: insightful, but not completely accurate.
The definition of a casino economy
is removal from production. For example, in a non-casino economy, you could invest in actual production
, such as build a car factory or a food making plant, or a service that meets an actual human need, and creates actual jobs. On the other hand, you could invest your money in paper assets-- such as stocks, bonds, or derivitives that might not create jobs or products but pay a good rate of interest. These 'casino' investments tend to be more liquid.
I work in the ultimate of casino
investments-- derivitives. Options trading is, basically a bet on the changes in the underlying financial instrument
-- one step removed from the stock/bond/commodity itself. Add some LIBOR
interest rate swap
s, etc. in the equation, and you're pretty far removed from production. To put this in perspective, the annual value of global merchandise trade is around 4 trillion
USD, while the global derivitives
market equals this value in transactions in two days
So why is this bad? It weakens the power of the government to control national economies
and protect jobs. Without actual production, there are less jobs, and more demand on government services to alleviate this problem. It promotes globalization, often detrimental to the economies of third world countries
, as paper money
flows in and out (but more often out) without creation of actual jobs
. The volatility and volume of trading weakens
the currency, leading to a reduced standard of living.
13 years ago, economist James Tobin
suggested two possible routes for reform of the international monetary system- (1) Making currency transactions
more costly (see Tobin Tax
) to reduce capital mobility and speculative exchange rate pressures (derived from Keynes
) or (2) Greater world economic integration, implying eventual monetary union and a World Central bank.1
Put in simpler terms, he's saying that to fix this problem we either eliminate arbitrage
by making the markets completely controlled, "outlawing" capital gains
from speculation, or by going the other way and make markets completely efficient, eliminating the need for speculation altogether
However, in most cases this is absolutely neccesary. Corporations
that actually produce things, sometimes must raise
extra capital for expansion or r&d
improvements. Where do they get this money? From the players in the casino. They go to a major investment bank, like JP or Goldman or SSB, and the bank helps them issue a stock offering
. They use this money to produce, and hopefully increase profits, and the investors
take a risk in hopes of return
The market serves another purpose as a source of information
-- It is not meant to reflect the facts
of the company, like the price/earnings ratio, or assets, but the public perception
of its profitability. For example, when HP and Compaq
announced a merger, both stocks tanked
. The earnings, etc. didn't change-- It was the perception.
It was the aggregation of millions of voices expressing their opinions-- that is the beauty of the market.
This world's not over yet-- it's just beginning
Yeah, they keep us business majors around for something. We just haven't figured it out yet.
1. Costello, Michie, Milne. Beyond the Casino Economy