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.