For some, the world economy is a puzzle. Just when things look like they are recovering from 2008, suddenly stock markets are falling everywhere. The sky is falling! The world is coming to an end! No, and no, although it is possible the world we once knew is changing and will never return to what it was. What I do not understand is why the inability to return to what was is so surprising.
First, the stock markets. Why are they falling? There may be a number of reasons, but in my opinion the obvious one is they are overpriced. In my last post I mentioned Apple is showing signs of bear behaviour. But then, look at the price it soared to, and, bearing in mind that it soared on the basis of an outflow of revolutionary products and that outflow appears to have at least paused, and furthermore, sales of its iphone are not going as well as hoped, why isn’t a correction expected? So, what about overall? In my opinion, the whole market was overpriced, and the reason for this lies in quantitative easing (or printing money). Now, you might expect that pushing money into the economy would be good, and it would get the economy moving, but that is misleading because as far as I can see, most of that money went to the financial products industry. A lot of that money was sucked up by bonds, but these now have very little yield, so investors go elsewhere. The simplest elsewhere was the stock market, so stock prices soared. If that analysis is correct, then this fall in stock prices is a natural correction, an inevitable correction, and there is nothing to worry about at all unless you purchased stocks just before the correction.
Mind you, if you have a few hundred million dollars to spare, there will be opportunities to take advantage of a market slide, although it may be a bit late. The idea is to short, or bet against a rise. The film, “The Big Short”, is an excellent account of how this can be done, and some of the problems in doing it. You may think we have learned and that sort of activity is over, but never fear; if you have the means, the bespoke tranche opportunity beckons. Of course it pays if you know what you are doing. As the film showed, even when the economy is shot to pieces, some who work out what reality is can win big. Me, I am a little short of the necessary cash so it is irrelevant, but much of that money that went into quantitative easing is being held by a very few who can and probably will participate in such activities. So in my opinion, part of the current problem is that while there is a mountain of money sloshing around, it is all sitting in financial “products”, rather than in something that generates wealth for the lower 99% of the population.
Obviously, that cannot be the only problem. One that is cited is the price of oil. In practice, this should be good, because it lowers the cost of a lot of production, but for some reason, it is considered to be bad. Certainly, it is not doing oil producers much good, but who else is it actually hurting? One group that it will be hurting are those trying to develop synthetic fuels. I shall leave that for another post. However, the reason it is not doing much good is probably that while the prices of many goods are coming down, too many people still do not have the money to buy stuff, so the lower prices are not stimulating the economy. This is the real problem of having too much money in the hands of too few. They are sitting on it.
Apparently, a number of major corporations are also sitting on money, rather than investing in new job-creating businesses. Why? My guess is that this is in part because professional businessmen, trained in financial management, now control the Boards. They are not creating new businesses or products because they do not know how to, or they are too dull to see what could be produced. There are exceptions, and the reason Apple grew so huge is probably due to Steve Jobs obsessions with new products, but Jobs was an exception. To my mind, this is the biggest single problem with the inequality that has come about. As in feudal times, when most of the wealth is concentrated in the hands of the few, all the few do is to feed their own egos and their own likes. Everybody else gets forgotten.
There are still other problems, such as ISIS cited, but I don’t see that as relevant. More of a problem for Greece is their debt problem. That might have gone away from the news, but it most certainly has not gone away.
Nevertheless I think the major problem we have is not exactly recognized by most, and it is that we are undergoing a structural change in our economy. This has happened many times before. The first to go out of business were flint knappers, and many have followed. While we still have horses, the average person does not engage personally with horses any longer. Right now, I have no idea where the world economy will end up, but it seems that work for the unskilled is basically going to disappear. Those educated for the new world will thrive, but what sort of education is desirable? Some of the specialist ones are obvious, but others are less so. And life will be particularly cruel for the child who wastes time at school and refuses to learn. What do you think?