V NOne concept that ties together many important drivers of market movement is incentives. What are the reasons for investors to own stocks as opposed to any other use of their money or time? Certainly the spectrum of prospective returns and the risks is important. The returns are influenced by such things as the amount that you will keep after paying the fees and "services" involved. Such services have been increased substantially with the increases in the new bills, thereby reducing incentives. This has a compounding effect in the future, making the ratio of wealth that one could hope to achieve say in 10 years from investments considerably lower than the increase in short term and long term rates. For example, 100 growing at 10% for 21 years will grow to 740 but 100 growing at 8% for 21 years will grow to 503. Thus, a 20% reduction in the after service return will lead to a 32% reduction in wealth.

Another aspect of incentives is the rules of the game. When certain groups of cronies are favored with amounts injected, with economic values substantially greater than their market values at the time of injection, it puts the non-cronies playing the game in the position that people who play sports are in when the referees are against them. That works for a game or two, but when extended, most athletes will stop playing the game, and prospective athletes will look for another area of endeavor. One would think that all the redistributions, all the tremendous rises in value of the new banks would have a similar effect on the current and future participants who are not in that favored position with respect to the referees.

Another group affected deeply by incentives is owners of businesses. What are the reasons to go into business, to start a business, as opposed to working in a secure job where firing hardly ever happens, and the amounts allocated to it are ever increasing as opposed to taking the risks of becoming an entrepreneur? According to Amity Shlaes, this lack of incentives caused the depression to last 15 years rather than two or three. My own experience with the owners of businesses started during that period confirms this in spades.

A small change in expectations in matters such as the propsective after returns, the rules of the game, and the security of alternate occupations versus entreprenurial activities has a great effect on the ultimate choices as to where and when prospective investors place their funds.





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