Irrational exuberance is back on Wall Street, encouraged by cheap credit lavished on heavily leveraged speculators, lax accounting rules and the unfortunate tendency to confuse the true value of stocks.
The Dow Jones Industrial Average, long a bellwether of the stock market, started the year at 13,416. Last week it hit 16,478, which is 2.5 times its low point during the Great Recession in 2009.
Given rather modest job growth, government spending cuts that have weakened the economy and other lukewarm measures of domestic and global economic growth, this rise in the Dow is difficult to explain based on rational expectations.
But the Dow’s striking 23 percent rise this year is nothing compared with the steep prices of many specific stocks, at least when traditional measures of valuation are applied.
These sky-high valuations get little skeptical coverage in the financial press, which has acted more as lapdog than watchdog in the past decade. Instead of barking warnings, many Wall Street reporters wag their tales in ways that please the speculative crowd, which, at great profit, feeds them market-moving tidbits along with a pat on the head.
A key element in today’s irrational exuberance is the rise of novel ways of valuing companies that gloss over key facts.
This is about savings-based stock market gambling.
More accurately this is not about investment and profit but instead SPECULATION and CAPITAL GAIN. But the media continues to framed the term as investment and investors instead of speculation and speculators when related to the stock exchanges.
Stock purchased from a company and in which the company receives the (typically past savings) money from the purchase in order to produce things is a TRUE INVESTMENT.
The stock market operates on the secondary level whereby stock is purchased from another stockholder who receives the cash from the transaction, which when held for sale at a future time is speculation.
In the first case the stock becomes speculative as soon as that buyer decides to hold it for appreciation but it is important to understand that the money received by the producer company is used to build new asset activity or replace old assets.
In the case of speculative stock buying and selling, this activity does not provide gain to the producer company (even if the price of the stock offered initially (issued and sold) goes up, but instead enriches the holder of the asset (stock). Of course, if the producer company decides to later issue new stock the company owners will receive more money per share of stock issued.
Speculators do not add to economic activity, at least primarily. Perhaps members of society will feel more optimistic with the stock shares (market) going up, and perhaps they will be looser with their savings to purchase products and services. Unless, however, the producer company has new cash to build products and extend services in demand, then speculation will not help. Eventually, the speculators might sell their stock or other asset and use some of that to purchase consumer items, but that is a tenuous trail to economic progress and again it does not assure the producer company having the cash to actually build more things.
Of course, if the money from these sources were sitting in the bank, the producer company could borrow money needed for new production.
Though millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments compared to the top 10 percent of capital owners.
Most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
Thus, as binary economist Louis Kelso asserted: “The problem with conventional financing techniques is that they address only the productive power of enterprise and the enhancement of the earning power of the rich minority. Sustaining or increasing the earning power of the majority of consumers who are dependent entirely upon the earnings of their labor, or upon welfare, is left to government or governmentally assisted redistribution of income and to chance.”
Unfortunately, pursuing economic democracy has been frustrated by the systemic concentration of economic power and exclusionary access to future capital credit to the advantage of the wealthiest Americans. The so-called 1 percent rulers of corporations have rigged the financial system to enable this already rich ownership class to systematically further enrich themselves as capital formation occurs and technological industrialization spreads throughout the world, leaving behind the 99 percent to depend on income redistribution through make work “full employment” policies, government boondoggles, excessive military build-up and dependence on arms production and sales, and social welfare programs due to the lack of an alternative to full employment and the growing economic helplessness and dependency. The unsatisfied needs and wants of society are not in that 1 percent or for that matter the 5 percent; those people are not the ones who are hurting.
Once the national economic policy bases policy decisions on two-factor binary economics, productive capital acquisition would take place through commercially insured capital credit, resulting in a quiet revolution in which economic plutocracy will transform to economic democracy.
What is needed is to implement the Capital Homestead Act.
Right now the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading, money would be created by loaning it directly to citizens via banks at near-zero interest to invest in FUTURE wealth-creating, income-generating (full dividend payout) productive capital assets formed by producer companies. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account to be invested in dividend-paying, asset-backed shares of corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
The Federal Reserve could play a more positive role, removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice
As an alternative that would result in financing to create real productive capital asset formation and grow the American economy, see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624