Numbers Go Up
Everything is economics1, but is the economy everything? You wouldn't be faulted for saying so, people of all political leanings paste charts from the St. Louis FED on Twitter to dunk on each other, even those not plugged into the "economics" or "finance" know about the movements of the Dow, and the gospel of ETF's as the "true path" to retirement has spread far and wide. Against all this we are confronted with dueling ideas: that the stock market is a proxy for general wealth, and that most, if not all, of our problems in the West can be solved through economics.
The first point is well-tred territory, and I won't spend too much time on it. Needless to say, wealth within what normal people would call "the market" is largely concentrated outside the hands of most residents of the US, and the past few months has exposed a dangerous cleavage between Wall Street and Main Street2. Gallup reports that 55% of Americans self report as owning stock earlier this year, which, if you take at its face value, means that day to day market movements wouldn't affect half the population3. Asset management has ballooned in the past few years, especially as technology, developed and refined during the era heyday of high frequency trading, has propelled firms to grow ever larger4. Even Goldman Sachs, who once flew high on investment banking, has been forced to walk among the mortals of consumer banking. Who can forget the bulls and bears of /r/wallstreetbets, who themselves made a cottage industry5? In sum, the realities of the "market"6 have shifted dramatically since 2008. So why is popular discourse about economics still trapped in the early 2000's??
To understand that, we need to take another look at economics today. John Cochrane has a article in WSJ Stephanie Kelton's new book about modern monetary theory (MMT), "The Deficit Myth"7. Cochrane states:
By weight, however, most of the book is not about monetary theory. It’s rather a recitation of every perceived problem in America: the “good jobs deficit,” the “savings deficit,” the “health-care deficit,” the “infrastructure deficit,” the “democracy deficit” and—of course —the “climate deficit.” None of this is original or relevant. The desire to spend is not evidence of its feasibility.
While I largely disagree with Cochrane's assessment of MMT, this line stands out as particularly cogent. "Economy" / "economics" / "the market" are seen as a proxy for general wealth by the news, so most economic analysis will leave you with "Dow go up good; Dow go down bad". Unemployment numbers, inflation targets, S&P, Dow, etc are all common news items to discuss, assumed to be generic barometers of "the economy". We've spend so much time and effort creating measurements for this amorphous blob most people know as "the market", as if we were trying to understand the thought process of a particularly impatient toddler. As these instruments became more refined, people began to worship at the alter of Wall Street, projecting their hopes and dreams onto it. As Cochrane points out, even economic leftists aren't free of this, we're trapped in this never-ending cycle of solutionism in the economy. Economics is important, therefore the economy is important, therefore all things can be solved via the market.
Nowadays, most people see "the economy" in the same way they see "the cloud", a big, amorphous blob that they cannot control, have little influence, and are at the mercy of its whims. Yet as any programmer will tell you, the cloud sucks. It breaks8, or has brownouts9, and is in general rickety mess held up by a few players, with most of its inhabitants removed from the plumbing.
As the cloud has continued to encroach upon new territory, so has economics and finance. "Securitization", or the act of converting assets into other securities, has dramatically expanded in the consumer field 10. When we buy a mattress, we are offered the chance to use a 0% loan, quick and free11. When we scroll through Instagram, we are offered the chance to "invest" in a winery12. A dearth of apps allow you to "invest" by squirreling away a few bucks a month13. The implicit marriage of technology brings efficiency, and the whiff of efficiency brings economics. Is it any wonder then, that solutionism runs amok in both industries? Many software engineers believe all things can be accomplished through technology, just as many policy makers and ordinary people believe all things can be solved through a more clever redeployment of economics.
The bastard child of this marriage is ETF's. Both the cloud and economics traffic in abstractions, they reproduce and grow by layering abstractions upon abstractions, redefining old products and creating new jobs along the way. How many startups exist whose sole purpose is to be a mediocre spreadsheet? How many programmers deploy their work onto a cloud provider, blissfully unaware of the massive footprint cloud providers use? "Deploy your stuff here, and forget about all that hard stuff you had to do in the past" is the promise of cloud providers. "Buy me and forget about all the work you had to do to pick securities in the past" is the promise of ETF's.
Yet, as all programmers know, abstractions are inherently loss. They lose information, they're sometimes leaky, and don't always fit all. Why do we expect different from the economy? When oil futures hit negative earlier this year, newspapers went wild. Yet soybean futures have hit negative before, and oil is a commodity like any other. Programmers don't expect the cloud to work all the time, yet why does the public expect the "economy" to be right all the time? The notion that the market is always rational14 is absurd, and the sooner we start treating the economy as the half-broken machine that it is, the sooner we can abandon the idea that the economy can solve all problems.
This is obviously not true, given that consumers can own money market funds, bonds, FX, etc. Not to mention corporations issuing bonds and other securities directly impact an employed American.
https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-profane-greedy-traders-are-shaking-up-the-stock-market describes this, but I am personally bearish on the actual impact of these traders. Low volatility, mob-style training done on /r/wallstreetbets is very akin to a very slow, very dumb HFT algorithm.
Using "market" literally here, as in the plumbing that allows securities to be traded and speculated on.
Looking at you GCP.
Remember the great S3 outage of 2017?
Acorn, Stash, etc
markets will always remain irrational longer than you can remain solvent, blah, blah