Sunday, June 3, 2007

Verbatim 0005 - The Stock Market


Read verbatim 0004 before you continue.

It’s important to realize that the stock market, like every else in the economy, displays the effects of inflation. In fact, it’s a particularly sensitive indicator of paper money in circulation because of its liquidity, its constantly changing price structures.

The stock market not only responds to inflation, it also benefits from it. It’s like the swimming pool industry. It’s an ideal investment receptacle for people who’ve been led to believe they have more money than they really do. In an inflationary cycle, many people who have no business investing think they have the funds to do so.

This pushes stock prices up faster than the general price rise. Other people, viewing the stock market from outside, see it as a way to beat the depreciation of the dollar. They withdraw their savings from banks and buy stocks instead.

The availability of margin credit adds to the number of people betting on higher stock prices. But margin credit isn’t the culprit of the stock market orgies. The villain is inflation. Without inflation, there wouldn’t be the feeling that higher prices are inevitable. People wouldn’t be so anxious to us margin if they thought there was a good chance the stock price might drop; for losses are greater if the falling stock is margined.

In addition, the paper money needed for margin loans wouldn’t be available without inflation.

The new paper money flowing into the stock market bids the prices of stocks well beyond the levels justified by any prosperity the companies involved are experiencing. So we see stocks selling 30 to 100 times their earning values.

At that point, the stock market moves by psychology rather than fundamentals. It’s no longer a question of what a particular company is likely to do in the future. The question is: what will other speculators think the stock of that company will do?

Chartists take over the market, looking for statistical trends, “break-out,” and other phenomena of mass psychology. The real fundamentals are ignored: supply and demand, company profits markets, management, etc.

But when the inflation ends, the stock market begins to drop – inevitably. It has to drop because there’s no longer enough paper money to support the higher price level.

All during 1929, people in the stock market fought to push the market to higher levels. They succeeded temporarily, despite the deflation beginning around hem. But the break had to come. By October, the point had been reached where it was literally impossible to support the old price levels; the paper money just didn’t exist any more.

The panic on October 29 wasn’t the cause of the depression, nor even the beginning of it. It was simply the irrefutable signal that there was a depression in progress – that the dream world ended. The price was about to be paid for years of tinkering with money supply.

All speculative orgies are the results of inflation. Neither stock booms nor land booms could be sustained without inflation. There just aren’t the resources available for people to buy-at-any-price unless inflation is pouring paper money into the economy. And the booms always collapse when the inflation ends.


Author : Harry Browne

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