For those bashing an estate tax I have a simple proposition and question for you:
Government spending is out of control, with our national debt approaching $9 trillion. The deficit for next year is projected to be $250 billion (without special Iraq spending bills). We are on the hook for programs like Social Security and Medicaid for trillions more. Absent major cuts in these social benefit programs (which will never happen because of who votes in this country - the elderly) the only way to avoid the financial ruin of our country is going to be by increasing revenues to cover this spending (i.e. more taxes).
With this as the backdrop, would you rather see estate taxes (which currently applies to estates with over $5 million in assets - phased back down to $1mm in 2010 or thereabouts) or an increase in income and sales taxes which impact all citizens? I will even take this a step further. I would like to see individuals who live off investments (i.e. they don't work - old money) pay an income tax on dividends and capital gains (goes for the hedge fund guys too) instead of the lower rates (around 15%).
Alternatively, I am willing to entertain any ideas to stop the financial hemorraging of our country. Please give me your best revenue enhancing / reduction in spending ideas. Maybe we can sell Alaska back to Russia. Christ knows they will have the hard currency to pay for it in 5 to 10 years (assuming China doesn't invade Siberia).
EDIT: Just to vent some more, I am getting tired of the American belief that we can spend way beyond our means forever with no negative reprecussions. This "belief" has become entrenched in our economic system from the federal government down to the individual consumer. If it wasn't for the massive quantity of capital this nation has borrowed from foreign investors (see China and the current account deficit) this recession would have happened long ago. You simply cannot borrow money forever, either as a nation or an individual. We need to get our shit together, make a fucking budget, and spend within our means before we are truly up shits creek. Look at National Debt as a percentage of GDP over the past 20 years.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
With this as the backdrop, would you rather see estate taxes (which currently applies to estates with over $5 million in assets - phased back down to $1mm in 2010 or thereabouts) or an increase in income and sales taxes which impact all citizens? I will even take this a step further. I would like to see individuals who live off investments (i.e. they don't work - old money) pay an income tax on dividends and capital gains (goes for the hedge fund guys too) instead of the lower rates (around 15%).
God yes.
Why is the capital gains tax half of the income tax again?
There's a bag that has been growing for decades now and someone is going to be left holding it
Isn't money just the idea of value? Technically it could perpetuate so long as it exists within an agreed upon system by those who choose to put value in it. I think the only danger is when enough people decide they're darned happy living in trees. Then again the guy with the chainsaw would probably force you back in line with his values.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
Which is why I'm wondering about some sort of system forcing you to hold onto stocks for a set period of time. It would force investors to thik more about the actual value of the stock and less about what everyone else is thinking about the value of the stock.
With this as the backdrop, would you rather see estate taxes (which currently applies to estates with over $5 million in assets - phased back down to $1mm in 2010 or thereabouts) or an increase in income and sales taxes which impact all citizens? I will even take this a step further. I would like to see individuals who live off investments (i.e. they don't work - old money) pay an income tax on dividends and capital gains (goes for the hedge fund guys too) instead of the lower rates (around 15%).
God yes.
Why is the capital gains tax half of the income tax again?
First, it is only long term capital gains (you have to hold for a year or more, sell in less than a year and the gain is treated as ordinary income). The rationale is that investing in a corporation is beneficial to the economy as a whole and to encourage this investment you get a break on capital gains. This is fine for people who invest their savings (after tax dollars) and make a living wage (on which they pay income taxes). If you are making a living off of your investments I think it is logical to pay an income tax on the money that acts as an income stream for you.
This was the big fight with the hedge fund guys, who were a lot of income on the 20% split of capital gains they generate. Since the income was derived from a capital source, hedge fund guys only pay the long term capital gains rate (18% I believe) instead of an income tax (30-40%).
There's a bag that has been growing for decades now and someone is going to be left holding it
Isn't money just the idea of value? Technically it could perpetuate so long as it exists within an agreed upon system by those who choose to put value in it. I think the only danger is when enough people decide they're darned happy living in trees. Then again the guy with the chainsaw would probably force you back in line with his values.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
Which is why I'm wondering about some sort of system forcing you to hold onto stocks for a set period of time. It would force investors to thik more about the actual value of the stock and less about what everyone else is thinking about the value of the stock.
See my post above. They encourage people to hold on for at least a year by giving them a tax break on their gains. Forcing people to hold kills liquidity and would severly dampen interest in buying stock. Plus, there can be very good reasons for selling stock in a year. What if you lost your job after investing a bunch of money in the market? Now you can't make your mortgage payment even though you have a large stock position.
With this as the backdrop, would you rather see estate taxes (which currently applies to estates with over $5 million in assets - phased back down to $1mm in 2010 or thereabouts) or an increase in income and sales taxes which impact all citizens? I will even take this a step further. I would like to see individuals who live off investments (i.e. they don't work - old money) pay an income tax on dividends and capital gains (goes for the hedge fund guys too) instead of the lower rates (around 15%).
God yes.
Why is the capital gains tax half of the income tax again?
Because capital gains that need to be used for something get converted to income, which gets taxed. People that "live off of investments" take money out of investment portfolios in order to pay for their lifestyle. The act of taking money out is considered income and gets taxed as such.
edit: I'm not actually doing it this way, as I don't like paying more than I actually need to. I think it's important to pay my fair share of taxes, but I think double dipping is horrific.
Capital gains, as they are now, are actually an additional tax on top of income tax.
For example:
I make money in the Forex market. As a private citizen in Canada, I am responsible to pay taxes equating to 40% of any capital gains on any of my investment accounts, yearly. That's *before* I withdraw anything to have it be useable for buying anything. Once I withdraw it (after it becoming calculated as a capital gain and gets taxed) I have to pay income taxes on whatever I withdraw, at my normal personal tax rate.
Capital gains tax is already a double-dipping tax on the rich.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
edited January 2008
I don't think that this is how it works in the US, Ninto. I'm pretty sure that money withdrawn from a portfolio is not taxed as income.
The "double dipping" argument is generally made by people who claim that their investments are made with income that they've earned and therefore already paid taxes on.
I don't think that this is how it works in the US, Ninto. I'm pretty sure that money withdrawn from a portfolio is not taxed as income.
The "double dipping" argument is generally made by people who claim that their investments are made with income that they've earned and therefore already paid taxes on.
Well that's also true. There's also the triple and quadruple dipping that happens here.
I'm not an accountant, so I might be wrong on how it works here...so far my Forex "business" as it is is pretty small so I'm not too concerned. I'll get an accountant once the numbers grow.
This thread is pretty interesting. I'm taking American Government now. I took the most basic Economics class a thousand years ago, maybe I'll take the next class up in the future. Hopefully there is a Economics History class.
It's a lot more lucrative to offer the guy who sometimes makes late payments a loan at 20% than to offer the guy who never makes late payments a loan at 5%.
Well yeah. The problem that I have is when people irresponsibly borrow more than they can possibly afford, and banks irresponsibly lend more than the borrower can afford, then the government (read: everyone who wasn't a dumbass) has to come along and bail them out so the economy doesn't sink.
Long story short: we are all subsidizing irresponsible idiots.
Somewhat, but in many cases the ones making the loans try to trick responsible people into acting irresponsibly. The credit card company has been trying to trick my parents into paying the minimum for years, going so far as burying the actual balance to make it look like the minimum is the balance.
There's a bag that has been growing for decades now and someone is going to be left holding it
Isn't money just the idea of value? Technically it could perpetuate so long as it exists within an agreed upon system by those who choose to put value in it. I think the only danger is when enough people decide they're darned happy living in trees. Then again the guy with the chainsaw would probably force you back in line with his values.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
By "Value based upon sheer optimistic speculation" do you mean intellectual property? That has a nasty habit of running out. While you may purchase it (or rights to it) I'm not sure you can write off the value as a depreciation expense either.
I think our value system is set up for natural corrections once in a while. The reason this one may have hit so hard is that people were in such a rush to prove to themselves that the 9/11 slump really didn't affect us in a major way. People then got used to floating above their means and forgot what the drive to keep the economy out of a slump was all about. It's understandable. I know a lot of small time business owners that were hurting for a couple of years. It makes sense they would grab as much as they could afterwards, even if on a national scale it could crumble and hurt a lot of people.
This thread is pretty interesting. I'm taking American Government now. I took the most basic Economics class a thousand years ago, maybe I'll take the next class up in the future. Hopefully there is a Economics History class.
Was the basic class you took a microecon class? Because you need to know macro in order to grasp economic history.
This thread is pretty interesting. I'm taking American Government now. I took the most basic Economics class a thousand years ago, maybe I'll take the next class up in the future. Hopefully there is a Economics History class.
Was the basic class you took a microecon class? Because you need to know macro in order to grasp economic history.
It delved into a little bit of micro and macro. It was more of a math course. Not very interesting.
There's a bag that has been growing for decades now and someone is going to be left holding it
Isn't money just the idea of value? Technically it could perpetuate so long as it exists within an agreed upon system by those who choose to put value in it. I think the only danger is when enough people decide they're darned happy living in trees. Then again the guy with the chainsaw would probably force you back in line with his values.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
Which is why I'm wondering about some sort of system forcing you to hold onto stocks for a set period of time. It would force investors to thik more about the actual value of the stock and less about what everyone else is thinking about the value of the stock.
See my post above. They encourage people to hold on for at least a year by giving them a tax break on their gains. Forcing people to hold kills liquidity and would severly dampen interest in buying stock. Plus, there can be very good reasons for selling stock in a year. What if you lost your job after investing a bunch of money in the market? Now you can't make your mortgage payment even though you have a large stock position.
Make it like a CD - penalties for selling early. And while those looking to treat the stock market as a gamble might be deterred, others would be more likely to invest in a more predictable market.
There's a bag that has been growing for decades now and someone is going to be left holding it
Isn't money just the idea of value? Technically it could perpetuate so long as it exists within an agreed upon system by those who choose to put value in it. I think the only danger is when enough people decide they're darned happy living in trees. Then again the guy with the chainsaw would probably force you back in line with his values.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
Which is why I'm wondering about some sort of system forcing you to hold onto stocks for a set period of time. It would force investors to thik more about the actual value of the stock and less about what everyone else is thinking about the value of the stock.
See my post above. They encourage people to hold on for at least a year by giving them a tax break on their gains. Forcing people to hold kills liquidity and would severly dampen interest in buying stock. Plus, there can be very good reasons for selling stock in a year. What if you lost your job after investing a bunch of money in the market? Now you can't make your mortgage payment even though you have a large stock position.
By "Value based upon sheer optimistic speculation" do you mean intellectual property? That has a nasty habit of running out. While you may purchase it (or rights to it) I'm not sure you can write off the value as a depreciation expense either.
He means stock prices based not on what you think you can get from your share of the company's profits but on what you think people will buy the stock for down the line. It creates a wildly unstable market because it's based entirely on everyone guessing what everyone else will guess about the worth of a stock.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
edited January 2008
The truth is that outside IPOs, the stock market does nothing in terms of "investing" or putting money in the hands of actual enterprises. Pretty much all the activity and money made there goes into the hands of investors and speculators. It's a pretty lousy model for directing capital to worthy enterprises efficiently, which is why companies basically only "go public" after they're already established.
Basically, I could give a shit about the stock market and don't really think it's the government's role to prop it up.
The problem with the stock market has always been that it operates with insufficient information, and the system makes up for this lack of information with speculation and expectation.
Well, the basic problem is that while "value" is basically "what someone will pay for it," it's also true that a huge amount of the "value" in our economy is predicated on sheer speculation that other people will continue to speculate contra any concept of actual utility or profitability.
I mean at the end of the day, houses are houses, and have some sort of utility. Not so much with a lot of our more abstract holdings. And value based upon sheer optimistic speculation tends to collapse in a cascading and catastrophic fashion.
And as I pointed out on the first page, the value of speculation is now greater than the value of the rest of the economy (ie the bricks and mortar bits).
Though to be fair, remember that technically this could also alleviate a recession. You forget to mention pessimistic speculation. If everyone started betting against growth (which is more likely today than, say, in the end-90's bubble), the markets could similarly be propped up by their own decline. Only problem is, people rarely bet against growth en masse, it's usually only a couple of Soros types who then spark a run among the rest of the sheep, making things worse.
But who knows, this downturn has been predicted for so long that there is a decent chance that enough people have bet on it happening to keep a good amount of capital in the system. Doesn't mean there won't be a slowdown, but it does make a 1929-esque catastrophic bubble much more unlikely. For example, this is one of the reasons we recovered so quickly from what would have previously been a catastrophic bear market when the late 90's bubble burst.
So speculative markets aren't entirely bad, they do partially fulfill their insurance function, just not particularly well or in the ways they are intended to.
The problem with the stock market has always been that it operates with insufficient information, and the system makes up for this lack of information with speculation and expectation.
When you think about it, it is quite irrational.
The stock market does not act irrationally, it acts unpredictably because you can't know the minds of all the rational actors. And I'm going to go ahead and say by and large they are rational, just their actions are motivated by different drives. For example, if you're one of the people who borrowed money to back a market position, the point at which you have to unload stocks is a lot lower then if you're not buying with debt.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
edited January 2008
I guess I'd say that the net effect of "rational actors" acting and speculating across a wide and unpredictable range of motivations and axioms yields a net result of "irrationality". I mean, pumping up a stock price on the premise that other people will do the same thing isn't exactly tending the market towards "equilibrium" in any conventional sense of value.
The problem with the stock market has always been that it operates with insufficient information, and the system makes up for this lack of information with speculation and expectation.
When you think about it, it is quite irrational.
The stock market does not act irrationally, it acts unpredictably because you can't know the minds of all the rational actors. And I'm going to go ahead and say by and large they are rational, just their actions are motivated by different drives. For example, if you're one of the people who borrowed money to back a market position, the point at which you have to unload stocks is a lot lower then if you're not buying with debt.
The stock market does act irrationally, because imperfect information means that people are always making bets about what will happen. People generally make these bets based on the idea that they have better or secret information or experience about what will happen than everyone else. Clearly the fact that more people lose money in this game than gain money demonstrates that this is not the case.
If people investing in the stock market acted rationally, they wouldn't invest in the stock market. Just because there is a rational aim to buying a lottery ticket, namely the chance of oodles of $$, it doesn't make it more rational than investing your $1 ticket price into a bank where it will definitely appreciate in value.
Really, investors on the stock market don't fit the economic meaning of rational actors.
If people investing in the stock market acted rationally, they wouldn't invest in the stock market. Just because there is a rational aim to buying a lottery ticket, namely the chance of oodles of $$, it doesn't make it more rational than investing your $1 ticket price into a bank where it will definitely appreciate in value.
Uh, what?
How do you think the bank makes it's money?
The stock market is not a casino. It's a method of investing money in companies and receiving a return on your investment. If people want to treat it like a trip to the racetrack then they can, they'll mostly fail but they can but there's nothing 'irrational' in buying a percentage stake in several companies for £50,000 and receiving a percentage of those companies profits every year.
Tax cuts to the poor implies the poorest people who still pay taxes I think. Though I do agree that tax cuts to the poor and minimum wage increases are the best way to devalue money significantly for the middle class. In other words, tax cuts for the poor makes the middle class poorer and doesn't have as big an effect on super large companies as people would like to think.
When you raise the minimum average income it also makes it harder for the people taking handouts poorer. This means you have to raise the amount of handouts for them to survive. Seems like a bad cycle to me.
Actually, tax cuts for the rich cause much more inflation, as they put money in banks using partial reserve systems, while the poor put money in non-liquid goods, which tends to reduce inflation.
Well it's a double edged sword. If I make 50 cents above minimum wage and it goes up by 75 cents, then most employers aren't going to do a percentage base cost of living increase. I'll likely end up making 25 cents above minum wage. Since the lowest point is also higher, that 25 cents is diluted in value compared to what 25 cents above min. wage previous to the hike. This means I've lost more than 25 cents.
Inflation isn't a bad thing if it isn't raised to rapidly. Money is just numbers, albeit numbers that must be managed carefully. What I'm against, is making my ass poorer when I look around and see 95% of the people around me working with less diligence and most of who have not spent all the extra money and time on more education.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
Tax cuts to the poor implies the poorest people who still pay taxes I think. Though I do agree that tax cuts to the poor and minimum wage increases are the best way to devalue money significantly for the middle class. In other words, tax cuts for the poor makes the middle class poorer and doesn't have as big an effect on super large companies as people would like to think.
When you raise the minimum average income it also makes it harder for the people taking handouts poorer. This means you have to raise the amount of handouts for them to survive. Seems like a bad cycle to me.
Actually, tax cuts for the rich cause much more inflation, as they put money in banks using partial reserve systems, while the poor put money in non-liquid goods, which tends to reduce inflation.
Well it's a double edged sword. If I make 50 cents above minimum wage and it goes up by 75 cents, then most employers aren't going to do a percentage base cost of living increase. I'll likely end up making 25 cents above minum wage. Since the lowest point is also higher, that 25 cents is diluted in value compared to what 25 cents above min. wage previous to the hike. This means I've lost more than 25 cents.
The cost of labor generally responds to a floor price by pushing up the cost of all labor, and the effect is strongest near the floor. The idea is that minimum wage will generally attract employees of a certain skill level and work ethic and reliability and so forth, and x% above the minimum is required to draw employees of y skills/ work ethic/ reliability.
Now, this effect competes with profitability to some extent, and is diminished in businesses with small margins or labor-intensive industries.
It might not necessarily happen that everyone gets a 75 cent bump on the day that the minimum wage increases by 75 cents, but it does effect the cost of labor.
The problem with the stock market has always been that it operates with insufficient information, and the system makes up for this lack of information with speculation and expectation.
When you think about it, it is quite irrational.
The stock market does not act irrationally, it acts unpredictably because you can't know the minds of all the rational actors. And I'm going to go ahead and say by and large they are rational, just their actions are motivated by different drives. For example, if you're one of the people who borrowed money to back a market position, the point at which you have to unload stocks is a lot lower then if you're not buying with debt.
The stock market does act irrationally, because imperfect information means that people are always making bets about what will happen. People generally make these bets based on the idea that they have better or secret information or experience about what will happen than everyone else. Clearly the fact that more people lose money in this game than gain money demonstrates that this is not the case.
If people investing in the stock market acted rationally, they wouldn't invest in the stock market. Just because there is a rational aim to buying a lottery ticket, namely the chance of oodles of $$, it doesn't make it more rational than investing your $1 ticket price into a bank where it will definitely appreciate in value.
Really, investors on the stock market don't fit the economic meaning of rational actors.
Does anyone know the "rational" ratio of Goats to Lettuce in the pre-stockmarket era? How about the Pre-money era? I don't think speculation is that bad of a thing.
Lots of people invest without even looking at simple things like the P/E ratio. If you understand the quality of finances it's not hard to make a decent decision. The problem is everyone is looking to hedge or invest in "get rich quick" companies without knowing what they have in their future pipeline.
Many blue chip companies such as J&J have done extraordinarily well with a long track record of sound financial sense. When J&J cut their Cordis division and laid off around 2000 people I really didn't think much of it in terms of company standards. I knew they were making a move that ultimately was for the best.
It's why stocks in the 1st world from a diverse portfolio are a good investment - in the long run western markets go up pretty solidly.
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Irond WillWARNING: NO HURTFUL COMMENTS, PLEASE!!!!!Cambridge. MAModeratorMod Emeritus
edited January 2008
Except when they don't.
Seriously, though - the basic reason for stocks has historically been that they paid dividends to shareholders. The expectation of receiving dividends was what drove the price of stocks.
Now we have some stupid system in which we value stocks according to whether people "like them" in some abstract sense. It's not really the stuff of a rock-solid economic system.
Seriously, though - the basic reason for stocks has historically been that they paid dividends to shareholders. The expectation of receiving dividends was what drove the price of stocks.
Now we have some stupid system in which we value stocks according to whether people "like them" in some abstract sense. It's not really the stuff of a rock-solid economic system.
That's why I said the market is really better for determining the attitude towards the economy instead of the actual status of the economy.
Let's not forget the market collapse before the depression happened like a year before the economy really started to effect peoples lives.
Plutocracy is correct, I was talking about the rationality of investment decision. Alistair, though people can make rational investment decisions, the stock market demonstrates that most people don't. Banks make money because they are in general better at judging investments & have stricter rules of investment than the market average. Moreover, they make most of their money through aggregate gains in arbitrage, but this is a technique almost purely limited to large financial institutions because it takes a huge amount of starting capital to work.
More to the point, you guys are all confusing speculative markets with investment markets.
Investment = paying $1 in stock for Wang PLC in the hope that Wangs will increase in popularity or that the company will persuade consumers that they want Wangs, that stock price will rise, and you will recieve 1c dividend a few times a year.
Speculative (ie Securities, Derivatives et c) = paying $1 to bet what Wang PLC stock will do, ie whether Wangs go up or down; or paying $1 to bet on what other people think about Wangs.
My point was that speculative markets have more value today than the rest of the world economy combined. Many economists think this is not entirely healthy.
Now we have some stupid system in which we value stocks according to whether people "like them" in some abstract sense. It's not really the stuff of a rock-solid economic system.
That's why I said the market is really better for determining the attitude towards the economy instead of the actual status of the economy.
True. But again, the flipside of that is that if you accurately determine a negative attitude towards the economy and bet along those lines while the economy actually has negative status, you ironically help to support it.
Problems are caused when the perception of the economy and the status of the economy are very out of balance, ie perception of economy negative but status is good = hurts what should be good growth, or perception of economy good but status is negative = bubble which will eventually burst. The perception alone being negative isn't necessarily a bad thing. If people start betting on a recession, and a recession happens, the money they earn from those bets will alleviate the downturn, keep money in the system, & provide a certain amount of stability.
The real danger of speculative markets is if a run starts which spreads throughout the globe and totally wipes out the value of the entire international markets, not if a single speculative market in one country takes a hit - so long as others stay strong, that merely destroys the single market while others will benefit from the increased trade. They are self-supporting; so long as people keep speculating, there is little danger. But now that we have such massive amounts of capital in speculation, if people stop speculating there will be massive knock-on effects and huge value will be wiped off the markets.
Current worries are that precisely such an international run may be in the offing.
Seriously, though - the basic reason for stocks has historically been that they paid dividends to shareholders. The expectation of receiving dividends was what drove the price of stocks.
Now we have some stupid system in which we value stocks according to whether people "like them" in some abstract sense. It's not really the stuff of a rock-solid economic system.
Capital appreciation has always been a factor in buying stocks, especially over the last 50 years. Take a look at performance of blue chip stocks over the past 50 years and you will see a steady trend upwards, averaging around 10%.
As someone alluded to earlier, it's the actions of the investor (not the underlying market) that make an investment irrational or rational. The basic premise of investing is matching risk and reward with the investment objectives of the individual. If you are 20, have disposable income, and have a high risk tolerance, purchasing an incredibly volatile penny commodity stock could make all the sense in the world. If you are a 65 year old retiree living off your savings it would be a bad decision.
Trying to limit people's investment options on the basis of your own views of what is rational or irrational seems a bit over-reaching. You are also greatly overstating the "like them" aspect of stock purchasing. Emerging growth sectors with tons of risk and upside definitely have this flavour but an informed investor understands the risk they are taking. Blue-chip, well established companies in mature sectors are priced based on fundamental financial analysis (including things like P/E ratios, dividend yields, etc.).
To boil it all down, you seem to be taking (and this is not an insult, just a reaction based on your statements) a fairly naive and uninformed view of investing and extrapolating it to cover the entire spectrum of securities (ranging from bank CD's to derivatives). The beauty of investing is that there are so many options out there that an investor can almost always find a security or investment strategy that meets their risk / reward objectives. The problem is when uninformed people jump into a sector with no knowledge about what they are getting into and then bitch when a flood of people like them create a bubble through their excess demand that eventually pops (see dot.com bubble and day traders or recent housing market and flippers).
The problem with the stock market has always been that it operates with insufficient information, and the system makes up for this lack of information with speculation and expectation.
When you think about it, it is quite irrational.
The stock market does not act irrationally, it acts unpredictably because you can't know the minds of all the rational actors. And I'm going to go ahead and say by and large they are rational, just their actions are motivated by different drives. For example, if you're one of the people who borrowed money to back a market position, the point at which you have to unload stocks is a lot lower then if you're not buying with debt.
The stock market does act irrationally, because imperfect information means that people are always making bets about what will happen. People generally make these bets based on the idea that they have better or secret information or experience about what will happen than everyone else. Clearly the fact that more people lose money in this game than gain money demonstrates that this is not the case.
If people investing in the stock market acted rationally, they wouldn't invest in the stock market. Just because there is a rational aim to buying a lottery ticket, namely the chance of oodles of $$, it doesn't make it more rational than investing your $1 ticket price into a bank where it will definitely appreciate in value.
Really, investors on the stock market don't fit the economic meaning of rational actors.
There's an interesting statement. Care to provide any facts that back it up? Because if you look at the increase in the value of the S&P or DJIA over time it appears that the total value of stocks is increasing.
Your second paragraph and last sentence are just gibberish. If you are comparing buying stock in GE, Microsoft, or Exxon to purchasing a lottery ticket there probably in discussing this point further to you. You also don't seem to understand the concept of risk / reward. If you had put your money in a bank for the last 50 years at CD returns instead of investing it, after adjusting for inflation, you would probably have the same amount of money now as you did at the beginning. If you had invested in blue-chip stocks you would be comfortably retired.
There's an interesting statement. Care to provide any facts that back it up? Because if you look at the increase in the value of the S&P or DJIA over time it appears that the total value of stocks is increasing.
See difference above between speculative and investment markets. The value of the stock market today is mostly based on the speculative markets, not investment (see, er, Gilpin: Global Political Economy: 2002 if I remember right, and others), and the majority of people in speculative markets don't make money (see John Kay: Truth About Markets: 2003).
Whether the total value of stocks is increasing has pretty much nothing to do with it.
Also, your opinion about the "beauty of investing" entirely ignores the many and serious arguments from economists that markets based on merely betting about the movement of capital rather than any actual physical value or trade benefits, are structurally extremely vulnerable. It isn't just that 'idiot investors' who don't know what they are doing ruin the system, it's that the system itself may be inherently unstable.
There's an interesting statement. Care to provide any facts that back it up? Because if you look at the increase in the value of the S&P or DJIA over time it appears that the total value of stocks is increasing.
See difference above between speculative and investment markets. The value of the stock market today is mostly based on the speculative markets, not investment (see, er, Gilpin: Global Political Economy: 2002 if I remember right, and others), and the majority of people in speculative markets don't make money (see John Kay: Truth About Markets: 2003).
Whether the total value of stocks is increasing has pretty much nothing to do with it.
Also, your opinion about the "beauty of investing" entirely ignores the many and serious arguments from economists that markets based on merely betting about the movement of capital rather than any actual physical value or trade benefits, are structurally extremely vulnerable. It isn't just that 'idiot investors' who don't know what they are doing ruin the system, it's that the system itself may be inherently unstable.
Yes, obviously excessive "bets" made in the form of derivative securities like credit-default swaps where the notional value of the bets being made far exceed the underlying assets is problematic because of the real impact it has on the value of said assets (see the effect of oil options on underlying crude prices in December). This aside, I still don't know how you extrapolate this into investing is like buying a lottery ticket and every one who buys stock is irrational. All investing (even putting it in a bank or have you forgotten the Great Depression or SNL scandal) involves some amount of risk. To say one asset class (stocks) is "irrational" because it has more risk and volatilty than another (bank CD's) is only true if the individual making the investment can't bear the risk. Likewise, I could say buying bank CD's in amounts over $100k is "irrational" because the bank could go under. Better to put it under the mattress and avoid all that risk. I will take a look at your two articles and get back to you
EDIT:
Reading up on John Kay he seems like a pretty reasonable economist. Read an interview with him at Forbes. He obviously has an issue with the excesses of the current market (which I agree with) but I don't think he would agree with your assessment that all stock market investment is irrational. I mean the guy has written for the Financial Times for the past 12 years. Here is one snippet.
Which U.S. economic policies are most readily transferable to other nations, and which policies travel less well?
What really makes a market economy work is what I call in the book disciplined pluralism, which is a system that encourages lots of experimentation. It cuts off experiments that fail, and experiments that succeed are rapidly imitated. That's what other societies most need, and success in that is what makes the U.S. the mainspring of innovation for the world economy as a whole. I think the U.S. policy that transfers least well is probably its reluctance to acknowledge that the risks that really matter to individuals, which are to do with marriage and relationship breakdowns, redundancy unemployment and business failure and acute or chronic illness, are better dealt with by social than by market institutions
Roanth, people like this are manifestations of what is wrong with the system. Sure, you can argue the bank should have taken better precautions towards preventing such a scenario, but the dude made a bad estimate of the risk involved and this is what happens.
Plutocracy on
They fuck you up, your mum and dad.
They may not mean to, but they do.
They fill you with the faults they had
And add some extra, just for you.
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Government spending is out of control, with our national debt approaching $9 trillion. The deficit for next year is projected to be $250 billion (without special Iraq spending bills). We are on the hook for programs like Social Security and Medicaid for trillions more. Absent major cuts in these social benefit programs (which will never happen because of who votes in this country - the elderly) the only way to avoid the financial ruin of our country is going to be by increasing revenues to cover this spending (i.e. more taxes).
With this as the backdrop, would you rather see estate taxes (which currently applies to estates with over $5 million in assets - phased back down to $1mm in 2010 or thereabouts) or an increase in income and sales taxes which impact all citizens? I will even take this a step further. I would like to see individuals who live off investments (i.e. they don't work - old money) pay an income tax on dividends and capital gains (goes for the hedge fund guys too) instead of the lower rates (around 15%).
Alternatively, I am willing to entertain any ideas to stop the financial hemorraging of our country. Please give me your best revenue enhancing / reduction in spending ideas. Maybe we can sell Alaska back to Russia. Christ knows they will have the hard currency to pay for it in 5 to 10 years (assuming China doesn't invade Siberia).
EDIT: Just to vent some more, I am getting tired of the American belief that we can spend way beyond our means forever with no negative reprecussions. This "belief" has become entrenched in our economic system from the federal government down to the individual consumer. If it wasn't for the massive quantity of capital this nation has borrowed from foreign investors (see China and the current account deficit) this recession would have happened long ago. You simply cannot borrow money forever, either as a nation or an individual. We need to get our shit together, make a fucking budget, and spend within our means before we are truly up shits creek. Look at National Debt as a percentage of GDP over the past 20 years.
God yes.
Why is the capital gains tax half of the income tax again?
First, it is only long term capital gains (you have to hold for a year or more, sell in less than a year and the gain is treated as ordinary income). The rationale is that investing in a corporation is beneficial to the economy as a whole and to encourage this investment you get a break on capital gains. This is fine for people who invest their savings (after tax dollars) and make a living wage (on which they pay income taxes). If you are making a living off of your investments I think it is logical to pay an income tax on the money that acts as an income stream for you.
This was the big fight with the hedge fund guys, who were a lot of income on the 20% split of capital gains they generate. Since the income was derived from a capital source, hedge fund guys only pay the long term capital gains rate (18% I believe) instead of an income tax (30-40%).
See my post above. They encourage people to hold on for at least a year by giving them a tax break on their gains. Forcing people to hold kills liquidity and would severly dampen interest in buying stock. Plus, there can be very good reasons for selling stock in a year. What if you lost your job after investing a bunch of money in the market? Now you can't make your mortgage payment even though you have a large stock position.
Because capital gains that need to be used for something get converted to income, which gets taxed. People that "live off of investments" take money out of investment portfolios in order to pay for their lifestyle. The act of taking money out is considered income and gets taxed as such.
edit: I'm not actually doing it this way, as I don't like paying more than I actually need to. I think it's important to pay my fair share of taxes, but I think double dipping is horrific.
Capital gains, as they are now, are actually an additional tax on top of income tax.
For example:
I make money in the Forex market. As a private citizen in Canada, I am responsible to pay taxes equating to 40% of any capital gains on any of my investment accounts, yearly. That's *before* I withdraw anything to have it be useable for buying anything. Once I withdraw it (after it becoming calculated as a capital gain and gets taxed) I have to pay income taxes on whatever I withdraw, at my normal personal tax rate.
Capital gains tax is already a double-dipping tax on the rich.
The "double dipping" argument is generally made by people who claim that their investments are made with income that they've earned and therefore already paid taxes on.
Well that's also true. There's also the triple and quadruple dipping that happens here.
I'm not an accountant, so I might be wrong on how it works here...so far my Forex "business" as it is is pretty small so I'm not too concerned. I'll get an accountant once the numbers grow.
They may not mean to, but they do.
They fill you with the faults they had
And add some extra, just for you.
Indeed.
Murdering accountants and tax attorneys?
By "Value based upon sheer optimistic speculation" do you mean intellectual property? That has a nasty habit of running out. While you may purchase it (or rights to it) I'm not sure you can write off the value as a depreciation expense either.
I think our value system is set up for natural corrections once in a while. The reason this one may have hit so hard is that people were in such a rush to prove to themselves that the 9/11 slump really didn't affect us in a major way. People then got used to floating above their means and forgot what the drive to keep the economy out of a slump was all about. It's understandable. I know a lot of small time business owners that were hurting for a couple of years. It makes sense they would grab as much as they could afterwards, even if on a national scale it could crumble and hurt a lot of people.
Was the basic class you took a microecon class? Because you need to know macro in order to grasp economic history.
It delved into a little bit of micro and macro. It was more of a math course. Not very interesting.
Make it like a CD - penalties for selling early. And while those looking to treat the stock market as a gamble might be deterred, others would be more likely to invest in a more predictable market.
It works for mutual funds.
Basically, I could give a shit about the stock market and don't really think it's the government's role to prop it up.
When you think about it, it is quite irrational.
And as I pointed out on the first page, the value of speculation is now greater than the value of the rest of the economy (ie the bricks and mortar bits).
Though to be fair, remember that technically this could also alleviate a recession. You forget to mention pessimistic speculation. If everyone started betting against growth (which is more likely today than, say, in the end-90's bubble), the markets could similarly be propped up by their own decline. Only problem is, people rarely bet against growth en masse, it's usually only a couple of Soros types who then spark a run among the rest of the sheep, making things worse.
But who knows, this downturn has been predicted for so long that there is a decent chance that enough people have bet on it happening to keep a good amount of capital in the system. Doesn't mean there won't be a slowdown, but it does make a 1929-esque catastrophic bubble much more unlikely. For example, this is one of the reasons we recovered so quickly from what would have previously been a catastrophic bear market when the late 90's bubble burst.
So speculative markets aren't entirely bad, they do partially fulfill their insurance function, just not particularly well or in the ways they are intended to.
The stock market does act irrationally, because imperfect information means that people are always making bets about what will happen. People generally make these bets based on the idea that they have better or secret information or experience about what will happen than everyone else. Clearly the fact that more people lose money in this game than gain money demonstrates that this is not the case.
If people investing in the stock market acted rationally, they wouldn't invest in the stock market. Just because there is a rational aim to buying a lottery ticket, namely the chance of oodles of $$, it doesn't make it more rational than investing your $1 ticket price into a bank where it will definitely appreciate in value.
Really, investors on the stock market don't fit the economic meaning of rational actors.
Uh, what?
How do you think the bank makes it's money?
The stock market is not a casino. It's a method of investing money in companies and receiving a return on your investment. If people want to treat it like a trip to the racetrack then they can, they'll mostly fail but they can but there's nothing 'irrational' in buying a percentage stake in several companies for £50,000 and receiving a percentage of those companies profits every year.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
They may not mean to, but they do.
They fill you with the faults they had
And add some extra, just for you.
Well it's a double edged sword. If I make 50 cents above minimum wage and it goes up by 75 cents, then most employers aren't going to do a percentage base cost of living increase. I'll likely end up making 25 cents above minum wage. Since the lowest point is also higher, that 25 cents is diluted in value compared to what 25 cents above min. wage previous to the hike. This means I've lost more than 25 cents.
Inflation isn't a bad thing if it isn't raised to rapidly. Money is just numbers, albeit numbers that must be managed carefully. What I'm against, is making my ass poorer when I look around and see 95% of the people around me working with less diligence and most of who have not spent all the extra money and time on more education.
The cost of labor generally responds to a floor price by pushing up the cost of all labor, and the effect is strongest near the floor. The idea is that minimum wage will generally attract employees of a certain skill level and work ethic and reliability and so forth, and x% above the minimum is required to draw employees of y skills/ work ethic/ reliability.
Now, this effect competes with profitability to some extent, and is diminished in businesses with small margins or labor-intensive industries.
It might not necessarily happen that everyone gets a 75 cent bump on the day that the minimum wage increases by 75 cents, but it does effect the cost of labor.
Does anyone know the "rational" ratio of Goats to Lettuce in the pre-stockmarket era? How about the Pre-money era? I don't think speculation is that bad of a thing.
Lots of people invest without even looking at simple things like the P/E ratio. If you understand the quality of finances it's not hard to make a decent decision. The problem is everyone is looking to hedge or invest in "get rich quick" companies without knowing what they have in their future pipeline.
Many blue chip companies such as J&J have done extraordinarily well with a long track record of sound financial sense. When J&J cut their Cordis division and laid off around 2000 people I really didn't think much of it in terms of company standards. I knew they were making a move that ultimately was for the best.
Seriously, though - the basic reason for stocks has historically been that they paid dividends to shareholders. The expectation of receiving dividends was what drove the price of stocks.
Now we have some stupid system in which we value stocks according to whether people "like them" in some abstract sense. It's not really the stuff of a rock-solid economic system.
That's why I said the market is really better for determining the attitude towards the economy instead of the actual status of the economy.
Let's not forget the market collapse before the depression happened like a year before the economy really started to effect peoples lives.
More to the point, you guys are all confusing speculative markets with investment markets.
Investment = paying $1 in stock for Wang PLC in the hope that Wangs will increase in popularity or that the company will persuade consumers that they want Wangs, that stock price will rise, and you will recieve 1c dividend a few times a year.
Speculative (ie Securities, Derivatives et c) = paying $1 to bet what Wang PLC stock will do, ie whether Wangs go up or down; or paying $1 to bet on what other people think about Wangs.
My point was that speculative markets have more value today than the rest of the world economy combined. Many economists think this is not entirely healthy.
Didn't we suffer less of a breakdown then other market economies prior to ours?
Amrrrka be nummer won!
YOU ES EH?! YOU ES EH?! YOU ES EH?!
True. But again, the flipside of that is that if you accurately determine a negative attitude towards the economy and bet along those lines while the economy actually has negative status, you ironically help to support it.
Problems are caused when the perception of the economy and the status of the economy are very out of balance, ie perception of economy negative but status is good = hurts what should be good growth, or perception of economy good but status is negative = bubble which will eventually burst. The perception alone being negative isn't necessarily a bad thing. If people start betting on a recession, and a recession happens, the money they earn from those bets will alleviate the downturn, keep money in the system, & provide a certain amount of stability.
The real danger of speculative markets is if a run starts which spreads throughout the globe and totally wipes out the value of the entire international markets, not if a single speculative market in one country takes a hit - so long as others stay strong, that merely destroys the single market while others will benefit from the increased trade. They are self-supporting; so long as people keep speculating, there is little danger. But now that we have such massive amounts of capital in speculation, if people stop speculating there will be massive knock-on effects and huge value will be wiped off the markets.
Current worries are that precisely such an international run may be in the offing.
Capital appreciation has always been a factor in buying stocks, especially over the last 50 years. Take a look at performance of blue chip stocks over the past 50 years and you will see a steady trend upwards, averaging around 10%.
As someone alluded to earlier, it's the actions of the investor (not the underlying market) that make an investment irrational or rational. The basic premise of investing is matching risk and reward with the investment objectives of the individual. If you are 20, have disposable income, and have a high risk tolerance, purchasing an incredibly volatile penny commodity stock could make all the sense in the world. If you are a 65 year old retiree living off your savings it would be a bad decision.
Trying to limit people's investment options on the basis of your own views of what is rational or irrational seems a bit over-reaching. You are also greatly overstating the "like them" aspect of stock purchasing. Emerging growth sectors with tons of risk and upside definitely have this flavour but an informed investor understands the risk they are taking. Blue-chip, well established companies in mature sectors are priced based on fundamental financial analysis (including things like P/E ratios, dividend yields, etc.).
To boil it all down, you seem to be taking (and this is not an insult, just a reaction based on your statements) a fairly naive and uninformed view of investing and extrapolating it to cover the entire spectrum of securities (ranging from bank CD's to derivatives). The beauty of investing is that there are so many options out there that an investor can almost always find a security or investment strategy that meets their risk / reward objectives. The problem is when uninformed people jump into a sector with no knowledge about what they are getting into and then bitch when a flood of people like them create a bubble through their excess demand that eventually pops (see dot.com bubble and day traders or recent housing market and flippers).
There's an interesting statement. Care to provide any facts that back it up? Because if you look at the increase in the value of the S&P or DJIA over time it appears that the total value of stocks is increasing.
Your second paragraph and last sentence are just gibberish. If you are comparing buying stock in GE, Microsoft, or Exxon to purchasing a lottery ticket there probably in discussing this point further to you. You also don't seem to understand the concept of risk / reward. If you had put your money in a bank for the last 50 years at CD returns instead of investing it, after adjusting for inflation, you would probably have the same amount of money now as you did at the beginning. If you had invested in blue-chip stocks you would be comfortably retired.
See difference above between speculative and investment markets. The value of the stock market today is mostly based on the speculative markets, not investment (see, er, Gilpin: Global Political Economy: 2002 if I remember right, and others), and the majority of people in speculative markets don't make money (see John Kay: Truth About Markets: 2003).
Whether the total value of stocks is increasing has pretty much nothing to do with it.
Also, your opinion about the "beauty of investing" entirely ignores the many and serious arguments from economists that markets based on merely betting about the movement of capital rather than any actual physical value or trade benefits, are structurally extremely vulnerable. It isn't just that 'idiot investors' who don't know what they are doing ruin the system, it's that the system itself may be inherently unstable.
Yes, obviously excessive "bets" made in the form of derivative securities like credit-default swaps where the notional value of the bets being made far exceed the underlying assets is problematic because of the real impact it has on the value of said assets (see the effect of oil options on underlying crude prices in December). This aside, I still don't know how you extrapolate this into investing is like buying a lottery ticket and every one who buys stock is irrational. All investing (even putting it in a bank or have you forgotten the Great Depression or SNL scandal) involves some amount of risk. To say one asset class (stocks) is "irrational" because it has more risk and volatilty than another (bank CD's) is only true if the individual making the investment can't bear the risk. Likewise, I could say buying bank CD's in amounts over $100k is "irrational" because the bank could go under. Better to put it under the mattress and avoid all that risk. I will take a look at your two articles and get back to you
EDIT:
Reading up on John Kay he seems like a pretty reasonable economist. Read an interview with him at Forbes. He obviously has an issue with the excesses of the current market (which I agree with) but I don't think he would agree with your assessment that all stock market investment is irrational. I mean the guy has written for the Financial Times for the past 12 years. Here is one snippet.
They may not mean to, but they do.
They fill you with the faults they had
And add some extra, just for you.