Tuesday, September 30, 2008

Bad language is just part of it

Poor Salesmanship is one of the reasons given for the bailout failure, and at this stage I’ll stick with the term bailout over rescue. But the whole area of economics and the markets suffers from poor explanations and language use. I was made aware of that today from the uniformed comments, the non-specific fear being generated over the issues.

I was interested to see, following the 7% +/- hit on the North American exchanges how we would fare. The initial hit was around 4% but that halved by afternoon trading. What really stirred up the locals were comments like “a $60 billion loss”.

My reaction was to advise that we see the day out and that it was, in reality, a paper loss not real money. Sure, anyone who opted to sell down made a money loss, but presumably buyers are looking to make money gains. To that extent, the market figures are illusory. [Ok, I know some of you are far more acquainted with market mechanics than I am, but the claim is broadly correct.]

But then I was asked; if it wasn’t real money why were the banks collapsing? Hang on! Surely that is another issue again, a different market issue. But the punters can only see this vaguely understood thing which bandies around sums like billion and trillion. At the top end the numbers are going cosmic, at the bottom they haven’t really moved for over a decade.

This is the issue I have the growing confusion between economies and markets, made worse by the US dabbling in ‘market economics’. Even when an economy allows something close to corporate anarchy, giving corporations and financial institutions free reign, there must still be a distinguishing point between the markets and an economy.

When McCain and others bleat about the ‘sound fundamentals’ what the hell are they talking about? Do they know? In the model the Bush administration has developed they only see the markets as the economy and the markets certainly aren’t sound.

Aussie and Canadian fundamentals are sound, but then we’ve stuck with a mixed economy model, despite attempts to follow the US. But it is hard to berate the ordinary punter for confusing the what and why when the economic and financial leaders barely have a clue.

4 comments:

lindsaylobe said...

As you say the economy isn’t indicative of short term gyrations of its stock exchange.

In the USA both rising debt and dangerously over leveraged banks funded growth. Politicians claimed the economy must be in good shape evidenced by modest growth in the GDP even though savings had turned negative and total debt ballooned to 375% of GDP.

But returns on the S&P 500 in the USA was also negative for the decade ending on 30th June 2008 and it has only got worse since, with worse to come, unless the systemic failure is soon rectified. An owner of a portfolio of shares purchased about 10 years ago representative of the index, who spent the dividends, would have seen his entire capital almost gone after allowing for inflation. But they were much better off than foreigners whose billions in rescue investments were wiped out in the space of just a few months.

Does anyone seriously think that is all part of a free market? I would contend it was neither transparent nor well regulated.

The returns here in the Australian market are much better but investors nevertheless suffered a + 25% decline in the listed value of their investments in the past year. Many are bewildered why strong companies with good earning prospects and no involvement in sub prime securities have been marked down so heavily. But the market is building in fears of what might happen should the whole world implode and businesses collapse with significant bad debts.

I think regulatory reform measures are urgently needed with the bail out or whatever as just a first tentative step of many to come.

Best wishes

Praguetwin said...

I think the key difference is that markets involve trading shares or futures (or currency, or commodities) but the economy counts everything down to the guy who collects aluminum cans to get the deposit back.

Lidsaylobe,

I think you have GDP confused with government revenue. Total public debt is nearing $10T. GDP in 2006 was about $13T if I remember correctly. FYI

lindsaylobe said...

No confusion there my friend.

True, you government Debt is nearing 10 trillion, but it dwarfed by your private debt!! (What is collectively owed by the private sector)
If you add the 2 together it comes to 375 % or 3.75 times you’re GDP.

Debt to capital ratios in the past decade escalated from ratios of 10 to 1 to 30 to 1 or more, (e g Fannie & Freddie was about 40 to I from memory, Lehman was 23 to one and so on ) to create this unsustainable leveraged structure now destabilizing the whole economy.

Private sector debt is okay if it is represented by future investments or assets which generate strong future returns.
But your private debt increase was mostly highly leveraged borrowings against a bubble in house prices which have since collapsed.

Best wishes

Cartledge said...

My argument is still that difference between what is an economy and what are its component parts.
The secondary issue then is the difference between a stock market problem and a credit market problem.
It's just too easy to erroneously lump it all in one basket.