Wall Street Financial Truth

Chapter 14 Who Emptied Your Wallet (5)
First, when the economy develops rapidly, people's imagination is stimulated, and those objects related to new technologies will be hyped up by the media, and the bubble will be blown up.For example, railway stocks more than a hundred years ago, "dotcom" and related high-tech stocks at the end of the 20th century, and even stocks related to the "green concept" in the future have all soared or will soar in the future. Gravity keeps going up.

Second, the formation of bubbles is related to people's necessities.For example, people firmly believe that the rigid demand for houses will always exist, so house prices can only rise but not fall.The same is true for oil prices in previous years, rising from $30 to $147 a barrel. Wall Street predators and some economists also predict that oil will rise to $200 or even $400 a barrel.

The incentives for these two bubbles have caused people to flock to them, pushing the prices of commodities higher and higher.Because human nature is the same and remains the same for thousands of years, whether it is an American or a Chinese, whether it is a person 100 years ago or a person today, they will try their best to catch up with the profitable express train, and never want to be squeezed by the people in the car. outside.Those traditional theories of predicting bubbles have long been thrown out of the sky. People often turn from initial doubts to curiosity, and then escalate to fanaticism.Every time the bubble will burst mercilessly, leaving behind a chicken feather.I will not mention the past. The high-tech stocks plummeted in the late 20s, and the stock price has not recovered to 90% of the highest point.Today, housing prices across the United States have fallen by 25% to 30%, and they continue to fall; in 60, the price of oil was close to 2008 US dollars a barrel, but it suddenly fell all the way to around 150 US dollars, and it is still hovering around 30 US dollars , not even half of the highest position.

Third, rare antiques and paintings by famous artists.

Recently, three modern paintings by a famous American painter fetched a high price of more than 100 million US dollars. He later revealed that two of the paintings were graffiti made by his daughter when she was four or five years old.There is another one that is even more outrageous, it is a masterpiece of a puppy in his family!A few days ago, in the auction of animal heads in Yuanmingyuan, which had been heated up, a collector revealed that he had collected one more than 10 years ago, and only spent 2000 US dollars.

Fourth, the obsession with so-called name brands and limited-edition luxury goods.

In recent years, the price of brand-name handbags has been rising rapidly at a rate of about 15% per year. I am afraid not many people have noticed this bubble.One of my wife's girlfriends is a huge fan of designer bags, buying a new style or two every few months.The designer has grasped the psychology of the followers, and named the handbags like those of famous cars, such as 'Uptown', 'Downtown', 'Mulberry', the price can be thousands or even thousands of dollars, and they call it limited edition. Supply preserves value.Once at a party, the young lady was carrying a transparent bag, and the items in the bag were faintly visible.I took a closer look and found that the material of the bag was similar to the shower curtain in my bathroom, so I deliberately joked to my wife, why did you use the shower curtain at home to make her a handbag?The young lady was not happy when she heard that: "Nonsense! This is the latest style of Chanel. It costs more than 800 dollars, which is many times more expensive than your shower curtain!" I thought to myself, this young lady lacks a sense of humor. Forget it, it's too pitiful to be fooled into such a famous brand without knowing it.

As for antique paintings and famous brand luxury goods, it’s okay if you have spare money to buy them and enjoy them, but these commodities themselves can’t bring any profit, so they can be called “priceless” treasures, or they can be said to be worthless.Their "value" lies in how much the next buyer is willing to pay (psychological price), just like the drumming and passing flowers we played when we were young, we have to pray that the next fool appears.The rich have too much money to go moldy, so let them play with it, but it is absolutely unreliable for ordinary people to expect those things to maintain and increase their value.

That's what bubbles are like. After you sing, I will appear on the stage.Recently, both domestically and internationally, there has been a lot of calls for gold to preserve its value. It is really "a city full of gold armor". Gold broke through 1500 US dollars an ounce, setting a record high.

There is a fable that says that there are two treasure hunters, A and B, who often go treasure hunting together.During a treasure hunt, it rained suddenly, and they hid in a cave. Unexpectedly, when they went deep into the cave, they unexpectedly found a pile of gold coins.They were ecstatic, so they split the gold coin into two and put each in their backpacks.The gold coins are too heavy, and they have to go through the desert if they want to take the gold coins away. The two had to drop their belongings and only brought precious water and food.They set off, and when they walked through a third of the desert, the sun was shining and there was nowhere to hide. Every step became very difficult, but no one wanted to throw away the gold coins.A took out the kettle and took a sip of water. Accidentally, the kettle fell on the ground and let the water flow away.He was so thirsty that he had to exchange gold coins with B for water.In order to get more gold coins, B exchanged the precious water for gold coins.Unfortunately, before walking out of the desert, B fell to the ground with a heavy gold coin on his back and walked into the kingdom of heaven.But A walked out of the desert empty-handed and survived.

Hearing this, readers may say that the story is old-fashioned and nothing new.Wait a minute, the story is not over yet. 100 years later, three other treasure hunters found B's skeleton and a pile of gold coins in the desert.Those three people were not excited at all when they saw the gold coins, because gold after a hundred years is like ordinary metal, and it is not precious at all.They didn't understand at all how B could die next to a pile of gold coins.

Judging from the history of modern currency development, it is not surprising that gold suffered such a fate.In the early stage of the development of capitalism, the currency used was the silver standard. With the rapid development and improvement of productivity, the demand for currency increased suddenly, and the gold standard was gradually replaced.The so-called "gold standard" system means that the value of each unit of currency is equivalent to a certain weight of gold (gold content in currency).

Because metal currency is limited after all, when wealth is increasingly concentrated in the hands of a few people, there will be less currency in circulation in society, which hinders economic development.Take the Great Depression in the 20th century as an example. Because the goods produced could not be cashed in, the so-called overcapacity was formed, and the productivity greatly exceeded the total amount of gold.It is probably not an exaggeration to say that it was caused by the gold standard. Because of the gold standard, it was unable to issue a large amount of currency to relieve the pressure, which caused countless bank failures, and the final victims were ordinary people.According to the two censuses before and after the Great Depression, during the Great Depression, the number of people who starved to death in the United States accounted for 7% of the total population at that time!Although this figure has not been officially confirmed, it may be a bit exaggerated.However, judging from the officially disclosed documents describing the Great Depression, it is also sufficient to see the horror of the gold standard.

Recently, the popular view of gold preservation has prompted people to invest enthusiastically in gold bars and paper gold ("paper gold" is a kind of gold with personal certificates. Investors buy and sell "virtual" gold on their books according to bank quotations. Suck high and sell, and earn the price difference of gold price fluctuations - editor's note).Gold flew into the homes of ordinary people again, and there were signs of the revival of the "gold standard", which made people have the illusion of time and space.

In today's world, the world is going downhill. Some people are fooling everyone into the market with ulterior motives, and some are fueling the flames ignorantly.Only after the bubble burst and the smoke receded did people see what was really going on behind the scenes.In order to avoid being deceived, the only thing ordinary people can do is to read more history, because history often repeats itself again and again, and there are striking similarities, whether it is human history or financial history, it is exactly the same.

11. GDP, the hollow wealth cake
China's astonishing GDP (gross domestic product) growth over the past few years has become one of the hottest topics in the world.The credibility of GDP, the measure of economic recovery, is being questioned more and more.

Let me tell you a little story first.In Paris, economists gathered at an annual conference on GDP.When the meeting was adjourned, Professor A from the United States and Professor B from the United Kingdom were walking on the street and saw a pile of dog shit on the ground.Professor A said: "My dear, if you eat a mouthful of shit, I will give you 100 million dollars." Professor B asked back: "Really?"

"Of course! But, I want to watch you eat it." Professor A said.

Unexpectedly, Professor B really lay down on the ground and took a bite, frowned, and swallowed.Professor A turned pale with shock.But the gentleman said that it was hard to chase, so he could only write a check for 100 million US dollars to Professor B.But Professor B was not happy when he got the check. He thought to himself, if it gets out that I have eaten dog shit, wouldn’t it mean that my reputation will be ruined?Seeing the regret on Professor A's face, he said: "Well, if you take a bite too, I will give you 100 million dollars." After hearing this, Professor A took a bite without hesitation.Professor B immediately gave him a check.Then, the two swore that neither of them would speak out.

The two of them talked about it on the way back to their hotel, and came to a conclusion: "In just the first 10 minutes, we collectively created $200 million in GDP."

Everyone on the earth knows that GDP refers to gross domestic product. This indicator was compiled by economist Simon Kuznets at the request of the U.S. Department of Commerce in the 20s (Gross Domestic Product, GDP).In the 30s, the World Bank and the International Monetary Fund planned a set of policies, together with the Federal Reserve, reached a consensus with Washington, including deregulation of banks and market liberalization, privatization and reduction of the size of the government, emphasizing GDP, making GDP growth rate a measure The most authoritative indicator of economic development.

However, in the past 15 years, financial crises and economic recessions have occurred every few years, making people increasingly question the reliability of GDP.Especially this once-in-a-century financial crisis. Before the outbreak of the financial crisis, the standard of living of Americans was not as good as 10 years ago, but the GDP showed that the U.S. economy was growing vigorously, indicating that the GDP data was covered up by unreal asset bubbles.Especially the real estate bubble is distorted, like those two professors each eat a bite of dog shit to generate $200 million in GDP.In fact, the constant flipping of real estate generates no wealth at all, but accounts for a large percentage of GDP.

In France, housing costs rose sharply as housing prices soared between 2001 and 2006, reducing disposable income for French households by nearly 50% in just five years.Real living standards have fallen significantly, while GDP shows that France's overall wealth has increased by 20% over the five-year period.

Facts have proved that GDP is only a quantitative indicator, not a qualitative one. The growth of GDP is not necessarily related to the improvement of the overall economy, society and environment, and whether people's living standards can be continuously improved.The reason for the US financial crisis this time is that most of the previous investment went to the housing market, auto market and stock market. Although the GDP has risen, it cannot be shown that this is sustainable.The sustainable development of human beings is precisely the most important thing, but CDP cannot measure it.

Based on the fact that GDP does not take wealth distribution into account, let alone moral values, it only calculates government input without considering output, and only calculates scale without considering benefits. Comparing GDP among countries is like comparing the weight of an elephant with the weight of a rabbit. Just as ridiculous.The United Nations has already tried to adopt a new indicator that can more comprehensively measure the level of social and economic development and evaluate the real quality of life in countries around the world - the "Human Development Index".In this index, green net national output including resource consumption and environmental degradation, social median income instead of average income, Gini coefficient and life expectancy reflecting social equality, and comprehensive indicators such as educational attainment.

It is hoped that this indicator will soon replace GDP as an indicator for measuring the development of countries.

12. Financial logic: fraud plus kidnapping
I often hear a story from colleagues.

In Northeast China, there was a couple with two sons.Strange to say, they were born to the same mother and lived under the same roof. The second child and the eldest child are completely different.The eldest is very promising. He went to the United States to study and work there. The second did not work hard when he was a child. He didn't ask for it either, and always felt that the eldest brother had a bright future in the United States, but the second child was a bit "poor".Therefore, after the second child made a girlfriend, the old man took the initiative to pay the down payment of the house for the second child with his savings for many years, and asked him to buy a house and get married.This is great, as we have a house, we need furniture, so the old man also took out the money that the boss paid for them, and bought a home theater with a big screen.Not to mention, there is still a lack of a private car, and the two elders have almost eaten up their money, so they have to ask the elder for it.For the sake of family affection, the boss remitted [-] US dollars.But the second child felt that the money was too little, just enough to buy an ordinary car, so it would be better not to drive.So I bought a brand-name car with a loan, and the loan was repaid slowly anyway.

The parents and the eldest couldn’t see it, and advised the second child to live within his means, but the second child didn’t take it seriously: “What age is it now? Why are you so old-fashioned? We need to be in line with international standards and learn from the United States. Even the government encourages us to consume to maintain economic growth. The eldest brother is also considered Americans, why haven’t you learned anything. I just asked you to borrow money, and I didn’t say I wouldn’t pay it back, you fool.”

The financial tsunami came, which had a great impact on Chinese export companies. There were fewer overseas orders. Soon the second child was laid off. He couldn’t find a suitable job. Unemployment benefits could not support a car and a house at the same time. The second child had to sell the car, but he was determined not to sell the house.After all, the crying child has milk to drink!Parents and eldest brother were kidnapped by "family affection", so they can only continue to "loan" money to him, and he must not be allowed to live on the streets.

What this story reflects is the current situation in the United States, and it can even be said to be a microcosm of the global economy. Many young generations in China are "slaved" by money.

Most Americans live a life of early consumption, and many have borrowed money from financial institutions to enjoy them, but they can't afford houses and cars at all.They think that once they can't pay back, they declare bankruptcy, and the government will definitely use taxpayers' money to bail them out.From a global perspective, the same is true. In recent years, Wall Street has been playing with derivative securities with increasing leverage, causing bubbles one after another until the big crisis caused catastrophe.Not only did Wall Street and the United States not thoroughly introspect: Is there something wrong with their own economic model, should the lifestyle of credit consumption be completely changed?Instead, continue to issue treasury bonds, borrow money everywhere, and consume in advance.Especially pointing to China, saying that if China does not buy US treasury bonds, once their economy collapses and the dollar becomes waste paper, China will also suffer huge losses.It means that the Chinese must live frugally and lend money to Americans for consumption, otherwise, everyone will be unable to eat and walk around.In other words, Americans are now the number two in the story, and China is the number one in the story.

The current economic downturn is forcing Europeans and Japanese to cut spending.Emerging markets in developing countries, which took years to recover from the financial crisis of 1997 and 1998, have just begun to pick up their consumer demand.Only Americans who have formed the habit of spending extravagantly will consume wildly and without restraint during a weak business period.Economists even declared that the United States is "the last holy land of consumers."

If the American people do not continue to consume, won't China's export industry also be implicated?Americans, whose average income is 30-40 times higher than that of Chinese people, are still spending a lot of money, living in luxury houses and driving luxury cars.If this situation continues, the United States will be like the second child in that family, more confident, horses run and dances, anyway, if there is no money, they can still reach out to their parents and elder brother, don't be afraid.

(End of this chapter)