Sorry my response to your other post has taken so long - but it's coming!
First, I would suggest that the person who buys "shares steadily" is interested in income. He expects to get something back every quarter. The raging increase in share prices is part of a collectible psychology in which income is unimportant. Thus, the viewing with alarm by analysts over the extraordinary Price/Earnings ratios.
This is on all fours with hanging on to your antique desk which will generate no income but will appreciate for no apparent reason - except that it does.
Pension investment and suchlike that was invested in stocks is a problem for individuals - but my point was that it has little or no effect on the economy. So it happens that a lot of people lose - even as a lot of other people gain.
One can sympathize with the losers - but it's just their tough luck.
No-one is guaranteed an income from investments and if the pensioners lost, one can feel sorry for them - but that's the way it is. Maybe they should have placed their retirement funds in a savings bank. (That's what I did and I haven't worried a bit about the stock market for 40 years.) Incidentally, my Individual Retirement Fund is now in an annuity with a large company. Last year, I earned 15.92% on it (untaxed)!
More risky than a savings bank? Yep! But, not that much.
I never had a pension fund, or a 401k, or any of the other schemes designed to retire me in luxury. One of the problems that are faced by people involved in saving the world from itself is that the pay isn't good. Yet, I managed to put away retirement money every year as a matter of course.
You worry that firms have lost "a great deal of the value of their collateral". Their "collateral" has run up and then run down. Presumably, nothing else had changed. The Widgets and Gadgets continued off their assembly lines as usual. So the "paper price" of their assets is now is only twice what it was originally - instead of ten times. It doesn't matter to those widget and gadget buyers.
Oh, but if they lost money in the crash, they wouldn't be able to buy widgets and gadgets, would they?
Well, actually they would. The dividends they received (ceteris paribus) would be the same in absolute terms. If they were getting 5% on their investment, but the speculative price increased by 10 times, their return would become 0.5%. (Arithmetic skills not included.)
Oh my gosh!
But the money they would be getting would be the same. They can buy just as many W and G as before.
(Never mind the chicanery of the pension fund managers. That's another matter that deserves attention - as do the Enron type swindles. We are not discussing the crooks, but the absence of effect on the economy of stock market volatility.)
It is true that sensible people get the urge to speculate and may mess up their businesses or their personal lives. But, that is pure incompetence - or bad luck. Or, perhaps the fruits of a neo-Classical dogma that has been most noticeable for its complete failure over the last 100 years.
I don't think banks are stupid. If I came to banker Keith and said - my $10,000 business has increased in value to $100,000 in this soaring stock market, so lend me $50,000 - I wonder if you would say: "Great! I'll certainly lend you $50,000 on a collateral of $100,000."
You'll recall that during the S&L land speculation crash - the Bank of America lost half the value of its real-estate portfolio - a cool billion dollars. That was a real crash. Had we had what passes for a free market, we would have had another Great Depression. We were saved by the built-in rigidities in a controlled economy (including a "loss insurance" that was passed in Congress at 3.15 am by a small group after most of our representatives had gone to bed).
As you mention, the banks learned a lot at that time.
Two items that should be considered.
When the stock market crashed last time (it was called the worst crash since 1929) the economy didn't notice it. The analysts and pundits - all brought up on neo-Classicalism said - "Wow! Fancy that! Isn't that strange?" But, they took no further notice. You see, it was an anomaly. The exception that proved the rule. Actually, the economy behaved just the way I've been teaching for the last 50 years. You know, the basic theory that is too simplistic to handle modern conditions.
Secondly, the present US economy is doing about as well as it was doing before the crash. However, it's doing it with less labor, which means that the unemployment rate for whites is about 5%. I'm deliberately omitting blacks, whose unemployment rate is horrendous. When labor is discarded it's the blacks who go. But, that is different subject.
The point is that the economy hasn't collapsed as a result of the stock market slump - they are mostly disconnected. (Recall, too, that in 1929 the economy collapsed - then the stock market followed.)
Of course the certainties of the expert prognosticators doesn't help much.
There would be no production were it not for consumers. The consumer can be the producer or someone else, but what we know is that there will be no production unless there is a reason for it.
Elision is useful in basic theoretical economics and I get rid of the consumer right away. The consumer is a given. Then, Classical Political Economy can do its job, which is to investigate the Nature, the Production, and the Distribution of Wealth.
Production costs exertion and we like to keep the exertion expended as low as possible. We expect something back for our exertion. If there is no consumer of the products of our exertion we will have labored for nothing.
This is not to deny that a producer may make something - say hula hoops - with the hope that there will be a market for them - take a gamble as it were.
But, if no-one buys his hula hoops - he will quickly be dead in the water.
So tomatoes are produced for the tomato buyer, bikes are produced for the bike buyer, tables are produced for the table buyer - and so on. A table buyer doesn't buy a table because tables are available, but because he wants a table.
I agree with Say's Law and for that matter with Quantity Theory, but by the time the neos have finished with them, they become too shredded for use. The Law is supposed to say that "Supply creates its own demand", but Say never said that. I don't think any of the other Classicals said it either - at least the early ones.
If I swap my book for your CD, then the book is worth the CD and the CD is worth the book. Supply and demand are the same thing. And there we have simplified but original Say.
However, once money is introduced into the equation we get all kinds of peculiarities. But the peculiarities are derived from that misinterpreted thing called money. Actually, that's wrong - money (by neo-definition) is a lot of things and has become thoroughly confusing. In fact, so obtuse that the Quantity Theory of Money is suspect - even though it is perfectly reasonable.
Again, the real problem is the failure of the neos to establish exactly what money is. However, that doesn't stop them talking about it. along with, as you mention, such nonsense as inflation being the way to boost the economy. (Hey, guys! Let's try . . . . !)
They seem to have no respect for consequences - particularly the unintended kind.
The problem with Japan is that they didn't crash completely. They needed a 1929 cataclysm, with land prices dropping into the basement. Then their economy could have picked up and by now things would have been very good for them.
As it was, political rigidities wouldn't allow land prices to collapse all the way. They got hung up on the way down - still too high for a genuine recovery.
Since then, the Japanese neos have tried every trick in the book but nothing works. I would suspect that land prices would be creeping up again - but have no information on that.
Main thing to remember is that consumers are producers too. If they cannot demand, it is because they cannot produce. This led to Henry George's shrewd observation that depressions are not caused by the popular "Over-Production" or "Under-Consumption" theories - but by Under-Production.
Essentially, when people cannot produce, they have no way to demand what they want. So, the decline in demand (under-consumption) occurs. This leads to full warehouses (over-production). Of course our economic scientists grab tight to the effects and try to make something of them.
Henry suggested that we concentrate on why people cannot produce.
But, then, he was kind of clever.
Harry
-----------------------------------------------
Keith wrote:
Harry,
I'm afraid I must disagree with you again over the matter of a slump in
share prices.
I appreciate that if someone has bought shares steadily over a long period
(and carries on doing so) then the occasional slump, however deep and
almost however long, does not greatly matter *to that individual*.
But it matters an awful lot to millions of those (in the UK and US) who
have been paying for a pension over many years and where the pension fund
concerned has been churning shares at a high rate during the last few years
in order to get kickbacks from brokers. In the present debacle of the past
two years such customers have lost anything up to 30 or 40% of their
pension with no chance of getting it back in the time remaining to them.
The same applies those who have bought "high security" bonds and many other
gimgracky investments such as split-risk funds, etc.
It also matters an awful lot to sound and vigorous businesses that are in
the process of exansion and wants to borrow money for investment either by
issuing bonds or borrowing from banks -- but finds that they have lost a
great deal of the value of their collateral and cannot borrow anywhere near
as much as they need.
The banks haven't been affected much so far by the stock market slide
because they largely stopped lending to big business a couple of decades
ago. However, pensions funds and insurance companies have been greatly
affected and there has already been sizeable fallouts. The stock market in
UK and US only have to fall a little further and some very large
household-name insurance companies will go to the wall. The Financial
Services Agency Regulator in England has already had to relax its required
safety margins four times in order for a number of insurance companies to
carry on trading. Soon, the FSA won't be able to relax them any further and
next time the bailiffs will be called in for quite a proportion of the
insurance companies that remain at present. All this will reduce employment
and further intensify the suspicion that many previous investors now have
about the whole of the financial investment scene and the principle of
investing for the future.
It has been a Keynesian fad in the last half-century to believe that demand
creates production. This is not necessarily so. It depends what's on offer.
The Japanese have been trying this for a decade now to absolutely no avail.
The Japanese customer has been unwilling to buy new road bridges or
redundant bypasses. The proper order of things is that it is production (of
desirable goods) that pays wages and creates income and which, in turn
creates demand. This is Say's Law and despite what Keynes said about it, it
still applies.
What is happening now in the US, UK and the EU could be similar to the
deflation that Japan has experienced for a decade or more and no amount of
trying to create demand will cure the problem. Even eminent economists have
been suggesting the over-printing of money in order to stimulate inflation!
What's actually needed is a swathe to be cut through regulations and thus
to encourage whatever innovations or energy efficiencies are in the wings
but cannot quite see daylight at present. Then people can be set to work to
bring these about and they will have wages to spend. Otherwise, I can't see
that America, the UK and the EU will be any better at breaking out of the
clamp of high debt and deflation that is now increasingly encircling and
tightening around us.
Keith
At 20:12 08/02/03 -0800, you wrote:
>
>
>
>Keith,
>
>The easiest answer to this is, so what!
>
>If Charlie buys shares at $10,000 and their value soars to $60,000 before a
>crash to (say) $20,000 - he will say he has lost $40,000. He won't say
>'I've doubled my money' - but he has.
>
>If Joe did the same thing as Charlie, but sold to Eddie at $55,000 - he
>will cry as the stock continues upward, wishing he hadn't sold and lost
money.
>
>Of course he will be smiling after the crash, but Eddie will be kicking
>himself for losing his shirt.
>
>Keith, who had invested in a solid concern - International Global Handlo
>Incorporated Ltd - has been concerned about his friends, Joe, Eddie, and
>Charlie, but not about himself. His checks have been arriving on time from
>IGHIL (pronounced "ILL" as the GH is silent).
>
>Except from the point of view of the butterfly's wings in Tibet affecting
>the world - the fluctuations in the stock market do not affect the economy.
>
>Trouble is that people either have taken neo-Classical economics, or they
>listen to pundits who have taken neo-Classical economics.
>
>So, they think the stock market is a player and may act accordingly.
>
>What they are doing in the UK and the US (and elsewhere) is removing their
>money from the suspect stock market and investing in housing.
>
>Housing - which means land. Back in the days of prudent banking (nowadays
>that's an oxymoron) bankers wouldn't lend on land, for land was considered
>too volatile. An enormous number of people around the world have jumped out
>of the volatile stock market into the volatile land market.
>
>So will the land (housing) market crash? Well, it always has. So will this
>destroy a lot of people? Probably not, for governments will go, I think, to
>extraordinary lengths to save their bacons.
>
>They will be helped by certain rigidities that didn't exist in the thirties.
>
>Social Security, Medicare, and paid off mortgages, will keep the elderly in
>relatively good shape. Large numbers of 'guaranteed' incomes in such
>tenured occupations as teaching along with government bureaucracies will
>hold large parts of the economy. Not to forget unemployment pay and suchlike.
>
>Even so, it will be a difficult time and may lead to the biggest
>governmental incursions into ordinary lives we've ever seen.
>
>But, don't worry, it can't happen here.
>
>Harry
>
>---------------------------------------------------------------------------
>
>Keith wrote:
>
>>A report published yesterday says that it will take 15 years for the UK
>>stock market to recover to the share prices of 1999. This is persuasive,
>>and far more pessimistic than anything I've been saying on FW.
>>
>>Those over the water should bear in mind that UK companies have purged
>>themselves far more thoroughly than US companies so far and it's likely
>>that share prices on Wall Street have a lot further to fall yet. One third
>>of the profits of American corporations will be devoted to filling the
>>holes in their pension funds for the next three or four years, then they'll
>>have to start paying-off their bonds before they can start investing again
>>in a serious way. This will take another few years. Then and only then will
>>they start to pay decent dividends to their shareholders. Then and only
>>then will there be a chance that savings and share investments by the
>>broader public will resume normal service.
>>
>>Meanwhile, watch China. In many ways, they have more serious problems --
>>though of an entirely different sort -- than America's but, in their
>>present Politburo, they have the most intelligent, administratively
>>experienced and scientifically qualified political leadership of any other
>>country in the world. If it takes 10-15 years for America's economy to
>>recover then it's likely that its present overwhelming hegemonic power will
>>have dissipated in the meantime and it will have then to share the world
>>stage with China. By then it's also very possible that the Chinese will
>>have solved the basic problems of a new hydrogen economy which can start to
>>replace the present fossil fuel technology as prices of oil and gas start
>>to rocket.
>>
>>Anyway, back to the item in yesterday's Times:
>>
>><<<<
>>UK SHARE MARKET MAY TAKE 15 YEARS TO RECOVER
>>
>>Helen Nugent and Gary Duncan
>>
>>Stock market managers and pension fund managers may have to wait 15 years
>>or more for UK share prices to recover to the peaks of late 1999, leading
>>academic experts said yesterday.
>>
>>The chilling study of long-term investment returns from ABN Amro and the
>>London Business School (LBS) brought fresh misery to FTSE 100 companies
>>facing a massive pension fund crisis.
>>
>>In a damning verdict on over-confidence among institutional investors and
>>companu executives, the reports' authors, three LBS professors, said many
>>were "irrationally optimistic" on market returns.
>>
>>The criticism came as leading accountants and actuaries sounded warnings
>>over a spiral that threatens to put shares under further pressure as
>>companies are forced to plunder vital funds to plug gaping holes in their
>>pension scehems caused by earlier market falls.
>>
>>Hewitt, Bacon & Woodrow (HB&W), the actuary, calculates that the dramatic
>>fall in stock markets has already led to a £100 billion black hole in the
>>final salary schemes of Britiain's biggest companies.
>>. . . .
>>Earlier, the ABN/LBS report spelt out the sheer scale of the carnage
>>wreaked by the three-year stock market rout. The longest bear run since
>>WWII has seen the losses in shares worldwide reach US$13 trillion -- $2,000
>>for every man, woman and child on the planet.
>>
>>The LBS experts poured scorn on predictions of a swift resurgence in the
>>market. Based on an analysis of 103 years of history from the world's
>>biggest stock markets, they found only a 50% chance that the FTSE 100 index
>>can claw its way back to its 1999 high by 2018.
>>
>>Elroy Dimson, one of the authors, said: "The market has no memory. It rolls
>>the dice for you, or spins the roulette wheel, every year." Professor
>>Dimson and his colleagues Paul Marsh and Mike Staunton said that equities
>>should still outperform other assets over long periods. But investors would
>>need to hold shares for well over 20 years to be reasonably confident of a
>>positive return.
>>. . . .
>> >>>>
>>
>>KH
****************************** 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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