Dear SAP Banking community members.
Last weeks, we commented some topics about assets valuation.
Assets valuation, from some perspective, is just a beacon for attracting resources.
For instance, if the government of a big country like China (or any big
economic player), decides to incentive the building of railways in front
of highways, that will have an impact on the value of the cars, car
manufacturers shares, etc; and same story with resources related to the
trains industry.
On my last post I commented that the bubbles are just one side effect of
the lack of correlation between the price of the limited natural
resources and their long term value. By implementing Fiscal and
Economical policies, voluntarily or involuntarily the economic agents
make some assets more attractive than others, those assets get resources
and become even more attractive, in a cycle (maybe vicious, maybe not)
which inflates the bubble.
Economic bubbles have very bad reputation because they’re recognized
when they burst. Until that happens they make the economy grow, and
everybody is happy with economic growth.
Of course, it’s an exaggeration/oversimplification, but the capitalist
system, especially after the Bretton Woods agreements and until the oil
crisis of the 70s have build economic bubbles (or in more politically
correct terms, implemented expansion fiscal policies) to feed the
economic growth.
The difficulty comes when we see that the resources are limited, so the
asset becomes less attractive as past profits are not maintainable in
the future, the bubble burst, economy falls into recession, and we close
the loop of the economic cycle. Let me comment that I’m not saying this
is good or bad, I’m just saying that in my opinion, that’s the way it
works.
Or more exactly, that’s the way it worked. After the real estate bubble
burst on the US, UK, Ireland, etc in 2007 and the Financial Crisis of
2008 was visible, the economic agents tried to stimulate the economy by
inflating a new bubble of public debt, but recovery didn’t arrive… The
main reason, natural resources are limited and oil price remind us that
more stimulus would bring hyperinflation and stagflation.
John Maynard Keynes was a genius, and his recommendations took the world
out of the 30’s depression (together with the reconstruction of Europe
after the second world war, which has probably been the biggest stimulus
plan of the history), but at that time the peak oil was still far, far
away.
So, if we cannot grow by stimulating consumption, we’ll have to find a
new way. Knowledge is the new resource and the new economy will be based
on increasing efficiency. But moving from an industrial economy based
on consumption to a knowledge based economy is a systemic change. As
we’re in a Capitalist System, the Financial Services Industry is the
main agent for driving the change, so the Financial Services Industry is
going to change, but we’ll talk about it another week.
Whenever we remember, the way we were...
Looking forward to read your opinions.
Kindest Regards.
Ferran.
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