[Edge03zn (OP)]

'Is there an Economist in the house?'

It doesn't seem that stable to me. I know it's a complicated subject. But what are the major factors acting against stability, and what are the safeguards in place preventing collapse?

[Teakhat]

The US Dollar rules...and will continue to do so. Although there are no precious metals behind it...it does have a backing, of sorts. 'The full faith and credit of the United States' is one thing...'In God we trust' is another. Basically, the US can print whatever it owes.....it's written on the money, too.

The US Dollar is the currency of choice. It underpins all other currencies. The USA acts as guarantor. But no-one acts as guarantor of the USA...so no-one want to have the currency fail. The black market has US cash under their mattresses.

It won't fail. Besides, that's the whole point of the US military......

[evan_au]

The economic system is chaotic (in the mathematical sense), so you can't really call it stable.

It has many random tugs on it, including crop failures, changes in government policies, swings in fashion, etc. But despite years of research, they have yet to find a clear link with sunspot cycles.

There are various positive feedback cycles which take place, so that if someone thinks that widgets are a great thing, the price of widget shares will zoom; other traders will see that widget stocks are increasing, and will buy in, hoping to sell when the price goes even higher, causing a runaway effect which has nothing to do with the true value of widgets. Eventually, someone realises that widgets are overvalued, the stock crashes and many people lose their money.

It's particularly bad if this same cycle hits many stocks and commodities at once; this can crash the entire stock market.

These fluctuations can become worse when computer trading is involved, because stock excursions can take place in seconds, even before the human traders have had a chance to react.

In the past, there were some spectacular failures of major banks, because their traders were given free access to billions of dollars, with no accountability as to risk, or tracking the actual financial position of a portfolio. Hopefully, that is better under control, now.

Trying to rein this in are the world's central banks, who can apply fiscal and monetary policy to provide steady economic growth. But it is hard to read the tea leaves in a chaotic swirl, and sometimes they get it wrong.

I heard of a recent psychological study of bank traders, which found that they applied a different set of ethical standards when they were primed with thoughts of their work, than when they were primed with thoughts of their family. This points to an institutional risk-taking mentality, trying to outwit everyone else for financial gain, which still exists today.
 
One classical explanation: "the love of money is a root of all kinds of evil"...

[wolfekeeper]

There's a big problem that has happened time and time again.

The real problem is assets.

When people lend other people money, they expect them to have collateral in the form of assets.

So if the deal goes bad they collect the assets and they haven't lost much money.

Unfortunately... the value of an asset is what you can get for it on the market... and that varies over time.

If you guessed right, then that's not a problem; and assets usually have a fairly predictable value.

But... bubbles.

Basically, sometimes people invest in assets, and the value of the assets goes up. So more people invest in the same assets and the value goes up some more. Suddenly, these assets are looking like a really good investment, so everyone buys into them... and then somebody works out what the assets are really worth or something changes that makes the assets worth a whole lot less, or people just don't have enough cash around to buy any more; and then the price of the assets collapses. The bubble pops.

Unfortunately, at this point, people start to panic and call in the debts, and then businesses suffer. Further, because when you borrow money, that money goes into the economy and that money is people's wages. That all comes to a grinding halt. So suddenly there's not enough money to pay people's wages. That collapses demand and lots and lots of people are laid off. You get a recession or depression that lasts until enough people aren't in debt any longer, the debt has been paid off or written off.

The assets involved can be anything, stocks & shares, houses, tulips, the same thing can happen with virtually any asset.

[alancalverd]

The system is inherently unstable. Whilst it might be legitimate to make money by buying and selling assets and commmodities, particularly if you add value in the process, the big money is involved in gambling on the future value of things that you don't actually intend to own or distribute. Thus money becomes divorced from its role as the counterflow to work (you work for money, then pay money to get other peole to do things for you) and flows towards those who are most adept at guessing and manipulating future trends. And not only of material goods, but even of the value of currency itself: if you can trigger a collapse by selling a few million zloty or whatever, you can buy them back at the end of the day for a lot less, then wait for the currency to recover or to be bailed out by the taxpayer, and you reap the benefit.