Millions wiped off the value of our shares in the space of a day. Unreal.

That is how economists also think. Economists view the economy as two broadly parallel strands: the ‘real’ economy; and the world of money.

The real economy is the world of consuming and producing goods and services, of putting aside some resources now to enhance productivity next year and enable future production and consumption.

The other world is one of paper and of property rights. We print notes and call them money. We create pieces of paper that represent loans and equities. We trade these pieces of paper to derive interest rates, exchange rates and share prices.

The two strands should run in tandem, and they do mostly. Interest rates and share prices determined in the financial markets are also a balancing force between the productivity of investment goods and our preference for consumption now rather than later.

For instance, when highly productive investments abound then the greater issuance of new debt and equity required to finance these projects will promise the higher interest or dividend flow that will, in turn, entice people to collectively consume less and free up the physical resources for the investment.

Think of financial market dealings as prompting a shift of builders from what would otherwise have been temporary seating for a one-off series of concerts (a consumption item) to building a hotel for overseas tourists (an investment item).

But sometimes the two strands disconnect. The problem is uncertainty: no one knows the future. There is a probability that future dividends could be higher or lower. There is a probability that borrowers may not be able to pay the contracted interest payment or return the initial loan.

Even the word probability suggests some form of predictability. Goldman Sachs discovered recently that the future really is unknown when a supposed 1-in-a-100,000 year loss occurred. So emotion plays a key role.

Sometimes changes in emotion, especially the swing between fear and greed, can effect changes in interest rates, exchange rates and share prices that then affect our real world decisions.

A surge of optimism will create too much call on our resources for investment, relative to those we are willing to free up from consumption: inflation results.

At other times, waves of fear will force interest rates up and share prices down, dampening investment at a time when spare resources are made available: a recession results.

It may be clumsy but the system does work in the sense that financial prices will also then change, bringing a swing in real world activity.

There is also the issue of trust. The contract between the saver and investor is not direct but rather through a mesh of intermediaries and other parties in financial markets.

If trust breaks down then, again, financial prices will change or, worst still, financial transactions could dry up and a severe swing in real activity would take place.

This is the risk that has emerged in recent months. The solution is to re-establish trust before significant real world effects occur. This requires those in the financial system to prove competency and honesty, a process that entails transparency.

The trouble is bearing one’s soul or, in this case, one’s off-balance sheet risk, can sometimes reveal a lack of competency.

Markets then react. We may be in for a rocky ride in financial markets over the next few months.

At the end of the day, though, honesty and competence do exist and this message will come to dominate: the financial market ‘crisis’ will not really matter much. Probably.