Can you gauge the economy by

[AndyP]

the strength of the stock market? Why or why not?

This came up in a talk I was having in my Poli Sci class (not my major though) and I was talking with the king dittohead of our campus- who's the president of the college republicans here. He was giving me the reasons why Bush's tax cuts worked, and he said since the stock market is doing well that means that our economy is doing well which means that the tax cuts worked.

I said that I disagreed since a minority of Americans own stock, and those who do are usually better off by a large margin, so therefore I saw it as another way that the tax cuts only benefited the rich. Is my thinking somewhat correct?

Back to my original question though. The stock market is doing pretty good right now, right? So, how can the stock market be doing well and the economy not be doing well? (that is if you agree that they are not related).

Your input is GREATLY appreciated. This will help in my research paper that's due on Monday. :)

:Yourock:

[lectrobyte]

1. The stock market was doing great in 1929, and also great in 1987,

right before it became not so great. To a certain extent, I've always looked at the stock market as an indicator of economic health, though, but I think employment numbers are more important.

[kerryin2004]

2. No, he's wrong..

check the stock market number for the end of year 2000 and then look at the number now.. We still haven't even met the total we had in 2000.


GDP is up, which is good for business, but when there are so many layoffs that means that less people are working more..


As for the dollar, it continues to weaken, and I would argue that other then the middle east instability caused by Bush there is also the factor that oil is sold in dollars.. Tell someone in GB that oil is too high and they might laugh at you since the pound is now worth double what the dollar is..The euro is worth 1.33 to the American dollar, and both Canadian and Australian dollars are coming close to equal with ours, which has never happened..IMO we are in deep shit especially because of our deficits.

[AndyP]

5. how does the weak value of the dollar

effect our economy? I'm not very clear on that, does it just mean that we have less buying/selling power? Or is it more linked to our ability to pay off our debts like you mentioned at the end?

[kerryin2004]

8. One example..

If oil is traded in dollars, and in all other countries like Britain and Germany, the dollar is worth less, then you must raise the price of oil to get the same amount of money you did previously when the dollar was valued more..If oil is 50 a barrel here then it is only 25 in Britain, or 38 in Germany, which means in order to get the same value you did when the dollar was worth more, you have to jack up the prices. Our dollar was worth more then the Euro just a few years back, and Canada and Australia have never been so equal to us.

[mhr]

3. Simply Stated For The Ditto Heads, Wall Street IS NOT Main Street

Corporations can be doing well and make profits while wages are declining and job creation is non-existent.

How?

By leveraging all that worker productivity to get 10 lbs of potatoes out of a 5 lb sack. Worker productivity lets corporations keep their prices high while they cut their costs. This improves the bottom line and increases corporate profits which Wall Street loves.

Wall Street UP ---- Main Street Down

By outsourcing American jobs to overseas labor markets, corporations also improve their bottom line by reducing labor costs directly. Every dollar saved on labor shows up on the bottom line as profit.

Wall Street UP ---- Main Street Down

There you go to clear examples of how Wall Street Does not reflect the economy.

[AndyP]

4. so you're saying

that the stock market is a good indicator on how *corporations* are doing but not the average american. The Bush tax plan is kinda like "trickle down economics" huh? I see the big businesses getting huge profits but they don't pass that on to their employees, or consumers, like Bush want us to believe would happen.

[mhr]

6. Exactly! That Is A Very Good Summation!

eom

[punpirate]

7. In addition to everything already said...

... the stock market only applies to the trading of publicly-held companies, which is not the entirety of the economy.

Tax manipulations (tax breaks for the wealthy and corporations) have not even managed a full recovery of the stock market from earlier levels.

But, the key to what is happening now with regard to the overall economy is the level of debt. Corporate debt is at an all-time high, mostly due to borrowing to buy back stock or to leverage buy-outs of other companies in the hopes of improving profits.

Personal debt is at an all-time high, as people refinance homes to maintain current level of spending, consolidate debt, or try to compensate for loss of part of the family income from job losses.

Commercial and residential mortgage debt is at an all-time high, because of the price of housing has climbed substantially when mortgage rates went down--everyone wants into the housing market, even if they can't afford it. Foreclosures and personal bankruptcies are at an all-time high, and this increase will likely continue for at least five quarters based on current notices of intent to foreclose (takes about that long due to the process)

Government debt is at an all-time high and is increasing rapidly, while tax revenues are down due to tax cuts, particularly for the wealthy and for corporations.

Current account debt is at an all-time high and growing every quarter.

The minimum wage hasn't changed in about eleven years.

Americans now work more hours per year than workers in any industrialized nation. Studies in 1997 showed that much of the productivity increases created by ordinary U.S. workers was undone by management mistakes. That problem is bound to be getting worse over time as management seeks to increase profits with fewer people on the job.

There has been an increase in the number of people living below the poverty level, as well as an increase in the number of people without access to health care.

I would say that's a disaster waiting to happen, not a strong economy, even if the stock market hasn't keeled over dead, just yet. Your Young Republican acquaintance has his head as firmly up his ass as Bush does. What we're seeing now is a repeat of the golden trickle-down Reagan years, with the problems getting larger and occurring more quickly.

Cheers.

[Rapier2]

9. notes

The economy has nothing to do with the stock market. I know this it total heresy and so far away from the conventional wisdom that it will be disregarded. Here it goes anyway.

The stock market rises and falls on the amount of excess money, liquidity, available for speculation in stocks. In other words stock market trends are a monetary phenomenon. Now I will backtrack a bit and say that there is a relationship between monetary policy and the economy so therefore one might say that there is a relationship between the economy and stocks, but this would be a logical error. The economy and the markets tend to rise and fall in a causal relationship with monetary policy, not with each other. (I hope you get that) B, the economy, rises and falls with A, monetary policy. C, stocks, rise and fall with A,monetary policy. This does not mean C rises with B in a causal way. The respond to the same thing, easy or restrictive monetary/credit conditions but they tend to do so in different time frames. Again stocks traditionally peak before the real economy.

Historicaly stocks actually do best not when the economy is at it's best but rather when it is improving out of a recession. That is because, again on an historical basis, traditionally monetary policy is most stimulative during such periods. The Fed is easy with money and so there is plenty around to move into stocks and other forms of speculation. During traditional bussiness cycles eventually the real economy attracted a lot of the excess money flowing thru the system and stocks reached their peak. In other words traditionally stocks peaked ahead of the economy. Then inevitably the Fed would start to reign in monetary policy and the economy and stocks would fall.

Under Greenspan, or maybe rather modern unrestrained finance along with and encouraged by Greenspan, the traditional monetary/credit cycle has been thrown overboard. Instead we have been in a period since 87 where periods of restraint by the Fed are ever shorter and less pronounced and more importantly the role of the Fed in controlling monetary/credit growth, and shrinkage, thru the banking system has been weakened or perhaps superceded by modern Wall Street and mortgage market generated credit.

(Monetary policy is CREDIT policy. Sorry if you don't get this. You need to take Econ 102 to get a handle on what money is in a modern fractional reserve banking system.)

The kicker now is the STOCKS ARE THE ECONOMY. The inflation of financial asset values has become so important to the economy that the system itself would be mortally wounded if stocks fall. That almost happenend In 01-02, thus Greenspans unprecidented 13 rate cuts and the unfaltering monetary growth provided by the new parrallel credit system, Wall Street and mortgages. It's why the poor job and income numbers are of so little concern to Greenspan and the big boys. Money has continued to be available to keep stocks afloat, the real economy is secondary. Which by the way helps to explain why income and assets have been relentlessly shifting to the top. The entire focus of the monetary political and bussiness systems has been to keep stocks and other asset prices high, and rising. THe real economy be damned.