Wagging the Dog

Wagging the Dog

Where does finance fit into the economy?

Photo: David Whelan. Source: Morguefile

Time was that the real economy was considered the dog and the financial economy the tail. Except for an occasional bubble, the tail didn’t wag the dog. What people ate and how they dressed was critical; how the saved and where they invested wasn’t. Now it’s not so clear.

The world produced about $80 trillion in goods and services in 2015. At the same time, public and private markets were worth over $250 trillion–more than 3 times global GDP. And this doesn’t even consider the $640 trillion in swap contracts outstanding. Even if you allow for some overlap—levered banks that own public debt, etc.—that’s a lot of money! Without a doubt, what goes on in the market affects the real economy.

This wasn’t always so clear. In 1955 future Nobel laureate Harry Markowitz almost didn’t receive his Ph.D. because his ground-breaking work on portfolio selection wasn’t considered an economic topic. His insight didn’t fit into the categories of the time. How could finance be considered part of economics?

How much the world has changed! Today, if there’s a cash-flow, we securitize it. If someone discovers a new gene, they patent it and go public. We live in a financial age.

It’s another reason that the Fed needs to consider global deflation in their deliberations. Because whether the tail wags the dog or the dog the tail, if the pooch is shaking, someone had better take note.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2017-07-17T12:22:08-04:00February 16th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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