(March 16) – “Why should stocks continue booming?, asks Wilfred Hahn in today’s Globe and Mail. “It’s a timely question. Marketers of wealth management services have a ready answer. They have discovered a great new story these past few years: The so-called “new paradigm,” a new world of opportunity made possible by advanced technology and knowledge.
“It’s been spun into an inventive tale of effortless and endless wealth creation, thanks to booming profit, low inflation and surging productivity; apparently a new age of human empowerment. I’m mesmerized with the new paradigm, too. Sure, some of its key tenets may be somewhat exaggerated, but a little sizzle can be forgiven.
“Who can doubt that a great deal has changed? New technologies have revolutionized world commerce and its business cycles in irreversible ways. The Old Economy’s nasty inventory cycle, which used to be the primary incubator of big interest swings throughout the postwar era, is almost extinct. Financial transaction and communication costs have dropped like a stone. Capital efficiency has soared.
“But there’s much more to the new paradigm than meets the eye. Actually, I’m a little peeved with the marketers for not talking up the full story. The facts be known, the new paradigm has a lot more to do with the financial economy than with old or new.
Look at the facts. The world of securities has mushroomed to several times the size of the world’s economy. The total value of all stocks and bonds is now nearly 225 per cent of the world’s gross domestic product, more than three times the relative size of the GDP at the end of 1982.
“The value of world equity markets jumped almost $6-trillion (U.S.) during the fourth quarter of 1999. If everyone could have booked these gains into income, capital appreciation would have added more than 70 per cent to total world income.
With gushing gains like that, people will be excused if they think that employment has become an Old Economy anachronism. Better to e-trade from the home office full time.
“However, to believe that spendable wealth can be created for society overall in this way is a massive delusion — what Old Economy economists call the “fallacy of composition.” What may apply to individuals can’t work for everyone at the same time. One physical law that has yet to be repealed holds that there has to be a buyer for every seller; a relative loser for every winner.