambitious young and middle-aged men of about my own age, and there I
>discovered the fact that few of them were really interested in ideas and
>policies that might be good for the country but rather in their own
>careers. As well as feeling naive within this world of practical politics,
>I felt something akin to disgust and after about four meetings I resigned
>from the NE and the Party.
>
>2. My second reaction was to look up charts of share prices over a long
>period. The US S&P 500 going back to the 1870s and adjusted for inflation
>shows that the average Price/Earnings ratio of share has been about 12
>(rather than the 14 or 15 that's usually mentioned). It's now around 35. In
>the '70s recession the P/E was averaging about 8 for almost a decade. It's
>a shock to realise this.
>
>I cannot see how there's any way of avoiding a recession. There's been the
>most absurd stock market phenomenon of one bubble followed by second one
>since the late 80s. Share tipsters, mutual funds and so on have had a
>wonderful time for the last 10/12 years and have managed to persuade scores
>of millions of ordinary people to "invest" in shares during this mad
>episode -- appealing, of course, to the natural greed of most of us. If
>this large number now decide that it's time to stop consuming so much and
>try and repay their credit card debts then the deflation which is already
>apparent in both producer and consumer prices will intensify and
>unemployment will surely mount. In the coming year or two, America's Fed
>and the Bank of England might find themselves pushing their interest rates
>down to almost zero (as now in Japan) in a vain attempt to get the economy
>moving.
>
>Keith Hudson
******************************
Harry Pollard
Henry George School of LA
Box 655
Tujunga CA 91042
[EMAIL PROTECTED]
Tel: (818) 352-4141
Fax: (818) 353-2242
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