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