5 ms·

I find it hard to believe that there are 2 orders of magnitude more goods and services being bought and sold in the economy that 25 years ago. Rather, the compl

I find it hard to believe that there are 2 orders of magnitude more goods and services being bought and sold in the economy that 25 years ago. Rather, the complexity of financial instruments is the one that has gone up and up, but there's not that much more real wealth to back it up. If that is the case, the short answer would be "because of inflation".

unclebucknasty 11y ago
Exactly. Much of it is just leverage and financial engineering. Create derivatives of derivatives until you're essentially divorced from any underlying real asset. Still, it's all counted.
- da02 11y ago
  Pardon my ignorance of economics, but does US/FED policy and trillion dollar deficits have anything to do with this? Along with other countries printing more money? I remember reading Zimbabwe had the best performing stock market, but it was fueled through the "printing press". And they had no choice but to stop printing more.
  - bavcyc 11y ago
    It is all interconnected, but I'm not sure anyone knows 100% how. I've started studying economics; the more I learn, the more I know that I don't know.
  - parasubvert 11y ago
    Not specifically, though indirectly. The FEDs activities are intended to counter balance the lack of economic activity and investment capital coming out of the banks after the 2008 crises left them having to unwind their debt positions globally. Someone has to keep the fuel spigot on - usually that's the government but most did the opposite (austerity) due to politics. What you're witnessing is a LOT of unused capital sitting around trying to find low risk returns. Interest rates are low so money is cheap, and there are only so many places to park capital, thus... Prices go up. Post 2008 Companies aren't investing as much in the real economy: wages, productive capital, etc. are stagnant. they're profit taking and retaining the profits. What's important to know is that while assets are trending higher historically , these are all mostly paper assets - they're indirectly tied to the real economy, and haven't completely become unhinged yet like in 2000. See http://mobile.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-the-everything-bubble.html http://mobile.nytimes.com/2014/07/08/upshot/welcome-to-the-e... Zimbabwe was a case of hyperinflation. Which is what eventually happens when you have more money than productive capacity - prices of "real stuff" go up fast. But real inflation in the U.S. and Europe is very low by historical standards. We are not going to become Zimbabwe.
    - da02 11y ago
      Thanks for clearing that up. What do you think the US govt & FED should/should not do now?
      - parasubvert 11y ago
        I think they should keep doing what they're doing - don't raise rates or reduce the monetary base (the $ trillions they keep on the books since the crisis) until real inflation is clearly setting in. Asset prices can keep inching up so long as they're not into bubble territory (which arguably they're not yet). The economy is in a much better position but it's still underperforming and the labor participation rate is still historically down as so many exited the labor force during the 2008 crisis and ensuing layoffs. Once some inflation sets in, it's a sign the world is returning to "normal" (after 8 years!), but .. no guarantees given instability in Europe, Middle East, Oil Glut, etc. Usual disclaimers: I am not an economist, but minored in it & follow it; the economics profession has a wide diversity of opinions, though I think my views aren't particularly radical. I also think the government should be ready to invest in our crumbling infrastructure for the next downturn/crisis. The 2009 stimulus helped but was not well allocated and was too small. That said it's unlikely congress will pass any such thing for many years due to current politics.
- JuliaLang 11y ago
  I don't think you understand derivatives. They assist in resource allocation by applying pressure to the future value of goods, so that we have more control to hedge our risks.
enraged_camel 11y ago
Yep. In other words, it's all a house of cards.
vinceguidry 11y ago
I don't. In fact, I find it very easy to believe. Now that the Internet has made it possible for anyone with an net connection to do business, goods and services can be completely made up out of whole cloth. Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not. All that has to happen for it to be a good or service is for money to change hands. I'd say between the internationalization of capital markets, the deepening of transportation services, and just the fact that many many more emerging economies are buying stuff now, two orders of magnitude difference might well be an understatement, it could well be three or even four.
- eli_gottlieb 11y ago
  >Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not. And yet the anime industry is continually going out of business?
panic 11y ago
If people have been making profits for the last 25 years and investing them, the amount of money in the markets will increase regardless of the instruments involved. Wealth is accumulating, but people don't really know what to do with it besides giving it to someone else to invest.
- crpatino 11y ago
  No, money is only numbers. If you cut down a tree, cut it in boards, cut the boards and nail the pieces into a bunch of chairs, that is value added. It did create wealth. Same, if you write a bunch of code that did not exist before, and the code is compiled and linked into a program that allows users to do stuff they could not do before (or could, but much more slowly) then there is value added. Wealth was created, even if there is no physical representation of that wealth... but it has real effects on the real world. But when people just place bets, and double-down bets, and triple-dare-you bets on whether or not some random guy is going to write a program that might or might not go viral and get a billion or eyeballs... that's not wealth creation. That is just toying with numbers. You just produce noise in the economy so that the real prices of real stuff cannot be discovered anymore.
  - justinmk 11y ago
    Prediction markets are valuable.
    - gress 11y ago
      Sure, but the stock market is not valuable as a prediction market.
      - justinmk 11y ago
        That might be a sign that it's over-regulated.
    - crpatino 11y ago
      Valuable for whom, or for what? If those did what they claim to do, sure: They would help to allocate resources to invest in projects that created the most goods and services to raise everyone's standard of living. There is certainly value in that, since we all would get more and better capital goods for the same amount of investment. Sadly, this is no longer the case. I don't really know about finances, but I have seen first hand great engineering companies that got bought by assholes that did not have any money themselves, but used their dark wizardry financial tricks to leverage themselves to the ears. Then, they proceed to cut costs like there is no tomorrow, again, making the numbers in the accounting books look much better than the real health of the company, all this at the cost of gutting the mid-to-long term feasibility of the business. Finally, they go and use their lies and numbers to find a bigger sucker, and sell the company by a price even bigger than what they paid in the first place. And you know what, the whole financial industry exist to enable those fuckers to go around dishing chaos and destruction, because earning an honest profit by servicing happy customers is almost never as profitable as dilapidating in months stores of wealth that took decades to build up in the first place. It does not matter if they sell below the real value, since they did not personally invest any time or effort in accumulating the wealth, getting pennies on the dollar suits just fine.
parasubvert 11y ago
Asset prices have gone up 2 orders of magnitude; real inflation for "real" things (not financial instruments) hasn't gone up as much (80% or so). In part this is because profits have been up, therefore equities are up. Profits are up because companies aren't investing in the real economy as much since the 2008 crash. As to whether this is sustainable... PE ratios are trending higher but no where near the dot-com era levels. So it's not like equities are completely out of whack with reality.
- tsotha 11y ago
  You also have to factor in QE. Low interest rates make bonds considerably less attractive, so a lot of the money that used to be in bonds has moved into the stock market chasing returns high enough to cover inflation.
rayiner 11y ago
You're mixing up assets and yearly output. You're also ignoring the fact that real assets that always existed may be shifting from other asset classes to hedge funds.
- crpatino 11y ago
  I confess I am ignorant, so I don't know what you are talking about. But, I do not see that many more hard assets (I mean physical... I am sure finance has a technical definition that has nothing to do with what the intuition of lay people like myself would think) created. It does not matter if there are trillions, quadrillions or quintillions of dollars; if they had to spend it all, they would end up owning the whole planet and still not run out of money. So, it is just a matter of stroking egos and playing con games with using K-9 level math, but with much higher numbers. Ultimately, the only thing that much money is worth is to show that you have much more of it than the next person. It is all about social posturing (or if you are cynical, about manipulating other people by triggering emotional responses to the huge numbers involved).
  - hglman 11y ago
    My guess is its that smart phones are more valuable than the raw materials, or more valuable than a tv, a land line phone, and a hand radio are individually. So not that there are more, that they are more valuable objects.
    - crpatino 11y ago
      To some degree, yes. Still, there were cell phones in the 90s. Are the current smartphones that much more valuable than those early mobiles? Remember we are talking about 2 orders of magnitude here. There were also PCs, and with Word Perfect and Lotus 123 you could do almost everything you do today with the latest office suite. At least almost everything of what the average user knows how to do.

unclebucknasty 11y ago

Exactly. Much of it is just leverage and financial engineering. Create derivatives of derivatives until you're essentially divorced from any underlying real asset. Still, it's all counted.

da02 11y ago
Pardon my ignorance of economics, but does US/FED policy and trillion dollar deficits have anything to do with this? Along with other countries printing more money? I remember reading Zimbabwe had the best performing stock market, but it was fueled through the "printing press". And they had no choice but to stop printing more.
- bavcyc 11y ago
  It is all interconnected, but I'm not sure anyone knows 100% how. I've started studying economics; the more I learn, the more I know that I don't know.
- parasubvert 11y ago
  Not specifically, though indirectly. The FEDs activities are intended to counter balance the lack of economic activity and investment capital coming out of the banks after the 2008 crises left them having to unwind their debt positions globally. Someone has to keep the fuel spigot on - usually that's the government but most did the opposite (austerity) due to politics. What you're witnessing is a LOT of unused capital sitting around trying to find low risk returns. Interest rates are low so money is cheap, and there are only so many places to park capital, thus... Prices go up. Post 2008 Companies aren't investing as much in the real economy: wages, productive capital, etc. are stagnant. they're profit taking and retaining the profits. What's important to know is that while assets are trending higher historically , these are all mostly paper assets - they're indirectly tied to the real economy, and haven't completely become unhinged yet like in 2000. See http://mobile.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-the-everything-bubble.html http://mobile.nytimes.com/2014/07/08/upshot/welcome-to-the-e... Zimbabwe was a case of hyperinflation. Which is what eventually happens when you have more money than productive capacity - prices of "real stuff" go up fast. But real inflation in the U.S. and Europe is very low by historical standards. We are not going to become Zimbabwe.
  - da02 11y ago
    Thanks for clearing that up. What do you think the US govt & FED should/should not do now?
    - parasubvert 11y ago
      I think they should keep doing what they're doing - don't raise rates or reduce the monetary base (the $ trillions they keep on the books since the crisis) until real inflation is clearly setting in. Asset prices can keep inching up so long as they're not into bubble territory (which arguably they're not yet). The economy is in a much better position but it's still underperforming and the labor participation rate is still historically down as so many exited the labor force during the 2008 crisis and ensuing layoffs. Once some inflation sets in, it's a sign the world is returning to "normal" (after 8 years!), but .. no guarantees given instability in Europe, Middle East, Oil Glut, etc. Usual disclaimers: I am not an economist, but minored in it & follow it; the economics profession has a wide diversity of opinions, though I think my views aren't particularly radical. I also think the government should be ready to invest in our crumbling infrastructure for the next downturn/crisis. The 2009 stimulus helped but was not well allocated and was too small. That said it's unlikely congress will pass any such thing for many years due to current politics.
JuliaLang 11y ago
I don't think you understand derivatives. They assist in resource allocation by applying pressure to the future value of goods, so that we have more control to hedge our risks.

enraged_camel 11y ago

Yep. In other words, it's all a house of cards.

vinceguidry 11y ago

I don't. In fact, I find it very easy to believe. Now that the Internet has made it possible for anyone with an net connection to do business, goods and services can be completely made up out of whole cloth. Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not. All that has to happen for it to be a good or service is for money to change hands. I'd say between the internationalization of capital markets, the deepening of transportation services, and just the fact that many many more emerging economies are buying stuff now, two orders of magnitude difference might well be an understatement, it could well be three or even four.

eli_gottlieb 11y ago
>Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not. And yet the anime industry is continually going out of business?

panic 11y ago

If people have been making profits for the last 25 years and investing them, the amount of money in the markets will increase regardless of the instruments involved. Wealth is accumulating, but people don't really know what to do with it besides giving it to someone else to invest.

crpatino 11y ago
No, money is only numbers. If you cut down a tree, cut it in boards, cut the boards and nail the pieces into a bunch of chairs, that is value added. It did create wealth. Same, if you write a bunch of code that did not exist before, and the code is compiled and linked into a program that allows users to do stuff they could not do before (or could, but much more slowly) then there is value added. Wealth was created, even if there is no physical representation of that wealth... but it has real effects on the real world. But when people just place bets, and double-down bets, and triple-dare-you bets on whether or not some random guy is going to write a program that might or might not go viral and get a billion or eyeballs... that's not wealth creation. That is just toying with numbers. You just produce noise in the economy so that the real prices of real stuff cannot be discovered anymore.
- justinmk 11y ago
  Prediction markets are valuable.
  - gress 11y ago
    Sure, but the stock market is not valuable as a prediction market.
    - justinmk 11y ago
      That might be a sign that it's over-regulated.
  - crpatino 11y ago
    Valuable for whom, or for what? If those did what they claim to do, sure: They would help to allocate resources to invest in projects that created the most goods and services to raise everyone's standard of living. There is certainly value in that, since we all would get more and better capital goods for the same amount of investment. Sadly, this is no longer the case. I don't really know about finances, but I have seen first hand great engineering companies that got bought by assholes that did not have any money themselves, but used their dark wizardry financial tricks to leverage themselves to the ears. Then, they proceed to cut costs like there is no tomorrow, again, making the numbers in the accounting books look much better than the real health of the company, all this at the cost of gutting the mid-to-long term feasibility of the business. Finally, they go and use their lies and numbers to find a bigger sucker, and sell the company by a price even bigger than what they paid in the first place. And you know what, the whole financial industry exist to enable those fuckers to go around dishing chaos and destruction, because earning an honest profit by servicing happy customers is almost never as profitable as dilapidating in months stores of wealth that took decades to build up in the first place. It does not matter if they sell below the real value, since they did not personally invest any time or effort in accumulating the wealth, getting pennies on the dollar suits just fine.

parasubvert 11y ago

Asset prices have gone up 2 orders of magnitude; real inflation for "real" things (not financial instruments) hasn't gone up as much (80% or so). In part this is because profits have been up, therefore equities are up. Profits are up because companies aren't investing in the real economy as much since the 2008 crash. As to whether this is sustainable... PE ratios are trending higher but no where near the dot-com era levels. So it's not like equities are completely out of whack with reality.

tsotha 11y ago
You also have to factor in QE. Low interest rates make bonds considerably less attractive, so a lot of the money that used to be in bonds has moved into the stock market chasing returns high enough to cover inflation.

rayiner 11y ago

You're mixing up assets and yearly output. You're also ignoring the fact that real assets that always existed may be shifting from other asset classes to hedge funds.

crpatino 11y ago
I confess I am ignorant, so I don't know what you are talking about. But, I do not see that many more hard assets (I mean physical... I am sure finance has a technical definition that has nothing to do with what the intuition of lay people like myself would think) created. It does not matter if there are trillions, quadrillions or quintillions of dollars; if they had to spend it all, they would end up owning the whole planet and still not run out of money. So, it is just a matter of stroking egos and playing con games with using K-9 level math, but with much higher numbers. Ultimately, the only thing that much money is worth is to show that you have much more of it than the next person. It is all about social posturing (or if you are cynical, about manipulating other people by triggering emotional responses to the huge numbers involved).
- hglman 11y ago
  My guess is its that smart phones are more valuable than the raw materials, or more valuable than a tv, a land line phone, and a hand radio are individually. So not that there are more, that they are more valuable objects.
  - crpatino 11y ago
    To some degree, yes. Still, there were cell phones in the 90s. Are the current smartphones that much more valuable than those early mobiles? Remember we are talking about 2 orders of magnitude here. There were also PCs, and with Word Perfect and Lotus 123 you could do almost everything you do today with the latest office suite. At least almost everything of what the average user knows how to do.