Though I often boast about my knowledge and understanding of history, I have struggled for a long time with economics. It was so bad for me that I avoided taking the subject in high school and in college.
I did understand that economics has played a very important role in history, so I’ve tried to get at least a basic education on the subject, realizing that “Money makes the world go around” and, as the late Harry Multer used to say, “People don’t really pay attention unless it hits them in the pocketbook.”
While in high school and studying American history under Multer and world history under Ernie Strong, I confess to not really “getting it” about why the stock market crash of 1929 caused the Great Depression of the 1930s in the United States and all over the world. Part of the reason was that I struggled to understand how the stock market worked.
During my college years, I did learn that the casino capitalism of stocks and bonds on Wall Street would affect the general economy because many people got into the game, and many people lost a lot of dough when the market crashed in 1929. The wealthy big spenders who invested heavily in the market no longer were able to use their money to pay their workers and too many workers themselves had squandered what money they had, thereby creating an economic crisis.
We haven’t seen anything like it since — until now. I hear tell the current unemployment rate in the U.S. is at its worst level since the Great Depression. Yet on the very same day I was told about this, the Dow Jones Industrial Average gained 341 points.
Conventional wisdom told me that as the stock market goes, so goes the economy. It was true in 1929, with the dot.com bust of 2000 and with the Great Recession of 2008-09. Stocks went down, and so did the economy, at least for awhile.
This crisis, however, is doing the opposite. As the Coronavirus pandemic worsens and as the unemployment rate continues to climb, the stock market in April enjoyed its best month since 1938.
Sorry, Dave. “Everything you know is wrong.”
How can stocks be doing better when the health crisis and the economic conditions and prospects for so many are tanking?
The only answer that makes sense to me right now is that the stock market no longer has any meaningful connection to America’s economic condition. The stock market actually is an independent island and we unwashed working stiffs really have no stake in its success.
When President Donald Trump gleefully pointed to the stock market and historic low unemployment rates as indicators of the American economy’s robust health over the past several years, I couldn’t wrap my head around his claims. I was seeing and hearing too many stories that told me otherwise.
While the Dow Jones was setting all-time records by climbing past 29,000 and the jobless rate was only 3.5%, I noticed too many horror tales about the decline of the American middle class and too many people living paycheck to paycheck.
Along came COVID-19, an unusual virus that spread quickly and threatened our ways of living. Was that bug all it took to crash the once great American economy and society?
Some very smart people said all along that the unemployment rate reports did not include that information that nearly half of all Americans would be unable to survive a sudden crisis of $400 or more. Even fewer would be able to rise above a sudden health crisis.
Then some pointed out that 84% of the stock market is played by as few as 10% of the population, most of whom are well to do. So the saying was that the rich were doing very well indeed because of that record-setting stock market. The poor and the middle class — not so much.
Some others have suggested that recent stock gains during the pandemic and awful job losses were the result of the government stimulus program that sent most of the relief money to large corporations and political donors instead of small businesses and the unwashed masses, the latter who got a one-time pittance of $1,200.
One really important historical interpretation I learned in my History 310, “Twentieth Century America” class was that Republican President Herbert Hoover’s biggest mistake was that he dealt with the economic crisis by providing government money to the top, hoping it would trickle down to the middle and lower classes. The strategy failed miserably and Franklin D. Roosevelt crushed him and the GOP in the election of 1932.
It is debatable whether FDR really ended the Great Depression, but most historians have praised his aggressive approach by making government an employer and instituting “socialist” programs such as Social Security and the minimum wage, and he succeeded in halving the unemployment rate.
Many argue that World War II ended the Great Depression. Ironically by converting to a wartime economy in a socialist fashion.
I’m not happy about it, but I’m coming to a realization that I’m not as stupid about economics as a I thought earlier. I also have come to realize that one of our greatest tasks ahead is to learn from the crisis, understand our shortcomings and begin the difficult task or moving forward instead of standing still or going back.
Mr Young
There is a saying amongst hardcore and professional gamblers….I takes money to make money and scared money never wins….
Just my opinion for what it is worth.
Oh David, You really don’t know how these markets work. All markets move on “expectations”. It is the reason all stocks have PE’s (price to earnings ratios). Those ratios reflect the expected future earnings of each of the companies. Stocks and commodities trade on forecasts. Watch the price of grain go up with a forecast of drought in the states that provide most of the grain. Or the forecast of a bumper crop of coffee would do just the opposite. In essence, the stock market does well on days of positive news with regard to the passing of this current pandemic. Much like it dropped significantly on devastating news, when the pandemic first arrived with all the catastrophic forecasts of what damage it would do to the economy.
As for us unwashed, I’ve been playing the market since the 80’s. And I would venture that there are way more participants than just 10%. How many people have 401K’s? They may not directly trades shares of stock, but are participants none the less.
And just one other aside. Economists are the worst prognosticators of all the experts. Even worse than weather forecasters. LOL!!
There is much more to economics than what gurus report. Especially those prone to being gurus for media outlets. They can be as biased as anyone, both positively and negatively. The markets operate on a herd mentality, often manipulated by those that desire a certain outcome in the markets.
I could go on, but it would be impossible for me to communicate all I have learned in a short response to your opinion item. I will close with, there are no greater manipulators than money changers. The key to success in investing is to determine when certain manipulations are in play.
Perhaps Mr. Young you might want to think about where all public and private pension funds plus individual 401k’s and IRA’s in this country are invested. Also it might be instructive if you examined the banking industry and it’s relationship to the well being of a majority of Americans. Credit fuels prosperity.
You might also do a better job of explaining economics to your audience if you actually understood the basic laws of that field of study. Money supply would be a good place to start. Monetary and fiscal policy today has greatly increased the supply of money. When that happens one can expect stocks to rise. Basic economic principle of supply and demand.
One is never to old to learn and I would encourage you to continue to do so.