Tuesday, August 2, 2011

The Stock Market's Curious Decline

The Wall Street Journal reports that stocks fell dramatically today. The S&P 500, an index of large stocks, fell by 2.56%, or $32.89. In the same issue, The Journal reports Obama's signing of the bill to increase the already massively distended debt ceiling.  The Journal writes:

President Barack Obama on Tuesday signed into law a bill raising the nation's debt ceiling, capping what he called an "unsettling" debate for the economy and helping the U.S. avoid default just 10 hours before the government would have run out of money to pay its bills.The move came after the Senate voted 74-26 to approve the legislation to raise the country's $14.29 trillion debt ceiling and cut the budget deficit by at least $2.1 trillion over the next decade, a major victory for Republicans who have long battled to shrink the size of the U.S. government.

The market had fallen last week and yesterday. Now, after the signing, the market fell even further.  This presents an interesting hypothesis:  The stock market does not reflect the well being of the economy. Rather, it reflects the short-term profitability of listed firms, many of whose existence harm the economy by keeping out smaller, more entrepreneurial firms that can outperform them. They do this through big government and regulation.  In other words, the market fell because the debt ceiling bill reduced the amount of government waste and overspending that goes to big business. An increasing stock market and America's welfare are at odds.

Americans need to rethink their love affair with Wall Street.  The average American's wage has been stagnant for 40 years while Wall Street has dramatically expanded. Might this latest evidence of a conflict between the nation's economic health and the stock market give one pause about the confusion between the two?

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