I’ve been following the news lately and pondering about “The Economy”. These days The Economy is being treated as a living entity. We are being bullied to do unsafe things for its sake.
The Economy has more respect and right to life than human beings. The USA recently passed 190,000 COVID-19 deaths with no fanfare from the press, or any acknowledgement of that grim milestone of pain from our dear leaders, but plenty of assurances from those same “leaders” that The Economy is healthy.
What is The Economy?
If you listen to those in power The Economy is the market value of a pre-defined group of stocks, like the Dow-Jones Industrial Average or the S&P500. Usually they will mention whichever index is doing the best at the time.
In micro-economics in college, the economy (lower case) was defined as the aggregate of all the purchase decisions made by individual people in a defined population. It is not easy to measure this, the consumer confidence index or the price of a basket of goods used to calculate a cost of living are examples of attempts to put numbers to parts of this.
The price of a set of stocks is much easier to measure, monitor and understand. The theory behind regarding stock indices as a measure of economic health came from the idea that consumer financial decisions would affect the value of companies and that value would be accurately reflected in the price of stocks.
The great divorce
Caveat: I am not an economist, whether that is an asset or a liability I do not know.
My observation is that, over the course of my adult life, there has been a divorce between the financial life experience of regular folks and the stock market indices. I see two factors in this:
- The elimination of pensions in favor of individual stock portfolios (401k and IRA).
- The ridiculously low interest rates over the past several years, combined with very easy access to the markets through online trading of buckets of stocks (mutual funds and, increasingly, ETFs).
The result of these changes has been a bunch of money dumped willy-nilly into the stock market. Money that would normally have been in the banks or invested in bonds earning a reasonable interest rate. The influx has inflated stock prices, with less and less regard for the value of the individual companies, or whether there is demand for their products.
Long term outlook
Looking to the future, I have concerns. Big ones.
The market ain’t what it used to be.
One is that we are no longer investing in quality companies. Increasingly, people are gambling on the market as a whole.
This is happening when we use Exchange Traded Funds, which are basically buckets of stocks that make up one of the indices, or represent a particular sector. This means that companies do not have to be exceptionally good at what they do or be innovative to access market capital.
By the way, this undoes one of capitalism’s most touted claims to validity, the efficiency of the market. They never were exceptionally so, but it has gotten worse.
Following the money
Another reason to be concerned about inflated stock prices is that, as the baby boom generation retires, they will be withdrawing money from the market to pay living expenses. Fewer people, generally lower wages with respect to living expenses, and massive education debts mean that savings rates are not high enough to replace that money. This will, over time, apply a downward pressure on stock prices.
Why are the extremely wealthy advocating the elimination of Social Security (the euphemism they use is “eliminating payroll taxes”)? I believe the point is to force even more retirement savings into the market to keep prices bolstered, thereby maintaining their net worth without having to invest in innovation.
The pandemic has, so far, not really seemed to affect the market much, but I think it might as the dust settles. People will have to pull savings out of the market to cover living expenses. Apparently, a fair amount from the $1200 checks was invested (because interest rates are so low people don’t have much choice if they need to set the money aside for future needs and do not want to lose out to inflation). Likely this caused at least some of the run up in stock prices.
As unemployment compensation drops and many companies that had government help to keep employees (like airlines) find those funds drying up and start laying people off, those people will need to sell shares to pay living expenses.
Notice how far from the day-to-day pain the effect on the market is?
It is depressing, in the financial sense
The problems with using the market as an indicator of economic health are manifold. One of the greatest problems is that the markets reward short term thinking. The kind of short term thinking that leads to great depressions. Eliminating Social Security is an example of that sort of thinking.
We all need to vote:
The current incumbent has promised to do away with “payroll taxes” that means eliminating Social Security and Medicare. These programs cannot be funded out of the general fund, which is already strained by the massive deficits from the T-party tax measure passed in 2017 and the extra costs from pandemic related expenses.
If your retirement plans include Social Security and Medicare you should vote for Joe Biden who will work to protect these programs. Having dealt with elder health care as I walked with my grandma her last few years, I can assure you that the vast majority of us cannot afford those care costs.
If your senator or representative is “Republican”* you need to find out if she or he is talking about reducing or eliminating “payroll taxes”, realize that actually means doing away with Social Security and Medicare, and vote accordingly.
*A republic is a form of government in which the country is considered a “public matter”, not the private concern or property of the rulers.Wikipedia