OT: Some truth about the stock market

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

I am an economist. Let me teach you a few little-known things about the stock market. First, it is much less important to the overall economy than you might think. Yes, the media and a great many people are obsessed with it. Truth is though that less than 2% of new business finance is funded through the stock market. The vast majority of NYSE and NASDAQ trading is simply shifting between assets. Certainly the ability to do that is an important support of the real economy, but hardly determines its direction. Are you thinking about 1929? It is almost universally believed that the stock market crash of that year "caused the Great Depression." No. The stock market had little to do with the Depression. Economic activity began falling off four months prior to the crash. We slid into a quite ordinary recession, which lasted until March 1931. Only then, with several bank failures unrelated to the stock market, did the Depression really begin. The major cause was the progressive banking collapse and shrinking of the money supply (30% from 1931-33), which the Federal Reserve, to its shame, could have prevented but did not. They are not about to make that mistake again. Find this hard to believe? Then let's take up something the 1929 people hate to think about: October 19, 1987. On that day the stock market suffered a "crash" more than twice as bad as that of 1929. Remember? The Dow Jones fell 508 points that day, the equivalent of about 3,000 points now. And what was the aftermath? Almost nothing; it was hardly a blip in the cyclical expansion of the late 1980's. One reason is that the Fed learned its lesson and was in there the next day with effective panic control. But more importantly, consumers are not much affected by even sharp turns in the market, becase they base their spending plans on longer-term considerations, such as expected average future wealth and income over many years. It is estimated that the $1 trillion loss in stock market valuation that day lowered consumption by no more than $40 billion. Peanuts! One might even say that volatility in the stock market makes it even LESS of a factor in determining real economic activity, as it becomes expected and largely ignored in long-run planning.

If I am not deleted as a "troll" of some sort, I'll be back with more.

-- Unreel (cometo@tention.net), January 01, 2000

Answers

Wall street is NY's answer to Vegas. To gauge the state of the nations economic wellbeing on the price of stock on wall street is tantamount to gauging the wellbeing of the country by how many people are playing the lottery. It is absurd! dig this-- Yahoo stock is worth more than Ford and GM combined. If one liquidated Yahoo how much money would you get VS. GM or Ford. Someone is going to get terribly burned by web stocks. Pity.

-- lenny (Chmielecki@worldnet.att.net), January 01, 2000.

Unreel: Do you foresee a significant market correction this year?

-- dinosaur (dinosaur@williams-net.com), January 01, 2000.

More please...this is interesting.

-- Moore dinty Moore (dac@ccrtc.com), January 01, 2000.

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