July 18, 2024

Stocks Plunge, Inevitably

The Dow Jones lost 778 points – a record – and I personally lost about $8000 in paper/play money today after the House failed to approve the compromise banking bailout plan.  Thanks for nothing, guys.

Loren Steffy says that things may get really ugly now:

This long ago stopped being about mortgages, and it’s no longer a question of moral hazard. This is about the very foundation of commerce. How long can a typical business survive without access to credit?

That’s a good question, one to which I have no answer.  Nor does anyone else, I suspect.  As one of Loren’s commenters noted, the better off, better managed businesses won’t be adversely impacted.  Others will and closures and job cuts will follow quickly if credit truly dries up.

I don’t think that’s going to happen, though.  There’s money to be borrowed, though a demand-heavy market will require higher interest rates.  For some businesses, that in itself is a death sentence.

I’ve written several times about the “negative sustainability” of the U.S.’s economic situation.  Fundamentally, the value put on our assets isn’t based on reality.  Housing and stock prices are overblown, or they were until recently.  Some still are.  None of us wants to see their investments or home valuation decline, yet we can’t deny that it has to happen for the market to match reality.

That’s the real message behind the Bush administration’s panicky call for a trillion-dollar bailout of the banking industry:  the value of a substantial portion of the banks’ assets is a chimera.  Blink and it’s gone, like Enron, my $8K, and some people’s live savings.

Americans buy and sell as if their lives depend on it and increasing debt is the oil that keeps the machine running.  But what does this country actually produce that the rest of the world values?  Computer software and Hollywood movies, possibly; otherwise, less and less every year, even as we import vast amounts of energy and export I.O.U.’s to some of the worst people on Earth.

That’s not sustainable, period. 

Sustainability is safe, boring, and uninteresting.  It’s also the most important thing about economic growth.  It continues, it endures through good times and bad, it survives.  Why?  Because it’s internally consistent, it’s based on fundamentals, like providing value greater than or equal to the price of a good or service.

Sustainability is not dependent on the good graces of foreign oil exporters or on favorable credit terms from China; rather, it’s based on actual profits earned from production, not speculation, and a product that someone actually wants rather than one that sells because of flim-flam marketing.

Sustainability is a long-term strategy utterly unlike the stock price-driven scheming that currently dominates and directs the management of U.S. corporations. 

Perhaps best of all, sustainability has relatively little use for the financial ponzi schemes that have led us into our current predicament.

If a massive devaluation of overpriced stocks and homes is what it takes to make Americans realize that they have to build their lives on what’s going to sustain them through the inevitable ups and downs of the business cycle, perhaps this mess is not something we should avoid but rather what must be embraced lest now lest it destroy us completely later.


Marc is a software developer, writer, and part-time political know-it-all who currently resides in Texas in the good ol' U.S.A.

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