After a election that feels more like a catastrophe, I try to understand why the financial markets are having such a strong rally.
I’m feeling heartbroken, as I’m sure so many millions of you are.
Regarding how the majority voted, I’m not willing to believe the worst. More likely it was economic concerns, which still feels a little offensive. My current take is that the majority said, “Forget about women’s reproductive rights or the rule of law…have you seen the price of eggs!?”
Never mind that the current administration doesn’t have the ability to reduce the price of eggs, and prices across the board will most likely skyrocket.
I think The Onion gets it right with its most recent headline: “America Defeats America”.
That said, one of the most confounding aspects of this catastrophe for American lives has been what the markets have done recently. Here’s a snapshot of the S&P 500 from right around Election Day:
That’s terrifying enough. But the same thing happened in 2016:
Why in the world would markets react positively to something that’s obviously going to be bad for business?
I have some theories.
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Economic morality
Let’s acknowledge that by default the capitalistic system we have is inherently amoral. It cares not at all for any externalities, such as climate change.
Take mining, or “extracting” as it’s more euphemistically known. Mining leads to terrible damage, from air pollution to chemical runoff, causing widespread illness for many living things around it, human or otherwise.
And yet, there is nothing in the business, short of government regulation, to factor this in. All the business sees is all the revenue from all that was extracted. If the Earth suffers, that doesn’t affect the bottom line.
This is, of course, one of the important benefits of government regulation, as it helps to support a livable Earth, something capitalism doesn’t do a good job of.
And you could argue that this is one of the reasons for the markets’ recent froth. With a government not only opposed to most regulation (women’s bodies aside), but also fundamentally incoherent and incompetent, that just means that companies can do whatever they want in order to make more money. Happy days are here again.
GDP is useless
Another way to show how markets don’t care about anything but their own enrichment is by thinking about GDP, or Gross Domestic Product.
Gross Domestic Product is defined as “the monetary value of final goods and services“. You hear it in sayings like how “California would be the 5th largest economy, based on its GDP, if it were not part of the U.S.”.
But it’s also kind of useless as a true measurement of anything. Bill Bryson, the writer, went into this in detail in his 1998 book, “I’m A Stranger Here Myself”:
“Any kind of economic activity adds to the gross domestic product. It doesn’t matter if it’s a good activity or a bad one…In fact, bad activities often generate more GDP than good activities…[For GDP, environmental catastrophe] is gain, not loss. So too is over-fishing of lakes and seas. So too is deforestation. In short, the more recklessly we use up natural resources, the more the GDP glows.”
“As the economist Herman Daly once put it: ‘The current national accounting system treats the earth as a business in liquidation.'”
In short, our economy is biased to build wealth even as it destroys, and destruction is often very good for business.
America defeats America
I’m not saying that we should celebrate the opposite—when markets tank—only that we need to keep in mind who and what is doing the celebrating here.
Apart from the uncertainty removed, the celebration is based mostly on economic principles that champion short-term growth-at-all-cost over long-term, sustainable living.
And this short-term euphoria is, of course, short-term. Should our incoming government decide to follow through on many of its top-line campaign promises, such as the mass deportation of millions of people, what would happen? We could then expect to see a massive rise in costs, disruptions, and chaos, which would certainly lead to a drop in growth.
None of this is particularly comforting. But if you pay any attention to the markets and wonder why they are celebrating what to you feels like a catastrophe, you can at least understand the reasons why, and not take it so personally. It’s not much, but it’s something.
