Wednesday, June 15, 2011

What value does the stock market add to the economy?

Indeed, that's the core question that baffled me when I first studied the Great Depression in grade school. Why would a stock market crash cause a depression? After all, buying and selling already-existing stocks generates no capital for companies, generates no new inventions for companies, in essence is just moving pieces of paper around without creating any real wealth. Remember, real wealth is actual goods and services, not pieces of fancy toilet paper. And IPO's and other new issues of stock account for a fairly trivial portion of the stock market, so for the most part purchasing stock doesn't help produce any real economic output.

But of course the deal is that the stock market serves as a store of value as well as a worthless gambling emporium, and when a major store of value declines in value, it has the same real consequences associated with monetary deflation in general -- the interaction with debt being the most important one, and the real cause of the Great Depression. So I suppose the answer to the question of, "why buy Apple stock?" is, "you help maintain the stock market as a store of value." Whether having a large portion of the effective money supply tied up basically in circulating around under a mattress rather than creating or purchasing actual goods and services is a good thing is an exercise left for a future post...

- Badtux the Monetary Penguin


  1. The stock market provides liquidity to business owners at the time of an IPO - all stocks (or their ancestors) had to start there. So there is a legitimate function. And the liquidity is mainly provided by speculators, so speculation does some small good.

    The problem is not with the existence of the stock market, but with its size. Look at the number of shares traded per day. It's a huge multiple of what it was in 1970. And not because there are more stocks. There is more circularity under the mattress. The average holding period for a stock purchase is about 20 seconds.

    That means that rent seekers - who do no good to anyone - are siphoning off tine increments times many thousands of shares, thousands of times per day. All of this is enabeled by lack of regulation and virtually cost free transactions.

    And this is what the finance industry has become. During the 60's a 13 yr running avg of finance after tax profits as a percentage of all corporate profits was in the range of 20 to 24%. the increase has been almost continuous.
    1980 28%
    1990 34%
    2000 41%
    2004 45%
    Now 47%

    This is money siphoned away from productive activity into the hands of leeches.

    Another part of why WASF!

  2. When I think of the lies made up about health care reform, I wonder what sort of insanity would be spewed after the suggestion of a 0.0001% tax on each stock trade?

    I always figured the stock market existed solely for the purpose of putting regular people money where the rich people could steal it directly and legally. Sort of like Vegas, but with far worse odds.


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