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There is real meat in the markets. But when the operative mood of many market players (especially newcommers) is "Just buy something, it all goes up", there is plenty room to set "professional" insider games.

People like to make easy moey, especially now. We are at a top point of the cycle of greed - "everyone" acts asif believing that maney can be made easily perpetually. (Yeah, there is no free lunch - if government assists. But otherwise, prosperity can grow ever more continuously.)

The most effective way to make easy money is a Ponzi scheme (or similarly, a pyramide scheme). They work especially well when there are many people seeking easy money, like it was in Russia and Easter Europe in the 1990's. The most smart blocks can profit handily from massive eagerness. (Poker works the same way, largely.)

Ponzi and pyramid schemes are illegal, of course - too many people inescapably suffer. But a Ponzi scheme does not have to be crystal clear or rigidly designed. Just throw in some ingredients - a steadily growing market, "assuredly" increasing asset value, a flow of newcommers, extra stimulation of demand - and experienced traders already recognize that they don't have to follow the value of their hands, they just have to get timing of Ponzi-lite trading right.

Hyman Minsky build a theory how unstable Ponzi financing patterns emerge from a prosperous or innovative economy phase.

Most disturbingly, the Bush administration was consistently bringing in Ponzi ingredients with its tax policies. That was a pretty sure way to deliver a booming economy - hardly anything can match a Ponzi boom. At worst, their insider ring might have had a hidden Ponzi idea from the outset...

by das monde on Wed Mar 21st, 2007 at 10:36:37 PM EST
[ Parent ]
for describing the current situation.  Ponzi just recyled the later money to pay off the early investors and ran away when the tanks were found to be empty.  That is hardly the case with real estate and the stock market.  The assets do exist.

What we have at the moment is a world with a rapidly growing population, with rapidly increasing productivity leading to a lot more work value sloshing around.  That's causing some asset bubbles as interest rates are probably too low and leverage is being offered too easily.  Simply just too much money chasing too few assets.  So maybe the assets are currently over valued and we will get a pull back.  

But I don't buy your Great Depression argument (90% drop in the DOW in 3 years and 25%+ unemployment).  20-30 % pullback like 2000 -- maybe.  But I'm getting awfully jaded with the Cassandra forecasts that would need a 30% pullback on the S&P just to get down to the point where the doom was first predicted.

by HiD on Thu Mar 22nd, 2007 at 05:54:13 AM EST
[ Parent ]
too much money chasing too few assets - so it becames a game of piling money into pyramides??

Existence of assests does not exclude emergent Ponzi financing. As you say, there might be too few assets for too much money. In effect, the market "recycles" money of later entrants to give profit margins to astute insiders.  The tanks are not left completely empty, but there remains just a meager bottom of aa volumous bubble.
 

by das monde on Thu Mar 22nd, 2007 at 09:08:24 PM EST
[ Parent ]

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