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Alan Greenspan And Socrates

Performance in the economy and performance in the stock market is driven by two different demographics. The economy is driven by spenders and the stock market is driven by savers. There is increased economic activity 28 years after an increase in the birthrate and there is decreased economic activity 28 years after a decrease in the birthrate.

Stock market performance is a result of investment activity. Investment activity increases 50 years after an increase in the birthrate and decreases 50 years after a decrease in the birthrate. This is because little investment can occur while there are still kids in the house. We know from the study of demographics that there is a sharp decrease in spending after age 50. As an individual's income stream remains intact until retirement, it can be assumed that the decrease in spending becomes an increase in investing. There is also urgency here when a 50-year-old faces the reality of insufficient savings.

I was reading an interview of Alan Greenspan, former Fed Chairman, in Bloomberg BusinessWeek. Greenspan said that the stock market, if it continues to perform well, could pull the economy along with it. Basically, that strength in the stock market could strengthen the economy and increase economic activity. His most recent book was about stock market bubbles. His main point was that it is impossible to tell if the stock market is in a bubble until afterwards, after something happens to prick the bubble.

The reason I mentioned this is to show that the most respected living former chairman of the Federal Reserve is not clear on what I just described about the economy and the stock market. A booming economy does not mean a booming stock market and a declining economy does not mean a declining stock market. Economic activity is driven by the demographic of spenders and stock prices are driven by the demographic of savers. The markets correlate with changes in the size of those two demographics.

It has been fashionable to claim ignorance since the days of Socrates. According to Plato, Socrates would feign ignorance and proceed to ask open-ended questions to those who were considered authorities on a topic. After a series of questions, the "experts" would have to acknowledge that they did not know nearly as much as they claimed to know. The Socratic Method was an interrogation technique. The interrogation was disguised as the pursuit of knowledge. The (overtly antagonistic) method was used to humiliate the authorities of that time.

The Socratic Method was never intended to be the epitome of thought. The method employed by Socrates revealed that much knowledge was flawed and incomplete. This realization gave the impetus to start anew. The open-ended questions indicated that the prevailing knowledge was insufficient. The questions did not indicate that knowledge was unattainable.

Socrates tore down the old structures of thought so that those structures could be rebuilt. Consider the edifice built by Alan Greenspan. He told Charlie Rose that fearfulness is the most prominent factor in people's decision-making process. Greenspan also said that fear can be measured as several multiples of euphoria and greed. In one fell swoop, he transferred accountability for market downturns from the central bank to one of the most debilitating human emotions.

Alan Greenspan's new book is called The Map and the Territory. The author states that the most fundamental insight of the book is that bubbles burst when fear comes to the fore of investor emotion. After a lifetime spent studying economics and finance, he managed to absolve the central bank and shift responsibility for downturns to fearful investors. The guiding principle of his career was that markets are efficient. Now, it seems, the tendency to panic is fundamental in the investment community and can undermine even the best intentions of the central bank when it either injects liquidity into the financial markets or holds down interest rates. The former chairman of the Federal Reserve said that the primary issue which affects the market is an unpredictable emotion. Alan Greenspan wrote a book to say he doesn't understand how the financial markets operate. I take him at his word.