The recent rise in Taiwan’s stock markets has been described as a “groundless rebound,” but the public does not seem to see it that way. It seems small-time investors are investing in the market in a big way.
The government has for the most part remained optimistic about local stocks, with some leaders saying they believed the market rebound was a first sign of economic recovery. This illustrates that it is difficult to resist the benefits offered by a bubble economy. Not only does the public have a hard time seeing past the profits, those in power also have a hard time seeing past the potential boost to their reputation and voter support.
This “groundless rebound,” in which there is a clear gap between asset prices and the operational profits of businesses, is a basic indication of a bubble economy. In economics, a bubble economy is neutral in nature. Lopsided information causes the public to develop overly optimistic expectations about future market demand and prices during the upturn of an economic cycle.
The formation of a bubble economy — and its eventual rupture — are therefore part and parcel of normal market operations. But when overly optimistic expectations are the result of government policies or statements, political leaders are guilty of interfering in the market and misleading the public.
There are many possible reasons behind the surge in the stock market, including an inflow of hot money as a result of looser monetary policies around the world and a return of funds as a result of tax reforms and relaxed barriers to entering the Taiwanese market.
However, regardless of what is behind the rise in the stock market, leaders should at least qualify their statements and avoid rash remarks on the factors behind the upswing. Nor should they link increases in the stock market to their policies to try to prove they are correct and effective.
Although comments made by those in power do not always truthfully reflect a situation, they do normally reflect expectations or opinions about how a situation will develop. Such statements are often easily blown out of proportion by the media. This in turn affects decisions made by the public.
Studies have shown that assessments by the media or analysts that differ substantially from the real performance of an economy can cause larger fluctuations in financial markets including stock markets and exchange markets. In other words, both the formation of an economic bubble and the rupture of a bubble can be aggravated by the media’s role in promoting overly optimistic — or overly pessimistic — opinions.
The government, which is very apt at using the media to promote its policies, should avoid inappropriate remarks that could lead to overoptimism concerning the economy. Carelessness could cause a new wave of damage from an economic bubble.
Tristan Liu is a consultant for Taiwan Thinktank.
TRANSLATED BY DREW CAMERON
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