themusic: insightful, but not completely accurate.
The definition of a
casino economy is removal from production. For example, in a non-casino economy, you could invest in actual
production, such as build a car factory or a food making plant, or a service that meets an actual human need, and creates actual jobs. On the other hand, you could invest your money in paper assets-- such as stocks, bonds, or derivitives that might not create jobs or products but pay a good rate of interest. These 'casino' investments tend to be more liquid.
I work in the ultimate of
casino investments-- derivitives. Options trading is, basically a bet on the changes in the underlying
financial instrument-- one step removed from the stock/bond/commodity itself. Add some
LIBOR interest rate
swaps, etc. in the equation, and you're pretty far removed from production. To put this in perspective, the annual value of global merchandise trade is around 4
trillion USD, while the global
derivitives market equals this value in transactions in
two days.
So why is this bad? It weakens the power of the government to control national
economies and protect jobs. Without actual production, there are less jobs, and more demand on government services to alleviate this problem. It promotes globalization, often detrimental to the economies of
third world countries, as
paper money flows in and out (but more often out) without creation of
actual jobs or
development. The volatility and volume of trading
weakens the currency, leading to a reduced standard of living.
13 years ago, economist
James Tobin suggested two possible routes for reform of the international monetary system- (1) Making currency
transactions more costly (see
Tobin Tax) to reduce capital mobility and speculative exchange rate pressures (derived from
Keynes) or (2) Greater world economic integration, implying eventual monetary union and a World Central bank.
1
Put in simpler terms, he's saying that to fix this problem we either eliminate
arbitrage by making the markets completely controlled, "outlawing"
capital gains from speculation, or by going the other way and make markets completely efficient, eliminating the need for speculation
altogether.
However, in most cases this is absolutely neccesary.
Corporations that actually produce things, sometimes must
raise extra capital for expansion or
r&d or
technological improvements. Where do they get this money? From the players in the casino. They go to a major investment bank, like JP or Goldman or SSB, and the bank helps them issue a
stock offering or
bonds. They use this money to produce, and hopefully increase profits, and the
investors take a risk in hopes of
return.
The market serves another purpose as a source of
information-- It is not meant to reflect the
facts of the company, like the price/earnings ratio, or assets, but the public
perception of its profitability. For example, when HP and
Compaq announced a merger, both stocks
tanked. The earnings, etc. didn't change-- It was the perception.
It was the aggregation of millions of voices expressing their opinions-- that is the beauty of the market.
This world's not over yet-- it's
just beginning.
Yeah, they keep us business majors around for something. We just haven't figured it out yet.
1. Costello, Michie, Milne. Beyond the Casino Economy