Casino economy is the term given to the world that has just ended, sometimes described as a bubble bursting (as in bubble economy).

For years now, the value of a company has not been some rational estimation of its physical assets, plus the contribution of its workers, rather the price to earnings ratio has been one that bears no relation to reality.

Some people do very well. They are able to influence the rest of us to at least try our hands in the gamble that a stock market inevitably is. What went up; goes down. And people lose.

People lose when they place what they should not into the market. People lose when governments place their resources at the disposal of the markets. People lose when governments pretend that they no longer need to exist, and that the private sector will take care of everyone.

The lesson of The Great Depression is about to be learned all over again. We have prepared ourselves so well by eliminating all the mechanisms of the public sector because, hey, let's gamble on the market.

Snake eyes, you lose!

Jennifer: I've always been in favour of a Tobin Tax, thus reducing the incentive for the rampant speculation that blights the world today. But that would require some world authority to at least coordinate the levying of such a thing, a difficult task.

But I think less difficult than achieving the imaginary state of a completely efficient market. Not only is that impossible, those who now benefit from the inefficiencies of the current one would not permit it--as they would not permit the exacting of a Tobin Tax.

themusic: 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 swaps, 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 or development. 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 or technological 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 or bonds. 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

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