The Guardian has a current headline: “Stock market turmoil: All eyes on the Dow after $4tn wiped off global shares.”
A shame, probably for our private pension, if we have one. Yet nobody has actually lost $4tn though one or two might have lost something if they needed to sell in a declining market.
It is a pity for another reason, too, for this sort of headline just encourages attention to be paid to something that is basically useless. It is financial froth dressed up as serving some vitally important purpose. These shares are all second hand for goodness sake. They’re not holding their prices too well – much the same as the second hand car market.
They are both an indication of some sort of human sentiment. Of course the second hand car market is more important to the economy – so far has the stock exchange strayed from its original purpose of raising capital for a new joint stock company.
A the South Sea Bubble showed, a booming market used to be one where you issued shares for a new company with a new idea. Yes, the idea was probably risky, but at least it was new. Now a booming market is just talking up old companies.
Yet we are told that this is one of the UK’s vital strengths as if it were still successful at the original idea of allowing thousands of innovative companies to raise capital. It isn’t.
Time, surely to revisit Steve Keen’s idea of Jubilee shares.
These would really just redefine shares to actually support their original purpose. When purchased from the company directly the shares would last forever and the purchaser might reasonably expect a long term flow of dividends. But once shares are sold by the original owner they would cease to be ‘Jubilee’ shares and become ‘ordinary’ shares that would expire in 50 years from the resale date.
Steve Keen continues:
99% of all trading on the stock market involves speculators selling pre-existing shares to other speculators. This trading adds zilch to the productive capacity of society, while promoting bubbles in stock prices because leverage drives up prices, encouraging more leverage, leading to a crash when price to earnings ratios reach levels even the Greater Fool regards as ridiculous. Then shares crash, but the debt that drove them up remains.
If instead shares on the secondary market lasted only 50 years, then even the Greater Fool couldn’t be enticed to buy them with borrowed money–since their terminal value would be zero. Instead a buyer would only purchase a share in order to secure a flow of dividends for 50 years (or less).
I suggest that this system would be very likely to end the periods of irrational exuberance that is endemic to stock trading.
Like a car, stocks should concentrate on their use rather than the resale value. The only problem could be that dividends might be driven higher. But if a company felt that dividends were being driven too high there would be the possibility of offering more original Jubilee shares to the market.
At the very least the proposal should dampen speculation.
And for any that have got a private pension, reduced trading will at least mean reduced management fees.