There are stock markets around the world. As I write this, the markets are reeling
from several days of losses of hundreds of points in their indices. They have
lost anywhere from 20% to 60% of their value and who knows what they will do
upon opening next week. Yet each day and each week we read or hear that the market
has not lost so much in a day or a week or a year since and they give a case
when things were even worse. So is it so bad or what?
As you might expect, when the market acts this way things are bad. The basic
reason is a number of what one might call "feedback loops." Just
what is a "feedback loop"? Well it's something like what happens
with a thermostat. The thermostat on your house (if you are fortunate enough
to have one in your house) senses the temperature and turns on or off your
heating or cooling system based on what the temperature is. There is also a
thermostat in your oven. The measurement of the temperature is feedback from
the environment and that controls whether the heat is turned on. But that's
just simple feedback and not a feedback loop.
With a feedback "loop," one has two-way feedback. Information in
some form is going in both directions. Because we use a POM (a physical object
money) the ownership of stocks is flowing in one direction while POM is flowing
in the other direction. Now both the money and the ownership are in the human
mind. In the modern stock market, currency is not changing hands, numbers in
accounts are changing instead.
In the case of the stock market, there are many people involved. They know
about the flow of money and ownerships and adjust their actions accordingly.
So when other traders are mostly selling, each trader begins to experience
an expectation that future prices are going to go down and this makes each
trader more likely to sell. The emotions of the other traders on the floor
of the exchange also affect traders giving them an incentive to do what the
others are doing. Note that this works for both a falling (bear) market and
a rising (bull) market.
Outside the stock market, people judge the value of their assets based, in
part, upon the current prices for stocks being sold. This has affects on the
behavior of those stock owners. When the market is falling investors tend to
cut back on their spending. This reduces many companies' sales which in turn
reduces their profits and the dividends the stocks of those companies pay.
That in turn tends to reduce the prices of those stocks.
Each element in the feedback loop is aligned such that increases in one element
generate increases in the other elements.
Therefore, the mere fact that the market is falling, though completely irrelevant
at the physical level to the amount of goods and services an economy is physically
able to produce has a huge effect on the amount of products actually produced
for purely psychological reasons.
One of these feedback loops related to the stock market is the willingness
of people to make loans. Banks and other lending institutions will not loan
money when they feel that the borrower might not be able to repay the loan
and doesn't have enough assets to cover the amount loaned. When prices are
falling, banks see non-money assets as being less valuable (with the value
expressed as dollars) and stop loaning. This in turn, reduces the ability of
businesses to hire and to produce products. That, in turn, reduces the amount
of money they and their employees can spend.
Their reduction in spending reduces the sales of other companies which puts
more downward pressure on prices for other products which lowers the value
of those products as assets.
To review, the feedback loops in a POM economy exist because while production
processes move goods and services in one direction there is a corresponding
flow of money in the other direction. This means that at every stage in all
production processes, the right amount of money must be available to flow in
the other direction just sufficient to balance the perceived value of the goods
and services produced. These flows of money and products constitute feedback
loops. And because the POM supply is independent of the goods and services
for sale, that feedback from the money can easily get out of balance, either
too much (inflation) or too little (deflation/depression) and one gets a boom
or a bust. When the supply of money is expanding, it tends to expand to excess
due to the reinforcing nature of the feedback loops and creates inflation.
When the supply of money is contracting, as it is doing these days, it tends
to contract to excess due to the feedback loops and suppresses production.
What can be done about it? Nothing, so long as the economy uses a physical
object money. A POM is uncontrollable. Therefore, nothing can prevent the markets
from being disrupted by events. Sooner or later, given a POM and human nature,
events will conspire to produce either destructive inflation or deflation despite
even a government's best efforts.
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