No one buys goods or services with money, nor does anyone save or invest “money.” Counterintuitive as the latter sounds, it’s a basic truth. Sadly, it’s one that few economists, politicians or journalists (if any) grasp.
When we buy goods or services, we’re only able to insofar as we produce goods and services first. We go to work for money, but what we’re really doing is working for all that we don’t have. Work is an expression of a desire to “import” goods and services from someone, somewhere.
But as is well known, some are much more productive than others. Their work, frequently as a consequence of years of painstaking effort, rates more in the way of dollars, euros, yen and other currencies in exchange. The highly productive frequently save what they have left over after having purchased their daily needs and wants.
Such is the beauty of money. An agreement about value among producers, money is a claim on goods and services throughout time. Since we earn money, we don’t have to buy everything at once ahead of hoarding.
When we earn “money” in return for our work, our capacity to buy things is permanent so long as the currency holds its value in the estimation of other producers. If so, as in if the currency is viewed as credible as a measure of exchangeable value over time, we can delay exchanging the money we earn for other goods and services for months, years, decades, and even centuries.
Exciting about the act of not spending is that savers can shift their resource access to others in return for greater resource access in the future. While economists bemoan “savings" as a sign of a lack of demand, the actual truth is that savings amount to a shift of consumption. Borrowers whose work perhaps doesn’t rate copious dollars in the present, but whose work is expected to rate abundant dollars in the future, pay the productive in the present for the right to some of their production. Bankers and financiers don’t so much move money around as they shift consumptive ability from savers to near-term consumers.
Of course some want to make loans to businesses eager to expand. There’s a reward for doing this. Since businesses eager to expand sometimes have low odds of success, they’re willing to pay savers even more for access to the resources that their dollar-denominated savings represent.
And then there are some businesses that don’t rate borrowing at low rates of interest at all, which means they hand over to savers equity in their commercial concept. In return for access to dollars exchangeable for smartphones, 3D printers, desks, chairs, WiFi access, office space, and workers, investors attain shares in companies.
It’s all a reminder of a basic truth forgotten by the pundit class, that businesses large and small are always and everywhere a consequence of abstinence. Of unspent wealth. If all we did was consume, progress would stop. Thank goodness for the rich people who, precisely because their productivity well outstretches their wants and needs, can fund progress with their savings.
All of which brings us to Matt Phillips’s latest column for the New York Times. Business journalists yearn to create the perception that the stock market is some kind of “other” concept separated from reality. As Phillips puts it, since the U.S. “is on the brink of the worst economic collapse since the Hoover administration,” the “stock market looks increasingly divorced from economic reality.” To support his point, Phillips found “market analyst” Joachin Klement to bolster his contention. Better yet for Phillips, Klement provided him with the trite, and rather empty quip that business journalists endlessly yearn for: “Wall Street has very little to do with Main Street.” Don’t you get it? Wall Street is heartless, well-dressed rich people moving money around. Main Street is noble. It’s the common man…..Gag.
Oh well, even Phillips had to acknowledge the basic truth that “markets tend to be forward looking.” This is important. Too bad Phillips didn’t spend more time on it, but when you’re demonizing finance and markets, why spend time informing? Needless to say, markets never price in the present. They’re only a barometer of how investors see the future, and since the lockdowns can’t last forever, investors are pricing this truth. When Americans are free to produce, their capacity for wealth creation is immense. Stock markets aren’t divorced from reality as Phillips sneeringly asserts as much as investors are, at least for now, optimistic about the ability of American businesses to eventually prosper in the aftermath of a hideous imposition of command and control.
Naturally Phillips didn’t spend any time on the message of markets. He had to make the absurd argument that a healthy stock market means little for the common man. He cites a Fed study revealing that – gasp – “the wealthiest top 10 percent of American households own about 84 percent of the value of all household stock ownership.” Contextual reporting is plainly not Phillips’s strong suit; that, or he doesn’t care about context in pursuit of making the rich look bad. Or he just doesn’t get it.
The good news is that Phillips unwittingly revealed why there’s no job creation and no progress without the rich. For one, that they own the vast majority of stock-market wealth is a blinding glimpse of the obvious. They’re rich, hence they have money left over after meeting their personal consumptive needs to put to work.
After which it should be said that the rich, when they invest, aren’t moving “money” around to some “other” entity; rather they’re moving resources to businesses eager to meet the needs of an increasingly acquisitive Main Street. As Phillips notes, much of the stock market’s valuation is a consequence of Apple, Alphabet, Facebook, Microsoft and Amazon. Last yours truly checked, those businesses didn’t attain nosebleed valuations because they’re not meeting the needs of Main Street. And when it's remembered that Amazon reached 300,000 employees faster than any public company in history, it's apparent that more than a few public companies employ Main Street.
In short, Wall Street serves a crucial function whereby it directs the savings of the productive to new and existing companies on the way to better products, services and employment for everyone else. To pretend then, as Phillips does, that “Markets Are Proving Detachment Between Wall and Main Street,” amounts to willful ignorance on the part of the reporter.
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at firstname.lastname@example.org.