If it is true that the US economy is not doing well and that bailouts have made the problem even worse then why is it that the stock market is doing well. And have been constantly growing for the past few weeks. DOW is up at 11,837. During the economic meltdown the economy been at about 10,000. It rose and it fell (below 10,000). But now it seems to have improved. Is there any connection to make between the state of the economy and how well the stock market is doing.
That’s about where it was 10 years ago as well.
Not if the growth is artificial. If the Federal Reserve sets interest rates too low, certain parts of the market will form a bubble (usually cars, houses, and banks). The bubble will make them look like they’re growing but the bubble will pop and the stock prices will go back down. The Federal Reserve can keep printing money and bailing companies out to make it look like everything is fine (TARP could have been a secret), but inflation will be visibly noticeable after a while. When the government gets out of business, things will get much better in some aspects, but they’ll also get worse for the time being until the economy can course-correct itself from what the government did.
You’re falling for the statist mindset hook, line, and sinker. The point isn’t too look at what happened and call it a “success.” The point is to look at the unseen whilst armed with the correct theoretical knowledge: without the bailouts, many of the companies would have been restructured whilst others would have been liquidated, but in all cases, the control of the companies would have been handed over to much more competent managers. There’s also the issue of incentives: letting the companies fail would have acted as an incentive for companies to take less risks. Lastly, there’s the issue of the misallocation of resources and market clearing: if the government would have allowed all of those businesses to fail, then their poor asset sheets would have been quickly cleaned up, and after a painful period of a few months, the economy would have a very solid foundation on which to quickly grow. Now it’s three years later in 2011 and unemployment is still ridiculously high and the economy is still very weak, thanks to the massive government bailouts, burdensome “stimulus,” and inflationary monetary policy.
“It comes from noticing only the results that are immediately seen, and neglecting the results that are not seen because they are prevented from coming into existence.” - Henry Hazlitt, Economics In One Lesson
Prices of everything have been going up. It’s called inflation, caused by money printing [=QE2].
@ Smiling Dave
Well actually inflation is the printing of money (increasing money supply) and rising prices are the result of inflation
smiling dave said it. You’re mistaking higher dollar prices for “the stock market doing well.”
A rising stock market isn’t actually a good thing.
excellent link, Nero
Keep in mind that the DJIA is merely an index of stocks. The stocks that make up the index can change at any time. Indeed, the DJIA’s components have changed 48 times since its formation in 1896.
While I’m not sure what the exact criteria are for adding and removing component stocks, I’m sure a major rule of thumb is to remove stocks which will “hurt” the index and add stocks which will “help” it. This has the effect of smoothing out troughs and emphasizing peaks in the trend of the index.
In essence, I think the malleable nature of stock indexes gives the lie to the notion that they can be used to accurately measure “the state of the economy”.
From Nero’s link: “A growing economy consists of prices falling, not rising.”
Value the Dow or individual stocks in terms of gold and you’ll find that, even though they have recovered their dollar price, they’re worth about 1/4 in terms of gold since 2008.
hmm, it seems zimbabwe may have the worlds most succesfull stock market…
Hard Rain,
What do you conclude from that?
The “recovery” is phony, of course, and people are not recognizing that stock prices, like those of the bailed-out banks and other “chosen ones”, have rebounded only in nominal terms.
The actual dollar currency is being pounded, but it’s not just in terms of gold. Value the dollar against cotton or silver or even South African Rands and it’s being thumped. There can be many reasons for this, most obviously outright market sentiment against U.S. debt and money-printing, but the point is the markets don’t like the dollar as much as more tangible assets or other currencies and that means gains made by U.S. stocks in terms of U.S. dollars are pretty illusory.
How/why is the price of gold a good measure of price inflation?
Thinking about it more, I see a flaw in the reasoning of the article Nero linked to.
If I have it right, the article claims that with a fixed money supply, the GDP cannot possibly rise beyond the amount of money. You can’t spend what isn’t there, right?
But here is a counterexample: Consider a country with two people, Mr Apple and Mr Orange. Mr Apple has a tree that produced one apple, and a dollar bill. Mr Orange has a tree with one orange, and no money. Apple uses his dollar to buy the orange, and Orange uses the dollar to buy the apple. They both eat the fruit they bought. GDP=$2.
The next year production increases, and each tree produces five fruits. Mr Apple uses his dollar to buy an orange, and eats it. Mr Orange uses that same dollar to buy an apple, and eats it. Mr Apple then uses that same dollar to buy another orange, and eats it, Orange uses the dollar to buy an apple and eats it, etc. Total GDP=$10, with no newly printed money, and it indeed reflects increased production.
EDIT: rereading, I see the author anticipated this when he wrote: and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged