Real vs. Financial Economies
Russ Randall has an excellent article from his Austrian Enginomics site that talks about this. My simple definitions are this: The Financial economy is based on the increasing valuations of assets - mainly paper assets such as stocks, and real estate (which the increase is based on cheap credit and mortgages).
The "Real" economy is based on actual savings, investment and profits from the private sector. A good example of the contrast between these two concepts is General Motors. Although it's losing over $10/share, GM's stock price has increased from $19 to about $33/share in 2006.
This is due to speculation that a 'white knight' such as Nissan will merge with GM and temporarily relieve their financial problems that include high levels of debt, and large pension liabilities. It's a short-term fix that doesn't address poor management, dwindling market share, and a heavily indebted US economy and consumer.
Even though the Dow has reached a new all-time high, I don't buy into the 'fact' that it reflects a healthy economy. The American economy today is like a exquisitely-furnished home with plush carpeting and beautiful hardwood floors. However, if you look at the home's foundations, you'll find these wooden beams shaky because of severe damage by termites - or in this case, debt.
That's what the high levels of debt do to a company and a nation. It's like a long-term financial cancer that gradually spreads. Once the damage is realized, it takes a long time to undo the damage, and a long time to get back to good financial health.
The "Real" economy is based on actual savings, investment and profits from the private sector. A good example of the contrast between these two concepts is General Motors. Although it's losing over $10/share, GM's stock price has increased from $19 to about $33/share in 2006.
This is due to speculation that a 'white knight' such as Nissan will merge with GM and temporarily relieve their financial problems that include high levels of debt, and large pension liabilities. It's a short-term fix that doesn't address poor management, dwindling market share, and a heavily indebted US economy and consumer.
Even though the Dow has reached a new all-time high, I don't buy into the 'fact' that it reflects a healthy economy. The American economy today is like a exquisitely-furnished home with plush carpeting and beautiful hardwood floors. However, if you look at the home's foundations, you'll find these wooden beams shaky because of severe damage by termites - or in this case, debt.
That's what the high levels of debt do to a company and a nation. It's like a long-term financial cancer that gradually spreads. Once the damage is realized, it takes a long time to undo the damage, and a long time to get back to good financial health.
posted by Brian Ochsner | 11:03 AM
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