The inverse relationship between stock prices and economic health

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by defectivedisabled

Returns from what is assume are safe investments disappear in a low interest rate environment. It pushes everyone who wants a decent return on investment into risky assets like stocks. This pushes up stock prices to all time high after all time high because of all the money flowing in it. Giving the illusion of stocks are easy money.

Low interest rates meant banks can get money at a low cost and transfer the benefit to the work class. But it is not happening. Adding an economic recession into the mix and it makes investment in main street less attractive since all the small and medium business are going bust. This will led to banks being unwilling to lend because they perceive lending money to be risky.

The end result we see from this fall out is central banks going out of their way and handing out free cash to hedge funds and banks directly. This is what quantitative easing is. Handing out free cash hopping these people would invest and create job opportunities. But this instead, is making the problem much worse than it needs to be.

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In a healthy economy, these productive businesses will generate a profit. It is this profit that investors seek and they are willing to invest in the business for the cash flow. Many of these investments goes into essential businesses. These are the businesses that are required to keep people employed and produce the stuff the society needs in order to run properly. Without these businesses, the poor and the middle class would suffer greatly.

When there aren’t any good business to invest in, the stock market is the only alternative to get a return. This return is mostly through capital gains, a ponzi scheme like investment model that relies on new investors paying the previous one cashing out. It is happening all over the world, as the stock market has mostly recovered or at all time high.

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This is where the huge wealth inequality comes from. You can have a booming financial market and a real economy that is in the toilet. The worse the real economy becomes, the more money flows into financial assets. It is a self perpetuating cycle of doom that can happen for a long time until society eventually collapse due to extreme wealth inequality.

There is pretty much nothing can be done to save this corrupt system but to let it implode. Low interest rate, QE, fed buying stocks nothing will work because the sickness is the system.

 

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