My husband is hoping that I can put my prodigious knowledge of the news to work by predicting movement in the stock market. I keep telling him that the fact that I know what’s happening in the world is entirely separate from my understanding what’s going to happen in the markets. For example, I know that Greece may give up the Euro (as may other smaller, economically sick countries), but I have no idea whether that will cause the Euro to self-destruct, or if it will become stronger with the deadwood gone. Knowing the facts doesn’t lead to economic understanding.
You can understand my dilemma.
There are some things I do know, though, one of which is that conventional wisdom is often proven wrong. A case in point is a recent New Yorker article talking about the fact that world politics have an effect on the market. (I would have thought that’s obvious, but it seems like a new idea to author James Surowiecki). Surowiecki is sanguine about the fact that governments intentionally manipulate the market, despite the fact that, as his lead example of Merkel and the Greek Euro shows, they often do so ineptly and damagingly.
Most of Surowiecki’s article simply states the obvious, but it also states the wrong, as when it says this (emphasis mine):
The economic downturn and the debt crisis have given us instead a world where governments are among the most important players in markets—injecting money into economies on a colossal scale and routinely propping up, or even nationalizing, troubled companies.
As a result, investors have a vast range of new things to worry about, like voter sentiment in Westphalia. They have to try to figure out whether policymakers will do things they shouldn’t, like slash spending during a downturn, and not do what they should, which is to intervene promptly when systemic crises appear.
In other words, Surowiecki is saying that the best way to prop up a falling market is through “stimulus” plans — that is, increasing, or at least maintaining, high government spending. That’s a Keynesian truism that’s guided liberals for decades — except that it’s wrong.
To the surprise of everyone in the Ivory Tower, actual real world data shows that, the more government spends, the more businesses retrench rather than joining the spending party. Business people understand what liberal policy wonks don’t: all that spending has to be paid for by taxes; all those taxes suck money out of the economy; and an economy with no money is a perilous business environment. The best way to keep a falling economy stable is to give money back to the people, not suck it further into the government’s maw.
I’m not a gambler by nature, and playing the stock market, as opposed to investing in it for the long haul, strikes me as the biggest gamble of them all — especially when the movers and thinkers aren’t moving or thinking very well.