Do Stock Markets Make Sustainability Impossible?
I am very interested in receiving discussion and feedback on the following ideas in my article, “Do Stock Markets Make Sustainability Impossible?” Here is a paragraph from each subsection. (For full article see Vermocracy.Org.)
- Unless stocks are deemphasized and bonds emphasized, it is ludicrous to assume that solar energy—or anything else—can create sustainability.
- Protesting stock markets is as important as protesting air pollution—but nobody is doing so.
- The New York Stock Exchange is not an original or necessary institution for capitalism, democracy, Christianity, America or free enterprise.
- There is no magical law that requires stock markets to have happy endings.
- Overpopulation is not mandated by religion so much as by stock markets.
- No movement is making the essential moves against Wall Street to make sustainability possible.
1. Unless stocks are deemphasized and bonds emphasized, it is ludicrous to assume that solar energy—or anything else—can create sustainability. Of course, it benefits the environment to develop non-polluting energy sources. However, overall “sustainability” must include financial stability. Otherwise, we face ever-repeating wars and stock market crashes and consequential ever-increasing populist demands to dismantle environmental protections. From about 1900 to 2000, we had a very inexpensive source of energy called “oil.” The personal computer also increased productivity several times over. All with no net increase in financial stability. In contrast, the ancient Hawaiians perfected fish farming. Thus, they primarily just needed to eat fish and then go surfing and dancing. Also, ancient Hawaiians were never told that they must eat more fish every year. That would have sounded ludicrous to everyone. Today however, we so-called modern people are told by most economists and politicians that we constantly face ruination, not only if productivity fails to grow, but even if the rate of growth fails to grow. At the crux of this naked inanity are stock markets.
2. Protesting stock markets is as important as protesting air pollution—but nobody is doing so. Of course, there has been an “Occupy Wall Street” movement. However, the Wikipedia article on OWS mainly lists protests against some of the inevitable consequences of overemphasis on stock markets: “wealth inequality, political corruption, corporate influence of government.” There seems no suggestion to deemphasize stock market investing. With no intellectual leaders speaking out against stock markets—it is obviously not feasible for political leaders to do so. Bernie Sanders, self-proclaimed “democratic socialist,” probably is the most harsh critic of Wall Street ever to make it to the US Congress. Every little bit helps. However, his most radical proposal is a small tax on high-frequency trading. Sanders has never proposed to reduce the general tax discount on stock market investing—nor proposed a tax discount for bond investing—nor criticized our dependence on infinite growth.
3. Contrary to popular assumption: the New York Stock Exchange is not an original or necessary institution for capitalism, democracy, Christianity, America or free enterprise. This article merely points out that modern society is dominated by corporations—which are funded by stocks and bonds—and that long-term stability and peace are possible if and only if we merely deemphasize the stocks! Some people will instinctively respond that to deemphasize stocks is somehow to advocate “communism” or “totalitarianism.” This is obviously not true. Here are the facts.
- Bonds are not communist. The US government and most US corporations sell bonds.
- You can buy books on the “all-bond portfolio.” This is a respected investing method.
- China and Russia are communist or totalitarian or both—and have stock markets.
- Washington, Jefferson and Franklin were not communists—and had no stock market.
- Adolf Hitler was propelled to power by the stock market crash of 1929. Stock markets cause totalitarianism. They are not a cure for it.
Others will respond, “This is a free country. If you do not like stocks, you are free not to buy them.” Ironically, this is exactly what this article argues should be true. If the stock market game were deemphasized to the level of a Las Vegas casino, then we might all choose to play it or ignore it. Unfortunately, that is clearly not our situation.
- Unlike casino games, every news show frets about stocks. Because they affect everyone.
- The stock market crashes of 1929 and 2008 caused millions to lose their jobs and possibly their life savings—regardless of whether they bought stocks.
- Walk in to any office of any stock broker and ask what will happen if you do not invest? The answer is that more than 1/2 the value of your savings will be lost to inflation.
- Walk in to any university and ask any economist, why do we have inflation? The answer is that we must have inflation to support the stock market.
- If a prostitute is forced to pay 1/2 her income to a pimp, she is said to be “owned” by the pimp. Similarly, everyone is somewhat “owned” by the stock market.
- For more thoughts in this direction, Google the phrase: inflation is invisible taxation.
4. Contrary to most financial experts: there is no magical law that requires stock markets to have happy endings. Most financial gurus will advise a never-sell buy-and-hold strategy for stocks. Also, for those who desire greater safety, large investments in corporate or municipal bonds. This is in spite of the ubiquitous refrain by the same people: “past performance does not predict future performance.” Buy-and-hold is like a religious faith based entirely on the performance of US stocks in the previous century. This ignores what happened in 2008 and what has happened to most non-US stock indexes since 2008. Also, we saw numerous bankruptcies and near-bankruptcies of US blue-chip corporations, insurers and regional governments in 2008: California, General Motors, Goldman Sachs, AIG, Lehman Brothers, etc., etc. This has proven that corporate and municipal bonds are now like wooden fire escapes: only safe just so long as there is no great need to be safe. Investment-grade corporate bonds should be safe. If not for our over-emphasis on stock markets, most bonds would be safe. Currently however—so long as the stock market has the power to trigger a cascade of blue-chip bankruptcies—then allocating anything for corporate or municipal bonds primarily means that you can allocate less for maximum-safety gold or US Treasury TIPS.
5. Overpopulation is not mandated by religion so much as by stock markets. Obviously, reproduction is essential for any species. Obviously, nature must create an off-switch for reason wherever reproduction is concerned. It is therefore understandable that even the most rationally-trained people are often bizarrely self-contradictory in opposing the clear mathematical imperative to stabilize the global human population. The Roman Catholic church has gradually been persuaded by scientific reason—such as that the earth is not the center of the universe. However, a religion can not be expected to abandon tradition for reason—when those supposedly representing “reason” are fanatics for tradition. It is not priests so much as economists who maniacally insist on infinitely more children. Even when the ignorance required to believe in “infinite population” is far more obvious than required for an earth-centered universe. In contrast, the Bible teaches that God created every species. Therefore, to destroy any species is to declare war against God. Not to mention the extinction of dozens of species every decade due to human overpopulation. Also, if all Christians are one family and all Muslims are one family — as both of their scriptures teach — then before having a second child, all parents should at least pay for the education of another child who is living among garbage.
6. No movement is making the essential moves against Wall Street to make sustainability possible.
- There is what I call the “High Plains Drifter” initiative. This means firstly, for one reputable economist to write one book arguing that capitalism has a future if and only if stock markets are deemphasized. Secondly, for the leaders of one underdeveloped or “outsider” nation to read said book and thus to start one new game on their own terms: encourage corporate bonds with national insurance programs and low tax rates—meanwhile discourage stocks—and thus become increasingly admired and imitated after each new, ever-inevitable global stock market crash. Russia, China, India, Greece, Cuba, Venezuela and Indonesia obviously should encourage bonds over stocks. Currently however, every nation stubbornly bellies-up to be fleeced at the anachronistic Wall Street game—regardless of whether they are a naïve novice, an atheistic anti-capitalist, a religious fundamentalist or even a chronic loser.
- Or, a “Newman Age” could be upon us if some new promotional strategy somehow enabled stock market corporations in every sphere to be eclipsed by for-charity corporations à la Newman’s Own—with a similar ferocity as My Space was eclipsed by Facebook. Currently however, there seems little significant interest in such projects.
- Or, a “Fight Fire With Fire” initiative might mean for some nonprofit foundation to manage “socially responsible” brokerages, autotrading systems, trust funds and mutual funds. If 1/3 of the foundation’s resulting income were used to finance pro-environmental politicians and organizations—while 2/3 were hoarded and reinvested—this eventually might build up a war chest with which to enable environmentalists to cross swords with billionaires and corporations. Currently however, environmentalists must forever act like the Dutch boy with a finger in a dyke.
Ebay, Google and Facebook all had humble beginnings—and yet, soon eclipsed stock market giants, even before joining the stock market. For the first time in history, it is no longer necessary to own steel mills in order to challenge the likes of Carnegie and Mellon. What is lacking today is only the will, not the capability. Each of the above “non-Wall Street initiatives” obviously could be accomplished within fewer than a dozen years by fewer than a dozen inspired individuals. This is probably a narrow window of opportunity and to which almost nobody is yet responding.
KH… To be honest, I find your arguments… well.. lacking in actual arguments. You make statements, like the following;
5. Overpopulation is not mandated by religion so much as by stock markets.
And then in a long, dense paragraph about religion you never again mention the stock market.. not once (sorry, can't seem to turn off bold). For me, the rest of the piece is similarly unconvincing.
I believe your entire premise is misplaced.. i.e. that the growth imperative you are ascribing to the stock market is one and the same with our money system, i.e. debt based fiat currency systems, where money is created as debt, with a future interest liability unaccounted for in the money creation process, all but require continuous, exponential growth to remain, "healthy", up until the point at which they cave in on themselves. It all starts with the money.
Jim, thank you very much for your feedback.
Re #5: "Overpopulation is not mandated by religion so much as by stock markets."
You have a point. I need to start this section with a few sentences clarifying that–according to basic "economics 101"–stock markets require population growth. This is why I say: "It is not priests so much as economists who maniacally insist on infinitely more children."
Previously, I had an entire section arguing that China has every element for a winning bond market, but lacks requirement #1 for a stock market: room for constant population growth. China has recently abandoned its population-reduction policy, largely because population reduction is not feasible with a stock-based economy. However, this is ludicrous because there is simply no room for population growth. China trying to win the stock market game by embracing population growth is like a short person trying to win basketball by standing on his toes. (The China section had to be removed for brevity–which admittedly is something I have somewhat given up on. This is a subject that requires a book to be properly discussed.)
And–unlike any time in the 20th century–the economy of China is now just as influential as the US or the EU. So, China depending on an impossible stock market is a danger we have not faced before. And, China operates on a 12-hour time difference. So, the next major crash could happen overnight, before we wake up in the morning.
Unfortunately, no matter how well I write this section #5, it is not likely to be well understood. This is because most people do not understand "economics 101." Even though they hear on the "economic" portion of the news every day that "we need more growth"–they tend to think I am exaggerating when I assert that "infinite growth" is a basic requirement of the stock market. Whereas those who do understand basic economics–such as stock brokers–tend to have a vested interest in not seeing certain obvious truths–such as that infinite growth is impossible!
That is one reason why my article was difficult to write. It is far from perfect. Any help is appreciated. Thank you, Jim.
Re: "the growth imperative you are ascribing to the stock market is one and the same with our money system, i.e. debt based fiat currency systems."
I tend to agree that there is a connection between fiat currency systems and non-sustainable growth-based economics. However, I fail to understand that people can focus on "non-fiat currency"–meanwhile ignoring the "elephant in the room," the stock market, that more directly and more obviously requires infinite growth.
From 1817 to 1929, America was on the non-fiat "gold standard." America nonetheless experienced numerous severe stock-based recessions, culminating in the "Great Depression." Obviously–regardless of the currency used–so long as we have stock markets, we are going to have stock market crashes! We are also going to have consequential endless need for growth and price inflation in order to continue the stock market.
In his "Cross of Gold" speech in 1896, Williams Jennings Bryan made it sound very simple that if we switched from gold-standard to silver-standard, every American would become rich. Today, nobody makes that argument. For one thing, the value of silver is far more volatile than gold. Moreover, there is obviously no magical formula to make everyone rich.
Williams Jennings Bryan was probably a good man and probably correct about many things. Similarly, however, for me, this "non-fiat currency" school of thought is mainly proof of the ability of most people who decry "growth-based economies" to ignore an "elephant in the room": the stock market.
Yes, there is something to "non-fiat currency." But it is not so easy to do, nor are the results so simple. For one thing–so long as the economy is tied to the stock market–we are obviously going to need artificial methods of "streatching reality" in order to prolong this infinite-growth system–which obviously cannot forever be prolonged. For another thing–the global economy and the global population today are both many times more than in 1896. Today–whatever we might use for "non-fiat currency"–there would need to be an awful lot of it! And anything which exists in large quantity is going to be volatile.
I am not an economist. However–even though non-fiat currency might be correct–I suspect that attempting to switch to non-fiat currency at this point might be similar to throwing your car into reverse because you are going too fast.
I.e., fiat currency is like a band-aid for the constant bruises caused by a stock-based economic machine. Tearing off the band-aid without first gradually stopping the machine would seem potentially to result in total collapse.
I am not an economist. I am not totally clear about the "non-fiat currency" question. However, what is very clear to me is that the people who argue for non-fiat currency are not being very clear! If you catch my drift. Meanwhile, what is very clear is that stock markets are obviously growth-dependent! Any stock broker will tell you so! Meanwhile, we are so "traditional" in our growth-dependency that even "anti-growth" thinkers never think to mention the stock market! So, as I say in the full version of my article, this is very much like a sort of mass-hypnosis mass-denial situation–such as described in the classic tale, "The Emperor's New Clothes."
Incidentally–just something to think about–what I posted above is only one paragraph from each section of a 6-section mini-book. Here is the actual ending to section #5. I hope some people might find this interesting.
"If a person has 7 dozen cats, everyone will label that person as pathological for “animal hoarding.” Somehow however, if a person has 7 billion dollars or a planet has 7 billion people, most of our most respected scientists and economists will cheer this on, thinking only about how to facilitate an increase to 14 and 28 billion. This is beyond pathological. This can not end well."
(P.S. Jim seems correct that, in this forum, it is difficult to "turn off bold" and other formatting. In most forums, we can simply "select" the text, then click "B" or "I", etc., to toggle formatting on or off. In this forum, however, it seems that once a format is "on" it will not go "off." We have to "switch to plain text editor." Or–to avoid monkeying with HTML: "cut and paste" the text into a search field or address bar or other non-formattable field. Then repeat a "cut and paste" back into the forum window to result in non-formatted text.)
For the interesting discussion. I am still not convinced that the stock market is the driver.. I think it's an asset market that is certainly more-and-more viewed as a key indicator (and driver) of economic, "health". I think one could take the housing market and completely replace all of your arguments with, "housing market" instead of, "stock market" and it would be the same.
Both are markets that have a money-like quality.. in other words as they expand and inflate, people's savings (or net worth) is inflating, and this can easily be turned into cash equivalents, at least in the case of housing, via home equity (loan) withdrawal.
Going back to the question of which is actually the dog, and which is the tail, money itself vs. stock and/or housing markets.. .please note that the FED created lots of thin air QE money in order to by MBS, while other central banks more recently (Japan, Switzerland) have been creating thin air QE money to buy (US and other) stocks to hold on their balance sheets. In each case the central banks are using their unique money creation powers to distort the hell out of the housing and stock markets. I believe this was done because of the high degree of connectivity between housing, stocks, and the existence (or not) of deflation in the system.
The stock market seems a rapacious growth machine because it's fueled by, and interacts with the debt-based money system. The stock market is the tail, and the money system is the dog itself. I am not necessarily arguing for non-fiat, or even non-debt-based money. I am though arguing for free markets for money, where the interest rate is determined (dictated) not by banks, but by the supply vs. demand market for money. I have also suggested in the past that an interesting patch on the system would be to create each year all the money necessary to pay the interest on the newly created money.. and to pay that out as a kind of dividend to all users. In this way banks could stay healthier.. because the money to pay off loans would be more readily available.. and hence other artificial (and much less democratized) means to induce growth.. to pick winner and losers.. would not be necessary.
Since the 1950's, the masters of our money system have not allowed any significant deflation. It should be allowed.
Note how deflation.. depicted in the chart (link above) by periods of red (below the line) has been essentially eradicated. The stock market can and does go down… money though will not be allowed to shrink. Money is the dog.
Fundraising is required for capitalism to function. That can be done using debt (bonds, or bank debt) or via equity.
Debt is annoying, because it is difficult to get rid of. The interest payments are a constant drag on operations, and when you pay it down, you have to do it with after-tax dollars. Equity feels different. You get a new partner that you have to share the profits with, but if there are no profits, that's no problem. You share risks and rewards equally.
I've seen how both operate on a small company; equity puts no pressure on operations, while debt is a constant drag.
Outlawing equity as a means of raising money for companies means you can't have a small company with multiple owners each of which contributes money for the initial startup, nor can you do subsequent funding rounds. When companies don't have any income, it doesn't make any sense to raise money with bonds – because they have no way to pay those bonds back.
As for a secondary market; the bond market is far bigger than the stock market.
Martin Armstrong is fond of saying that it wasn't a stock market crash that caused the depression – it was the bond market crash that did so. The bond market crash happened in 1931-32, and it destroyed a lot more money than the 1929 stock market crash did. You can see the bond market crash in the following chart: rising rates = falling bond prices.
We had a stock market crash in 1987. No depression. We had another one in 2001. No depression.
If you believe that, going forward, there will be no new inventions that need funding, that we've got no small businesses that will have multiple owners, then sure, no equity funding, and no secondary market.
Banks don't do startup funding. Neither does the bond market. That's done with equity. To get bond or bank funding, you need to already have earnings. How do you get to a place where you can have earnings when you can't raise money?
The rate spread chart is the difference between junk bonds and high grade corporates. When that spread blows out (i.e. when you see a spike in this chart) it is also a sign of a bond market crash.
The reason the spread comes back to normal after the '31 crash? My guess is, a whole lot of junk bonds died – because the companies that issued them died. The survivors get their bonds upgraded or they pay them down.
You can see we avoided a bond market crash in 2008 because the spike was relatively brief. There wasn't enough time to clear out all the debt. We most likely have another spike in our future, because all that junk debt is still there, and it needs to go away.
Jim and Dave, thank you for the very thoughtful comments. I will try to reply briefly and in order of importance.
A. Stocks vs. Fiat Money vs. Controlled Money As the Root of All Evil.
1. Can someone please explain to me more about "non-fiat currency" being possibly the primary driver of non-sustainable growth-dependence?
Since Jim seems willing to think about the stock market as a driver of growth-dependence–I am now less interested in explaining my view than in someone please explaining more about the "non-fiat currency" theory? I don't get it. I can see that non-fiat currency makes it easier for debt to get out of control. However, I do not see how "fiat money" morphs from an "enabler" to a "driving force"? Nor how re-introducing fiat-currency is going to eliminate debt? Any more than than buying a new milk carton is going to clean up spilt milk?
Also, regardless of whether currency is fiat or non-fiat, when equity enters the stock market, it seems in some sense "fiat" or "floating." Based on a brief internet search: there are about US$200 trillion "cash" in existence vs. $70 trillion in stocks and $1,000 trillion in "derivatives." https://www.quora.com/If-you-converted-all-currencies-in-the-world-to-USD-how-much-money-would-exist-in-the-world-today — http://www.marketwatch.com/story/this-is-how-much-money-exists-in-the-entire-world-in-one-chart-2015-12-18
On the flip side–back in the 1990's, the combination of Bush 1, Clinton 1 and Ross Perot's third-party balanced-budget campaign and the financial boom did seem miraculously to balance the US federal budget. (Until new wars were created by Bush 2.)
I am not arguing here for Bushnomics or Perotonomics. I am simply saying that regardless of currency type, debt can get out of control. And regardless of currency type, debt can be controlled.
In contrast, the stock market requires growth! And if the economy is tied to the stock market–then if the stock market crashes, the economy crashes! So–even if somehow "fiat currency" is the initial driver of growth-dependence–I still would not see how to reduce growth-dependence without deemphasizing stock markets?
2. Can someone please explain whether or how bitcoin and "free markets for money" and "non-fiat currency" views are all compatible?
Jim says he personally does not argue for non-fiat money so much as for free markets for money. This seems to me like the "bitcoin" theory. Both of these seem to me diametrically opposed to a "gold standard" or "non-fiat-currency"–which demand that currency be stabilized by being physically backed. And yet, PeakProsperity seems to be a hotbed for both directions. Some people also are saying that bitcoin is more secure than gold. I do not fully understand any of these theories. I would like to know more. However, I am prepared to argue that bitcoin is certainly not equal to gold and not a place to hold your life savings.
(A few of many existing PeakProsperity bitcoin discussions: Gold vs. Bitcoin (2013) — Bitcoin Architect: Everything About Bitcoin (2013) — Why the Dollar and Bitcoin Keep Rising (2017).)
3. Re the "lack of deflation," my response is simply: so long as we emphasize stock markets, then according to economics 101, we must usually have some inflation or we will have a severe collapse.
Jim seems to think that the fact that governments discourage deflation shows that deflation is a primary cause of something. But if so, what is deflation causing, how is it causing this, and why are governments discouraging it? I do not quite understand what Jim is saying.
Meanwhile, I would simply say that the fact that governments discourage deflation is merely a demonstration of the primary need to feed the stock market.
[quote=Jim H] https://www.advisorperspectives.com/dshort/updates/2017/02/16/a-long-ter… Note how deflation.. depicted in the chart (link above) by periods of red (below the line) has been essentially eradicated. The stock market can and does go down… money though will not be allowed to shrink. Money is the dog.[/quote]
In reply, please consider this. "Inflation is invisible taxation." (Click to google if unfamiliar with this concept.)
A primary reason for inflation is to subsidize the stock market. Because, by itself, the stock market is non-viable. In school, we are taught that stock markets benefit the economy. But if so, why cannot stock markets merely add their so-called benefit, without being subsidized? The fact is, the average "index stock" must usually increase in value. Otherwise, many investors will sell. This starts a chain reaction resulting in a crash. Obviously, it is extremely difficult for any business–let alone most businesses–to increase profits consistently. Therefore, every government targets a certain degree of price inflation and population growth. Therefore, it is much easier for most companies to do better most years–simply because there are more customers who also are forced to pay higher prices. But ultimately, of course, the whole world must pay in wars, depletion of resources and financial crashes. I.e., non-sustainability.
Please note, there is nothing factually "unproven" or even "unconventional" about my description of stock markets. I am merely reiterating what any economist or stock broker will tell you. Just without the usual rose-colored slant. Many people like this system. It favors the super-wealthy and risk-takers. But it is certainly not honest or fair. In addition to the ultimate long-term destruction–even in the short-term, this stock-based system forces everyone either to risk their money in investments–or, if they refuse to take invesment risks, then before they retire, they even more certainly will lose over 1/2 the value of their life savings to inflation.
Conversely, according to economics 101, deflation and population reduction are intolerable to stock markets. So long as stock markets dominate the economy, calling for "allowing deflation" or "reducing population" is calling for that which is financially impossible. It would cause a crash.
4. Please note, I am not suggesting that there is any chance that the US government might ever deemphasize stock markets!
In the USA, political initiatives to deemphasize stocks are politically and culturally impossible.
It might be possible, however, for non-stock corporations to develop strategies which enable them to out-compete stock-based corporations. Thus gradually for stock markets to become deemphasized via the laws of competition. This is not very likely to succeed. Nonetheless, I am attempting to develop a non-Wall Street alternative to Facebook.
Also, if other countries such as China or Greece (sure losers in the stock game) were to introduce bond-based economies–then every time there is a cyclical stock market crash, this eventually could inspire gradual changes in the USA. Or–perhaps more importantly–if there is a complete breakdown of the USA–the existence of a better system in another country might inspire constructive reconstruction instead of despair and anarchy.
[quote=davefairtex]"Outlawing equity as a means of raising money for companies means you can't have a small company with multiple owners each of which contributes money for the initial startup…"[/quote]
Thank you, Dave, for the opportunity to clarify this issue. This is a frequent misunderstanding which I was unable to discuss in my over-lengthy article.
Firstly–my suggestion is to tax stock markets. (Or at least to stop giving them more federal tax incentives than are given to corporate bonds.) This means limiting the ability of so-called "publicly traded" aka "listed" aka "New York Stock Exchange" corporations to cripple or "hold hostage" the US economy. Stock markets should be deemphasized until their outcomes are like the outcomes of football games and poker tournaments–perhaps highly profitable but never seriously affecting the US economy! This has no effect on the "private corporations" or pre-market startups–which Dave mentions.
Secondly–my suggestion makes it easier for Dave's "private corporation" or small startup to compete. Because they are then not struggling against huge publicly-traded mega-corporations. This is Wall Street vs. Main Street! Dave is talking about Main Street corporations. As everyone knows, they are being driven towards extinction by Wall Street corporations.
(Incidentally, a "private corporation" can become huge. Such as Koch Industries or the Trump Corporation. That is not part of this discussion. Except to say that limiting stock markets does not limit opportunity.)
Thirdly–there are new ways of funding, such as "crowd funding" and "customer sharing." My business model for a "Pro-Sustainability Social Network" includes semi-random profit-sharing with customers. This does not obligate customers to invest time or money. Nor does this obligate me to make any payments to any specific customer. Instead, this obligates me to place some profits in a discretionary fund which I must spend as desired by some customers–and to make all payments transparent. This encourages both "crowd funding" and customer loyalty. This eliminates debt burdens. This also eliminates miles of legal red tape. This also flips the advantage away from Wall Street and in favor of Main Street.
[quote=davefairtex]"Martin Armstrong is fond of saying that it wasn't a stock market crash that caused the depression – it was the bond market crash that did so…"[/quote]
Thank you, Dave, for another important issue. Martin Armstrong's example actually proves an important point in section 4 of my full-length article. As follows.
Also, we saw numerous bankruptcies and near-bankruptcies of US blue-chip corporations, insurers and regional governments in 2008: California, General Motors, Goldman Sachs, AIG, Lehman Brothers, etc., etc. This has proven that corporate and municipal bonds are now like wooden fire escapes: only safe just so long as there is no great need to be safe. Investment-grade corporate bonds should be safe. If not for our over-emphasis on stock markets, most bonds would be safe. Currently however—so long as the stock market has the power to trigger a cascade of blue-chip bankruptcies—then allocating anything for corporate or municipal bonds primarily means that you can allocate less for maximum-safety gold or US Treasury TIPS.
I.e.–let's complete the timeline started by Martin Armstrong…
- 1929 — stock market crash
- 1931 — bond market crash
- 1933 — bank run (savings banks crash)
It is obvious that the bank crash and the bond market crash were both caused by the stock market crash–which came first. Also, quoting from section 1 of my article:
Of course, stock and bond markets both have ups-and-downs. However, when blue-chip stocks fall, we sell. When individually-held investment-grade bonds fall, we hold to maturity. Thus—in addition to stocks requiring infinite and impossible growth—stocks inevitably magnify instability while bonds generally regenerate stability.
I.e.–masses of people do not sell investment-grade bonds–nor do they close savings accounts–unless bonds and savings are totally unsafe–which can only happen because of a massive stock market crash… exactly as happened in 1929 and almost-happened in 2008. And next time, Trump on the right and Bernie on the left both promise to refuse future bailouts of Goldman Sachs et al. They might be correct–things might work out. But might not. It is all theory and conjecture. Do you want your nation and your life savings to depend on theory and conjecture? Furthermore–perhaps the federal government is unable to do a bailout. We just don't know. What we do know is that it is obviously not "safe" for an entire economy to depend on stock markets!
[quote=davefairtex]"We had a stock market crash in 1987. No depression. We had another one in 2001. No depression."[/quote]
It is correct that in 1987 and 2001 there was no depression–and also no crash of bond markets–and also no run on banks. Because, obviously, these crashes were not that severe. The above statement seems to imply that there is no connection between a depression and a stock market. But I doubt that anyone here means to say that. Perhaps this is an accidental misstatement?
[quote=davefairtex]"You can see we avoided a bond market crash in 2008 because the spike was relatively brief. There wasn't enough time to clear out all the debt. We most likely have another spike in our future, because all that junk debt is still there, and it needs to go away."[/quote]
I think we partly agree here:
- Junk bonds are dangerous!
- If too many junk bonds, big danger for the whole economy!
However, I would add the following:
- Junk bonds make it easier to get funding.
- Junk bonds can inspire rapid economic growth.
And I also add the following:
- Junk bonds ≈ stocks ≈ casino games. Take serious risk. Maybe get serious reward. Maybe lose all. No guarantees. [Equivalency symbol: ≈ ]
- A little bit can be shrewd or fun or harmless.
- Too much = big risk to entire economy = big risk to entire planet.
- By what right to we force this risk on everyone and the planet?
- Isn't this obvious?
Junk bonds might have the same power as stocks for rapid initial growth. An overheated junk bond market might also be easier to control than an overheated stock market. Some experts have credited the 1980's junk bonds of Micheal Milken as a primary factor for the financial boom of the 1990's. Quoting from Wikipedia:
His critics cited him as the epitome of Wall Street greed during the 1980s, and nicknamed him the "Junk Bond King". Supporters, like George Gilder in his book, Telecosm (2000), state that "Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken…and others took the vast sums trapped in old-line businesses and put them back into the markets." (Additional interesting pro-Milken arguments can be found at his website: http://www.mikemilken.com/myths.taf )
So–to whatever extent stock markets are needed–this need might be met with junk bonds. In addition to possibly being more easy to control, junk bonds are a one-time thing per buy or sell. Stocks markets, on the contrary, permanently burden the corporations with grow-or-die desperation–and burden the entire planet with infinite-growth-dependence. Again quoting from the full version of my article:
…the Club of Rome seems to wish to deemphasize equally stocks and bonds, in favor of unspecified “new methods.” This will be exponentially more difficult than merely favoring bonds—already familiar to all and favored by many. Most strangely, they seem to suggest ending tax deductions for bonds but not for stocks–the opposite of what anyone who protests stock markets would propose.
More fundamentally, the Club of Rome seems to imply that emphasizing growth-dependence is a choice made by corporate executives and investors, and which choice is merely facilitated by the two relatively passive and slightly naughty methods of stocks and bonds. If so, this is amazingly naïve. Firstly, a stock market corporation has no choice but to chase growth or die. The stock market is not the hogtied masochist in this relationship, but is the sadist with the whip. Secondly, an individual investor who buys a bond, a.k.a. “fixed-income security”—unlike the stock investor—is not demanding eternal infinite growth but a one-time fixed return.
I think that part of the answer is that enablers ARE drivers, but what one or another might see as drivers vs indicators vs enablers are more likely higher and lower on the chain and simply not being recognized as such.
One of the reasons the stock market AND lending are so ubiquitous, is that these things empower a country to war more effectively; and since the winner of the war can set the new rules of the vanquished (or kill, or rape, or pillage) at their pleasure, then this empowers the conquest of humanity by the Bank and Market.
But that is an extension of a lower function.
I have a psychologist uncle who long ago studied anthropology, and he commented that our society is an Agricultrural Warlike society; that there are many kinds of societies throughout the world, but that all the recognized nations nowadays are Agricultural Warlike.
I think the principle of AW is that you engage in agriculture to increase your yields; with the increased yields you proliferate as fast as possible; when your environment degrades to the point that starvation would ensue, you go viking: conquer your neighbors, take their stuff, convert their land to agriculture, go on.
Interestingly, though we know “viking” as going on the warpath and pillaging, the word would seem to be related to the Lithuanian / IndoEuropean root “Vaik”, which means to walk.
In other words, it’s the walk of the lemming.
So to me, the root of our problem is that our entire society is geared to waste and warfare from its very roots. And any society that leaves the path makes itself fodder for those that DON’T leave the path.
I think you are still missing it Huang… what? The exponential nature of money at interest.
Secondly, an individual investor who buys a bond, a.k.a. “fixed-income security”—unlike the stock investor—is not demanding eternal infinite growth but a one-time fixed return.
If a bond owner lives on his fixed return.. in other words consumes it, then it's fixed. But.. if a bond owner re-invests this return into more bonds.. then guess what! It's an exponential system. Money is an exponential system because of the interest – our money system is the thing that demands eternal infinite growth. A system that grows by a fixed percentage each year is not a linear system – it's exponential.