Financial Daily from THE HINDU group of publications
Wednesday, Oct 06, 2004
Financial Daily from THE HINDU group of publications Wednesday, Oct 06, 2004 |
||
|
|
||
|
Money & Banking
-
Insight Industry & Economy - Petroleum Columns - Financial Scan Markets defy theory S. Balakrishnan
ECONOMICS is a funny subject, simple and complex at the same time. Not for it the exactitude of physics. The reason is obvious. Economic activity deals with real people, with their fluctuating emotions, optimism and pessimism. John Maynard Keynes understood the point. Business cycles are caused by the volatility of new investments, in turn a function of what he called the "animal spirits" of investors and businessman. The solution was for Governments to act as a stabiliser, coming to the rescue when these spirits were at a low ebb. The well-being of a people cannot be hostage to which side of the bed a rich man gets up in the morning. The last two decades have witnessed the phenomenal growth of financial markets. Just about everything, including most commodities, are traded as financial contracts to buy and sell, without the slightest intention of taking or giving delivery. The conversion of commodities into financial products has enlarged the number of market players to include those who may have no knowledge whatsoever of the commodity they trade in. They are just speculators - Wall Street refiners, in market parlance. This is most clearly evident in today's oil markets. The price of crude has shot up to $50 despite increased and increasing supplies and the stockpile of inventories in the US and elsewhere. What is more, the world's largest oil producer, Saudi Arabia, has been signalling its intention to step up production from its huge reserves to bring down the price for the long-term stability of the market. To no avail at all. The proximate reason for the oil price rise is hedge fund buying - entities which manage the funds of the rich and aim to create big market swings from which they can rake in the moolah. In this case, by pushing up the market, they hope to attract more speculators and drive up the price, at which point they will exit. Beginner students of economics are taught that if supply increases, price falls. They would rightly be utterly bewildered by the entirely opposite behaviour of today's oil markets. Like this, there are many situations in which economics and economists have been stood on their head. Theory says increasing money supply increases inflation. Fiscal deficits are bad for interest rates and trade deficits are bad for the currency. A low saving rate reduces investment. International trade will be guided by comparative advantage - the list can go on. But each and every one of these statements found in every economics textbook has been refuted in the real world of financial markets, the current remarkable example being the crash in Treasury yields from almost 5 per cent to below 4 per cent, even as the Fed raised interest rates in each of its last three meetings. In recent years, the search for the Holy Grail has led to the discovery of a new subject and new explanations, going by the name of behavioural finance. The stuff is serious enough to justify the award of a Nobel Prize. Will it mean better policy responses and more mature markets? Only time will tell. Again, may be the explanation is that financial markets are Maya, an illusion!
More Stories on : Insight | Petroleum | Financial Scan
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|