One more warning from China
Photo: Artyom Geodakyan /TASS

Photo: Artyom Geodakyan /TASS

The crash of Asian stock markets will drag down the economy

The crash of Asian stock markets will drag down the economy

The Moscow stock exchange reopened on 11 January after a long winter break. During the break, the world’s biggest enterprises’ share prices slumped, 400 richest people lost $194B and the world became approximately 7 per cent poorer. Of course, if you think the stock exchange is real. The slump continued on the first week-day.

What in the world made everybody suddenly sell shares and refuse to buy them? No catastrophes on a global scale have been witnessed. A-plants aren’t exploding, aliens aren’t invading, Obama’s alive, Assad’s safe and sound, Putin’s given a cheerful interview to the Bild. What happened, then? The People’s Bank of China devalued yuan against global currencies by 0.5%.

Just imagine: merely 0.5% for yuan and 7% for the rest of the world. This equation clearly reflects what the modern economy has turned into: a quasi-scientific branch of psychology or psychiatry.

The gist of a share

A share is the basic unit of the stock market, while other financial instruments derive from it and are based on the value of currencies and natural resources.

The gist of joint-stock companies as they are is explained in the timeless novel “Dunno on the Moon” by N. Nosov. Did Nosov know he gave a caricature of his own country’s nearest future?

When a company needs real money it issues shares, each of which represents a particular share in the capital of the company.

Every share buyer consequently becomes a co-owner of the company and can count on certain advantages.

The main advantage is a distribution of profits. As a balance sheet is made at the end of a defined period of time, e.g. a business year, a shareholder meeting distributes dividends among stockholders, as well as to bonuses for senior management (who are usually hired) and further development of a company. 

Is a shareholder not an owner?

In the modern world, shareholders, i.e. owners, don’t control anything: they’ve been substituted by hired managers. Interestingly, the same double standards have been introduced to politics: parliaments, being a state’s shareholder meetings, have lost real power to service staff – governments, represented by civil servants with fixed wages.

The great economist John K. Galbraith wrote:

Owners, stockholders, shareholders [have] a seeming role in the enterprise. No one should be in any doubt: shareholders-owners-and their alleged directors in any sizable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist. An accepted fraud.

Eventually, omnipotence and impunity of the management has changed the initial mechanism of dividend distribution. Now the puppet board of directors votes for minimum, if any, amount of dividends, while bonuses for senior management rise year by year. As a result, now the most of share buyers don’t think about dividends at all. The initial conception of share trading has been distorted: the value of the share itself, and not the business operation, plays a key role.

Стол регистрации акционеров перед общим годовым собранием

Reception desk at annual general meeting © Sergei Fadeichev/TASS

Let’s give an example: a mining and processing enterprise went public in order to acquire additional capital to exploit a new reservoir. As a matter of fact, when the enterprise’s shares became free-floating (i.e. available for purchase and sale), some notions have been mixed up. Say, a few shareholders want to sell their shares (they need money, for instance), and the enterprise’s value suddenly decreases, because offer prevails demand. Market laws in effect. Of course, it has practically nothing to do with the real operation of this enterprise.

Across a minefield

The dogs bark, the caravan moves on, as they say: let people trade paper if they want to. But capitalization is an important part of economics; a share of the enterprise’s debt can be inherited in stock. Besides that, a malevolent investor can buy valueless stock to sell it all out and close the wretched enterprise down for ever, paying the staff two-month salary and wishing them good luck in their new life. Those who’ve heard about shares-for-loans auctions, know this scenario very well.

Without any doubt, dropping share prices of a successful profitable company down to zero is impossible or, rather, very expensive. But it’s possible to influence its operation for someone’s own benefit or even accidentally. This all makes stock market a time bomb planted under every joint-stock company. In the first days of 2016, we’ve witnessed such a bomb being tested.

Brightside

There’s no doubt that the mechanism of joint-stock companies is doomed. An incompetent owner – and such owners typically hold shares of public, and sometimes private, companies – is not able to carry out proper surveillance of the management’s operation. As a result, even the profit generated by a very large enterprise is distributed to neither dividends, nor production, but straight to a few people’s pockets. Some CEOs and chief accountants caught red-handed can, of course, be fired and sometimes sent to prison, but it’s just a drop in the bucket of unfair revenue distribution all around the world. And why do you need to start or join production, if you can become a stock trader? Thanks to so called securities, the virtual economy has outweighed the real one. It’s enough to mention that oil futures, worth billions of barrels, are traded every day, while physical delivery of oil occurs only on 1.5% of this flow.

What we see is tokens of a crisis in stock markets and securities in general. Significant fluctuations, like the Chinese 2016 case, occur more and more often. These fluctuations are about to come into resonance with currency system to put the whole modern economy six feet under. It may happen in the span of nearest 25–30 years, not more.

The aforesaid scenario should not be taken for apocalyptic. It’s just the opposite: the forecast is optimistic. A truly apocalypse will happen if the existing system survives.

But it is true that economic revolutions take a greater toll than social ones. A stock market crash will lead to mass unemployment. Hundreds of millions of people are involved in trading fake goods, whether directly or indirectly. Gazprom, for instance, has above half a million minority shareholders. Every day hundreds of thousands of the gas producing giant’s shares are being handed from one person to another.

***

With escalation of tensions all over the world, financial turmoils will occur more and more often. The Chinese warning wasn’t the last one. The system is ill and inoperable and won’t last long even with proper care. And once it passes away, shareholders, depositary receipt holders and holders of other kinds of perverted financial instruments will realise they have nothing but pieces of paper and a few lines of code. Which won’t save them from hunger and cold.

The modern economy will have to build itself anew, once a real product gets its place at the heart of the system. Knowledge and competence, not shares and depositary receipts will become companies’ basic capital. An engineer will earn much more than a broker, if the latter won’t go the way of the dodo. This is, in a sense, a comeback to 18th century, also in terms of living conditions for the fallen in this global stock battle (for almost everybody): but if you’ve lost your way and ended up in a dim-lit cul-de-sac, you can always go back to choose the right path.

Оригинальный текст (original)

«Мы — маленький Эрмитаж» Далее в рубрике «Мы — маленький Эрмитаж»Директор музея им. Бурылина Сергей Конорев — о том, каким должен быть музей в современном мире

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