The stock market reflects the economy, it does not cause it

Michael Greiner
6 min readDec 16, 2018
Photo by Markus Spiske on Unsplash

It’s the money supply, stupid

Prominent economist Robert Samuelson once quipped that “the stock market has forecast nine of the last five recessions.” I love this quote because it elucidates something economists understand but is poorly understood outside academic circles: the stock market is not the economy.

As a society, we put too much stock (no pun intended) in the various fluctuations of the investment markets. The most recent example of this is an article in The New York Times whose headline screamed “Investors Have Nowhere to Hide as Stocks, Bonds and Commodities All Tumble.” Again, the question is raised whether fluctuations in the financial markets will cause a recession. But in reality, markets don’t cause recessions.

Take the classic example of the Great Depression. My students, and my wife for that matter, were convinced that the depression was set off by the stock market crash in October 29, 1929. In reality, when you look at the financial indicators, the United States was already in full recession by the summer of 1929. The stock market crash simply reflected that fact, and it did little to make things worse. What did make things worse was a series of bank failures starting in November 1930 that brought the nation’s financial system to the brink of collapse.

This recession started as part of the regular business cycle, something that was inevitable back in this time in which money was based upon a gold standard. Where now we have a fiat currency, where the value of our dollar is based upon the overall economic power of the United States, back then each dollar was backed by a certain amount of gold the nation had in its reserves. The benefit of this policy is that the value of the dollar fluctuated very little. The disadvantages, however, were many. For example, since the value of the dollar was based upon the price of gold rather than the strength of our economy, the dollar could be strong while the economy was in crisis, or vice versa. Also, the fact that the supply of money was relatively fixed, the economy would go up and down like a yo-yo. The good times were almost evenly balanced by times of recession. Long periods of growth with short periods of recession, like our economy experiences now, were impossible…

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Michael Greiner

Mike is an Assistant Professor of Management for Legal and Ethical Studies at Oakland U. Mike combines his scholarship with practical experience in politics.