Saturday, April 25, 2009


As posted by Dr. Mahathir Mohamad at Che Det on April 23, 2009 4:15 PM

(This is the first instalment in a series on the trends that led to the present financial crisis)

1. We all believe that the great economically developed countries achieved prosperity through their genius in economic management and their skills in business. They are also seen to be able to govern their countries well.

2. They had developed various indices to indicate the level of prosperity they had achieved. And gleefully they compared these indices, especially per capita incomes and Gross Domestic Product, with those of the poor countries, to show how competent they were in the management of their economies. The poor are poor because they did not learn how to manage their countries. They should be regarded as failed states.

3. The claim by the rich that they were good in management and governance is only partly true. They did produce goods, provide services and they traded domestically and internationally. But their wealth from these activities is not as big as they made out to be. If the per capita and GDP are based only on these real businesses they would not be as rich as they claim to be. Certainly the United States and Britain would actually be nearly bankrupt.

4. What has sustained their high indices is their genius at gambling and manipulating money. It is this which had earned them huge profits and enabled their people to enjoy a very high level of prosperity.

5. Take the stock market for example. The money made in playing the stock market has nothing to do with real business. Usually the dividends paid out are very small, being based on the original share value. Thus if the shares were initially valued at one dollar, a five percent dividend would be only five cents.

6. But if the demand for the shares is great the one dollar share may be valued at very many times the initial share price. If the "market price" of the share is five dollars, a five per cent dividend would give the shareholder only 0.5% or half-cent dividend for each share bought at five dollars. That is not likely to make the shareholders rich.

7. It would be better to put the money in fix deposit and get a four per cent interest i.e. on five dollars one would get 20 cents in interest.

8. However, if the value of the shares appreciates say from five dollars to six dollars the return on the five dollar investment would be one dollar or 20 per cent. But the real worth of the business in assets term will not be as reflected in the market value or capital.

9. If the business fails then it would fetch only a fraction of the market price should it be liquidated.

10. On the other hand the assets may be worth far more than the depreciated market price. By then the investors in the shares at market price would have lost much of the money invested.

11. If a buyer buys up all the depreciated shares, he would make a good profit selling off the assets and liquidating the business. This is not really business, though some do buy to do asset stripping. After that there would be no more business to contribute to the GDP.

12. What is clear here is that the share prices have nothing to do with the business being done. Even when the business is profitable the very high share prices do not really reflect the market value or profitability of the business. The share prices are really artificial. The shares, basically the pieces of paper have become commodities on their own.

13. Yet investors can become very rich buying and selling the shares. Of course they can also lose all their invested money.

14. The share prices are also subject to manipulation. Through short selling the prices can be pushed up or down. Again the movements of the share prices have nothing to do with the real business being done.

15. The stock market has degenerated into a casino where bets are made which may have nothing at all to do with the businesses. This gambling in the rich countries can be far bigger than the worth of the companies listed in the stock market. Yet this wealth from non-business will get into the calculation of the per capita income and GDP.

16. But this is not the only non-real wealth which pushes up the per capita and the GDP of the rich countries.

17. I will follow this up with other wealth which are the result of shuffling papers.