Bubblenomics is Alive and Well in Canada

Here is a guest post from BC union (Steelworker) researcher Kim Pollock.

By Kim Pollock

There is growing evidence that a new stock-market bubble is growing daily, right before our very eyes. But while stock-market prices and market capitalization grow, there are still few signs of real economic recovery.

In Canada for instance, real gross domestic product decreased 0.5 percent in May, a faster rate of decline than in the previous three months, according to Statistics Canada. And it was the goods-producing industries that saw the biggest decrease in real GDP. The energy and manufacturing sectors were the main contributors to May’s decline notes Stats Can, while construction and wholesale trade also decreased.

Conversely, the activities of real estate agents and brokers as well as retail trade actually advanced in the month. This indicates there’s no end in sight to the massive growth in debt that helped fuel last year’s economic meltdown and that now is likely to deepen the recession. In March, the Chartered General Accountants of Canada reported that household debt is at an all-time high, reaching $1.3 trillion in 2008. And they warned that the escalation of debt is primarily caused by consumption motives rather than asset accumulation.

The three main indicators of household indebtedness – debt-to-income, debt-to-assets and debt-to-net worth ratios – have all deteriorated significantly in the past two years and particularly during 2008, say the CGAs. Canadian households are financing consumption activity and fuelling gross domestic product growth with unearned money as families increasingly turn to credit to finance day-to-day living expenses. While their wages stagnate, working families are borrowing just to maintain their living standards. And with growing unemployment, there will either finally be a decline in debt-creation, putting pressure on consumer demand or else a further growth in indebtedness and insolvency.

In July Stats Can says that another 45,000 people became unemployed across the country – more than twice what most economists predicted. Losses were severe in both full- and part-time work. “Since October, total employment has fallen by 2.4 per cent, all in full-time work, with the vast majority of employment losses in manufacturing, construction, and transportation and warehousing,” the report stated. “During the same period, the unemployment rate increased 2.3 percentage points to 8.6 per cent, the highest rate in 11 years.” Worse, it’s increasingly clear that the Harper government’s “stimulus package” was either too puny or so ineffectively delivered that it will do nothing to stop the tide of joblessness.

As a result of the growing employment crisis, Canadian personal bankruptcies are also jumping, up in June by over 50 per cent compared to the same time last year. CBC reported a total of 10,823 personal bankruptcies in June, up 54.3 per cent compared to the previous June’s numbers. The Office of the Superintendent of Bankruptcy Canada says that while only 7,013 individuals had to resort to bankruptcy in June 2008, a few months before the recession took hold. This June, there were also 515 business bankruptcies, up 10.8 per cent year-over-year.

The June 2009 personal bankruptcy numbers represent a 9.3 per cent increase compared to the previous month’s figures, when there were 9,900 personal bankruptcies. Personal bankruptcies rose for all provinces, both year-over-year and compared to May numbers.

In other words, we’re simply seeing an extension of the same perverse economic forces that were at work before the global economy imploded. Capital continues to be diverted from production to investment and spending rather than production of goods and services. Corporations and consumers continue to try to square the circle through borrowing. And real investment and employment creation remain in the tank.

With respect to investment, Statistics Canada for instance reported recently that business fixed capital formation – investments in the buildings, machinery and equipment needed to actually produce goods and services – fell by 6.4 percent from the last quarter of 2008 to the first quarter this year. Compared to a year ago, capital formation was down by 6.3 percent.

Companies’ record in machinery and equipment investment is even worse, falling by 10.8 percent from the last three months of 2008 to the first three months of 2009 and down almost a fifth since the first quarter last year.

But bad as this seems, it’s even worse when you take oil and gas investments out of the mix. Almost all of Canadian firms investments in the past decade were in fact in the oil patch: Canadian firms’ investments in the energy sector grew by 12.2 percent per year from 1999-2008, while investment in the overall goods-producing sector actually fell by 0.1 percent per year.

So even though it’s a good time to invest, with prices of many commodities low and even falling and plenty of people looking for work, and even though new investments are clearly needed to keep Canada internationally competitive and save Canadian jobs, companies are currently not taking the opportunity.

Instead, what they are doing is continuing to shovel capital into stock markets, where the rate of profit continues to exceed that offered by real production. It’s what UCLA historian Robert Brenner calls “bubblenomics”. The Toronto Stock Exchange hit bottom in early March at an index level of just below 7600. Since then it has rebounded to about 10,800, a recovery of about 42 percent. So while capital has poured back into the stock market, it has not gone into investment or production of goods and services. And sadly, financial investment will not significantly ease the employment crisis.

The growth in stock values helps to explain one thing though: why some economists insist they can see signs of economic recovery. Apparently they don’t get or don’t value the difference between real investment in production and speculative investment in stocks, bonds, securities or weird financial instruments like derivatives – the same bunch of exotic, fictitious assets that helped push the economy over the brink last year. It’s the sort of thinking revealed by former US Federal Reserve chair Alan Greenspan, who told Congress last year he didn’t see the crisis coming! During the run-up to the recent crash indeed, the illusion that all was well seems to have been fed at least in part by the sustained growth in market values and share prices.

In fact, there won’t be any shift toward real investment without concerted government intervention. This might take the form of a concerted program of investments in infrastructure such as urban transit and commuter rail, alternate energy projects, improved social program delivery, child care, health care and education. Hopefully these should be combined with “Buy Canadian” procurement policies – instead of howling about the US “Buy American” program in other words, the Harper government should match it with a Canadian equivalent to ensure that the benefits of stimulus stay here in Canada rather than get exported to China and other low-wage platforms.

There also has to be regulation of lending and capital markets to stop the flow into speculative investments rather than goods and services production. The reason that capital continues to flow into financial dealing is not hard to find, after all. Stats Can reported in May that while lower corporate revenues contributed to falling profits across the economy – Canadian corporations reported operating profits of $55.1 billion in the first quarter of 2009, down 11.8 percent from the prior quarter – profits in the non-financial industries fell 12.6 percent to $41.0 billion, compared to only 9.3 percent to $14.1 billion in the financial sector. This comes after a decade or more in which profits in financial dealing exceeded those in the real economy.

The net result is a strong and likely mounting corporate preference for stock-market speculation, not real investment. The federal government should break that tendency with investment targets in manufacturing and other goods-producing industry, as well as measures to encourage training and infrastructure development. These are measures that would lift sagging consumer demand, create jobs and put Canada on a firm footing to compete globally when the slump ends.

In short, it seems like all the forces that created the economic crash and drove the economy over the precipice remain fully in effect. There is little reason to expect a recovery of the Canadian economy any time soon, in spite of the repeated cries of “light at the end of the tunnel” or sightings of “green shoots” of economic growth. And there’s particularly to reason to expect an early recovery if the government sits on its hands.


  • Ooop! First few paras are too tiny. Fix, please?

  • “Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.”

    Proverbs 13:11

  • “Capital continues to be diverted from production to investment and spending rather than production of goods and services.”

    Sorry, but there’s a lot of confusion in this sentence. And it’s not all just terminological.

    1. If people decide they want to stop saving and consume instead, that might not be such a bad thing in current circumstances. It will increase demand for goods, which (in current circumstances) would give firms the incentive to increase production, and also possibly increase investment. (Paradox of thrift).

    2. Any individual has a choice of whether to use his savings to finance new investment (in real capital equipment, or education, or something else that increases productive capacity), or whether to buy existing capital equipment off someone else (which is essentially what you are doing when you “invest” in the stock market). But it’s a fallacy of composition to think that all people can do this, and that “investment” in the stock market subtracts from the total pool of savings available for investment in new productive capacity. If I buy a stock, someone else must have sold me that stock.

    This is not a right/left issue. I have heard people on the right make the same mistake.

    There are several good economists on this board who can go into greater detail, if needed, and who you might be more inclined to listen to than me. I will leave it to them.

  • Great stuff Kim, not a lot of glee in any of those numbers, no matter what way the flows are going.

    The one notion that I think we need to solidify here is the fact that about the only movement seems to be in consumer debt- i.e. a continuation in the expansion in credit capitalism that as when combined with bubbles is not sustainable.

    I jeust read an article that China is starting to unless a bit of a credit backed consumer expansion with a new wave of credit card issuance within the Chinese population. Potentially Credit Capitalism can keep expanding!?

    THe sorry state of investment is what I see is a real problem. When you consider, as you pointed out about the only investment in the last decade has been in the Tar sands, it really is pathetically old world, well generation. We need to see a new world on the horizon, and it will only be brought about by new world innovation. And that my friends is not happening to the level that we need.

    A lot more movement in the at least the transportation sector would be a really nice thing right about now- and potentially all that oil sand investment will be for not. So why not cut our losses and take the oil sands off line and pour it into the transportation alternative energy industry.

    It only makes sense, otherwise we are going to be sitting here in 20 years with a whole pile of rusting metal and pipes sitting idle in the tar sands and a whole lot of wealth generation lost beacause we didn’t see it coming?!!!!!

    So much wrong way investment going on.

  • Nick said:

    “If people decide they want to stop saving and consume instead, that might not be such a bad thing in current circumstances.”

    But where’s the money coming from? Certainly not those big raises and bonuses Canadian workers have (not) been getting. It’s credit that’s greasing the wheels (has been for some time now) and the lenders haven’t been making enough of a profit lately to keep that going well enough. Certainly not ad infinitum.

    “to buy existing capital equipment off someone else (which is essentially what you are doing when you ‘invest’ in the stock market)”

    Um, when someone buys stock, they’re not doing it to purchase existing assets but rather to make more money than what they put in (it’s a portion of ownership of future profits). This leads to a somewhat different kind of mentality.

    “But it’s a fallacy of composition to think that all people can do this, and that ‘investment’ in the stock market subtracts from the total pool of savings available for investment in new productive capacity.”

    This might be true or not, but, since capital wants profit and wants it yesterday, given the choice, it’ll look for the quick buck by gambling on stocks before it’ll stir to invest in needed assets that’ll bring money later on down the line.

  • “Capital continues to be diverted from production to investment and spending rather than production of goods and services.”

    Perhaps this sentence would have better said:

    “Capital continues to be diverted from production to speculation, to spending rather than production of goods and services.”

    However with respect to Nick Rowe, I think that’s true, the numbers bear it out and there is no “fallacy of composition” involved. There is in fact a tenuous connection at best between investment in the stock market and investment in real production.

    In a recent paper in the journal Managerial Finance, Nikiforos Laopodis wrote for instance that “… during the 1960-1990 period investment and the stock market exhibited a good relationship and shared a common stochastic trend. Second, during the 1990-2005 period this relationship broke down. Finally, extending the model to include the long-term interest rate did not produce significant impacts on or feedbacks from and to either variable. It is concluded that the 1990-2005 period has been distinct from the previous periods in that the stock market did not always abide by the fundamentals such as interest rates and/or investment expenditures. It is thus concluded that the high stock market growth rates of the 1990s have adversely impacted real investment expenditures.”

    That’s what I meant to say and I think it’s correct.


  • Kim: I thought you probably meant “speculation” when you wrote “investment”.

    Now when you say “spending” in the same sentence, do you mean “spending on consumer goods”? (That’s what I interpreted you to mean, from the rest of your post, but I wasn’t sure.)

    Here’s the problem: If I put money into the stock market, by buying shares, someone else must have sold me those shares, and so taken money out (unless firms issue new shares). We can’t as a population put money into the stock market (unless firms issue new shares).

    So there’s a problem with the argument that if we put money into the stock market there’s less money available for real investment in machinery.

    (The opposite view, that if we all put money into the stock market to buy newly-issued shares it will always be spent on real investment, also has problems. It only works if the firms spend the proceeds from issuing new shares on real investment, rather than, for example, paying down debt.)

    And yes, there may or may not be a correlation between high share prices and high real investment. It depends on what causes the high share prices: high demand or low supply. Could be either. A rise in P could be associated with either a rise or fall in Q.

    Todd: “But where’s the money coming from?”

    That’s the magic of the Keynesian multiplier process. If desired spending on newly-produced goods and services increases by $1, and firms respond by increasing production by $1, incomes rise by $1. So the spending is self-financing. (I am assuming unemployed resources, and that the only constraint on firms’ hiring those unemployed resources is that there is insufficient demand for the goods and services they can produce.)

    At “full employment” (whatever that means precisely) it is true that an increase in consumption will cause a corresponding decline in real investment (at least in a closed economy, where we can’t import the extra consumption goods). But the problem is not “where’s the money coming from?” We could always just print more money, if that were the problem. The problem is where are the unemployed resources coming from?

    But I don’t see that as a major problem right now.

    Come on guys: where are the Keynesians on this board?
    You shouldn’t be leaving it to me to make the Keynesian case against the classical!

  • I don’t know about the rest of them but I’m hardly “classical”.

    My point is in fact that all transactions are not created equal. You can have any number of financial transactions you want; they won’t compensate for the lack of certain types of transactions in the real economy, in particular investment in production.

    No matter whether someone else buys a credit default swap were I to sell one, it’s a qualitatively- different transaction from hiring workers and machinery to make steel, autos and lumber or to provide health-care services and child care. That’s my main point.

    David Harvey in his book The Limits to Capital writes that:

    “If real wages are held constant…” which they have been for the past 30 years and continue to be, “the share of variable capital in total output declines, sparking imbalances between production, distribution and realization, unless there is a compensating acceleration in demend for means of production and luxuries.”

    There has been no increase in “demand for means of production” (ie. investment) and the demand for luxuries, even though massive, ultimately hasn’t been enough to offset the stagnation in wages, even with massive increases in consumer debt. We have already seen the consequences in the housing market and we are seeing every day the culmination of the consumer credit bubble.

    “An economy which stuck to such a trajectory,” adds Harvey, “would soon find itself in the ‘lunatic’ condition of producing ever more machines by machines or relying on an ever-increasing disparity in wealth of the two great social classes.”

    Since there has been dwindling investment in “machines that produce machines,” we have indeed reached the point of massively-increasing disparities — social, economic, political — between classes.

  • Nick said:

    “That’s the magic of the Keynesian multiplier process.”

    Not what I was referring to, but I’ll keep going . . . .

    “If desired spending on newly-produced goods and services increases by $1, and firms respond by increasing production by $1, incomes rise by $1.”

    Why do incomes have to go up? Incomes could just as easily stay the same when workers are scared of losing their jobs. And in such a situation, why would the owner of the company give up his power advantage to get more labour out of his workers for less pay?

    “But the problem is not ‘where’s the money coming from?’ We could always just print more money, if that were the problem.”

    The Right is already making noises about inflation over stimuli; do you really think there’s hope of there simply more money being printed? As if that would help . . . .

  • Hi Nick,

    I can”t make heads nor tails of your demand that we here make the Keynesian case against the classical case.

    Which Keynes and which classicals?

    There is the bastardized Keynes (Joan Robinson’s coinage) of the neoclassical synthesis, then there is the Keynes of the orthodox Keynesians, and then there is perhaps the incisive and contradictory Keynes.

    On the other side of your unclearly specified command there is the classical school. Are you here referring to the classical epoch which ran from Smith to Marx; or the Manchester apologists which seemed to be Keynes’ target and which he explicitly confessed he was perpetuating a solipsism by calling them classical economists; or the neoclassical classical tradation which took up a hegemonic position after the fresh water fish desalinated the salt water fish(and any honest observer would say emasculated the bastradized Keynesians)?

    My intuition is that what you really want it is a three round bout between the New eviscerated Keynesians and the new bullyboy classicals. Both of which I will define here as strands within scientific liberalism. Why on earth do we need to rehearse Krugman versus the Republic of Mankiw and co?

    I suspect none here doubt the multiplier; nor do they disagree with Keynes’ observations on paradox of thrift. Where they do doubt (and with Keynes they might add; see the conclusion to the GT for a refresher) is the efficacy of speculation and the benevolent role it plays in the propensity to invest. And they seemingly further doubt that the extension of more private credit to individual workers is the solution to the problem of generating sufficient effective demand to generate full employment.

    Indeed I was rereading the GT last night an I know of no place where Keynes suggests that extending more credit to already overlevarged households and unemployed workers is the solution to the problem of effective demand and full employment.

    Perhaps there is a new new neoclassical synthesis that takes the rather jaundiced accounting identities of the bastardized Keynes as a license to conclude that an augmentation of private debt is equal to an augmentation of public debt financing effective demand. That may be the case, but then it is only a marker of how much further the house of scientific liberalism has strayed from reality.

    The crucial issues are thus:

    1 ) Do you think that North American hoseholds say below 90 percent of the income distribution are already overstretched?

    2.) Do you think any sane capitalist is busy investing in more productive capacity when they have doubts about whether existing physical and human capital can be profitably deployed?

    My instinct backed with some empirical evidence suggests no to both 1 and 2. In such a situation speculation is a real threat. To the degree that speculation is about the future path of prices without respect to sustainable levels of effective demand such speculation may simply serve to drive the short term problems into the medium term and beyond. And here I must then, to be consistent take some umbrage with Kim’s assertion that we want more private investment in physical productive capacity because it is not at all clear that there exists profitable vents for an increased production of goods and services at this time.

    The problem thus seems to me to be one that we want state debt financed effective demand to sop-up existing excess productive capcity until the point that that ratioal levels of private debt/wages can sustain the productive capacity that already exists.

    And that is the best case I can make for the Keynesian case against the vulgar classical case in all its historical manifestations.

  • Post by “don the libertarian democrat” on Nick Lowe’s blog site:

    “Suppose that everybody took all their extra cash, emptied their bank accounts, borrowed against their comic books and houses, and sat down to perpetual games of Fan Tan. There would be no investment, as all the money would be in The Game. Isn’t this the prototypical idea behind the argument? Instead of expending time, energy, and financial resources in productive activities, people are making bets in the attempt to get rich quick.

    “Now, in real life, as you say, if you buy a house as a speculation, somebody else gets the money, and they do not necessarily speculate with it. But in the prototype of The Game, they do. Speculation is money chasing money.”

    Nick seems to assume that there was no growth in the volume of the stock market over the five years before the crash.

    That’s not true. We had financial institutions and banks creating new “financial instruments” whilly nilly — asset-backed paper, mortgage-based paper, swaps, derivitives, etc, etc.

    Nick also seems to assume that there was plenty of cash for investment in productive assets because the sellers of stocks had cash to invest after they sold them.

    Unfortunately, they didn’t.

    In Canada, as I point out in my article:
    “business fixed capital formation – investments in the buildings, machinery and equipment needed to actually produce goods and services – fell by 6.4 percent from the last quarter of 2008 to the first quarter this year. Compared to a year ago, capital formation was down by 6.3 percent.

    “Companies’ record in machinery and equipment investment is even worse, falling by 10.8 percent from the last three months of 2008 to the first three months of 2009 and down almost a fifth since the first quarter last year.

    “But bad as this seems, it’s even worse when you take oil and gas investments out of the mix. Almost all of Canadian firms investments in the past decade were in fact in the oil patch: Canadian firms’ investments in the energy sector grew by 12.2 percent per year from 1999-2008, while investment in the overall goods-producing sector actually fell by 0.1 percent per year.”

    So while there was growth in profits — the fastest growth in profits and slowest rise in wages of any recession since the 1930s — there was no growth in investment.

    So where did those profits go? Into stock markets, offshore capital formation and luxury consumption, whether or not it’s true that one person bought, another sold.

    None of Nick’s — verrrry interesting but irrelevant — talk of “Junkers” can wish that away.

    I don’t suppose many Canadian workers actually care much about the “Junker’s fallacy” in any event.

    But they do care that their wages are stagnating while profits are expanding and that none of those profits are being reinvested in production to create future jobs or that those that remain are competitive.

    They likely also care that while their wages stagnated, some of their employers either made a killing on the market with profits they generated, raised their own incomes through bonuses, huge salaries, dividends and interest payments or bought mansions, yachts and luxury townhomes. The rich are taking plenty out of Canadian industry in other words, while workers either go without or go into debt.

    And I suspect they care as well that it appears to be happening again in spite of all the hand-wringing and mea culpas from Wall Street and Bay Steet just a few months ago.

    Ideology is designed to blind us to reality. I fear that the ideology that “nothing really happened because when one person bought stocks others sold them” is designed to mask some very real, very important realities:

    Did profits increase? Yes.

    Did wages stagnate? Yes.

    Did millions of working families go into debt? Yes.

    Did companies invest billions in production? No.

    Did they invest billions in the stock markets? Yes.

    As don the democratic liberterian says:

    “Certainly this interpretation does not seem fallacious. There indeed have been places and times when far too many human and material resources have been devoted to risky, unproductive behavior. :)”



  • I think potentially the Swiss bank accounts may have also been a holding tank for wealth. The underlying truth behind this debate is the following- do we know where all th wealth actually goes- not when it goes inot the hands of fewer and fewer individuals, that all studies seem to suggest, i.e. polarization of wealth.

    It is, as Kim states, quite a simplistic deflection that Nick makes, where by the stock market is some sort of zero sum game. There are flows in and out, and there is a lot of bias to the information on trading. Leakage of profits from the stock markets are not flwoing the way theory suggests- it is but a comfort factor for those who make the rules- no rules for the rulers, and that is exactly what was a good part of the forces that brought us here. Barbarism in the form of “self” regulated market behaviour here. There is a lot of unevenness to the market, in the form of access to information, knowledge and controls over the apparent transparency of regulation.

    The bottom line is- I don’t believe the academics are as informed as they think they are about markets flows and stocks as they want to let on they are. In fact in many cases, especially when it comes to markets and such, fiction writing skills and creativity- especially for the apologists are quite a handy skill and potentially a prerequisite.


  • Suppose you believe that investment was too low, and you want to explain why it was low.

    Saying that some of the money that should have gone into investment was diverted into the stock market just doesn’t work as an explanation. Unless firms issue new shares, we can’t divert money into the stock market. For every buyer of shares, there must be a seller.

    Think about the real economy, that uses real resources to produce real goods. If fewer real resources are used to produce investment goods, where have those real resources been diverted?

    In a classical model (by which in this context Travis I mean “one in which Say’s Law is assumed”) those resources can be diverted into producing goods for consumption, government, or net exports. (Y=C+I+G+NX)

    In a non-classical model (“keynesian”), they can also be diverted into unemployment. (Y falls).

    “The stock market”, or “Swiss bank accounts” are not on the list.

  • I guess we are gonna have a look at those swiss accounts now aren’t we- I just love stories like that one- I do wonder how far the media and the Swiss banks will be allowed to go with this.

    We can posit as say Mr.M did many years ago, that as money goes into fewer and fewer hands, instead of going into investment, where the model suggests it go- it goes into savings and hording, basically out of circulation. somehow, and I am not going to pretend I am an expert on the plastic role of the stock market and all it many manifestations- basically somehow the linkage is broken. I still do believe that with the unevenness in information access, it becomes a bulldozer for those on the inside, to clobber the small investors or those on the outside. Trading programs are a big part of this and that is- mathematically speaking- the quickest dogs chasing other happy dog’s tails, especially the big ones.

    Given the breakdown in the financial sector, it is fundementally clear- things are not working the way the “models” predict. Actually, on second thought, they are working precisely the way the should.

    lets look at the chain

    investment->production->wages->consumption-> profit->investment

    pardon my french regulation approach to capital accumulation. the key point in the model is the profit-> investment-> production bit.

    and the wages- consumption bit

    there is a level that- depending on the dynamics, will effectively maintain and expand productive investment within the boundary required for a specific systems political and cultural ends. If the flows are not adequate then the model fails on several fronts. The two larger ones that are of concern right now is investment and employment.

    The evolution of should I say degradation of the finanical markets have pounded a stake into the heart of this model. everything from credit collapse to stagnant wages to massively accelarated unemployement rates.

    The long view for me on causation

    1) is the long decline in effective demand from wages. It is a bit of a fordist perspective, but what did we learn from the great depression- what actions caused the wealth in society to change from the hour glass to the egg shape and now over the past 30 or so years, back towards the hour glass. There were fundemental lessons that were learned in the 30’s and they are highly relevant for today’s policy makers.

    2) the transformation of financial markets from their role of generating the required levels of productive investment and credit management to the casino oriented – infinite credit defaulting model.

    so we come back to the question what are the probloms with the stock market and how to we assess the transformation of stock market activity and relate it to the required level of productive investment. The relationship is quite obviously gone off the tracks at least that is what Kim was originally saying and Nick is saying there is no problem here.

    I say Kim is right but the reasoning needs to go deeper especially from an empirical analytical standpoint. More research is needed in this area. Jim`s paper boom was on that track, the progressives need to go further with this concept.


  • Charles Kindleberger, a Keynesian economist of some repute, noted in his book The World in Depression 1929-1939:

    “An a priori objection to the view that the stock market absorbs credit is that for each individual or company that buys a security and uses money for the purpose, there is another that sells it and aquires money. The stock market therefore leaves the volume of money unchanged. Like so many a priori arguments, this is irrefutable on its own terms but of doubtful empirical relevance. If the money supply is divided between the financial circulation on the one hand and the transaction circulation on the other (to use an expression of Keynes denoting money use for expenditure against goods and services), a stock-market boom can draw funds from the transaction to the financial circulation… Intense interest in the stock market.. is likely to enlarge the amount of funds held ready for opportunities to speculate and to shrink those which normally turn over in the production, distribution and consumption of goods.”

    Hopefully this lays to rest all talk of Junkers. What really matters is junk bonds. As Kindleberger rightly suggests, capital travels in circuits that might be connected at some higher level but which are quite seperate most of the time.

    The Canadian mining or manufacturing company that buys shares, derivatives, swaps, etc. on the TSE or NYSE for example buys it from a broker, investment banker, financial house in Toronto or New York. They are most likely to use the money to buy other shares. They are certainly not likely to use it to invest in production in Canadian mining or manufacturing.

    As long as the rate of profit in financial dealing is higher than that in production, that cash is in fact most likely to be trapped in The Game and swirl around within the confines of the money market. It will only be reinvested in production accidentally, at best.



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