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Tactical Economics 501: Inflation and the Stock Markets: Not what to look at to judge an economy [1]
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Date: 2025-04-13
501.01: What We Get Wrong
A big reason people are confused about economics is that they look at the wrong things, namely inflation and the stock markets.
Inflation is an effect, but not always of the same thing. It does not indicate whether the economy is doing well or poorly. A football analogy is passing yards. A big number can indicate your offense is moving the ball at will, or it can indicate you got so far behind, you had to pass on every down. (btw The statistic most correlated with W-L is the number of rushing attempts.)
Joe Biden lost his opportunity for a second term essentially because America was convinced that inflation is leprosy. The so-called “Bidenflation” was a talking point, a theme of propaganda, not a symptom of a sick economy. After the Covid disruption and price gouging, lingering inflation was caused by new demand bidding up prices, as unemployment dropped and new production lagged. Yes?
Q: But there was no investment. Between 2020 and 2024, investment was actually down.
A: I’m glad you brought this up. First, let’s look at the data. This is for private business investment.
So first, why are we all of a sudden talking about investment? Because investment generates worker incomes without generating consumer products, to put it as briefly as possible. Those incomes combine with incomes from consumer product workers and together comprise the demand for consumer products. This is the standard explanation for why inflation comes along with a growing economy, called by some a “hot” economy. It’s called demand pull inflation. Does everybody get that?
If an economy is composed of zero investment and all consumer product workers, there is no inflation, because the income generated is just enough to buy the product. If you have income but no product, as with investment, then it adds extra buying power without adding extra things to be purchased.
A look at your contention indicates that maybe investment was flat over the four-year period 2020-2024, but it came back strongly in the latter years and may well have been a stimulus to inflation.
Yes?
Q: What about government? Government workers produce no consumer product.
True, but at least in theory, their wages are paid by taxes, which withdraws an equal amount of spending power to that generated. Let’s leave that there. Just remember: demand pull inflation. Mr. B here says there was lower investment or at least it was flat. The graph shows this is true, sort of. Private investment tanked in 2020 because of Trump’s bungling the Covid pandemic response. But it rebounded strongly and by 2022 was above the pre-Covid level.
More to the point, however, is the fact that government can invest and did invest and additionally added spending power by direct payments to individuals. The latter is self-explanatory. It may not surprise you that government can invest. After all, what is a bridge or a tunnel or a roadway.
Of course, households can invest, too, primarily in housing. The following graph combines all private domestic investment.
Now I just grabbed what was easy for demonstration here, the units don’t match. You won’t get away with that in any paper you turn in. But for illustration, yes, investment burgeoned at the same time as inflation. We need to move on.
The point is that employment under Biden was going up, investment, infrastructure, corporate profits, going up. But inflation, because of he increase in Americans’ purchasing power was stuck above the comfort level, so the GOP convinced voters the economy must be bad. So wrong. So very wrong.
Let’s now take the inflation arriving courtesy of Trump’s tariffs. This is called cost-push inflation, as opposed to demand-pull. We had serious cost-push inflation in the 1970s, with the ballooning oil prices, compliments of OPEC and the Iran oil embargo. The tariffs and the increased prices are net subtractions from demand, which obviously could mitigate prices in the aggregate – inflation – so that the actual damage would be there without the top line number.
Q: You mean prices for shoes go up, but prices for groceries goes down?
Something like that. When you say it out loud it doesn’t sound very convincing, but we’ll see. Bottom line, inflation is not a good measure of whether the economy is working or working smoothly. The other thing that confuses people is the stock market.
Stocks have gone down considerably since Trump’s tariffs, but what that means is not that the economy is suddenly worse today. Wall Street will tell you that the tariffs suddenly made the future look less promising and that the markets are pricing in the future. I have a slightly different take.
Trump was no less corrupt and incompetent on March 30 than on April 4. It was no less evident. What changed, it seems, was the business community’s assessment. Specifically, Trump said he wanted tariffs, the business community said, no that’s too crazy and the markets will be a guardrail.
We have billionaires in his ear, he’ll never do that. C’mon, man. He produced a video prospectus for taking over Gaza and installing a strip of casinos. He still claims he won the 2020 election. The man is seriously damaged intellectually and morally. Yet Wall Street was ecstatic when he was elected, and blind, maybe purposely blind, to the obvious. Why? Anyone?
Q: Tax cuts.
That would be my first guess, too. What you see here is not an economic fundamental operating, you see the interests of a class dominating. The institution of the plutocracy is moving the market, nothing else. The tariffs were their notice that the plutocracy was not in charge, at least for a little while. What you also see is the herd behavior. Smug satisfaction while the whole Elon Musk coup happens, then panicked hysteria when their perceived bottom line is threatened.
It’s worth noting here that the stock market has nothing to do with investment, or is tangential to investment, at a minimum. Stocks are traded like baseball cards, traded. A net new dollar in stocks does not translate to a net new dollar in a physical investment, or even planning for one. Stocks and investment should not be confused. Stocks are ownership certificates for companies who do their real investment, probably, with debt financing.
The markets are very poor leading indicators. For example, the peak of the market in the Great Financial Crash, was months after the recession started. The best description was offered by John Maynard Keynes almost a hundred years ago. It was like a feature in the Sunday newspapers, where people were invited to pick the most beautiful among a gallery of photos of women. Keynes pointed out that the winner would be the one who best gauged the opinions of the other contestants. So it is not valuing the stock itself, it is gauging how everyone else will value the company and the value of its stock. This and the herd essential insights for the non-professional approaching the markets.
For the tactical economist, the thing to know is the gross valuation. Here is the Buffett Indicator:
The Buffett Indicator may indicate stocks are at an untenable high, or maybe they will stay up there. It also shows that an enormous amount of money is concentrated in stocks compared to earlier eras. Of total stock market wealth, 93% is owned by the top 10%. That is ridiculous. On the other hand, tactically speaking, if half the stock market disappeared, the losses would inordinately fall on those who could afford losses. The hysteria is real on Wall Street, I’m sure, but it is not concern for holders of the 401(k)s, it is for the oligarchs, whose paper wealth is enormous. In the event of a severe crash, we should remember this, and accept willingly the erasure of a big part of the disparity in wealth.
GOING FORWARD
The primary tactical economic lesson here is that there is a huge overhang of paper assets owned by the super-rich. It is a vulnerability for the class that is manipulating government to the detriment of the average American. The primary plan in a crash, should one occur, must be No More Bailouts!
Congress and Presidents since 2008, along with invaluable assistance from the Fed, have insulated the wealthy and made them wealthier while the rest of America struggled. It is the root of the reflexive populism on both sides, and a foundation of the grievance politics practiced by the Republican right. At the same time, without government help, there would be a lot less rule by the rich.
As to the effectiveness of bailouts, the experiment has failed, capped by the 2024 takeover of the Presidency by Big Money and, incidentally, their ownership of 93% of stocks.
Will the current downturn will develop into the kind of crisis that will have Corporate America applying for subsidies as well as tax cuts? Not clear at all. But if it does, the response must be different from Congress. Equity stakes for any help, nationalization of failed sectors, and simple market discipline for those who preach market discipline.
FYI, here’s the Fed’s balance sheet. Enough of this.
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