Parallel
Universe
If you listened to the last GOP presidential debate in
South Carolina or have watched with anxiety the tumbling of the stock market,
with a downward spiral that comes close to the 10% official “correction”
designation, you’d think that the US is on the verge of collapse. If you were
young and ambitious or retired with a sufficient nest-egg, you’d be checking
the Internet on where to immigrate. Who would want to live in a country that is
unsafe, led by a president who “doesn’t care about America,” and an economy
that is so bad that more illegal immigrants are leaving than entering our
southern border (by as much as 140,000 from 2009-2014, according to Pew
Research Center). The political climate in Washington, DC is so contaminated
and corrupt that some leading members of congress (Steve Israel of the 3rd
district of New York is the latest casualty) are simply not seeking re-election
(which is a guarantee to incumbents at the rate of over 96%, according to Louis
Jacobson in Politifact).
But this isn’t the America I live in. I recall the
announcement by the Bureau for Labor Statistics that some 292,000 nonfarm jobs were
added in December 2015, that the economy was growing fast enough for the
Federal Reserve to increase interest rates by .25%, that lower oil and gas
prices and the discontinuance of the prohibition of oil exports will make the
US not only energy independent and a net exporter of oil and gas but one of the
leading producers of oil and gas in the world, and that overall we still enjoy
civil rights that are denied by many of our allies, like Saudi-Arabia (whose
legal system is based on a very strict orthodox interpretation of Sharia law).
Paying less than $2/gallon of gas will allow all of us to spend more of our
money on other goods and services which in turn will boost the economy, since about
70% of our Gross Domestic Product comes from consumer spending. Lower oil
prices will lead to greater spending, and greater spending to economic growth;
this, at least, is what neoclassical economic theory teaches us. But maybe this
theoretical rosy picture is too naïve, maybe in the real world things work
differently, even without a conspiracy theory at work.
In the real world of brokerage houses on Wall Street a
stable economy that is slowly but steadily growing is not volatile enough for
daily trading spreads. A bit of bad news followed by good news and vice versa
ensures enough volatility to guarantee great profits. You can check the
financial reports of any of the major investment banks in the US and see right
away that the largest contribution to their bottom line comes from trading,
what some call arbitrage (which is simply buying low and selling high). The
margins are miniscule, but the volume is so large—billions of dollars
daily—that by the end of the year there are substantial amount of money being
made from little movements in stock or commodity prices. And when a bunch of
hedge funds collaborate to bring prices down or up, as they have been fined
after legal discovery, then the trust we have in the fairness of markets and
the supposed reflection of prices of efficient information about supply and
demand (EMH) falls apart. And if these margins aren’t sufficient,
inside-trading is always available, as hedge funds, such as SAC Capital and its
CEO Steven A. Cohen, have admitted as much when paying $1.8 billion(!) in
fines.
Add to this the technically-enhanced “high-frequency
trading” which finds the buying and selling prices of stocks nano-seconds
before these prices appear on the market itself, and therefore are able to
“game” the buy and sell orders before anyone else has a chance to fill them,
and you have, once again, inside-trading plain and simple: information gained
before anyone else has a chance to compete with you is still unfair, no matter
what technical trick or loophole you were able to find. So, is volatility the dream
of any trader? Yes, it is. Is knowing a bit before anyone else what someone is
willing to pay for a stock inside-trading? Yes, it is. Grand conspiracy? Maybe
not; but definitely an advantage to elite hedge-funds and investment banks that
can game the system in the name of “free markets”; the term “collusion with
impunity” seems apt. And when caught, years later, as Goldman Sachs was in its
involvement with mortgages and the collapse of the economy, then a fine of $5.1
billion(!) makes it all okay—it’s the price of doing business. And the six
million Americans who lost their homes can be forgotten. For those who are
interested in a simple, straight-forward explanation of the mortgage bubble and
its ensuing Great Recession, go watch the recently released movie The Big Short.
It’s plain why Republican presidential contenders claim
that the country, led by a Democrat, is doing poorly—they want to build an
argument for changing the guard: Democrats are bad, we are good, ergo: your
next president must not be a Democrat but a Republican. It’s also plain why
they would portray such a negative picture of America’s national security and
its economy, not giving any credit to the president for any policy decision
that helped us get out of the (Republican-induced) Great Recession of 2008-2012
or spending more on the Department of Defense than the entire world put
together (ABC News 2/24/14), a budget which, incidentally, is voted on by
Congress which, incidentally, is controlled by the Republicans. So what about
the media?
You’d think the media would be smarter than all of that,
telling us if the king has no clothes or telling us the truth about our own
country. But you’d be sorely disappointed. What happened to independent
reporting, cool-headed analysis, and a long-range perspective on what’s going
on in the economy? What about calming the population rather than scaring it
half to death, especially when there is no reason for alarm? Last I checked,
there is something called self-fulfilling prophecies, the kind of alarmist
pronouncements that make people withdraw their money from their local banks,
only to perpetrate a run on the bank that in fact leads to its collapse… Have
we learned nothing from our own economic history? Don’t journalists and pundits
realize that the more positive their pronouncements are—given positive economic
data—the better the economy (of consumers) will function? It’s plain that the
latest negative hype is just a hype, nothing more nothing less. And the quicker
we get over it, the better, because the American economy is still very strong!
Raphael SassowerWall
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