Musings on the Effects of the Stock Market's Precipitous Decline

The DOW Jones Industrial Average is, as I type this, hovering around 6,750. There are other things to talk about, including the sobering news about AIG and continuing bank failures and the struggles of the financial system... but let's think about this one issue for a minute from a couple of different angles. What does it mean that broad stock averages (and I mean the S&P 500 and Wilshire 5000 more than the DOW, really, but most people who are not brokers focus on the DOW, even though it is probably the worst of the averages as an indicator of stock market performance) are down roughly 60% from their highs less than a year and a half or so ago?

First, clearly, a lot of people have lost a tremendous amount of money. But not everyone lost the same amount-- to have the prices drop as they have, a great deal of selling has to have and did occur. So, some people cashed out earlier, and though there were some straight-out losses, it was not a zero-sum game. Where did that money go? Well, it's hard to say definitively, but based on market movements and such, a lot of it seems to have gone to precious metals and to (government) bonds. It doesn't take a PhD in Economics to know that the macro effect of over half of the investment in our public companies moving to metals which, last time I checked, sit in coffers and don't go out and hire people, make things, or offer services, is extremely bad. Funding the government isn't so bad, though, especially if the only way the government can spend money is through borrowing, which is certainly the case with the federal government of the U.S. these days. But it also is not as good a vehicle for economic growth, because it means that the public at large will have to service interest payments on huge sums for up to 30 years. Interest payments don't do much, though I suppose it funds the incomes of the people collecting them and thus would presumably stimulate the economy when they spent money-- which might have been okay in 1970 when over 90% of US bonds were held by US residents or the US itself andwould presumably spend money in the US, but isn't so good now, when roughly 40% of US bonds are held by foreign governments, and that number is likely to grow much higher as the public debt increases by about $3.5 trillion over the next 3 years. So, from a macro perspective, this is a body blow to the economy it seems to me.

Let's step away from the macro-economic viewpoint (which no one really understands anyway)for a minute here, though, and focus on some micro-economic effects of the stock market's raging decline. Here's one that cooks my own goose: if you started investing in 1996, then you have seen a 0% return on your money. 0%. Let me just type that number again (before it goes negative, because it probably will): 0%. I graduated from college in 1996. If you're like me, and started working in the late 1990s, and saved--okay, I could have saved a little more, but I tried--you haven't gotten anything out of it, basically. I should have bought a fancy car, gone on a couple of nice vacations, had a few more great meals, seems to me.

Another micro-economic impact: those poor employees who were incentivized to invest their 401ks in company stock have gotten slammed, especially those working for any bank anywhere or for AIG and other countless institutions.

Let's go back to the macro here quickly, because another bad effect of all this just occurred to me: what will be the impact of over a decade of lost return on social security? These people, including myself, who have done what they were "supposed to do"--not even talking about the people who have blown all their money or got into stupid credit card debt-- they are going to be, net and average, just poorer when they retire. Thus, they will be relying on social security MORE, not less. There's been talk about saving the liquidity of social security by lengthening the number of years it takes to qualify for it or reducing payments in some way-- we could be in a for a really sad episode in about 30 years, when a lot of old people will desperately be scrimping and saving and competing in the workplace long past the time when their parents and grandparents retired. All in all, we've stepped back. Our parents were better off; our grandparents were better off.

But maybe our kids will be okay. If they don't mind us oldsters around so much later on.