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Kleinfeld: China Didn't Cause US Stock-Market Crash

Kleinfeld: China Didn't Cause US Stock-Market Crash

Sunday, 23 August 2015 04:59 PM Current | Bio | Archive

If we listen to the financial-television talking heads, internet gurus, and newspaper economists, you might think that China caused the U.S. stock-market crisis.

Yes, China’s officials devalued their currency. And, yes, stocks plunged. The numbers (as reported by Bloomberg News) tell the sad tale.
  • The Standard & Poor’s 500 Index sank 3.2 percent on Friday to cap a weekly loss of 5.8 percent, the worst daily and weekly declines in almost four years. The benchmark gauge is down 7.5 percent from its last record in May, after dropping out of a trading range that has supported it for most of the year.  The index ended the week down 4.3 percent for the year and sank below the 2,000 level for the first time since February.
  • The Dow industrials lost more than 1,000 points for the week to 16,459.75 after a 530-point, or 3.1 percent, drop on Friday.
  • The Nasdaq 100 Index slumped 4.3 percent to extend a two-day drop to almost 7 percent, its worst back-to- back decline since the financial crisis in 2008.
  • More than 10.5 billion shares traded hands in the U.S. today, the most since December, as the rout in stocks and the expiration of options boosted trading volume.

But just because two events happen coincidentally doesn’t mean they are related. And even if the two are related, it does not mean that one caused the other.

China’s currency antics didn’t cause stocks to suddenly lose value and plunge.

Investors sold off securities because they collectively realized these investments were not valuable enough to keep. It was better to cash out.

"Well then,” you ask, "Just who caused this overvaluation of the stock market?"

Answer? Our own government did that.

You know, those people in Washington, D.C., spending like they can endlessly print money, claiming that government can create jobs, build the middle class, strengthen the economy, and protect us from our never to be named enemies. The politicians feathering their own nests but like Napoleon the pig from George Orwell's book "Animal Farm."

They excuse their excessive appetite for greed and cronyism by telling us two things: First, they are making the personal sacrifice to stuff themselves (like pigs). Second, we need to be starved (of capital) for our own good.

What a fraud.

The government knows absolutely nothing about how the economy works except how to screw it up.

The poster child for economic incompetence must be the Federal Reserve.

So how do you figure that the government is to blame for the financial disaster we are so painfully experiencing?

The market crashes because suddenly vast numbers of people and trading algorithms concluded that they would be better off selling the stocks they held. The trigger — or breaking point — may well have been the Chinese currency devaluation. But that's not the underlying cause.

Stock holders believed in the illusion that the securities markets had great economic value. Statistical data were cited to prove the economy was in recovery and likely expanding. That, they were told, would keep stock market valuations edging up in line with all the data.

Unfortunately, reality came crashing in. Data can never trump actual investor behavior for long.

Mountains of cherry-picked data was spewed by the Federal Reserve, Wall Street, financial gurus, cable news talking heads, and other pundits to pump up the markets and convince investors to keep buying overvalued securities and financial services.

It also justified the government controlling the economy while dictating which favored campaign contributors will be winners and which non-payers will be the losers.

As long as investors kept buying into the whole economy is recovery and expanding scam, the pump would work.

But something shook investors out of their investment trance. Whatever the combination of complex events and occurrences that abruptly collided, the result was that investors changed their behavior.

What investors may have only viscerally understood was that the stocks they were holding were in companies that were as productive as they thought and therefore overpriced. It was time to sell and sell quickly.

Without companies being productive, data hype notwithstanding, the economy can't possibly be productive.

While investors may not have articulated the specifics, they realized that their share holdings were badly over overvalued.

The thing is, that the underlying economics are not particular difficult to understand.

The value of an economy only expands when there is productivity. Similarly, a company's value can only increase with productivity.

Productivity comes about with the application and allocation of capital. The mechanism of the free-market has worked best to properly allocate capital.

But in the United States, capital has been diverted because of decisions made by the Political Establishment of both parties to favor certain constituencies who provide votes or campaign contributions which can buy votes.

Instead of a free-market, our economy is government-driven and manipulated.

The Federal Reserve intentionally suppressed interest rates and wants to create inflation. The free-market would never have tolerated interest on capital being at 0.0 percent. Not for one second much less six and a half years.

The free-market understands that inflation is just another tax on the consumer and loss purchasing power.

There effectively has been no private capital investment into either long term assets (stuff lasting over 20 years) or everything else (stuff lasting under 20 years).

Productivity only comes from the capital investment in the private sector. Government is a cost and never creates productivity. The reality is quite the opposite.

When government takes a dollar from a taxpayer and pays a dollar to a bureaucrat there is no productivity. There is no multiplier effect. It is a dollar of capital denied to the private sector.

What have been the economic consequences of the government's capital heist from the private sector?

I can demonstrate the results by pointing out that the poverty rate has doubled, the number of people on food stamps has doubled, and the debt of the United State has doubled.

Most of what our own government has done and plans to do drain the economy.

Basically, whatever government officials “do” … they do badly.

Although the American economy has depth and breadth it is not sustainable without being replenished.

That can only happen when capital is not being diverted to be wasted by the government, but is allocated to productive uses by the free-market.

Only then will the American economy reliably expand.

Only then will investors see that stock and investments have potential to grow in valuation terms of real importance: purchasing power.

Our financial crisis and stock market decline is not caused by China’s yuan tactics.

The crash of the stock market was caused by our own government.

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If we listen to the financial-television talking heads, internet gurus, and newspaper economists, you might think that China caused the global stock-market crisis.
china, stock market, crash, american government
Sunday, 23 August 2015 04:59 PM
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