—Current research on the connection between
financial markets and real economy is inconclusive. We look at
this relationship by analyzing statistical interconnections
between stock prices, the potential for growth in companies and
macroeconomic aggregates. Such analysis shows weak bond
between real economy and financial markets in Poland between
1997 and 2012, thus corroborating other recent research.
Further we investigate the causes of such weak relationship and
find that research showed a strong relationship a few decades
ago, but not in the last 30 years, indicating a structural change
in the last 50 years. We believe that the cause may be connected
with the abolition of the Bretton Woods Agreement, the
propagation of fiat money, and the following rise of the
debt-driven capital markets, as well as the steady decline in
labor share connected with sharp increases in labor
productivity in the First World. We investigate the possible
results of this and find not only a possibility of an abundance of
crises in the future but also a possible limit to economic growth.
We also review the possible answers to the problem, and find
that the answer lies in disincentivizing the speculative nature of
modern financial markets and reforming current monetary
system, i.e. fiat money.
—Financial markets, real economy, labor share,
Paweł Fiedor is with the Cracow University of Economics, Poland
Cite:Paweł Fiedor, "Financial Crises and the Future of the Real Economy," Journal of Economics, Business and Management vol. 2, no. 2, pp. 147-151, 2014.