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Magic numbers

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The Dow Jones index fell below 7,000 points, a level that many analysts consider as a sort of symbolic, magical or psychological point. The Dow even fell to 6,800 points and stock exchanges around the world followed, of course (now they are expecting to rise a little again). From now on, the situation is expected to get really serious… But it’s nothing more than superstition, magic and maybe intuition (or maybe not). From a rational standpoint, there is nothing to support the idea that these “magic” numbers” mean anything significant.

Even though stock indexes have fallen to half the value at their peak levels, only now they have reached the level when former Fed chief Alan Greenspan talked about “irrational exuberance”. That was 13 years ago in 1996. Paul Krugman noted this in his blog on Tuesday. Krugman added that, in reality, stock markets right now are around 1994 levels if we take inflation over the last 13 years into account.

The question is at what point the stock market decline finally bottoms out. The Wall Street Journal quoted an analyst, who said that we will have hit the bottom when the US government restores the health of the financial sector, and when property prices bottom out. The first condition is the great unknown. The Obama administration is aware of the gravity of the situation, but so far it has not convinced the markets that it has a trustworthy plan for the financial sector. It has rejected the simple solution of the state temporarily taking over the biggest bank houses. But there has been talk about so-called “soft nationalisation” (the state wouldn’t be the majority owner). The question is whether the markets will understand and accept this.

And what about the second condition – the bottoming out of property prices? The site provides the best charts, graphs and comparisons. The Case Shiller index shows that property prices can still keep falling and have not reached a sustainable level yet.

We should also add that when stocks markets recover, it will not necessarily mean much. During the Great Depression, stocks recovered significantly and than fell again many times.

Petr Holub wrote an interesting article for the news site Aktuálně.cz. He wrote that the Czech Republic is making a mistake in rejecting aid offered to the central European region. Analysts cited in the article say that while it may be true that the country has very different macroeconomic data [from other countries in the region], it will experience a decrease in investment. Partly because its banking sector is controlled by foreign companies.

I am not sure about that. It is not possible to siphon away the capital of Czech banks (if we don’t take dividends into account), and the central bank is able to keep an eye on that. And preventing the outflow of investments in the industry sector is not possible. How would foreign aid help? How would such aid need to be directed? By boosting production that would go directly into storage houses? Should we support local demand (for imported goods)? Foreign aid could theoretically help us invest in our infrastructure, but nothing like that is being planned, and it is not even in the competency of the International Monetary Fund, which is responsible for organising aid to this region.

And if the crown really begins to fall drastically, and foreign-exchange reserves do not help, the IMF will help us under quite clearly spelled-out conditions. Let us hope it will not be necessary. We don’t need such help.

On Monday Poland officially asked to be accepted into the ERM-II (European Exchange Rate Mechanism), that serves as a sort of entry way to adopting the euro. It’s interesting, however, that Poland does not want to speed up its euro adoption, which it has set for 2012. But entering the ERM-II means abandoning criteria of currency stability in preparation for joining the eurozone. The Czech government should start dealing with what Poland’s joining the ERM-II will mean for us.

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