Financial Markets, Money and the Real World
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Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.
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Chapter 6: Financial Markets, Liquidity and Fast Exits

Paul Davidson


In modern entrepreneurial economies, the development of well-organized, orderly markets for financial assets sever the direct link between ownership and control of real capital assets. In the modern corporation, ownership is typically widely dispersed among a population that holds its savings in the form of financial assets. Owners of these enterprises hold legal titles primarily for the expected capital gain they expect from changes in financial market prices and secondarily for the dividend yield that accrues to them while they hold legal title. Most owners would know little about managing the real capital goods that enterprises use. 6.1 THE DOUBLE-EDGED SWORD OF FINANCIAL MARKETS For the real economy, the existence of liquidity-creating financial markets is a double-edged sword that in good times facilitates investment in real capital goods but in bad times ‘adds greatly to the instability of the system’.1 The good edge of the financial market sword is that the existence of financial markets makes real investments that are fixed for the community appear to be liquid for the individual. This prospect of liquidity encourages today’s savers to transfer their command of existing real resources to entrepreneur-investors who require funding in order to command real resources in excess of what their own earned claims will permit. In good times, the expectation of high returns2 associated with the possession of financial assets encourages many savers to surrender the full liquidity of their money holdings. The result is that very large investment projects – projects often too large to be funded by...

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