Updated: Nov 10, 2020
Source: Ryan Cooper
A view held by many in the mainstream media is the stock market is a general barometer of economic health. If it's going up, then things are assumed to be going well — and if it falls a lot, then it's time to worry. Thus conservatives in the US have been celebrating the astounding stock rally of the Trump era, which has been more than twice as strong as the average since 1928 for presidents at this point in their term. To be sure, a stock market crash can have serious negative repercussions. But the current booming market is also evidence of a deeply sick economy — one geared to funnel money to the very tippy-top of the wealth distribution, and which is seriously vulnerable to another devastating financial crisis.
The first thing to know about stocks is that a huge fraction of the population owns no stock at all, and only the rich own them in significant quantities. A Gallup poll found that 55 percent of people own any stock — a majority, but most of them own only small amounts. If we break the population into 10 groups (or deciles) based on how much stock they own, we find that the top decile accounts for 86.8 percent of all stocks. The next decile owns 9.5 percent, the third 2.8 percent, and the rest little or nothing. Adding to this, the fraction of GDP going to labour costs has fallen sharply since the 1980s, while the fraction going to corporate profits has increased sharply, and the share of income and wealth taken up by the very rich has skyrocketed.
The broader economy, including all these public corporations, is still based on mass production and consumption. It follows that as inequality grows, the economy will sag and slow, because rich people disproportionately save their income rather than spend it, usually by buying financial assets like stocks. So as the financial markets are swamped by a tidal wave of profits, those stocks, in turn, become ever-more divorced from the health of the underlying corporate enterprise. The result is a marked tendency towards financial bubbles, as oceans of money slosh here and there looking for safe returns that can't exist because the mass public has little disposable income which would justify fresh investment in real enterprises. This is exactly the background that made the Great Depression of the 1930s and the Great Recession after 2008 so bad. The economy was fundamentally unsound, and it took only the kick of a financial panic to knock it over.
The stock market is surging under Trump largely because of the massive tax cuts for corporations and the rich that Republicans passed in 2017. Contrary to their promises, corporations spent most of the windfall not on investment, but on dividends and share buybacks which fuelled gains in the market. Wages, meanwhile, are up slightly, but not anywhere nearly as much as stocks. Overall growth is also weak. This means the stock boom is built on sand — especially given how the Trump administration has dismantled much of the post-2008 financial regulation. I hope the top decile is enjoying themselves, because the good times can't last forever.
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