In the midst of
the Chinese stock market crash is evidence of failed economics. It is the
economic theories of John Maynard Keynes. And while they might be irrational
and improbable, they are still the economics that influence government action
around the world. High on the list is the ‘great unmentionable’ – price theory
The essence of
Keynes’s debauched economics is the idea that people who save their money (i.e.
hoarders) are the cause of the economic problem, defined by Keynes as a
shortage of purchasing power. The solution? If the people won’t spend, then the
government will simply spend on their behalf. But where will the government get
the money from to spend. Ask not, and you’ll be told no lies.
But... There,
in the midst of the Chinese market, the government is claiming that people who
don’t spend (i.e. buyers) are the cause of the market problems. So they come up
with the silly idea to ban or limit selling but encourage buying. Keynesianism
applied – even if it is not named.
Never mind that
an estimated 90 million Chinese suddenly took to the stock markets on margin
lending, driving up prices in the past few years. And even though the market
fell 30%, it did not wipe out the gains of the past few months.
The problem is
buyers have withdrawn from the market. Probably for the same reason, which
Keynes never understood, that hoarders withdraw from the market because that is
their current valid economic decision. Now of course, Keynes is referencing
consumption, not investment. So hoarding (i.e. saving, or not spending on
consumption goods) is not a beneficial economic activity for the market.
Thus, people
don’t spend on consumption, and suddenly there is a shortage of purchasing
power.
The “great
unmentionable” in the Keynesian system, however, is prices. It is unmentionable
because it is the free market’s answer to the alleged shortage of purchasing
power. Purchasing power can only be calculated at specific prices. If prices
went down, would there still be a shortage of purchasing power? Other things
being equal, as economists like to say, money chasing goods at specific prices
would tend to equalize.
Now it might be
argued that there is no manipulation of actual stock prices in China in the
current confusion. But there are restrictions on who may buy or sell. If you’re
a director of a public company, or own more than 5% of stock in a particular
company, you may not sell your stocks in those companies without approval.
Such a solution
as price theory, however, eliminates the need for government interference in
the market. The best the Chinese government could do is nothing and let
buyers and sellers negotiate. And that is only partially what has been
happening on the Chinese stock markets, with the result that overpriced stocks
have come down, wiping out millions of small Chinese investors who, in the run
up to the crash, invested all their cash, borrowed more, gave up their jobs to
live on easy street.
There are no
free lunches – not even in the Chinese stock exchanges – as the sudden drop in
prices indicates. And the ‘great unmentionable’ – flexible prices –is again
ignored in favor of market manipulation as the mechanism for restoring a sound
economy.
Source:http://affluentinvestor.com/2015/07/the-chinese-great-unmentionable/
Comments
The Chinese stock market moved from 2000 in
March 2014 to 2500 in November 2014 and then to 3400 in January 2015. It then
dropped back to 3100 in February 2015 and shot up to 4500 in April 2015. It
dropped to 4100 in May 2015 and shot to 5200 in June 2015. The 30% drop happened in July 2015 to 3400
and settled back up to 4000.
The growth in the Chinese economy is
plateauing and their stock market reacted to take the excess price out of their
stocks.
The global sovereign debt bubble will be the
drag anchor for stock price corrections around the globe.
Norb Leahy, Dunwoody GA Tea Party Leader
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