The American Decline II: Oiling the Cogs of the Stock Market

In the last essay we examined the growing inequality of wealth (defined as “net worth”) in America from the beginning of the Reagan Administration forward. We looked at the decline of manufacturing in this country in the last 25 years and the advantage the rich (the top 20% of the population) have over the poor (the bottom 40%).

This advantage comes from the fact that the money making of the rich, speculative market investment, can make you more money under absolutely any economic circumstances: all you need is shrewdness about how to invest. Jobs and wage levels, however, can only improve the lot of the poor when the jobs actually exist and the wages rise, in other words when the economy is both nominally and actually improving.

America is declining because, after 25 years of policy decisions by a largely Republican executive branch, we have reached a state where nominal improvement in the economy is not resulting in actual improvement in new jobs and rising wages. These essays examine why.

This time we will be looking at five charts: the poverty and recession chart we used last time, a chart of the stock market as reflected in the S&P 500 Large Cap Index, a chart of the rise and fall of oil prices, expressed in inflation adjusted 2004 dollars, a chart of the growing Federal deficit, and a comparative chart of oil production and consumption between America and four other countries.

For a brief explanation of why I have chosen the S&P 500 to represent stock prices you can look here. Another reason for this choice is that many Stock Market Index Funds--which are a simple way for middle-class investors to achieve a widely diversified stock portfolio--use the S&P 500 large cap as the index they target.

So what do we find? Not surprisingly, some of our recessions begin with a sharp fall in the price of stocks. How large a fall? From 1962 to 1982 a fall of at least 30+ points was a clear recession trigger: 36 points in 1969, 49 points in 1974, 37 points in 1981. The only exception was the recession of 1979, and we will examine why in a moment. Remember that 1979 was the date we gave last week for the clear separation of the fortunes of the American rich and the American poor.

After 1979 a very peculiar thing begins to happen: starting in 1981 the stock market takes off like a rocket, gaining a full 1424 points (!) between 1981 and its all time high in 2000. This was an unprecedented twenty year orgy of stock speculation. As a part of this process, something strange begins to happen, as well, to recessions: they are no longer reliably timed by sharp market falls of 30 points or greater.

A 112 point fall occurs in 1987 with no official recession following, a 67 point fall occurs in 1990 but in the middle of the recession rather than the beginning, and it takes a fall of a full 680 points to trigger the 2000 recession! This is by far the strongest evidence that the market growth from 1979 forward has been largely speculative and driven by the investment of the net worth of the rich rather than by the productive basis of the economy itself.

Something else also begins to happen. Before 1979, the valleys and peaks of poverty are very closely associated with the beginning and the end of recessions (1969-1971 & 1973-1975). From 1979 forward the highs and lows of poverty begin to loosen from the actual recessions themselves. Rising poverty now lasts for years into recoveries (1979-1980, 1991-1993, and 2001 to 2005 and still rising) while falling poverty is abruptly ended by stock market declines (1990 & 2000).

In other words, since the beginning of the Reagan Administration the relationship between poverty and the stock market has been almost totally reversed: the rich are making the greatest gains from sharply rising stocks early in the recovery when the poor are poorest, as opposed to all of us benefiting by the stock market rise. And the poor make the greatest gains immediately before the sensible rich bail out of the stock market and it falls.

In this country poverty is also now being driven by pure stock market speculation rather than real and productive economic gain and loss.

Why? Oil. And oil prices. And the policies of largely Republican Administrations toward oil prices.

From 1973 to 1980 the price of oil (in 2004 dollars) jumped from $17 to $94 a barrel, or about 575%! And in 1979 alone the price jumped from $42 to $94, or about 225%, the largest single jump ever. We spoke last week of the very important recession of 1979, the only one which both started and ended under a Democratic Administration. The cause and effect relationship between that recession and the insane jump in oil prices is as clear as anything gets in economics, and totally beyond control of the polices of any government.

This is, in fact, when America started to come apart. From 1980 to 1986, the price of oil fell almost as precipitously as it had risen from 1974. This period of steeply falling oil prices corresponds almost exactly with the first great bounce of stock speculation ending in the 112 point crash of 1987. During that same period the number of people in poverty rose by 10 million (the size of a major world city, like Tokyo, to keep that number in perspective).

After this, in 1991 following a $25 a barrel spike up, and immediately down, of oil prices, the second great speculative stock orgy began, with a further fall in prices in 1994 sending the market up at the fastest and longest clip in history, ending with the dot com crash in 2000, from which we have still not fully recovered. The 1987 to 1994 climb in the market actually saw the numbers in poverty increase by a further 7 million. So two major cities worth of poor people were added to America during the 12 years of rule by Ronald Reagan & George Bush I.

From 1994 to 2000, under Bill Clinton and a stalemate with a Republican Congress, steadily falling oil prices, combined with a high flying stock market, managed to produce some serious relief to the growth of the numbers in poverty: by 1999 we had at least worked our way back to where we were in 1988, if not to where we were before the ascension of Ronald Reagan.

But under George Bush II and a Republican Congress we have seen not only a precipitously falling stock market (of 680 points, or about 40% of the speculative excesses of 1981-2000) but also fast rising oil prices to the tune of a full $40 a barrel or an increase of 400%!

So I wouldn’t be looking for job numbers to increase any time soon or for the ranks of the poor to stop growing while the rich today are now well established in reinvesting in stocks to fuel the next big speculative extravaganza, driven by more government deficits.

Why have we gotten to the pass? Two reasons, both matters of Republican policy. First the insane budget deficits run by Reagan/Bush I and Bush II. In the twenty five years since Ronald Reagan assumed the Presidency, the national debt has grown from $1 trillion to $8 trillion dollars, 800% in nominal dollars not adjusted for inflation. In the same interval the stock market has risen 1000% in the same nominal dollars to the huge profit of the wealthiest 20% of this country. This is clearly cause and effect.

In the same 25 years poverty has bounced back and forth by about plus or minus 10 million people (one of those major cities, remember) as the oil prices have gone up and down. This is also cause and effect. We now stand as a country with 13 million more in poverty than the lowest number both in absolute terms, and in poverty rate, of 23 million people in 1979. And poverty is still rising while job numbers remain essentially flat, and barely able to absorb any totally new entrants into the job market.

The second policy decision which brought us to this awful economy is the failure of Reagan, Bush I, Clinton, and Bush II to heed the wake up call of the first 575% rise in the price of oil from 1973 to 1980. The big spike of 225% in 1979 forced the only serious cutback in American consumption—lasting until 1981. But no one has been minding the store on this matter since. And certainly no Republican politician of any consequence has seriously advocated conservation or cutting back consumption in any other way.

In the last 25 years the United Kingdom has kept its own consumption of oil flat despite the bonanza of its own oil production from the North Sea. China, Indonesia, and India are consuming oil at a faster rate than us, but China and Indonesia have used oil surpluses to industrialize and all three are now making most of the goods, and offering many of the services, that we used to, but now do no longer. If you look at the economic opportunity for future growth in all four—the U.K., China, Indonesia, and India--you will see what advantages both oil conservation and real manufacturing give them over us at present.

In the next essay we will look at the American middle class, at why their fate is tied up with our insatiable appetite for oil, and why they are likely to be by far the biggest losers in the American Decline.