Sunday, August 3, 2008

Stock prices

It has become a tenet of American economic faith that stock prices ought always to rise. But there is a serious problem with this. Let's say we had a gold coin economy. If prices of stocks never ceased rising (particularly in the exponential manner we have seen them rising for the last century), the gold supply would quickly be exhausted and all gold would be tied up in stocks.

Clearly, something is amiss.

The problem is that stocks are a kind of credit, or loan from the stock buyer to the stock issuer, the company. The price of stocks can go up over time, but in an honest economy, we would expect stock prices to go down when credit is tight and up when credit is loose. Stock prices in a gold coin economy would not increase indefinitely. Instead, companies whose growth potential is greatest would experience rising stock prices while other companies would experience concomitant stock price decreases, given a fixed "tightness" of credit. That is, for a given supply and demand of credit, only so much gold would be available for stock investment. The money that goes into growth stocks would have to come out of other stock investments.

That most stocks are able to rise in price most of the time is a simple consequence of central bank inflation. As the supply of money is constantly increasing, the prices of stocks can continually rise with the prices of everything else. The continually increasing index of the stock market, then, is not an indicator of economic progress! It is an indicator of the steady march of inflation. In an honest money system, we would expect the stock market indices to increase with loose credit and decrease with tight credit. The long-term trend of the stock market indices should be proportional to the long-term trend of credit availability. Obviously, credit availability cannot exponentially increase over time (in a gold coin economy).

So, Wall Street is a bunch of crooks, just as Main Street suspects. But it's because they're in collusion with the government, not because the government has not sufficiently regulated them. So long as the public continues to imbue the state with a parental aura, Wall Street will continue to profit off their romanticism. Each new legal restriction on the free market will be twisted by the number surfers to their own benefit. The average Joe cannot win the battle of re-writing the rules of the game with the professional financial gamer. But the average Joe, by supporting the protection of his own property from theft by the crooks on Wall Street and Pennsylvania Avenue can defeat them. So long as we play their game, they will always beat us. Their worst nightmare is a strong, private property society where what's theirs is theirs and what's mine is mine. The vultures on Wall Street are not content with a private property society and free market. They want to increase what is theirs by stealing what is yours and mine.

Don't ever buy the lie that you and I can be better off by letting the government take from others to give to us. It's just an excuse for the professional crooks to get their hands on what's rightfully ours - our property.

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