One of the most regular news items nowadays is the performance of the stock exchanges around the world. This is happening within a very specific scenario. Over the last decade or so the globalisation of the international economy has progressed in an inexorable manner.
The bonds and equities of global companies as well as the sovereign bonds of the major economies are being traded on a number of stock exchanges, rather than just one.
The major currencies are being traded as if they were a commodity. Financial instruments have become increasingly sophisticated.
The level of capitalisation of a significant number of hedge funds is much greater than the market capitalisation of leading companies. Because of time differences, there is at least one or more international stock exchanges that is open during a 16-hour stretch in a day.
In addition, capital is allowed to move freely around the world. Within such a scenario it should come as no surprise that financial markets take up an important part of the world’s news, especially in times such as the ones we are living in.
The snag with such a development is that what happens in financial markets is more important than what happens in the productive economy.
When we are told that the index of a stock exchange has gone up or down, we are never told whether it is because of negative results by companies listed on it. The message is that that traders have pushed the price up or pushed the price down for reasons they know best. In fact, the fundamentals of companies, whose equities have lost value in the last months, are quite positive, and nothing appears to justify the drop in the value of their shares.
In most instances there is a disconnection between a company’s performance and its share price. As an aside, it is interesting to note that a study by the University of St Gallen in Switzerland has likened the behaviour of financial traders to the behaviour of psychopaths.
The same thing is happening with economies around the world. The so-called bond spread and ephemeral aspects such as business and consumer sentiment have become more important than fundamental macroeconomic data such as unemployment, inflation, investment, etc.
It is as if we have lost our understanding of what our objectives should be. This has provided fodder to the speculators, who made full use of the possibility to move immense sums of capital around the world to earn money, without the need to undertake any productive activity.
Thus the financial markets have become more important than the productive economy.
This is not a phenomenon of the last three years or so. The property bubble, the credit bubble, the dot com bubble and other bubbles that we experienced in the past, are all the consequence of the excessive influence of financial markets over the productive economy.
The financial markets that are meant to sustain the productive economy as it is an important source of capital, have ended up stifling it. And this brings me to the title of this week’s contribution. We are losing the plot, unless we have already done so.
I will give one practical example. Several countries have run up significant budget deficits in the wake of the 2008 financial crisis, not to stimulate the economy but to bail out banks.
Not one job was created thanks to that use of public funds. If anything, jobs are now being lost, as these countries need to rein in the fiscal deficit through increased taxation and cutbacks in public expenditure. Companies that were doing well would have loved to receive some of the money that went into the bailout of banks for their research and development activities and to strengthen their competitiveness.
This week we had the news of a potential increase in the EU’s financial stability fund that is meant to be used to support the sovereign debt of those countries that cannot sustain it through their own efforts.
It was reported that the size of this fund could be going up to three trillion euros. If this were to really happen, are we sure that this would be the right decision? And why is this necessary? Because the financial markets are demanding it.
If we were pursuing the right plot, wouldn’t we use these funds to support the productive activities within the EU to generate employment and real wealth?