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Stock market wobbles: should we worry?

THERE’S NO need to stockpile groceries just yet, but there’s always cause for concern about how the world’s economic system is functioning – especially for the poorest across the globe.

The present jitters began on Monday on Wall Street – the Stock Market in the USA. The Dow Jones Index (which shows whether the prices of shares is, on average, rising or falling) plunged downwards. That worried financial speculators in Asia, so stock markets across the continent took a tumble too – after which stock markets in Europe followed suit.

Commentators leapt in, announcing that this was not the end of the world – not even the beginning of the end.  It was a Blip – and as Blips are temporary, it would all be all right if not by bedtime, then very soon. In fact, we’d all been wanting a blip for some time, so the drop in share values was just what we had all been hoping for.

The jittery Stock Markets did level out within about 48 hours, so on the face of it the share price tumble was a temporary phenomenon. However, if you read the words of the commentators closely, you can see it is not all over yet.

You have to remember that money is not a separate Thing – a commodity which can be created from nothing or from raw ingredients. Money is a means of exchange. It is a way in which we can sell something which has a value and we can then hold that value in money until a later date, when we can use the money to buy something else.

That all works well when the value of the first item (the one we sold) is the same value as the second item (the one we want to buy). If I swap you some potatoes I have grown in return now for some eggs your chicken has laid, we know that this many potatoes have the same value as this many chickens.  But if I take your money for my potatoes, I have to know that this money is enough to buy your eggs six months later, when your chicken is laying and when I need the eggs.

Money holds the value of something sold until it is spent on buying something. Therefore, the money that is knocking around at the moment, from all the sales that have been made, must represent the value of everything that has been sold – and it must be enough to buy everything that is needed in the near future.

In 2008 there was a global economic crash. That is, someone realised that some parts of the economy had been overvalued. It began with homes in the USA, which had been sold on mortgages that the new owners would not be able to repay – so the homes were almost worthless, as the mortgage providers would not get their money back.

This set up a reaction across the word, with many banks and financial institutions realising that parts of their assets were similarly over-valued – and had been bought for more money than the assets could ever get back. The value of stocks (ownership of companies) fell on the stock exchanges.

How the world got out of that crash is that governments created more money. Now, you can’t create more money because money is only a representation of the value of the goods you have.  So the governments didn’t really create money. What they did was to print more banknotes to try to convince the banks and the businesspeople that their assets were worth the money they had paid for them.  If money represents the value of all the goods and services that can be sold, then if you have more money the value of those goods and services must increase.

The governments were buying time: they were gambling that by increasing the amount of money around, and apparently the total value of everything sellable in the world – eventually the people who make goods and services would grow what they produced and the real value of everything in the world would catch up with the amount of money sloshing about.

Usually the economy grows because people grow the amount of goods and services they produce for sale. Having extra money and then hoping the goods and services grow to that value was just a short term one foot getting ahead of the other.

Unfortunately, if one foot gets too far ahead of the other, you will fall down. The little blip at the start of this week was a reminder that governments cannot rely on goods and services growing fast enough to match the higher prices stocks are being sold for.

That is the very quick, brief and basic explanation of what just happened.  If the Governments gambled correctly, the value of what the world produces will catch up with all that extra money printed ten years ago. If the value grows too slowly, there will be further problems – and Stock Market blips.

Cross your fingers!

•Read more about it:
Economy jitters slow down house price rise
House price drop bad sign for economy

 

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