The stock market does not represent the economy. If the stock market DOES represent the economy, then monetary policy is too loose and the stock market will act as the indicator that a correction of that monetary policy is in place – by correcting. So it’s better to treat the stock market as a canary in a coal mine that senses extremes.
Think of the economy as an enormous school of fish, or flock of birds, that has incentives both to stay near one another, to follow others who have found opportunities, and to ‘defect’ (branch off) if they find counter-opportunities.
Bad monetary policy that is used to inflate employment, by artificial stimulation of demand,
The primary value of the stock market is providing an alternative store of value given that the government is constantly destroying the value of money through inflation.
The secondary value of the stock market is that because the financial sector must desperately seek returns in order to prevent the governments’ destruction of value, the money is reinvested in increasingly risky possibilities stimulating innovation and risk taking.
The third value is that some of these infinitely risky possibilities are what we call ‘startups’ that produce technological innovations that has been the chief contribution of american society to the world economy. And the possibility of going public and ‘winning the economic lottery’ by doing so, provides the lottery effect, that although few people win, many people ‘play’, and this generates economic opportunity.
Now, I can also list all the bad things. But I’ll leave that for another post.
How does this affect the average american? Quality of Life? Well, that’s a very … troublesome term. It’s like happiness. We can’t measure it, because it’s dependent upon the individual, not the polity. We can however measure standard of living, which means the resources available to the individuals prior to their mixture of good and bad decisions.
And the evidence speaks for itself.
There is a reason that americans have the stock market and produce technology. There is a reason that london holds the bond market, and produces financing. There is a reason that germany masters capital production. There is a reason that russia masters military production.
Those reasons are the differences in risk tolerance and the sensitivity to failure of each of the polities.