Dean Baker: The Stock Market is not the Economy

[eridani]

http://www.cepr.net/blogs/beat-the-press/quick-thoughts-on-the-stock-market-and-the-economy

First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.

Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.

Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expected the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn't.

Turning to this specific downtown, it seems clear that the troubles in China are the immediate cause. I will claim zero expertise on China's economy, but one thing seems very clear, it had a serious stock bubble. Its market rose by more than 60 percent from the start of the year to its peak in early June. At that point is was more than 150 percent above its year ago level. Even with the recent plunge, it is still more than 50 percent above the year ago level.

It was inevitable that this bubble would burst, the only question is when. The collapse undoubtedly hurt some Chinese investors, many of whom recently entered the market, often with large amounts of leverage. The direct impact on the Chinese economy is likely to be limited, these people would not in aggregate have enough wealth so that any reduction in spending would hit the economy in a big way. (Remember, people who were in the market last year are still way ahead.) There may be a political issue here the Chinese government, which apparently encouraged people to buy into the market.

[truedelphi]

1. The problem is that many people have their

lives tied up with the stock market. There is little way to get around it, short of putting one's savings into a large hole in their mattress.

Workers who have pensions often come to find out belatedly that their "safe retirement savings" were being handled by someone or some group of someones who invested the monies in the stock market.

Baker is speaking as though this dip in the stock market is related to a needed "market correction" of the Chinese stock market. Perhaps that is the case. But every so often, a correction becomes a total bust of the economy.

Hopefully we' re not facing a total bust at this point.

[eridani]

2. What do you consider "safe" that would be secretly invested in stocks?

I have everything in CDs, which have shitty returns, but no loss of capital.

[DemReadingDU]

4. +++

[truedelphi]

5. People who have their money in cd's have control over those monies.

But again, many workers do not have such control. And they come to find out that their pension monies were actually put into the stock market, and sometimes even into risky ends of the stock market.

This has certainly been the case with PERS, which is the pension and pension management end of California State and County workers' retirement funds.

[Demeter]

3. The problem is, the market reflects the really bad economy we have

with the excess fiat currency messing things up all over, jobs gone, velocity of cash down to nothing, hoards of wealth piling up in 1% accounts and festering....

[truedelphi]

6. ^^^^^^^^^^^^^^^^^^ n/t

[eridani]

7. So basically, there are no really good investments unless we fix our economy

Suspected that was probably the case.

[Demeter]

8. Well, GOOD investments

like infrastructure and greening everything, education and demilitarization, would fix our economy...which comes first, the chicken, or the egg?

How about we work at both ends and meet in the middle?