From: pmetzger@snark.shearson.com (Perry E. Metzger)
Subject: Re: Basic Questions of Political Economy
Keywords: political economy, foundation, greeks, aristotle
Organization: /usr/local/lib/news/organization
Date: Mon, 23 Nov 1992 20:32:48 GMT

nagle@netcom.com (John Nagle) writes:

>      Yes, this reflects the financial crisis that knocked Portugal
>out of world-power status.  With Spain and Portugal importing
>silver and gold from the Americas in large quantities, these
>countries were experiencing inflation, since their medium of exchange
>was increasing in quantity and thus becoming less valuable relative to
>other goods.  But inflation wasn't understood yet, and the problem wasn't seen.
>People thought they were getting richer.  After all, more gold and silver 
>than ever were floating around.  All this new money produced lots of
>economic activity.  More demand for luxury goods.  Big expenditures on
>even more gold and silver mining in the Americas.  But no overall
>increase in productive output.  Eventually, a crash came.
>
>      Kind of like leveraged buyouts in the early 1980s.

Not at all like leveraged buyouts. First of all, they did not and
could not expand the money supply -- thats something the Fed does, not
the markets. Secondly, leveraged buyouts were a perfectly good idea.
At the start of the 1980s, business journals were full of articles
that asked the following interesting question -- why were all of
America's largest companies trading at half of "real" value or less?
The answer was that there was no expectation in the market that an
arbitrage would occur between the book value of the equipment, etc,
that a company possessed and the stock priced. After all, who had a
couple billion dollars around to buy out a company and sell off the
parts for a quick double-your-money profit? Junk bonds changed all
that by allowing a good arbitrage between stock value and real value
of companies, and within a few years stock prices were back in line,
with the result that an extremely healthy stock market had benefited
the economy in numerous ways. The junk bond industry provided
financing for scores of other sorts of ventures as well -- would you
say that MCI is "junk"? No? Well it was financed with junk bonds. The
problem is that past 1987 the market had already hit parity with book
value and there was no longer any incentive for companies to heavily
leverage themselves. Mike Milken stopped doing junk bond deals for
leveraged buyouts about then, by the way -- he was a rather scrupulous
operator. Unfortunately, others did not realize that the bonanza was
over, and there were a few mishaps, like Federated Department Stores
and Southland. Well, big deal -- the majority of the junk bond market
was and is to this day strong and well founded. The fools were
punished by the market. Meanwhile, of course, Mike Milken languishes
in jail, punished primarily in an exercise designed to demonstrate
that becoming rich in america is a crime. Just as a reminder, lets
recall that he wasn't ever convicted of insider trading or anything
like that -- all his "crimes" were technical violations of SEC rules.
He was largely sent to jail to further the US Attorney's desire to get
big press in advance of announcing that he was running for mayor of
New York.

--
Perry Metzger		pmetzger@shearson.com
--
"They can have my RSA key when they pry it from my cold dead fingers."
Libertarian Party info: Phone 1-800-682-1776, E-Mail 345-5647@mcimail.com
Newsgroups: alt.politics.economics,alt.cascade