What is ‘normal’ for markets?

Over and over again, in reading about the financial/economic crisis, I come across the expression “when markets return to normal,” Do people really believe that we are going to go back to the dividend-driven, supposedly risk-free, immediate return seeking ways of the last few years? Doesn’t anyone realize that the wealth that was supposedly created in those years never really existed, it was just an illusion to allow a few people to benefit hugely at the majority’s expense? We artificially inflated our net worth, by bidding up the prices of everything, and paying ourselves huge bonuses for being alive. The money that was zooming around, being loaned out again and again, was a fantasy, with nothing to back it up. Just because someone claims that something is worth a certain amount does not make it so, no matter how hard we wish.

So we had better start adjusting to a new reality, one where wealth is again hard to come by, and is only created by work, not by manipulating numbers. We must accept that we cannot live off of our investments alone, because they are not going to provide the steady stream of money that so many have become addicted to. Stock dividends are going to become extremely rare, because the companies will be too hard pressed to come up with cash. Credit default swaps are not going to prevent risk, because too much has been invested under the false belief that it cannot be lost. The government cannot hand out trillions of dollars to keep investors from losing when the slowing of the economy stops the payment of debt.

The entire premise that being owed money increases one’s worth will have to be jettisoned, because too many accounts receivable are not going to be collected. A bank holding company may claim that it worth large sums of money because of all the debt that it holds, but how much of that debt will be converted into cash cannot be known in advance. Those companies that do not re-invest their profits into reducing debt and improving efficiency will not see their stock increase in value, unlike in the past. We have gotten used to believing that we were wealthy because we could easily borrow money. We never were wealthy, and we sure aren’t now.

Tags: Add new tag, collapse, deflation, economic crisis, financial crisis, money supply