Financial bubbles and their cause

Date:            29 June 14
By:             Frank Gue, B.Sc., MBA, P.Eng., Burlington, ON Canada L7R 2B5, 905 634 9538
For:            Editors, The Economist
Re:             Counting the cost of finance, June 21, p. 68

 
Dear Editors:
 
You ask, “Why has [the finance industry’s] increased importance been associated with slower economic growth in the developed world and a greater number of asset bubbles?”
 
Herewith an answer:
 
As a society develops, its people devote less time to subsistence activities and more time to high-tech agriculture, manufacturing, and especially services.  Embedded in “services” are intellectual activities such as R&D and teaching.
 
Agriculture and manufacturing are authentic, tangible Value Added (VA) activities.  Some, but not all, “services” are also Value Added.  Among the “not all” are No Value Added (NVA) and Value Subtracting (VS) activities.  Examples of NVA would include High Frequency Trading, whose microsecond transactions can conceivably benefit no one but the trader.   Value Subtracting activities would include fiendishly ingenious and complex financial misnamed “products” whose main purpose is to conceal from the retail investor how and by whom he is being robbed.  Mind, many of the NVA and VS activities are not unlawful, merely “unethical but not illegal”, as the SEC described the Goldman Sachs billion-dollar can’t-lose double-bet of 2008.
 
Much of the money results of these NVA and VS activities get lumped indiscriminately into the GDP, thereby inflating it.  While this partly imaginary GDP is rising, real people in the real world feel it rising less or falling.  Evidence that the financial world has little resemblance to or connection with the real world is in many graphs of developed-world stock market indices, some of which have risen one-third in the past year in the face of little or no real-economy  growth.  The difference between these two is your bubble-in-the-making. 
 
The only question is when.  
 
Cheers,
 
F.
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