The Economics of Expectations
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Economies revolve around and are determined by
"anchors": stores of value that assume pivotal roles and lend character to
transactions and economic players alike. Well into the 19 century, tangible
assets such as real estate and commodities constituted the bulk of the exchanges
that occurred in marketplaces, both national and global. People bought and sold
land, buildings, minerals, edibles, and capital goods. These were regarded not
merely as means of production but also as forms of wealth.
Inevitably, human society organized itself to
facilitate such exchanges. The legal and political systems sought to support,
encourage, and catalyze transactions by enhancing and enforcing property rights,
by providing public goods, and by rectifying market failures.
Later on and well into the 1980s, symbolic
representations of ownership of real goods and property (e.g, shares, commercial
paper, collateralized bonds, forward contracts) were all the rage. By the end of
this period, these surpassed the size of markets in underlying assets. Thus, the
daily turnover in stocks, bonds, and currencies dwarfed the annual value added
in all industries combined.
Again, Mankind adapted to this new environment.
Technology catered to the needs of traders and speculators, businessmen and
middlemen. Advances in telecommunications and transportation followed
inexorably. The concept of intellectual property rights was introduced. A
financial infrastructure emerged, replete with highly specialized institutions
(e.g., central banks) and businesses (for instance, investment banks, jobbers,
and private equity funds).
We are in the throes of a third wave. Instead of
buying and selling assets one way (as tangibles) or the other (as symbols) - we
increasingly trade in expectations (in other words, we transfer risks). The
markets in derivatives (options, futures, indices, swaps, collateralized
instruments, and so on) are flourishing.
Society is never far behind. Even the most
conservative economic structures and institutions now strive to manage
expectations. Thus, for example, rather than tackle inflation directly, central
banks currently seek to subdue it by issuing inflation targets (in other words,
they aim to influence public expectations regarding future inflation).
The more abstract the item traded, the less
cumbersome it is and the more frictionless the exchanges in which it is swapped.
The smooth transmission of information gives rise to both positive and negative
outcomes: more efficient markets, on the one hand - and contagion on the other
hand; less volatility on the one hand - and swifter reactions to bad news on the
other hand (hence the need for market breakers); the immediate incorporation of
new data in prices on the one hand - and asset bubbles on the other hand.
Hitherto, even the most arcane and abstract
contract traded was somehow attached to and derived from an underlying tangible
asset, no matter how remotely. But this linkage may soon be dispensed with. The
future may witness the bartering of agreements that have nothing to do with real
world objects or values.
In days to come, traders and speculators will be
able to generate on the fly their own, custom-made, one-time, investment
vehicles for each and every specific transaction. They will do so by combining
"off-the-shelf", publicly traded components. Gains and losses will be determined
by arbitrary rules or by reference to extraneous events. Real estate,
commodities, and capital goods will revert to their original forms and
functions: bare necessities to be utilized and consumed, not speculated on.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site: http://samvak.tripod.com
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Article Published/Sorted/Amended on Scopulus 2007-11-04 00:08:13 in Economic Articles