No, says Richard Gwyn

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One institution, though, may suffer an irreversible loss of faith. That's the stock market. It's actually a most curious institution. Created originally so that companies could raise capital, it hasn't performed that function for years, except marginally. Almost all investment capital comes from the banks or the retained earnings of the companies themselves.

Rather, the stock market's purpose is to make money, almost out of nothing. It's a kind of money tree. That was fine when great numbers of people made money plucking its products, in their pension funds, in their small portfolios.

Now the realization has taken hold that the stock market is a rigged game, no different from any casino. The insiders do extremely well. The real — unadmitted — purpose of getting all the other investors involved is to create a pool of money so the insiders can cream off the top; to be mugs, that is.

Mass stock ownership was supposed to be "people's capitalism." What we've got is crony capitalism with a lot of mugs looking in from the outside. That can't last. If anything really important gives as a result of this crisis it will be, I predict, the stock market.

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[ July 22, 2002: Message edited by: rasmus_raven ]

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One institution, though, may suffer an irreversible loss of faith.

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Nevertheless, the prognosis now is for a Japanese-style grinding-down of market valuations; losses of a few points every week over the next few years. This will force a gradual shift out of stocks and into bonds, and be accelerated by the inflationary surges expected to come over the next decade. (Interest rates will come up, making bonds more attractive than stocks)

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Now the realization has taken hold that the stock market is a rigged game, no different from any casino.

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Why is it not OK for adults to think through the possible consequences of placing their bets on the casino of the stock market, I wonder?

Perhaps the mutual fund sharks are panting for more money to play with so they can get those fat commissions.

One thing that used to be common in the mutual fund industry were these things called trail fees. The longer your customer kept his or her money in your fund, the bigger your cut got. So if you had a bunch of people all in mutual funds for, say, 10 years, by the end of that decade you'd be rolling in some serious money for doing nothing other than the occasional "portfolio rebalance" (which basically means doing what everybody else is doing - funny, that herdlike behavior of the stock market isn't it?) and having your customers sign off on the paperwork.

I dunno if it still is common for these kickbacks (which is essentially what they are) to be paid out, since there were a few revelations about the fiction of tight regulation of the securities industry a couple years or more ago.

(Edit to see if I can still make the text really _small and not sidescroll)

[ July 22, 2002: Message edited by: DrConway ]

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sadly the greed of the average person is perhaps just as strong as the greed of the executives.

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I gotta disagree here (sorry, Apemantus, I know it seems like I'm always being contrary with you but it's nothing personal )

Of course people get a little gleeful when it starts to look like their stocks are paying off in a big way, but when we talk about what makes the average person invest, I don't think that greed is a fair way of putting it.

I personally know a couple of people of modest means who lost all their savings when the techno-bubble burst. They were hard-working people who had (quite rightly, in my opinion) always felt cheated by the system. After a long life of striving and working, they had saved a mere pittance of a nest-egg. They saw the stock market as a way to finally get ahead of the game, something that just being a working person had never allowed them to do. Of course, they were wrong, but I think a lot of small-time investors view the stock market in a similar way.

Executives, on the other hand, are mostly millionaires. They will never want for anything that 90% of the population would consider a "need". Nevertheless, they engage in shady practices and play underhanded games with the savings of others, all to amass more personal wealth. And why? Just to have more. They already have more than one person could reasonably spend. At their level, it's all about being the best, getting prestige, and plain old bare-assed power.

This gives rise to something I've been puzzling over for a long time. If people now concede that the US economy experienced a prolonged share price bubble, then why did the US economy begin growing at a faster rate in the late 1990s?

The fact that relative economic weakness in the rest of the world meant inflows of currencies to purchase US securities, which "leaked" into the real economy can only, IMHO, explain part of the faster pace of growth.

It still seems to me that Greenspan knew that the fiction of the noninflationary limit to growth of 2.5% per year was just that, and he needed an excuse to prove that 4% per year was still possible.

It is also interesting to note that for all the much-vaunted "fiscal responsibility" of the US government, government spending has gone from $1.2 trillion in 1992 to $2 trillion today.

Rolling 1.2 trill forward to account for inflation would only bring it up to $1.4 trillion.

Thus a goodish chunk of the increase in US government spending has been to outpace inflation, and therefore to produce actual gains in spending as opposed to just increases to match inflation. This heightened spending must also have had a moderately stimulative effect.

I think, ultimately, it boils down to this fact: The notion of a "speed limit" of economic growth rates fixed by anything other than the availability of natural resources is a farce.

[ September 06, 2002: Message edited by: DrConway ]

Using simple rules one can invest in the market and make a good return. It's simple wealthy barber stuff (mixed portfolio, skewed to low risk for short term investments, higher risk for long term investments). Take advantage of tax incentives. One of the earliest tax judgments ruled that not only do we have a right to any tax incentive governments put into the system, but in some ways we are moral obligated to participate. For example, Canadians are nortorious for being leery of high risk start up investments. Governments used to invest themselves in startup companies, but after a few major flops (NFLD greenhouses, Bricklyn, some language computer scam in Saskatchewan), they instead moved to providing tax incentives to push us to make these investments for them.

Yes, people are pushed to buy stupid things like the ads to buy Gold when it is at a 10 year high, but that is no different than the fashion ads that try and get us to replace our wardrobe at the drop of a hat. At some point there has to be some level of personal responsibility.

[ September 07, 2002: Message edited by: Pogo ]

[ September 07, 2002: Message edited by: Pogo ]