[OPE-L] stocks versus bonds in the global market

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Thu Oct 18 2007 - 17:34:34 EDT

Hi Jerry, 

I assume the figures refer to all types of bonds traded in domestic and international markets, in current dollar terms. I haven't really cracked the bond problem yet, I am working on it still. I really need much longer time-series.

The aggregation of these very large magnitudes is quite a complex task. Generally, what I tend to do, is first look at what different agencies and researchers have already done, in terms of calculations or estimates. Obviously somebody already looked into it. You cannot expect very exact measures of this type of thing, but an indication of relative magnitudes is useful enough. What I am really after is a comparison between global equities by type and the total global amount of securities of all kinds issued, by type, and how the relationship evolves over a long period of time. To some extent the ECB also estimates this kind of data, to show the proportions of different kinds of placements. 

By relating different kinds of data (national accounts, BoP, flow-of-funds, government accounts, enterprise surveys, bank data, tax data, company balance sheets, anecdotal evidence etc.), you can obtain a picture of the total investment pattern by type of investment, if you like, the national or global portfolio. "Capital formation" data in national accounts refer only to net additions to fixed assets (productive and residential) by enterprises, disregarding depreciation, but obviously that is not total investment. You also have investment in financial assets of various kinds, durables etc. Plus of course individuals and households (as contrasted with enterprises) can also invest on own account.

An important issue to explain is why the value of annual investment in new means of production in the USA, Europe, Japan and Australasia shows such historically low growth rates. There's got to be a number of different reasons - possibly technological change, cheaper fixed assets, excess capacity, slow demand growth, relative returns on investment, financing techniques and considerations, organisational challenges, the minimum capital requirements of business-starts, risk perceptions and actual risk, etc.

My general impression about the world economy is that there is an gigantic amount of "excess capital" not productively invested, plus a gigantic amount of labour that is not, or not fully employed. So that is, in total, a very serious misalignment of the "factors of production", and the misalignment has grown over the years, despite the greater "efficiency" of financial markets. 

The claim of the financial guru's is that the deregulated financial markets function to create a better allocation of capital and labour. Maybe there is some truth in that, but the aggregate global result appears to be very different. The income disparities between and within countries are gigantic, and there appear to be serious barriers to market expansion and the ability to extend credit, outside of the group of high-income earners who can consume luxuries and finance weaponry etc. You have a relatively small group with gigantic buying power, and a very large group with very little buying power. And this brakes economic growth.

Generally, the relevant literature pins its hopes on the middle classes as the instrument to expand markets, i.e. the middle classes generate a "trading-up" dynamic in the culture of a country. Simply put, you need a growing middle class, and a middle class culture, to expand the market, and so then you have to stimulate that. Workers or peasants who have no savings or collateral, and a rather low income, cannot borrow anything much either, and so they don't generate much extra demand either, except if there is a surge of a whole lot more workers employed. 

But at least in OECD countries this doesn't really happen much, only in some countries with "emerging markets". If there isn't a surge of productive, job-creating investment, then you obviously cannot have a surge of more employed workers either. Actually, in a wealthy country like Holland, you have half a million of adults who do not work and do not get an income from the state either, i.e. they have sufficient assets and income of their own, to live without working at all. On the other side, the people who financially benefit most from the Dutch welfare state are those who are well-off already.

The thing about "emerging markets" is that you have to explain how they emerge. This is really the central problematic of modern neo-liberal development economics, i.e. how do you get people to trade more using money? 

If you have a large mass of people living at semi-subsistence level, they don't have savings or collateral, they don't accumulate funds, they are very limited in their capacity to buy, borrow and sell. In addition, they do not have the behaviours, discipline, ethics and habits (with regard to saving, consuming, trading and working) which you need for a growing, sophisticated market with developed credit facilities. Maybe also there is a lack of social stability. So you have as much a cultural problem, as an economic problem. 

In that case, the propensity to extend credit, or invest in new production, will be low as well, and it involves taking risks. Why take those risks with large capital funds, if you can also have low-risk or risk-free accumulation? In this sense, capital has an intrinsically conservative aspect: the larger the amount of capital owned, the less willing the owner usually is to risk it and the more he tries to insure himself against risk.

Ultimately, the problem is really about private property relations. Marx tells an amusing anecdote about the English lord who emigrated to Australia, only to find that his servants ran away, because English property relations did not exist there. The foundations of market development are to be found in secure private property relations, but if you don't have those, the possibilities for market development are rather slim. 

Developing property relations is obviously not simply an economic problem, it is a problem of legal enforcement, of power, of politics, of culture. 

Somehow you have to convince people of the advantages of participating in an economic growth project. If they see no personal advantage in it, however, then you don't have their co-operation. In the end, everything depends on how you get people to co-operate, which is what management and politics is all about. 

In this respect, the neoliberal ethos of "individual freedom" is often more of a hindrance than a help. If people see managers more as people who use their position to rake in cash, rather than as inspiring leaders, or if they are disaffected from political life as such, and don't even bother to vote, it can be very difficult to get any co-operation. Yet without durable cooperation, you cannot organise anything.

Because of personal troubles I had, I haven't been able to delve into the data deeper as I intended, but even just a few readily available global indicators make the size of the problem quite clear. 

In the modern world economy, you can hardly say that there is "too little capital" or "not enough labour" anymore. Paradoxically, the problem is that there is too much labour, and too much capital. The real economic relationships that exist, seem to defy or refute most traditional economic theories, in which case they provide no orientation, and people are not oriented by them much anymore either. Thus economics seems to devolve more and more just into a set of techniques for amassing personal wealth, no more. It explains little anymore about society, only about what you need to do to get rich.


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