How often in the face of economic slowdown is the government accused of simply turning on the printing presses, recklessly creating something out of nothing, flooding the economy with dubious dollars. The idea of artificially creating value seems to many to be altogether sinister and potentially catastrophic.
Now, I’ve been dabbling in the stock market for years, making some money, losing more, but never under any illusion that I was contributing to the overall economic advancement of the United States. I’ve always considered the stock market to be primarily an upscale gambling parlor for America’s middle and upper classes given respectability by generously designating as “investors” people who plunk money down there.
A case can be made for the stock market. A start-up company that shows great promise can apply for listing on an exchange, sell shares to the public and raise the money it needs to expand operations. An established corporation can use existing shares or issue additional ones to reward managers and other key personnel or for the acquisition of other companies. Admittedly this is useful and convenient although not altogether necessary. Companies can, after all, raise money from private investors, get loan support from banks, use untapped cash reserves and reward employees in a number of other ways.
Still, our major focus here is what’s going on as public companies conduct their business and the public trades their stock. A profitable company with good prospects can expect its stock price to be anywhere from 10 to 30 or 40 times current earnings per share. So, let’s assume those earnings are $2.25 per share of outstanding stock. Thus, the market price could be anywhere from $25 to $40 or $50 a share. A company earning $125 Million for the year could see its stock valued into the hundreds of millions or even billions of dollars by the market. Where did that additional money come from? (Total capitalization of securities, just on the New York Stock Exchange, amounts to trillions and trillions of dollars.) Did it simply materialize out of the air? Is it merely an artificial creation, far beyond what alchemy once promised? Both good questions.
So we have trillions of dollars worth of corporate stock out there available to be bought and sold. Individuals and institutions are going in and out every day profiting or losing on each trade, but with the underlying companies essentially out of the equation, neither benefiting or suffering from all these transactions (though most every company prefers that its stock go up in price and views it as a barometer of investor sentiment). Take the most obvious example involving day traders. They’ll jump into a stock that appears to have upward momentum, at least temporarily. Riding with it for a point or two, they’ll likely sell later in the day. Whether they lost or made money, the company they bought (often without knowing much about its business) was unaffected by the transaction (just as anyone betting on, let’s say, the Dallas Cowboys leaves no trace, has no impact on the team).
The prolonged high wire act occurring in Europe in 2011 and 2012 regarding sovereign debt issues, the credit standing of its major banks and the prospects for recession across Western Europe shook US markets for months on end. When it appeared that progress toward resolution was at hand stocks soared.. But the next day when European observers expressed skepticism about any deal, the market went into a swoon. The roller coaster pattern went on for months. Billions and billions of dollars of stock value materialized only then to disappear in a mystifying pattern of creation and destruction. The public companies being traded did not themselves either gain or lose by this endless churning in an effort to outguess the market. As we’ve said, they’re simply props, a convenient platform for all the money flowing in and out.
So, when people speak with contempt about the government printing money (which it doesn’t actually do much of) we should remember there’s a similar operation underway non-stop, one scarcely recognized for what it is. It’s one more vast and efficient than a printing press or instructing an imp to spin gold out of straw. Because so many benefit from this magical process, no one will ever risk calling it what it is , thereby ending the game.