Stocks. Yawn.

While we’re sliding into the financial sewer here in the Commonwealth, it’s party time on Wall Street. The Dow Jones Industrial Average is catching its breath after sprinting to an all-time high of 9,374.27 on Monday (New York time).

The Big Question is when (okay, “if “) the Dow will hit the 10,000 mark. Why is 10,000 so important? Because it’s a big, round number. If you can’t see the logic in that, well…I’m with you. But since we’re going to be stuck with this 10,000 (it’s biiiiig, and it’s rooouuund) talk for a while, we might as well make our peace with it.

About one-third (small, and not round) of my email from readers asks me about the stock market. As weird as it sounds, I don’t really follow it. I am, however, honest enough to admit that I’ve got no idea where it’s headed. Anyone who could predict the market with accuracy would become a billionaire — it would be a legal license to print money. So enough of all that prediction nonsense. It bores me. Yawn.

On the economic side of things, though, some broad points boil to the surface. Take, for example, the fact that tax law in the United States encourages folks to put money into the market, via IRAs (Individual Retirement Accounts), 401(k)s (a fancy name for another kind of retirement account), and such. These gimmicks offer a tax break for those who put
their money in these accounts. Where does a lot of that money go? Into the stock market, of course. The important point here is that more money goes into the market than would have gone in under a free-market allocation of capital. Why? Because of the tax angle. The government essentially pays you to invest, or, alternatively, penalizes you for not investing. Either way you look at it, you’ve got a market distortion caused by government policy.

Market distortions caused by government policy are, of course, the notorious reason for the downfall in Asia’s economic fortunes. While they’re worrying in Tokyo, they’re whooping it up in New York. Indeed, the Japanese are suffering from a financial hangover while the Americans are drunk with glee. Problem is, they’re drinking from the same economic cup (known as “Market Distortions. 200 Proof.”)

Americans are notoriously bad at saving money, yet these juicy stock market prices make Mr. and Mrs. average look pretty darned rich. But that wealth is “paper” wealth — it’s just tied to the price of stocks which may, of course, go down. A lot of these people don’t really have a financial safety net; they’re playing the market and essentially betting the house on it. That, to my mind, has an air of unhealthy speculation about it.

This “paper wealth” effect induces consumers to spend more money, because they’re getting “richer.” The increased spending, of course, is good for businesses, and, logically enough, good for stock prices…which means more paper wealth, more spending, and happy times.

I don’t want to rain on the parade. Let the good times roll, that’s what I say. But if fortunes start to roll in the other direction, they might find that the highway to Hell is paved with government distortion of financial markets.