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Two gas pipelines are built across the Andes: one from Bolivia to the Atlantic coast of Brazil, the second the longest in the world from Patagonia to Buenos Aieres. This became possible because of an invention of joint-stock, limited-liability corporations. Multiple investors jointly own the companys capital. Limited-liability because the separate existence of the company as a legal object protected the investors from losing all their wealth if the venture failed. The primary discipline on companies comes from stock markets where shares (small pieces of companies) are brought and sold. The price for a share tells how much people rely on the cost of the company in the future. Stock markets hourly evaluate the company on various aspects. The life of a stock market represents the reflection of human moods on the price of shares of a company. Optimistic buyers of stocks are bulls; pessimistic sellers are bears. There are five stages of stock markets life that repeatedly continue as a cycle: displacement, euphoria (overtrading), mania (bubble), distress, revulsion (discredit). The three other recurrent features of stock markets are asymmetric information, the role of cross-border capital flows, and easy credit creation (banks play a role in creating bubbles). Falls and rises of Dow Jones Industrial Average the longest running American stock market index in 1979-2002 and its erroneous prediction by the press are presented. In the long run American stock market is the best. The average return is 4,73 percent per year; Sweden (3.71); Switzerland (3.03). Market interruptions are the result of war or revolution. Stocks for the long run are not a universal treatment, but better than bonds.
The Company You Keep
John Law of Edinburg invented the stock market bubble. Amsterdam became the capital of innovation in finances by 1690s. The worlds first central bank was the Amsterdam Exchange Bank. It solved the problem of debased coinage by creating a reliable form of bank money. The join-stock company system was invented in Amsterdam based on high risks of delivery spices by sea. United Dutch Chartered East India Company or VOC was established in 1602. The structure and functioning of the company follows. The VOC initiated the creation of stock market built in 1608. The Amsterdam Exchange Bank was found in 1609 since a stock market could not readily function without an efficient monetary system. There was never such a thing as a Dutch East India Company bubble. The rise and fall of the VOC closely tracked the rise and fall of the Dutch Empire. John Law was inspired by Dutch financial system. He said: I have discovered the secret of the philosophers stone it is to make gold out of paper .
The First Bubble
Frances fiscal problems were in an especially desperate condition. Law claimed to have the solution to establish a public bank on a Dutch model issuing paper money. The monarchs credit would effectively operate within a trading company financial system in Laws scheme. He proposed to take over Frances trade with the Louisiana territory that led to a foundation of a new Company of the West . The bubble was based on rosy visions of the colony that were not true. The bubble collapsed in 1720 and resulted in total financial catastrophe in France. That was one of the preconditions of Revolution. The South Sea Bubble in Britain was smaller.
Bulls and Bears
The Great Depression hit the entire world in 1929-1932. Except the USSR. The reasons and the conditions that led to the Depression are discussed. Five reasons are named. Two major conclusions are inept or inflexible monetary policy in the wake of a sharp decline in asset prices can turn a correction into a recession and a recession into a depression and the benefits of a stable exchange rate are not so great as to exceed the costs of domestic deflation.
A Tale of Fat Tails
The Federal Reserve prevented the financial crisis in the 1980s by injecting money into the system. The story of bubbles of the 1990s and the Enron Company bubble follows.
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