"What we must rather recognise is that we must return to some "true" valuation of real investment - the sort of real investment in the production of goods and services that we had in the period between 1945 and 1969."

I haven't studied the economics of that period in detail, however it's my understanding that much of the investment in infrastructure after the war was quite 'obvious'. Building highways, industry, etc. were all clearly needed and would provide a good ROI. However as these infrastructure projects developed it became less clear as to where best to invest resources.

This is where the market economy proved its value. It created a system where those who's investment policies best matched those best for society to be the most successful, and hence have the most control over future investment. However as the understanding of the investors evolved they began to learn that 'real' investment wasn't in their individual best interest, but rather their best option was to spend their money to acquire market power.

"We must see again the value of real private and PUBLIC investment..."

The major issue I have with those who advocate a minimalist government is that there is a significant amount of infrastructure within our society where private investors would have great trouble gaining enough return to justify the investment but where the government easily could.

"They call for a return to the attitudes of mind that we had at the end of World War II."

Unfortunately, I don't think we can rely on individuals for anything other than acting in what they see as their own best interest. Even if they means taking the foundations of our society and economy to sell off to the highest bidder as everything collapses around them.

From my admittedly limited understanding of economic history, it all seems not too dissimilar to what occurred prior to the Great Depression - wealth was so concentrated in the hands of a few, that the only way to "make" more money was debt and speculation. Today, wealth and income disparities in the U.S. are reaching similarly distorted levels, and it's leading to a similarly unsustainable type of economy.

The only realistic fix is surely some form of wealth redistribution. Gradually transfer wealth back into the hands of the masses, and economy has a chance to get back on a stable footing. But as long as governments are in the pockets of those who own the wealth, few politicans are likely to propose such a solution

I agree wholeheartedly with the theme of this article. My comments below are extracts from various letters to editors dating from as early as ten years ago. Earlier comments along similar lines are not on my computer.
Politicians are making little progress in coming to grips with the problems being caused by the acceptance of the $US as the main international trading currency and by the flood of privately created credit slopping around the world currency and securities markets.
In international trade, money’s only sensible use is as an intermediate facilitator for the exchange of real goods and services between market participants, not as a trading commodity in its own right.
We are failing to clearly distinguish between various types of capital and what I consider to be pseudo capital. The longest lasting real capital is agricultural land whether it is growing crops meat or timber and all it demands is careful and adequate maintenance. A second class of real capital are depletable resources such as coal, oil and other minerals. If any country wastes or exports these items to support current consumption it is robbing it’s future generations. This leads to the pseudo capital. America is consuming, for example, Arabian oil (a real asset), paying for it by creating bank balances in American banks for Arab princes and claiming that these balances can be on lent as if they are real capital. At 1990 oil prices Saudi reserves have about the same value as all USA farms at about $US8000 per hectare. When their oil is gone will the oil exporters own and occupy all USA farming land or will they own pseudo capital which can be wiped out at the stroke of a pen backed by a few nuclear powered warships? However a case can be made that mineral assets are the property of all human beings but the USA has already used more per head than any reasonable assessment of their entitlement

continued...
Adam Smith was adamant that capital should not be allowed to move across borders (meaning between different currencies). Politicians need to institute a different exchange system for genuine international trade. This could be based on a composite international exchange currency instead of the ridiculous reliance on the American dollar, complicated by the USA’s unwillingness to control its money supply, and the fictitious savings, in international trade terms, of its professional and business class.
Everyone who believes that economic management is chiefly concerned with improving the well being of the human race needs to remember, every day, section 6 of chapter ten of the General Theory of Lord Keynes.
In Australia our politicians are unwilling to make the decisions which are necessary to restrict activities which are in effect selling real assets such as coal and productive entities to buy imported current consumption goods which we could produce ourselves. In effect we are destroying the future of our grandchildren.
A country’s currency is the property of the country’s people and should be administered by their representatives for the peoples benefit. Allowing banks and other financial entities to privately create uncontrolled credit is another case of politicians abrogating their responsibilities.

“The steady, relentless creation of the monster that we now confront goes back decades. It has soured, poisoned and corrupted the whole system - the real economy, the real credit markets”

Maybe as far back as the “savings and loans” scandal which occurred during Reagan’s tenure.

Between these two “credit market” events we have had, the dotcom bubble and burst.

“Credit derivatives, SIVs, CDOs, hedge funds”

Sound so similar to the “junk-bonds” of the 1980-90s developed for MBO operations, typically the Michael Milken, issues, not those which Warren Buffet was overseeing.

“the countries with a grave speculative addiction and those who, through their superior perception - or perhaps because of their naivety”

Ah yes, the free market, where every opportunity is a potential risk versus the dead hand of oppressive government where every opportunity is a opportunity missed.

Somehow, the only outcome from the inertia created by oppressive government regulation, which denies the individual the right to “speculate”, produces only the stagnation and gloom of 1970s UK.

“Real fixed-capital investment is the great engine of growth of income, wealth and employment. It always has been and always will be.”

Ah yes, I see it, the those “dark satanic” cotton mills of Lancashire.
Huge public investments in railways and canal networks (but not much return of true “Social value”).

“We must avoid the volatility of recent years on which speculation breeds and the real economy is diminished or destroyed.”

Whilst innovative aberrations like Enron will always occur (about once a decade), the rules have changed since 1929.

The events which saw the type of collapse of 1929 are no longer legal. Whilst “illegality” will never inhibit the fraudesters, it at least minimises an otherwise wide potential collapse as experienced in the past.

“They call for a return to the attitudes of mind that we had at the end of World War II.”

Ah pump priming, Marshall Plan Style

The author has the attitudes and values of a very old man, who can no longer handle the “heat in the kitchen”.

A sad, pessimistic attitude and article

Dr Cumes accurately describes the problems of the “casino economies”, manifested in the continuing sub-prime crisis. (For my own analysis see http://mike-servethepeople.blogspot.com/2007/12/sub-prime-crisis-house-of-cards-waiting.html )

Whether it is possible to transform these economies back to “real investment” is a bigger question than whether or not such a move is desirable.

Real investment is investment in productive capacity, in productive processes that create added value which is realized through the sale of goods and services. Realized added value increases, however, the amount of capital, which in turn must reproduce or increase its own value in order to remain useful for its owners.

Up until the last quarter of a century or so, major economic fluctuations took the form of overproduction of material commodities.

Inevitably, finance capital sought faster and higher returns, and returns unencumbered by the requirement for part of the investment to be tied up in capital items such as plant and machinery.

So finance capital itself became a commodity once risk-takers established that its purchase and resale (often stripped of capital items and so-called labour costs) could result in massive quick profits. The financial market place now largely consists of tables simultaneously occupied by bodies of organized finance that can be buyers one moment, and bought the next.

Our current crises now take the form of the overproduction of finance capital, of capital as virtual capital not based on the real value of goods and services.

This arrangement is now so dominant that it has created a whole set of cultural, political, economic and military characteristics that we refer to as globalization.

Can we stop this? We can perhaps retard it, repudiating for example, the changes to Australian banking law introduced by Howard in December 2006 that exempted foreign investors from a 30% capital gains tax. This led to a massive increase in private equity buyouts.

But Cumes is correct. “Short-term expedients will not do.” Neither will playing King Canute at the shoreline of the profit economy.

Capitalism always finds ways of outwitting the regulators and is itself the problem.

there is never any shortage of prescriptions about what 'we' must do. i do wish writers would nominate who 'we' is. ozzies in particular have no input at all to national policy, generally don't know what national policy is, and are speaking from a point of ignorance exceeded only by their impotence.

i suppose there is some vicarious satisfaction in resolving dilemmas in international affairs, as though one's opinion mattered to anyone. but i would be more impressed if a writer stuck to areas wherein opinions could be tested by action. the difference between discourse and gossip is the possibility of action. that's why oz has chatterati instead of intellectuals, ozzians can talk, but they can't act.

wow, what a load of rubbish. Sad to think I just wasted 60 seconds of my life I can never get back reading this article.

Rather than just going back to 1945, let's revert back to before the Industrial revolution (terrible terrible times, all those poor people being taken advantage of), actually bugger it, let's go back further to before fire was invented, all it ever does it burns things down.

Hang on, let's go back further...there must be a time somewhere in the past when we were all so happy and the world was perfect and we never faced a challenge or a change...surely?

The massive increase in YOUR standard of living is based squarely on the system you disparage so much. Were it not for the same 'rotten' system you would be too busy eking out a living in some cave somewhere to have the time to write an article like this.

Countryboy, did you even read the article?

I will say agree though that at least a portion of our current material standard of living is based on (non-investment) debt and speculation. The best we can hope for is that Australia's productive capacity is dramatically boosted to be actually capable of generating the level of wealth we've become accustomed to, or there will necessarily be a drop in our standard of living. This wouldn't be a huge problem in itself, given that we were perfectly happy 20 or 30 years ago with a lower standard of living, except for the fact that people tend to react badly to losing what they've grown attached to.

Fear can cause market collapse, panic buying, mass lay-offs. There's no doubt that the greed and stupidity behind Automatically Readjusting Mortgages (ARMs)were time bombs - flicked passed around the world. Now we all have to face up to the consequences.

Americans and those holding global securities with ARMs exposure are having a frightening experience as the US slips into a recession.

The job market is softening with consumer spending, property prices are falling, and forced property sales are leaving ghost towns while pessimissm mounts over rocketing fuel and health and education costs rocket.

Obama and Hillary are promissing around US$75 Billion to help mortgagees and poor/middle income Americans ameliorate the pain. Band-aids to fix a systemic problem.

Our Australian regulators and political leaders clearly fell asleep on the job in not recognising that ARMs and similar 'instruments' are laying financial minefields that destroy lives, not only through those directly affected, but those harmed in the sampede as fear takes hold and faith in our governments, regulators and financial institutions is shattered. 1929 revisted.

The real reason for all the financial problems mentioned is the FED
printing money in an effort to prevent a market correction.
Unfortunately for them the market is now making it's own corrections
that will not stop until all the malinvestments are abolished.

Really, you all should know this from your reading of Austrian
economics!

MikeServethepeople” So finance capital itself became a commodity”

Finance has been a “commodity” since the 17th century when central banks were established.

If you can demonstrate the dollar in your pocket is different to the dollar in my pocket, I am prepared to reconsider,..

“Up until the last quarter of a century or so, major economic fluctuations took the form of overproduction of material commodities”

Speculation existed since farmers started to produce beyond their subsistence needs.

Like when farmer Brown, in a year of high yields and glut, decided to store his surplus, against a possible poor year, rather than sell it on the current market at low “glut” price.

I would note the Dutch invented “joint stock companies” (the forerunners of modern corporations) in the 17th century to enable more elaborate ventures to be funded, allowing “shares in a common venture” to be “financed” by separate individuals, the “speculative risk” spread beyond one single merchant.

The occurrence, popularly known as the “South Seas Bubble” happened several hundred years ago, fuelled by speculation in the spice trade of the East Indies.

I would further observe, enforced savings plans, like compulsory Superannuation, will also produce “commodity finance”, that is when there are billions of dollars of superfund deposits (supply) chasing a fixed amount of investment opportunities (demand), the “price” of investment funds will diminish.

I went to your site. As soon as I saw your web banner “Marxism-Leninism, blues music, Bob Dylan and more” I understood your motives.

“Capitalism always finds ways of outwitting the regulators and is itself the problem.”

Actually that is wrong. A system is a system. Abuses of a system are the result of human failings, not system failings.

Whilst you might claim capitalism has its flaws, it betters the economic/political system of the Marxist/Leninist/Stalinists who carry the blood of millions on their hands

3-10 milllion due to Lenin’s man-made famine, 30 million due to Stalins incompetence, deliberate policy and terror, untold numbers due to Mao, Pol Pot etc. etc...

Capitalism has actually "enhanced" millions of lives where as "Marxist/Leninsts" has only destroyed them.

I think we have to accept the fact that everything grows and withers.We cannot expect economies to be any different.We have not seen anything approaching the Great Depression of 1929 since the banking system reacts far more quickly and effectively to a crisis than 79 yrs ago.We cannot erradicate all speculation since many good ideas/businesses are financed on someone taking a chance.It is just a matter of keeping a lid on the froth and bubble that perpetuates the illusion of productivity.

Putting too many restrictions on our economies will see very low growth of both inventions and businesses.The last thing we need on our planet is the cringe factor,when we have both environmental/economic problems that need courageous solutions ,not whimpy Govt regulation on the really productive,private enterprise powerhouse.

Yes Arjay,

but it isn't the "the really productive, private enterprise" that the author was referring to.
It is the really non-productive enterprise, the very "froth and bubble that perpetuates the illusion of productivity" (as you so aptly put it).

You are right in saying that “that everything grows and withers”. Historically with global capitalism the prevailing world order seems to last for about 30-40 years before collapsing catastrophically & renewing itself.

The ‘classical’ mode born of laissez-faire capitalism died abruptly in 1929. An excessive concentration of wealth (too much capital chasing too fewer productive assets) & excessive lending gave rise to the inevitable bubble & crash.

Keynesian economics filled the void with a more egalitarian consumer society & fiscal policy regulating the boom & crash cycle. This then faded with the emergence of “stagflation” in the 70’s.

Our current “neo-classical” model is now in the early stages of terminal decline with both a massive asset-price bubble & (more interestingly) stagflation as an emerging feature.

Bernanke’s dilemma right now is that lowering interest rates while postponing a crash (and recession) will encourage inflation.

Higher interest rates, the monetarist tool for controlling inflation is in simultaneous conflict with the desperate cry for lower interest rates which have kept the casino economies running.

In the 70’s the problem with inflation was inflation. With our debt levels the problem with inflation is the effect it has on interest rates. We have come to rely on a low inflation, low interest rate regime that was never going to last

As for the idea that “We have not seen anything approaching the Great Depression of 1929” I recommend Steve Keen’s article”

http://www.onlineopinion.com.au/view.asp?article=6528

it shows that historically, the only periods that have come remotely close to being in parallel with our current level of private debt were the periods immediately preceding the depressions of the 1890’s & 1920’s.

The banking system may better but the devil now lies hidden in the “SIVs, CDOs, hedge funds” etc. & the household sector.

And the household has never been this exposed to an investment market collapse.

-Mr Smith

But, I digress.

I really dropped in to say that the author of this article couldn’t be more right.
This “is not a crisis which just turned up yesterday because something marginal went wrong in, for example, some real-estate or energy market”

The media and financial industry would have us believe that the “sub-prime” phenomenon is a cause rather than a symptom. Their attempts at identifying this whole problem as being somehow isolated & uniquely American would be funny if they weren’t serious.

“The real economies, investing in real things and producing real goods and services” are better positioned than we are (even if the Shanghai stock market is something of an exception).

Asset-price inflation & real growth were never one & the same. Pure speculation is a poor substitute for productive investment & families with $40,000 a year incomes weren’t meant to live in $600k houses

We have created a generational wealth divide under the pretence of creating wealth and accumulated astronomical debts under the illusion of becoming “prosperous”

In terms of fiscal policy one of the first & easiest remedies for this malaise would be phasing-out of investor tax incentives for non-productive investments. Negative gearing & capital gains concessions (for established homes) are an obvious example. There are others.

In any case, I loved this article. It was a refreshing & relevant antidote to the orthodox rubbish that one is more likely to find in the mainstream press (such as The Australian or Financial Review)
While the views that the author expresses may seem exceptional now they will become all the more common as the prevailing 'wisdom' is inevitably exposed for the fallacy that it is & always has been.

Mr Smith

There is nothing intrinsicly wrong with the concept of Capitalism. While the Market is a vital part of the Capitalist paradigm, it is simply a subset of the Commons and there are some Commons which must not be privatised - ever, if the desired outcome is a stable, long-term economic arrangement.

Debt-based money (lending money into existence, at interest) is the root-cause of inflation and the 'business-cycle' of boom-and-depression (and all that goes with it).

The key is monetary reform; Do away with debt-based money. The question is whether those who have privatised Money are willing to relinquish what is arguably the greatest material prize in history. . .

TheBootstrapper: "There is nothing intrinsicly wrong with the concept of Capitalism."

Capitalism has an inherent gravitation effect on wealth. As wealth becomes more centralised, the most profitable investments shift from those of 'true' production that benefits society, to one of market control. Enron is a prime example of this, they made more money from raising prices by restricting supply than they did by being productive. These significantly more profitable (yet unproductive) actions will drive capital from productive enteprises to such market manipulation. While this creates apparent wealth, in reality the wealth is lost. This process accelerates until you have fewer and fewer people fighting for a larger share of less and less.

The only reason Enron resulted in prosecutions was because the power industry was a heavily regulated market. To take a current example one only has to look at Microsoft and their dominance in the unregulated operating system market. If you want to invest money in that market, the best ROI is to buy a share of the Microsoft monopoly rather than invest in a competitor. This results in artificial wealth creation through asset inflation rather than real wealth creation through additional products or services. The debt based money supply only magnifies this effect; it is not responsible for it. You can apply the same logic as applied to power stations and software to almost any other market.

In essence, there is plenty right about capitalism, but there is plenty wrong with it too.

"The key is monetary reform;"

The key is creating mechanisms (legislative, regulatory, social, tax, etc) that minimise market manipulation and asset inflation while maximising the investment into 'real' wealth.

Desipis, you said

"If you want to invest money in that market, the best ROI is to buy a share of the Microsoft monopoly rather than invest in a competitor. This results in artificial wealth creation through asset inflation rather than real wealth creation through additional products or services."

How does buying a share in Microsoft result in artifical wealth creation? How does buying a share in any company result in artificial wealth creation? And how would investing in a competitor (such as Red Hat) create real wealth through additional products or services?

CountryBoy,

I guess I should have been a little bit clearer and stated 'new competitor' or startup/venture capital etc.

Using that money to start a new company and hence create new products will create 'real' wealth (IP). The stark contrast between the cost to produce and the sales revenue of the Microsoft OS would typically create great incentive for other investors to enter the market and create new products. However because of the anti-competative actions of Microsoft this has not happened to the extent it would in a competative market.

Buying shares in an established company increases the demand for shares and hence increases the price. This increases the apparent wealth held by other shareholders without creating anything of practical value. While its true this money flows on, the capital gains from shares would typically be reinvested in the share market (even more asset inflation) or siphoned off for consumptive uses. Simply put, the bulk of your investment dollars get spent by someone paying high prices for some widget in limited supply, rather than building a new widget factor to meet new demand.

Desipis, buying shares in a company is not designed to create 'artificial wealth' and if it does then that is merely a by product of the actual purpose of a stockmarket. I can show you a lot of examples where buying shares led to a price decrease!

The point of a stockmarket is to provide a means for companies to raise capital. An increase in share prices is not "creating anything of practical value" but it is making it cheaper for the company concerned to raise capital. For Company A a rising share price = cheaper access to capital (you only have to issue X fewer shares to raise the same amount of capital). This is where the share market (and rising share prices) benefits the economy.

Bubbles, booms and busts on the other hand, only occur due to humankind's inbred greediness and ends up benefiting the smart and punishing the foolish.

Country boy and Col Rouge,
This article and the posts by Desipis are as good as anything I have read on economics for a long time. For probably twenty years the actions taken by politicians and central bankers have tended to only push back the day of reckoning. The comments by Desitis about the real productive economy and the artificial speculative economy (the various bundled assets and derivatives particularly) have been spot on. We are all paying far too dearly for the banks efforts to achieve spectacular excess profits so they can use the capital adequacy ratio as a multiplier to create more debt money. Australian banks have been increasing their loan books by 12-15% compound each year since the early nineties and much of that debt money has flowed into asset creation, pricing the young battlers out of the house market. My first new home in 1957 cost me about 2.5 years salary as a junior steel industry supervisor and I financed it at 5% for 25 years. We need a new Australia Bank (we had one but it got lost) to get the banking system back under control.

The Get Big or Get Out capitalistic craze which began in the early 1970s and now with Centro's et al all going bust and our own former little Wesfarmers risking borrowing 20,000 million bucks to buy Coles, plus us little ones now only surviving by what we can steal off the big ones, must surely show we are heading to make the Great Depression seem like a sideshow.

Maybe we should back Cheney and Bush to let tiny Israel unload its nuclear rocket arsenal on Iran, bringing on WW3, such horror apparently the only way we can stop this growing bigness of the resultant economic fewer finally disappearing up their own backsides.

MR Smith “easiest remedies for this malaise would be phasing-out of investor tax incentives for non-productive investments. Negative gearing & capital gains concessions (for established homes) are an obvious example”

What qualifies as “productive investments”?

You are suggesting that investment in properties (which receive negative gearing etc) are “non-productive investments”.

I would note, the Australian economy, in common with all other economies, is measured inclusive of the “services sector”.

If the provision of housing is not a productive service then where would you place the provision of real estate sales services or plumbers repairing busted pipes?

If the provision of one service is invalid then what about tax assessment services or banking services or insurance services?

A “productive” investment is the type in which the exchange is valued by the seller and buyer.

The nature of their contract, be it for shelter (housing rent), food or clothes ( ‘necessaries’) or a holiday in Queensland (not a ‘necessary’) will always involve buyers and sellers.

To suggest that the “shelter” component of ‘necessaries’ is less “productive” than a holiday in Queensland or Ford car does not constitute “reasoned logic”.

It is naïve to fixate on one individual minority aspect of an “Economy” (investment housing) and pontificate that changing the rules for that one aspect would influence the rest, especially when that one aspect is presently treated indistinguishable to the rest (same tax rules for apply to housing investment as are applied to Ford shares or a sole traders “business assets”).

“While the views that the author expresses may seem exceptional now they will become all the more common as the prevailing 'wisdom' is inevitably exposed for the fallacy that it is...”

Like I said,

“The author has the attitudes and values of a very old man, who can no longer handle the “heat in the kitchen”.

Foyle “artificial speculative economy”

Where two parties make a contract, for any reason, is where “economic activity” is generated.

It is presumptive arrogance to decry any method which you happen to “not agree with” or maybe just do not understand.

It seems to me, that the market is slowly sorting things out. A larger
and larger % of America's major financial insitutions, is being
bought up by the Arabs and Chinese. American banks are paying a huge
price for their mistakes.

As to the criminal side of things and who goes to jail, I guess that
still needs to be sorted out. Somebody rerated subprime mortgages
as AAA,they were then flooged off as that, they need to be held accountable.

Provision of services is no differnt to provision of goods. Consumers
want both and I'd rather have a range to choose from, then be dictated
to, by any State Bank.

As to the Australian situation, we are affected as we rely on
overseas funding for good reasons. The tax system is so structured
that people are penalised for saving cash, so they don't. Any
interest on deposits is eaten away by inflation on one hand and the
marginal rate of tax on the other. So many people simply don't
bother with too much in bank deposits. Better to either spend it
or borrow against it and buy something that might retain value over
time.

There is too much doom and gloom.Money is only the oil that lubricates the economy.We have turned it into an commodity so the most unproductive sectors of our economy prosper at the expense of real growth.
We here in Aust don't really manufacture anything and have a balance of payments deficict of $560 billion or $50,000.00 for every working person with record sales of resources.
It is very easy to find reasons why our economy will fail,so don't just let negative thoughts ruin your day.
Letting China and India make everything was a big mistake,since if a crash does happen ,then the service industries which form the basis of our economy will evaporate.Gee you lot depress me.Can someone say something positive about Aust industries?

Col Rouge
So much for old men among whom I am numbered. FDR was credited from lifting the USA out of the depression and said the following,
Roosevelt’s Inaugural Address – 4/3/1933
… “the withered leaves of industrial enterprise lie on every side.”
“Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.”
“In our progress towards a resumption of work we require two safe guards against a return to the evils of the old order; there must be a strict supervision of all banking credits and investments; there must be an end to speculation with other people’s money and there must be provision for an adequate but sound money.”
Time has proven that unregulated banking will eventually lead to a disaster but as the comedian Will Rogers said, "There have been three great inventions, fire, the wheel and central banking." Moving away from regulating the supply of money and allowing banks to create money under the control of only their capital adequacy ratio has played a major role in the current predicament and is the cause of the high fees now charged by all the main banks.
It can be argued that we have high levels of employment but much of this is only in manipulation of money and paper certificates or in jobs no better than taking in one another's washing. A good example would be that every wisit to a doctor keeps two or three people employed collecting insurance money and tax and paying some of it back to us. yet we are short of nurses. Some jobs, enterprises and transactions are far more important than others!

Col Rouge

Has asked me:

'What qualifies as “productive investments”?'

Put simply, a productive investment is made when one invests in an activity that adds to the supply of goods & services.

And to correct the record - I was suggesting that speculation in the price of established (or existing) homes is non-productive.

Building a new home by way of contrast, is productive. It adds to the stock (or supply) of houses.

a nice, straightforward & obvious example of passive vs. productive investment.
A passive investment can yield an income or capital gain without adding anything to supply.

Passive investment profits through changing ownership. It has nothing to do with adding to the supply of services.

This is not to say that all speculation is in non-productive enterprises. One might invest in say, a rural or manufacturing business with a view to making a short-term gain.
The price of that investment when (bought or) sold may exceed its underlying value but at least the company is producing something.

Excessive speculation nonetheless is essentially non-productive regardless of whether the investments are passive or not.

A speculative investment is made in anticipation of selling at a higher price for short-term capital gain rather than receiving an income through long-term management of the asset.

Excessive speculation (asset-price inflation) occurs when the price exceeds the fundamental value. To avoid a loss then, the speculator will need to sell before a ‘correction’ occurs.

Speculation in short, is gambling. In excess it merely inflates asset-prices without commensurately adding to productive capacity.

While speculation & correction will always occur, polices that encourage excess - bubble markets, crashes & recession are simply bad policy.

Col Rouge said:
“Where two parties make a contract, for any reason, is where “economic activity” is generated

Those two may be the punter & his bookie, that doesn’t necessarily constitute a productive activity.

Col,

We here, the young & the old, are perfectly capable of distinguishing between passive investors & service providers or production & gambling.

This issue is highly significant & real. Definitions, obfuscation & semantics won’t diminish it.

-Mr Smith

Yabby “It seems to me, that the market is slowly sorting things out.”

As it always has done and always will.

One certainty, government intervention never has done and never will.

Foyle, as I approach my 7th decade, I too could claim to be among the “old men” .

However, I still value the spirit, energy and aspirations of “youth” (and still feel the blood course through my groin).

Maybe that is what separates us.

“manipulation of money and paper certificates or in jobs no better than taking in one another's washing. . . . Some jobs, enterprises and transactions are far more important than others!”

I would observe, for a person in good health, with dirty laundry and no time, the efforts of a laundress is more “productive” than , say, a nurse.

As for “more important”, surviving in the market determines how “important” (or otherwise) any enterprise or job is.

Mr Smith, your theory re passive investment is illusory.

An older existing property, available for rent, is an equal participant in "rental supply" with a newly built property.

Add or take away either source from the rental stock and supply diminishes, regardless of the age of the building.

I would note, “short term capital gain” (your speculative investment) is already treated differently, under the existing tax acts to “longer term” investment.

“Those two may be the punter & his bookie, that doesn’t necessarily constitute a productive activity.”

Who are you to judge the “merit” of someone elses speculative / investment decisions?

Personally, some “investments” I thought I was making would, in hindsight, have produced a more “productive result”, had I spent the money on a day at the races.

Money is a commodity, it has no morals.

Pretending that some “investments” are more virtuous or noble than others, because of their nature is, only observable in terms of their “end product”.

Typically, one rental property is synonymous with another, subject to size and location.

Perhaps you will illuminate us with your analysis to the “productive merit" of say: DefenceSA versus TAB versus Luna Park?

Yabby “It seems to me, that the market is slowly sorting things out.”

Unfortunately it'll do that through something called a depression. I don't know about you, but I'd rather avoid such a situation.

Col Rouge: "One certainty, government intervention never has done and never will."

What a load of utter idealistic tripe. The extremist view that the market is an all solving mechanism to solve every problem will cause as much damage to our economy as pure communism did others.

I don't think Foyle quite made the point with his washing example, so I'll give it a go: Imagine I have a widget that I sell to my neighbour for $1, and he sells it to his neighbour for $2, and so on for $3, $4, etc. The end result, once passing around all 20 million odd Australians is we've created $200 trillion of 'economic activity' and everybody has made a dollar! But really we've done nothing at all. Although everyone has 'invested' to their own financial benefit, no wealth has actually been created.

Col Rouge: "An older existing property, available for rent, is an equal participant in "rental supply" with a newly built property."

The changing of ownership of an existing property does not add to the rental supply like the construction of a new one would. Both would be weighted equally in terms of economic activity and create equal individual wealth, while only one increases the total wealth of the society.

Money and the market are tools we use to manage the division of wealth within our society. Some investors make money through investments that take wealth from others. Some investors make money through investments that actually create wealth. We need to do more to encourage the later.

We are consuming far too large a portion of our resources fighting each other over the wealth instead using them to create more wealth to go around.

If you really want to know where all the wealth goes,study the symbotic relationship between lawyers and insurance companies,whereby litigation creates the need for insurance and lawyers feed off the spoils.Consider also the banks,money spent on crime/policing,more insurance because we are becoming more dishonest,Govt waste and corruption,social security beauracracy,fraud and waste,money spent on arms a and incompetent defence beauracracies that cost us $billions.You only have to look at the classic of all monumental stuff ups,that of the NSW Iemma Govt.The list goes on.
Speculative fever is only one of our woes that need to be fixed and we had better start by making Govt more responsible.We need a rationalisation of all our Public Services.

*Unfortunately it'll do that through something called a depression. I don't know about you, but I'd rather avoid such a situation.*

I think you are jumping the gun a bit. There will be winners and
losers, sure, there always are. Those who overborrowed and overspeculated,
will have to sell assets cheaply to those who wisely avoided speculation
and saved their pennies. The Americans stand to
lose heaps, the Chinese and Arabs will be waiting with their cash.

Col is correct, money is nothing but another commodity. In money
terms, the US $ used to be considered the default currency, thats
now changing. In commodity terms, money is simply the default
commodity that we all can use, as we exchange goods and services.

The thing is, our perceptions of what things are worth will change
over time. That is refelected in a marketplace and where there is
a marketplace, there will be speculation with winners and losers.

As Arjay notes, there is huge waste in the system, above all
in the Govt system, for they are the only ones with the luxury of
monopolies.

Our own markets are largely distorted by various Govt regulations.
For that you can't blame the market, but Govts

In an earlier post I meant commend the contribution of Mr Smith to this discussion as I did Desipis. Their contributions and the original article were all excellent.
I have another FDR contribution this time from his 1932 campaign commenting on the situation before the depression.

“A glance at the situation to-day only too clearly indicates that equality of opportunity as we have known it no loner exists… Our economic life was dominated by some six hundred odd corporations who controlled two thirds of American industry. Ten million small business men divided the other third. Clearly, all of this calls for a reappraisal of values…
As I see it, the task of government in its relation to business is to assist the development of an economic declaration of rights an economic constitutional order… Every man has a right to his own property; which means a right to be assured, to the fullest intent attainable, in the safety of his savings… If in accord with this principle we must restrict the operations of the speculator, the manipulator, even the financier. I believe we must accept the restriction as needful, not to hamper the individual but to protect it.”
The concept that all jobs in the economy are valuable is beyond my comprehension, but I am closing on my ninth decade. Desipis's widget example showed that argument fallacious. FDR also is stating that the speculator, the manipulator and even the financier are not all that valuable and are in effect parasitic.

FDR
23 Sept., 1932

Desipis “government intervention never has done and never will.”
The role of government is to regulate, not to participate in any market.

The only time government has owned a commercial interest is when they have operated a monopoly, to the detriment of the consumer

examples,

the two airline policy, where one was owned by government.

Telstra.

Their sale into private hands has produced

Cheaper airfares on domestic routes from an increased number of participants.

More price competitive telecomm services.

The government regulates by organizations like ACCC, who have powers to inspect and prosecute (eg Visiboard).

ACCC does not operate a “commercial division” to sell “specialist consultative services”.

Such an activity would represent a “conflict of interest”.

The eternal conflict which always occurs when the umpire is owned by one of the teams.

The only reason you would manage to sell a widget to your neighbour is because he perceives it have a value to him, either real or intrinsic, which exceeds the price you are offering it for sale.

Your hypothesis fails for the simple reason the increasing price charged by your “neighbours”, even with a specialty insight and skills at selling, will quickly find no one to onsell the widget to.

The only way your hypothesis could possibly work is if it were a form of “pyramid scheme”.

therefore your hypothesis fails because pyramid schemes are illegal (section 65AAC, Trade Practices Act) (as you should know if you wish to preach commerce).

The issue remains “What represents a productive investment”

Defining “Productivity” is very simple,

It is the “satisfaction of a want”.

The satisfaction of any “want”, by form of commercial exchange is a “productive” exchange.

The Resources needed to facilitate such exchanges represent “productive” investments.

Buying a hooker is a productive exchange and Melbourne’s “Daily Planet “ a “productive investment” (immoral but now legal).

Buying a high tech factory which ends up being used for a flea market is both moral and legal but I doubt the investors “return” would class it as a “productive” investment

Col Rouge, two counter examples:

Australia Post
The rise in bank fees and closer of branches after the privatization of the banks.

As for Telstra, anyone with a basic understanding of the telecommunications industry could tell you what an absolute mess that has created.

The great virtue of capitalism is that it frequently aligns the interests of the collective with the interests of the individual. The government should maximise the benefits from this by allowing freedom in cases where the interests are aligned and providing mechanisms to deal with the situations where they aren't. Sometimes this mechanism might be regulation, sometimes it might be a baseline competitor and sometimes it might be a government run monopoly. It is necessary to identify where interests are not aligned and determine the best course of action for the collective.

"The only way your hypothesis could possibly work is if it were a form of “pyramid scheme”."

That's pretty much my point, that the asset inflation we're seeing is a result of people buying something because they think they can sell it for more later, not because there's some underlying worth to it.

"The satisfaction of any “want”, by form of commercial exchange is a “productive” exchange."

The converse of this is that: The creation of any "want" by form or commercial exchange is an anti-productive exchange. This is one of the key issues, in that many businesses go out of their way to create "want" or "need" to increase opportunity for profit. This is anti-productive and harmful to society. (e.g. excessive marketing, selling addictive substances)

Another issue is where a business deliberately avoids satisfying "want" because it is more profitable. This is anti-productive and harmful to society also. (e.g. market manipulation, Enron)

Foyle: It's reassuring to have the support of another commentor, it's greatly reassuring to realise that I'm saying the same things as a guy who was elected president 4 times. Of course its not the fact that he got elected that legitimises his policies, but rather the almost 100% increase in real GDP during the 8 years of his pre-war presidency.

Col,

Neither I nor anyone else here is daft enough to fall for that whole “rental supply” ploy.

There is only one way to add to the housing supply and that is by building more houses.

An increased level of investment in established homes merely redistributes ownership among the existing stock.
More specifically it decreases the rate of home ownership.

Conversely, a decreased level of housing investment (ie. lower proportion of tenancies) increases the rate of home ownership.

It's a proportional relationship. There is no separate & distinct “rental supply” there is an overall supply of available homes among which the ownership profile is constantly changing.

Houses, unlike farms factories & other commercial properties don’t produce anything. They are passive assets. Merely changing the ownership of these assets adds nothing to production. Construction does.

As for the broader picture beyond that, while you may be unwilling to differentiate between productive & non-productive industries, economists and finance sector professionals have been making these distinctions for decades.

I was trying to minimise the jargon in my last post but you will no-doubt recognise that” the formal terminology refers to “value-creating” & “value-adding” industries.
While speculation has been exhaustively discussed here, economists recognise that there are a wide variety of ventures that are neither ‘value-adding’ nor ‘creative’:

Monopoly profit, arbitrage, derivatives, short-selling, currency (foreign exchange) dealing, carry trades, asset-stripping, financial engineering etc.

While you may be disposed toward the philosophical notion that any business is just as good as the next - as long as they turn a profit.
There is nothing particularly compelling about that idea from an economic policy point of view. It's a means-justifies-the-end doctrine that requires a certain level of faith on the part of the believer.

Businesses don’t exist in isolation they affect others. Policy is made on a collective level. There will always be plenty of people that will favour the enterprises that create tangible value over those that profit from redistribution & debt.

By way of a practical observation (rather than a moral judgement) the least productive ultimately become the most expendable.

-Mr Smith

Desipis, I remind you that the bank spread on housing loans used
to be around 4% plus, its now around 2.5%. Yes they closed my local
bank branch and I protested. They were right actually. I now do most
banking on the net, the banking facility at the grocery store is
all that I need. Its a win-win all round. As a superannuation
shareholder in banks, as most people are, we all benefit from
their profits, as well as their improved efficencies.

Telstra, when it was a Govt monopoly, used to charge me 9$ an
hour for internet access. It took a tiny ISP and ten of us original
subscribers, to insist that they were too busy feathering their own
nests and did not give a stuff about the customer. Whatever you
may claim about the telecommunications industry, fact is that
consumers have benefitted from lower prices. Competition seems to
be the only way that people who work for monopolies, be they
Govt or private, will get off their little butts and start to think
about the customers, rather then just themselves and their little
feathered nests.

Yes Australia Post now works ok. For the threats were made clear
and they could see all around them, Govt enterprises being flogged
off. If they did not pull their proverbial fingers out, they would
be next. Amazing how that simple threat has transformed AP. The
threat of competition and the real world. Again consumers benefit.

Would like to know how deep down in the US money chest George W' can really go - nearly a half trillion wasted on Iraq alone, being enough worry.

Seeing they pretty well own the Federal Reserve, was wondering when the Rockefellers and Morgans will enter the picture?

Also one wonders how these scions of the Rothchilds could watch our world being financially ruined by Neo-Con backed slow learners trying to run and rule this world.

Dinkum academics don't know whether to laugh or cry to see globalisation taking more out of the Third World than ever, first world racketeers paying sixteen times less at at the black African farm gate than is finally made before sold over the Western shop counters.

Also heard a story the other day from a WA bee-keeper who we thought was still doing well out of his honey. But was shocked to be told that even Wescobee is buying in low-grade overseas honey and mixing it in with our top-grade stuff, and still charging the same.

As one going on 87, starting to feel how lucky one has been to have spent most of his working life under Keynesian philosophy, not under this New-Age plus Neo-Con US Lunacy

I wonder what happened to the guys that gave sub prime loans a triple A rating?
Surely this is the beginning of it all. It amazes me that the"sub prime" tile was invented after the market was "conned" into buying the morgage.
Was the title devised to excuse incompetent research into home loans?
Was it a device used to make "criminal profit" or as I suspect greedy orgs. trying to maximise returns to share holders and to maximise so called"incentive bonuses" to traders?
Will we too, find hard working people lose both equity and house.
I suspect there is too much cash/credit slopping round the world.
Recently on tele a lady was part of an audience worried the second house, bought for speculation, was maybe going to cost her the house she lived in.
Pathetic I thought, hope to profit from young buyers trying to buy a house to raise a family. No doubt following an advisers personal preference.
fluff4