I was talking to the Taxi driver taking me back home yesterday. As these conversations go, we started talking about the politics and the economy. At one point, I said that losses in the stock market weren't validated until the stocks were sold. He replied that people using their RRSPs during their retirements have no choice but to sell to be able to use their assets.
This got me thinking. The stock market is a secondary market. It is set up so that owners of a company can sell their parts in a company to others that want to be part of the company's future. Well, that was the idea. What is happening now is that most people (and I'm included in this) buy shares of a company with the hope that their value will go up so that they will be able to sell them for profit afterwards. This is creation of wealth without effort1 or real production.
The basis of capitalism is to create wealth through production. The idea is that the market will regulate what gets produced through supply and demand. The production is essential for the growth of a country but our economic system is based on the increase in money rather than physical or virtual products (IP or the like). I can't say the current financial crisis or the resulting economic slowdown was inevitable. I just think that from a political perspective, there should be a way to uncouple the economy from the financial secondary markets. We need to bring back the incentives on production. Also, we need to make sure that people's wealth doesn't disappear because of someone else's mistake.
The creation of a beefier savings program by the government, one that would give guaranteed returns as high as mutual funds, would help tremendously. This program would not need to be tax deductible like the current RRSP, but you wouldn't be able to remove the money before retirement or a certain age. I'm not sure such a plan would be profitable but the government is not there to make a buck. It is there to ensure that citizens live as well as possible.
1There is of course intellectual effort in choosing the right stocks or mutual funds, but it is theoretically possible to make money by just picking random securities.
3 comments:
Big problem with the plan... What will the government do with all that money from the savings? It will have to invest it in the secondary market you are trying to avoid... the stock market. What else can the government do with that money to ensure its growth???
Yea Alex,
You are completely right. What this does however, is uncouple the people's savings from the stock market with the government as an intermediary.
That way, confidence will not dip as much when the economy goes into recession.
Also, the government doesn't actually need to deal with the secondary market and could lend the money to entrepreneurs to make it grow
It does encourage production, in a way, companies have to make their stockholders happy, how do you do that? By becoming more profitable and making the price of your stock increase which in turn demands that a company be more productive (theoretically) the problem is that speculation by passes this whole concept creating bubbles,the dot com and housing crisis were being predicted by many analysts, logically web sites that made no profit and houses being sold to people without jobs was a problem but the government did nothing because its like Vegas they don't give a damn who gets the consequences, just as long as the dice keep rolling, The hoes keep hoeing, and the money keeps flowing
Post a Comment