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[00:01:01] Daily, because their economy is doing better than most and their share market is on a bit of a bender. Why? Because America is exceptional. Didn't you hear that? So is this hiding the truth? Let's entertain the notion today
[00:01:15] that America isn't exceptional and rising shares don't mean an improving economy, although they are seeing more growth than just about anybody else. So that is the exception. So maybe they have a case. That's this week on the Debunking Economics podcast.
[00:01:34] Well, we know it's hard not to do what America expects of you. I mean, militarily the West relies on them to step up to the plate when all those countries who haven't spent as much on defence can't get by themselves on their own.
[00:01:48] But that means, of course, we surrender our own political agenda for whatever it is that America believes in, which can be hard to fathom at times. For example, Elon Musk is already speaking out against spending money on Ukraine
[00:02:00] saying that we'll never beat Russia, so just let them win. And you know what Elon says? Donald is sure to follow. So there's a foretaste of what we can expect at the end of the year.
[00:02:11] But that aside, what about the reliance on America in terms of business and finance? Let's take the equity markets as a good example. So the US share market has a market cap that amounts to 70% of all the world's totally listed market cap.
[00:02:27] 70% of all money spent on shares is spent on shares in America. Now, if that sounds a lot, because it is. In 2008, which isn't that long ago, it was way less than 50%. So what's changed? Well, to a large extent, the magnificent seven.
[00:02:42] So Meta share price is up over 150% in the last 12 months. Alphabet or Google not doing quite as well, but they're still up 50% over the year. Microsoft is about the same and so is Netflix. Amazon up 70% in the last 12 months all in time
[00:02:58] when the S&P generally just rose 20% well below the levels of big tech. So Steve, this is a problem, isn't it? If one country dominates, let's just look at equities festival. If one country dominates arguably the future,
[00:03:11] because people are investing in how they expect these companies are going to do. If you dominate in such a big way, that becomes a problem for everybody else, not for America, of course. They're loving it. Yeah, I mean, I have a general picture about this American exceptionalism
[00:03:25] and I'll give a couple of anecdotes because it's something that isn't just restrained to the stock market, it was just the stock market. You say that casino is dominated by fly-ins from America rather than fly-ins from China or a sense reply in Australia.
[00:03:40] To me, that's a casino. You could ignore it otherwise. But it's an everything and it permeates the culture of America and it permeates how they affect foreign relations, military interventions, everything else. So I had one of the persons that I doubt about that.
[00:03:57] A guy applied to do a PhD with me at Kingston and he was supposed to do some particular form feeling. I've forgotten what it was. He hadn't done it, so I just reminded him. He wrote back to me saying, oh, I believe in American exceptionalism
[00:04:10] and everything I look at, I think, well, does this really apply to me as an American? And I said, right, you're not going to be my PhD student. I did not want that mindset to be lying between me and you talking over intellectual issues. He was outraged.
[00:04:24] How dare you not take on an American? I said, because you're an American and you believe you're exceptional. And I think there's a price to their politics in general. And a phrase which I saw this in my own youth in the 70s
[00:04:36] when you had the Vietnam War coming to an end, thank God. But the attitude of America to everything was effectively the same as a house owner to what happens in the backyard. Why is that weed growing in my backyard?
[00:04:51] And I coined the term, not American exceptionalism, but the parochiality of empire. And the empire sees everything in the rest of the world as disobeying what the owner of the rest of the world, that's why I used the House and the Backyard Analogy, wants to have done.
[00:05:10] And they plunge into issues where they have no understanding of why, for example, there was a bad idea to invite Iraq when there were two major religiously based factions in the country, Shia and Shiite. And you had a minority governing a majority
[00:05:30] and not knowing what they were going to do when they interjected their Western Anglo-American attitudes into an internally conflictual system which itself was created by the British. I mean, you just get a cascade of ignorances about the rest of the world and they see everything from their perspective
[00:05:51] and it's no damn wonder they stuff up the bloody slum. Right, good. And it continues. I mean, that whole fighting over Islamic factions continues, doesn't it? And so you put your fingers into that game and you're never going to win and we are experiencing that right now.
[00:06:07] Obviously in terms of Iran basically controlling multiple wars on multiple fronts and America is obviously in on all of that but let's not talk about the military because I mean, that's a different discussion. Let's just talk about American money and American business.
[00:06:27] American money, that sounds like a song. But if you want to get, if you are a startup and you've got a great idea, you almost have to go to America because America is where you're going to get the finance,
[00:06:42] it's where the market is, it's where you've got to start in a way. It's very hard, isn't it? To start a business in Australia or the UK really if you've got a great tech idea in particular, you know, you've almost got to move to Silicon Valley.
[00:06:58] Yeah, and I've got personal experience with that right now. We're trying to develop Ravel which I'll be talking about more as we get closer and closer doing a commercial launch of it. But yeah, the first, you don't, because you have that enormous volume of money
[00:07:13] you mentioned of course dominated by the tech seven at the moment then it's almost automatic that if you want to get something started in tech you're going to find it easier if you can manage to knock on an American door to try knocking on an Australian one.
[00:07:27] And I've also had direct personal experience of that. So because the money is the share of value, the value of the explosive increase in valuations and the marketing and so on is centered around America then that becomes where you've got to go.
[00:07:44] And it's actually, there's a theory in economics but one of the few things worth learning in conventional economics or by which is respected by conventional economists is called the Hattelling Hypothesis. And that is that if you look at the spread of industries on a geographic basis
[00:08:02] you don't get a perfect market outcome. The usual in the classical stuff says you know leave it to the market you'll get a perfect balance and that's full of more crap than I have time to discuss today. But Hattelling's idea was imagine you had a beach
[00:08:15] on which there was an ice cream where you were having the very first ice cream distributor where's a sensible location if the people evenly distributed along the beach then you whack it right in the middle of the beach then you have a competitor turning up.
[00:08:29] Now what's the ideal situation for the people on the beach as a customer is buying ice cream? Well that's the, you have them at the one third of the beach and two-third of the beach location which means nobody has to cover this before
[00:08:41] but they all sit next to each other and they get half the beach each and you have, yeah so this is the single. And that is what we're seeing with it. Yeah. Well it's what we're seeing with the tech industry isn't it? Absolutely.
[00:08:54] But I mean it's not just necessarily being in America is it? It's just that you need to be, you know if you want to get listed you want to get listed on those exchanges. So you know we've got companies that are not necessarily
[00:09:05] American companies that want a list on the American Stock Exchange so they move to America for that to happen and then you get this big inflow of capital as well going into the United States with people buying those shares
[00:09:15] not necessarily American money, money that's flowing into the US as well. So you talk about it being a casino but I mean which obviously it is but also it is helping to raise capital in businesses as well and it's not necessarily American money
[00:09:29] that's flowing into there, it's a mix of American money and money coming from overseas. Yeah and this is what gives you an over, again this has got all sorts of other consequences as well because it certainly means that if you're looking in the tech world
[00:09:40] then yes you get, you know Indian rupees get converted into American dollars so that you can capitalise your company in the United States of America which is demand for American dollars and that for as well as meaning that gives the financial
[00:09:55] and the stock market side of America immense power it also means that the American dollar is massively overvalued for manufacturers trying to export in the opposite direction so it helps out the financial system but it hollows out the industrial system of America.
[00:10:10] Yeah and I don't know what they do about that and for it being a casino where would you imagine the largest net purchases of US assets? Well let's just look at stocks, the largest net purchases where in the world do you reckon most of the money comes from
[00:10:27] and this is in 2022 and haven't got the exact figure looking on a graph it looks like it's about $170 billion worth of investment in that year in US stocks where do you reckon it comes from? Oh boy you've got me here. Hmm well I'd be jumping China or India
[00:10:46] and my third better be Europe but I'm certainly out in the dark here. This just shows how it's a game that you and I will never play in it's the Cayman Islands. Oh Jesus okay of course tax haven, okay.
[00:10:59] Oh my God have you ever been to a tax haven? No, okay but I mean I understand there's an address which has got like 50 businesses and there's really just so much. I went to the, I can't remember if you're trying to remember this is the two marriages ago
[00:11:13] with my first wife we went to I think it was the Cayman Islands and this is back in the late 1990s and we went there for snorkeling and we had to add to the drama she left our paddy cards behind
[00:11:26] so we ended up going in one of the abyss submersibles instead but we went to that building and I don't think I took a photograph unfortunately this is before digital cameras but there was a white washed two-story building about the size of a reasonably well off you know
[00:11:48] McMansion sort of size not a large McMansion like you know what they call the medium size McDonald's hamburger and there were 50 or 60 parks on the door including News Limited and quite a few others and no one was home
[00:12:05] and that building is probably where most of the investment money is coming from this is money laundering and this is another thing that casinos you know we try as much as we can to stop actual casinos from doing money laundering
[00:12:19] but the stock market is clearly enabling money laundering so the wealthy are keeping the wealth to themselves yeah, yeah, Cayman Island what's number two? for stocks it would be well just as an aggregate Middle East oil exporters okay, I fear I should have thought of them then Singapore
[00:12:40] then oh no, then China I should say then Singapore then Germany oh well so how Luxembourg pulled out a lot of money that year so actually you're negative in terms of well that's where you go to live yeah okay, ah Jews the Cayman Islands I should have known
[00:13:00] I know but I mean what a staggering figure 170 billion in one year so I mean it's so we've got and of course China meanwhile you know is just not is not attracting investment at all so I'm just wondering whether this is a bad sign
[00:13:17] for the future that you know you've got this yawning chasm now between US and China in terms of equity share and the US is claiming more and more so there's more investment going into tech and these big tech players as we were talking about
[00:13:30] with the honest a few weeks ago are just dominating so much of society like you can't buy anything that's not Amazon Amazon's got what is it 50% of the retail share in the United States and actually not the biggest we could talk about that in a moment
[00:13:46] but it's just the idea that so much is now getting dominated by tech and America is dominating tech and nobody else gets a look I don't know how you get around that problem again the point you're making about the Cayman Islands is a major issue there
[00:14:00] I'm kicking myself and not nominating a tax haven immediately but yeah what we have is people are evading tax now this is where the MMT point comes in it's not that that means they're not funding public enterprises it means that there's pressure to reduce the tax take
[00:14:18] which means reduce the scale of government activity in general with a small gap it's the gap between tax and spending that creates fiat money you need a substantial amount of tax in the first place to have the public services that we also take for granted
[00:14:34] in more advanced countries than America the Scandinavian countries and some of the higher tax take also have much much higher provision of public services but what you have is by people evading taxes they're meaning that the money the government creates and injects into the system
[00:14:52] is taken out of our bank accounts the poor not the wealthies bank accounts so they accumulate additional money over and above what they should in terms of taxable income and then put that back into ownership of more shares again so it's a concentration process concentration of wealth
[00:15:10] and that concentration of wealth is elevating the price of those assets yeah again it's a feedback process which means of course they come back and if they're not going to be paying tax with the money they're not going to be putting their money back
[00:15:24] you know just destroying money that way they're going to accumulate that money and put into ownership of further capital resources which further enhances the inequality that is possibly the most defining feature of the system we live in yeah and is so clear
[00:15:40] in America and going to Chicago last year I was shocked thinking that this is a first world country and the gap between the very rich and with my relatives who one of whom boasted about the fact he keeps his air conditioning on in this house in Florida
[00:15:58] even when he's not living there just to keep the house cool and then seeing you know the poverty on the streets in Chicago it's staggering it is staggering but that's actually I haven't actually give myself time to just listen to the Putin interview with what's that American politician
[00:16:20] that went there and not politician Fox News guy yeah okay and he was stunned by the subways in Russia which I've been in and they're stunning their beautiful works of art and this is because it's because he's not been at Tucker Carlson as the guy
[00:16:38] because he's not clearly not been anywhere else not outside America he thinks the American Subways standard now if I had to think the two ugliest subways in the planet in New York number one and London number two where the police has quirks in its favor
[00:16:52] and you haven't been on the Elizabeth line Elizabeth line is gorgeous but that's what you find that's what you know that's what you find in France, you find it in the Netherlands you find it in most European countries with a higher tax take
[00:17:06] also higher governments being above that again which they're mistakenly trying to reduce but you need that so you provide the public what was once described by John Kenneth Galbraith you should have public affluence okay you said what we get instead is private affluence and public squalor
[00:17:22] and American cities are just to sign off what happens when you don't have a large enough tax take as well as don't have enough government spending on top of it over and above the tax level so yeah they go somewhere else in the world and see how
[00:17:34] bloody awful their public system is and you need that to have a civilized society yeah so here's the here's a quirk isn't it, you've got people who are avoiding tax as you say money that could we know how works but people are avoiding paying tax
[00:17:54] so that's seen as a reason for not spending as much on public services and that money is being spent to buy up more equities which is pushing up the value of equities does that really matter in terms of the scheme of things
[00:18:08] so I guess as we go to this break America seeing this big increase in its share of all the equities in the world do we care too much or is it just creating an inequality that is America's problem more than anyone else's well it's two fold because
[00:18:24] to a large degree equity market should be where capital is created but it's often where speculative ownership is created rather than new investment but there is a bit of the new investment which has captured courtesy of that huge dominance of the American
[00:18:40] market but in general it shows we rely far too much on letting the activities of a casino determine the development of societies and that was Keynes' old point from back in the 1930s and if you look at what happened when we went from a period where we didn't
[00:18:54] put the stock market front and center which is the 50s and 60s to where we have done that the 70s in particular the 80s the economic growth rate should have increased because we've got more private creation of capital blah blah blah
[00:19:08] in fact when you look over the global system the rate of economic growth was about one and a half to two times higher under the so called constipated Keynesian policies than it was when the neoclassicals came over and exalted the stock market above everything else
[00:19:22] alright ok loads of questions on that when we come back is the debunking economics podcast me and Steve Keane stay with us Konto is the all in one business account to manage your company no matter if you're independent or the financial department of a
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[00:20:10] is possible the cheapest article is free come right into one of our files or order on seman.com seman so easy it can be so Steve we're talking just before the break and we won't just talk about the equity markets but let's just finish off on that
[00:20:37] the fact that it has increased so much particularly the magnificent seven in the US because tech has been doing so well we talked about how a lot of that clearly has been elevated by tax dodging and so much money is coming from the Cayman Islands
[00:20:49] American money probably isn't it back into American stocks versus the Cayman Islands I raised the question as to whether we really care is it just damage that America is doing to itself so if it is do I mean I'm seeing less invested in European shares for example
[00:21:07] is the European economy really losing out or does it really make no difference to the European economy so we're looking at growth for example because obviously America is growing much better than everybody else is that in any way tied to the fact that we are seeing greater investment
[00:21:23] that is more and this comes under a different issue and it's actually much more MMT aligned as well European countries are obsessed with getting their budget deficits below 3% of GDP the Americans have been under Biden and they have to say this is possibly a certain credit
[00:21:39] for Stephanie Kelton's capacity to convince the large number of leading Democrats that they shouldn't be worried about the deficit America is still creating fiat money by having a substantially larger government deficit and that is counteracting the deflationary impacts of higher private rates on private credit creation
[00:21:57] so when you look at the aggregates of money creation by the fiat system on the one hand and credit system on the other America is still running substantially positive whereas Europe is so obsessed with getting negative reducing government deficits running surfaces rather than deficits
[00:22:15] and their credit system is also affected by the high rates so you're not getting the same rate of credit money creation overall you've got higher money creation in America and well dirt you get a high rate of growth of the capitalist economy Europe is lower because it's
[00:22:29] crucifying itself by not understanding fiat money creation and not understanding credit money creation either so very easy to fix that balance then isn't it just to invest more money in the public sector in Europe problem solved and we talked about that in terms
[00:22:45] of money creation last week but what also about the domination of the US dollar so let me give you some numbers on that so there's 21 trillion if we look at M2 for definition of M2 we've fed a last week's episode there's 21 trillion in US dollars
[00:23:01] for a country of 330 million people 63,000 per person just a bit below the average wage although not everyone works of course very old people don't work babies even in America don't work we look at 3.8 trillion in US dollars in terms of the UK money supply
[00:23:19] M2 money supply for a country of 67 million that's 58,000 per person not too dissimilar given how much the US dollars used overseas 2 trillion US dollars for Australia for a country of 67 million that's 77,000 actually more than the United States I looked at all those numbers and I was thinking right
[00:23:37] we're going to see because the American dollars used so much we're going to see that there is so much more US dollars in circulation but actually that's not the case when we look at the money supply as a whole when we look at notes and coins
[00:23:49] it's a very very different story the US dollars you know flooding many parts of the world but in terms of total money supply the US is not actually you know and look at it on related to the population the US actually is not that much more
[00:24:01] there's not that much more money in circulation does that surprise you? Not particularly I don't think it's as relevant as people would like it to be in conventional economic theory if you look at how Benanke tried to explain the Great Depression
[00:24:13] it was largely over the ratio of gold to base money and base money to M1 and M1 to M2 and so on and so forth and relating all those to GDP it's really that it's the level of turnover of the money that is an essential
[00:24:29] and so is of course they don't understand credit money creation so they're not looking at the scale of money created by the banking sector and it's also not to get America is not the world's most prosperous country on a per capita basis
[00:24:43] the Scandinavian I don't know where it sits in the global scale these days but it's down about number 10 or 15 in per capita income so I'm not amazed to see it having a lower level of money per capita either until you start looking at cash so almost 10% of all
[00:24:57] US currency is cash come again? 10% of US money in terms of noting coins 10% of all of that M2 supply is cash that's another funny piece of American exceptionalism 4% in the UK 3 or 4% in most countries but 10% is American that's backwards exceptionalism and this one thing I find quite remarkable
[00:25:23] there's many quirks to America if you try to interpret it just as a capitalist nation you're going to fall over on so many different details it's a religious nation it's a militaristic nation as well and you've got to combine all those components together
[00:25:35] to try to make sense of the place but I remember going through America this is early 2000s and a good friend was in the neighboring state of the plane I couldn't go and visited him but I thought I'd give him a telephone call
[00:25:49] and this is back in the days when you still had physical phones to make calls and I found one and it said okay this call will be 5 minute call will be $6.75 please insert $6.75 in quarters what? quarters Americans will not change out of their bloody useless banknotes
[00:26:11] which are all the same size and all the same color you might know that Ray the great blind penis singer Ray Charles insisted on being paid in $1 notes because that way you couldn't be defrauded whereas every other country has notes that are different sizes and coins 25 cent coins
[00:26:31] I mean you can find some of the denomination of value coins where I've been in Budapest recently but Australia abolished the 5 cent coin what 20 years ago 30 years ago and the coins are now the coins have kept pace with inflation American coins and notes haven't kept pace with inflation
[00:26:47] and at the same time let's go back to our favorite topic here it's a great way to launder money when it's physical rather than electronic so America's you know it's stuck you cannot get Americans to use to use to make larger coins $1 coins
[00:27:03] I think the main place we can buy $1 coins is Ecuador you can't find machines to use $1 coins in America they don't change their vending machines so like exceptionalism can be backwards as well well yeah I mean having said that I
[00:27:17] so a couple of stories coming out of that one is I'm just imagining Ray Charles getting paid in dollar notes if he was around today he'd be getting paid at least $10,000 a night wouldn't he he's going to be up all night counting his money
[00:27:29] he wasn't going to be defrauded he found quite a few times he'd go to put money in the bank and be told he thought he was depositing you know $1,000 and he would find only depositing $100 so I'm talking about blind performance I saw Stevie Wonder he was on stage
[00:27:45] this was in Australia years and years ago he was absolutely superb with an amazing backing band big brass section so his band was on then he came onto the stage and he was carried onto the stage by two bouncers who put him in the middle of the piano
[00:28:01] and he started playing and it was just awful and he just told everyone to stop and then the bouncers came back on again and moved him into the right position on the piano it was just a joke until they put him in the right place
[00:28:15] and then he was fine from that foot on but anyway, just as an aside but isn't there reason why there's so much money though so much more cash is because it's being used in so many more parts of the world
[00:28:25] so the American dollar is not just being used within America and you might be right that it's used more because there's more reliance I went in the middle of last year to Chicago as I've mentioned we didn't change any cash so we got by without the American dollar
[00:28:41] vending machines, yes, there's one at the airport which took cards and asked for a tip are you kidding on a vending machine would you like to leave with the default seems to be everywhere 18.5% the minimum tip to a vending machine oh that's farce-less
[00:29:01] but this 10% of currency isn't a lot of that going to be because the American dollar is being used in so many other parts of the world it depends on the stats I mean it depends on the stats whether your stats were actually American dollars
[00:29:13] currency in circulation in America or globally but I think this is globally globally, when you got countries where people don't trust that domestic currency so Argentina and places like that you have a secondary market in dollars as well as the local market in whatever local currency is
[00:29:31] so that's again another huge mistake coming out of the very dexter white overruling canes and getting us to a domestic currency rather than an international currency for international trade but yeah that's a major part of it and also it's the again money laundering and presupposes of crime
[00:29:51] all this stuff is best handled with American dollars then with any other currency because it is the international currency so there we are another example of American exceptionalism if you are trying to defraud people then it's the currency to use but I mean
[00:30:09] let's look at this word exceptionalism because it seems to be used a great deal again lately because of the strength of the share market and the strength of the tech sector but you made the point if you look at GDP per capita they're well down the
[00:30:23] well down the table if that's the best measure anyway but in the United States is number 7 number 1 understandably as you know Dichtenstein all the tax dodged countries Luxembourg Bermuda all got something in common haven't they then you get into Ireland obviously doing quite well
[00:30:39] because it's similar to tax dodged it's tax dodged for companies and Switzerland similarly nice bank account Norway, Cayman Islands Norway is the first country that actually starts with the first real country and then Singapore where we were back and Qatar and then the United States so actually
[00:30:57] when you take out the tax dodged countries they're not quite high up but look I've done the measure of use for the income comes in as well yeah then you've got a real problem but then if you also look at the world trade so they're not
[00:31:11] they're a big country that the world's largest economy but they are 11% of world trade I mean they're not exactly dominating 70% of of world stock market yeah yeah doesn't make a great deal of sense does it well the stock market itself doesn't make sense
[00:31:27] and I was actually talking on my one of my lecture courses about this with a new arrival and that is that shares themselves should not be open-ended because they're open-ended you can get these crazy valuations coming out of them and that then means people
[00:31:43] buy them as speculative vehicles not as vehicles to enable actual capital formation to occur so I propose when you're well back before the financial crisis that we should have we should remake shares in what are called these shares when you buy them initially
[00:31:57] which is an initial public offering so you are giving money to the company then they can last forever if you don't sell them but as soon as you sell them they've got a 30 year use by date they expire after 30 years which would mean that you would
[00:32:09] be forced to consider what is the income stream going to be over the next 30 years of this share back in the days when I thought we had 30 years to think about and that would mean that you're focusing on the dividend flow which according to conventional theory
[00:32:23] that's what shares are based on of course that's crazy it is the shares share prices are based on expectations of capital gains which again leads to this whole inflationary problem in asset prices they're not based on what you would expect the income stream to be out of those
[00:32:37] companies and that's why I can get incredible crashes when after a while the delusion that a share is going to be worth 10 or 100 times its price in 10 years time from today it's collapsed then the bubble bursts and you have you know I'm actually
[00:32:53] reading the Dernsbury cartoons right now which about a 25 year 20 year lag on the real world between 20 and 25 years and they're in the middle of the dot com double and you're getting these valuations like pets.com which at one stage was worth more than all the
[00:33:09] retailers in America disappeared and all these things huge valuations crash huge valuations crash and this is the whole gambler I wonder whether we're about to do it there again with AI because all of these are being artificially inflated by AI talk and I just wonder whether it's another
[00:33:25] dot com hype and we're going to see another crash because of that. Well I mean there's the huge when you look at the type of thing with AI does I use AI for note taking in my my lectures these days and they're great
[00:33:37] you know at a level of having an automated secretary that does the work which you normally say can somebody else take notes here please I mean nobody wanted the job and it was always poorly done and now we get a quite a brilliant summary AI for diagnosis
[00:33:51] AI for transportation there are so many areas which it will have quite a dramatic impact but still like the whole dot com bubble it'll be over hyped in terms of current valuations. So this idea that shares start to lose value
[00:34:05] at the moment you start to trade on the secondary market I mean the advantage of that obviously that does sort of get over this hoteling type principle that you're talking about where if you want to invest you've got to invest in the
[00:34:15] United States and you do that because you expect you're going to see the share price rise so much more there because there's so much more speculation by the Cayman Islands as we take it out of the equation. Yeah if you take that out of the equation then yeah
[00:34:27] then you might get to the situation where somebody could in Europe for example say well yeah we've got a great idea let's list let's list in Europe because you know we're going to get the same level of investment as in the United States
[00:34:39] we're going to see the same increase in the in the value of shares as we would in the United States that drive to all shares to go to the United States might start to disappear. And you'd also get more genuine capital formation coming out of it
[00:34:53] because the main way you're going to make money is by finding that company which actually is going to generate a permanent income flow over time rather than the one who you think everybody's going to do the hot potato routine on which is what you'll get instead
[00:35:07] so Cain's described the stock market as being like a beauty contest where the prize is given what you're going to say you're supposed to this is of course looking at only at women you've got to pick the ten most beautiful women out of a list of
[00:35:23] 100 and the prize goes to the person who guesses what the majority opinion is and it says you don't win by picking the most beautiful person or even the person that most other people think is going to be picked by others as the most beautiful person
[00:35:39] you've got to pick the person who most people think is going to other people are going to think is the most beautiful person and he called it the madness of the third degree and I think that aptly describes how stock markets actually behave and the fact that
[00:35:51] we don't reform them shows how little they are to about capital creation. So we're not saying we're not basing our evaluations on a company based on what we think the company is worth we're basing on what we think other people think it's worth. No
[00:36:03] what other people think other people think it's going to be worth. It's a three two one. I think that the absurd bubbles and crashes coming out of it rather than people saying this is really interesting technology we need to develop this that's what an intelligent society
[00:36:17] would be doing right so is this bubbling in equities is that hiding what could be a dangerous position for America then because if we look at World Trade I mean they so actually in twenty twenty two the total trading goods and services in billions of US was six
[00:36:37] well okay trillion six point seven trillion the European Union eight point one trillion China seven point one trillion so if you look at international trade their third place yeah yeah and this comes back to the extent to which that money speculation on stock markets
[00:36:57] is turning to physical capital and also the competitiveness of the technology you're producing with the rest of the world's physical capital and it's clearly that America's great at creating paper wealth but it's not creating long term capital assets which are the form in which we actually can produce
[00:37:17] physical goods and services to give us the genuine standard of living I mean again living out the climate changes as I have to whenever I talk about this stuff these days but it is not a way of doing capital it's a way of speculation
[00:37:33] and it ends up with wasted capital being created out of it because people are forced to put some of that huge paper valuation into physical capital which then is over invested useless, loses money boom crash boom crash we're back on the boom crash opera
[00:37:51] rather than producing stuff which could be exported which could help America's trade position so its share of global GDP by the way forty percent in 1960 obviously since 1960 global GDP has increased a great deal so that's partially explains this figure but it's gone from forty percent in 1960
[00:38:07] to just twenty four percent now in the same time China's gone from four percent to sixteen percent cost the rest of the world a skyrocketed so you know at the ten of the century GDP global GDP was 35 trillion now it's close to 90 trillion but America is a declining
[00:38:23] share of that world trade even if it is an increasing share of the equity market so two very different things and that's come back to the point you started with is actually destructive of America to have these other value stock markets yeah, yeah and even when you look
[00:38:37] at you know things that in the tech sector we think well okay they're dominating and clearly they are but will they do that forever so if there is a collapse in shares what does that do for the you know if the valuation of those businesses fall
[00:38:51] how does that change the enthusiasm for those companies to invest further and to expand or does it give opportunities elsewhere so you look at Amazon for example and it accounts for half of all the e-commerce in America compared to Apple for example which is four percent
[00:39:09] of all e-commerce in America so it is huge in America but it's small compared to Alibaba so 239 billion for in terms of global sales for Amazon compared to 765 billion for Alibaba so we talk about American exceptionalism but that's fine so long as we ignore China perhaps
[00:39:29] that's a mistake trying to do in America has been making for about 40 years now so it could all change couldn't it, it could all turn and just wondering whether and is it the equity market that's going to cause that change
[00:39:41] I think it's going to be manifest in the equity market rather than caused by the equity market I'm not sure what have we declared American exceptionalism is a myth perhaps no well the mental belief certainly real but whether exceptionalism leads to exceptional performance
[00:39:55] is another story entirely and what you're pointing out at the end there is that the exceptional performance of the stock market is not not at all mirrored in the performance of the physical economy and that's where other ways of creating capital other ways of bringing
[00:40:11] about investment are more successful than the casino approach America has gone for yeah very good very clear good to talk we'll catch you again next week thank you welcome out okay bye the debunking economics podcast if you've enjoyed listening to debunking economics
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