The Stock Market, Gambling, and How the Government Got us Here
This past week has seen lots of eagerness and angst directed at Gamestop, hedge funds, Reddit, and Robinhood. There are plenty of explanations for what is happening and the various legalities (and illegalities). I’ll provide a link to Ben Shapiro’s summary which I found to be succinct and clear.(1) But what I want to cover is [1] this emerging idea that the stock market doesn’t improve economic prosperity, [2] that the stock market is just gambling, and [3] how the government got us into this situation.
[1]
In the traditional sense of investments and buying stocks, there are tangible economic gains to be made for both the companies and the investors. It’s the same reason I went to the bank to ask for a lot of money to buy a house, and the bank said “Okay.”
My house provides shelter, heat, air conditioning, a place to hang out with friends and makes my life better and more comfortable than before. The bank is similarly going to profit because it will recoup all the money it gave to me, plus a percentage (the interest) added on top. This was already a common practice in Biblical times (Matthew 25:27, Deuteronomy 23:19-20).
[2]
Now that’s what happens when things all go as planned. But there is a very real risk that I could lose my job or otherwise be unable to make on-time payments to the bank. This would mean I lose the house and it also means the bank doesn’t fully recoup its investment. This is why they foreclose and sell the house to make back as much as they can. And if this were to happen on a national scale, then you get the housing and banking crisis of 2007-8 and movies like “The Big Short.”
So there is risk on both sides of the transaction, and according to Merriam webster, that qualifies as gambling: the practice of risking money or other stakes in a game or bet.
So yes, we can call the stock market a form of gambling. But then every action in life has some risk associated with it: buying a house, buying a car, even commuting to work is risk with 1 in 4 fatal car wrecks occuring during rush hour (2).
But economics teaches us that there is also risk from inaction. The folks who owned Gamestop at $2 could withdraw their stocks and make a lot of money. 10-year-old Jaydyn Carr turned $60 into $3,200 (3). But there are others who chant “hold the line.” They could cash out, but they don’t. Their inaction is a risk, because while they are hoping the price will continue to climb, it could just drop to $20. That’s a gamble too.
[3]
Which brings me to my final point, why people bother with the stock market at all. Why not collect interest from the bank? The simple answer is the government. When I started writing this paragraph, the US National Debt was $27,855,778,581,902 by the time I finished about 10 minutes later the debt had increased by $26 Million to $27,855,804,516,128.(4) This debt affects each and every one of us because the Federal Reserve’s strategy to dealing with the debt has been to lower interest rates. This is the same mechanism as when I bought my house, except that the government and the Fed can arbitrarily give themselves a lower interest rate.
This might seem smart. It’s a way to borrow more for less. Unfortunately, when the Fed lowers interest rates to practically zero, the interest rates offered by the bank, similarly drop to zero.(5)
Remember how inaction can be a risk? Inflation of the US Dollar bounces between 1.5% and 2% per year. This requires a dedicated essay, but the easy explanation is that if you start out with $100 in the bank, and you have an inflation rate of 2%, then at the end of the year you would only have $98. So you’re losing money.
This is why people have turned to and accepted the higher risks of the stock market. Now there are other things people do to protect themselves like buying valuable things like gold, land, guns, bullets, even chunks of Aluminum.(6) But those also have their own unique risks. The newest, and most volatile, strategy is to buy Bitcoin.
This is why economics matters. When it comes to paying off the Federal Debt, politicians will continue to kick the can down the road, ignoring basic budgeting and math. These decisions will negatively affect our own budgets and the budgets of generations to come. Therefore, it is up to us to be prepared. In Egypt, Joseph used the years of plenty to prepare for the years of famine. For the sakes of our families and communities we should be similarly prepared for the years ahead.
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