Thoughts building on “Market Legitimization” by O.G. Rose.
An Unrealistic Wall Street Means An Invisibly Inefficient Main Street
Where the money flows, so prices change, and the economy responds accordingly
Another term for “Stock Market” is “Capital Markets,” which should remind us that a point of Wall Street is the allocation and reallocation of resources and capital for the real economy. If Wall Street loses its connection with Main Street — if stocks basically have nothing to do with the real economy — there will be costly inefficiencies.
Though I’m personally fond and nostalgic of the company, Gamestop could be used as an example: as of March 30th, 2021, the stock is currently trading around $150 a share. Perhaps Gamestop is worth $30 a share, and no doubt the company was unfairly shorted after Covid, but is Gamestop really worth triple digits? If not, this is an example where a business is receiving capital and resources in an inefficient manner, which is to say an old business is being propped up, possibly at the expense of new enterprises. This is an inefficiency.
If most of Wall Street is now decoupled from the real economy, our economy is becoming inefficient. Problematically though, the ways the real economy are inefficient due to a “unrealistic” stock market are going to be invisible to average people. We can’t see the businesses that would have started if capital was more efficiently allocated; we can’t see where resources would have been distributed to if stock prices reflected earnings; and so on. We never occupy alternative dimensions.
The US government is spending a lot of money, and debts are sky-rocking. However, if these debts stimulate productivity, then the debts will turn out to be investments and pay for themselves. Debt isn’t inherently bad: it depends on if productivity arises to back it, productivity which perhaps would have never arisen without the debts.
Unfortunately, if debts are increased in a manner that ends up mostly driving up Wall Street and making the stock market the most expensive it’s ever been in history — as of 4.25.2021, check the Buffet Indicator — then there is a good chance that increased debts are contributing to an inefficient Wall Street, which means the efficiency of Main Street is (invisibly) falling. If Main Street is less efficient, then Main Street is less productive, which means the likelihood we will be able to back our debt is lessening. Hence, it is possible debt is being accumulating that is lowering the productivity necessary for transforming that very debt into investment.
A risk of government spending is that it causes inflation. If debt however generates productivity, then inflation will be well-managed. Generally, we can say inflation rises when money is created that it is not backed by productivity, so if money creation increases productivity, inflation shouldn’t be a problem. Please note that in this way a mere rise in prices doesn’t necessarily mean inflation is happening: we have to be more nuanced. Unfortunately, if the government is creasing money that ends up lowering the efficiency of Wall Street (and Main Street by extension), then government debt is decreasing the productivity that can keep government debt from becoming inflationary. It’s like a snake eating its own tail.
Does government spending have to reduce market efficiency? No, but the point here is that it can do so, and a reason this matters is because the efficiency of Wall Street and the efficiency of Main Street are linked. If “market legitimacy” is in decline today due to a separation between Wall Street and Main Street (as discussed elsewhere by O.G. Rose), this is likely accompanied by a decline of overall market efficiency. This only worsens the “legitimation crisis,” for if Wall Street is getting richer while getting less efficient and becoming less helpful for Main Street, this only furthers the sentiment that Wall Street is a casino for rich people. Public outcry could begin to roar, which could hurt Wall Street in the name of Main Street, and yet paradoxically Wall Street is something that Main Street needs.
Sometimes, the relationship between Main Street and Wall Street feels like an example of “mutually assured destruction,” but only Wall Street has the time to use the resulting leverage in its favor. Main Street may have started to notice.
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