Friday, 22 January 2016

Please sir, may we have some more?

From City AM:

Finally some good news: the FTSE 100 got off to a flying start this morning, gaining up to 1.8 per cent in early trading as dovish remarks from Mario Draghi sent investors' spirits soaring.

Global bourses surged, with Japanese stocks roaring out of bear market territory to make their second-biggest one-day gain in five years.


I can see why governments want unemployment to be low and the economy to be growing, and fair play if they interfere to try and achieve those, but why on earth do they want to prop up share prices? It's just as mad as propping up land prices (although considerably less damaging to the economy). Share prices are not fundamental or important in themselves; what is important is total output, total employment and of course the underlying profitability of businesses.

Which is one more argument for having deposit funded corporations instead of companies with quoted shares - DFC's don't have a share price to worry about. To the extent that the government interferes in the economy, at least it would be focusing on what matters - output, employment and profits. And seeing as output = wages plus profits, really all it needs to worry about is 'output', so an obvious first step is reducing taxes on outputs (i.e. VAT).

Sorted.

9 comments:

Dinero said...

Why ?
Well there is a theory ,I read about it yesterday, that the stock market value has a proceeding correlation with the amount of employment.

paulc156 said...

Governments are Minskyites. They fear a negative and self perpetuating effect from falling stock prices.

Dinero said...

anyhow
the London Stock Exchange trading rules forbid the making of trades with the sole or main intent to move the price of a security or index.

Lola said...

D. Quite. Bx was fined for rigging interest rates. But isn't that what Draghi and Co. do every day?

MW Shares work well, if, and it's a very big if, their prices are not constantly distorted by interventionist governments printing money and fixing its price. And all the ludicrous 'rules', obviously.

But I agree, a share price, and especially an index of share prices may have little bearing on the state of the real economy.

DBC Reed said...

Sounds interesting but why is it that when you enter deposit funded corporations on Google you get nil responses?

Ralph Musgrave said...

Dinero,

It could well be that share prices preceed faster economic growth – assuming share prices are being boosted by GENUINE investors and/or those who think they’ve spotted faster economic growth in the near future.

Unfortunately that doesn’t prove that having government use taxpayers’ money to ARTIFICIALLY boost share prices will have the same effect. And even if it did have the latter effect, it’s a daft way of boosting growth, as Mark suggests.

Mark Wadsworth said...

Din, share prices are indicators of lots of other "things", but they are not a "thing" themselvesf. It's like saying "When the economy does well, rents go up, so therefore we should push up rents". that would be arse backwards.

P156, yes.

Din, good point, arrest them all!

L, of course businesses should be privately owned, but it does not need to be shares, that is the whole point.

DBC, because I invented the term "deposit funded corporation", it's not an entirely original idea but nobody has bothered inventing a name for it yet.

RM, exactly and thanks.

James Higham said...

Was waiting for the VAT to appear. :)

Derek said...

Dinero said, "Well there is a theory ,I read about it yesterday, that the stock market value has a proceeding correlation with the amount of employment."

There is a correlation but according to Steve Keen it's because of a common cause for both of them. Basically cheap loans cause increased stock markets and also cause increased business activity (which leads to increased employment). So as Ralph and Mark point out, artificially increasing stock prices via government purchasing is unlikely to have any effect on employment.