Why the Govt Can't Allow a Stock Market Decline

Why the Stock Market Won't Crash

I never imagined that the stock market's fate could be so intertwined with government finances, but as I delved into the data, I uncovered a system where preventing a major decline isn't just desirable—it's essential to avoid a fiscal catastrophe.

As I analyzed the data, it became clear that the stock market isn't just about investors making profits—it's the backbone of federal tax revenue. The top 1%, who own half of US equities, generate massive capital gains that drive a record tax haul, even as wages grow at a snail's pace compared to skyrocketing financial assets. This disparity means the government has a strong incentive to keep the market rising, widening wealth inequality while plugging a growing fiscal hole.

Looking at historical charts, like the S&P 500 since 1957, I saw an almost relentless upward trend, whether in regular or logarithmic form. When I compared the S&P 500 to the M2 money supply and gold, it was evident that stocks have outperformed both in recent years, especially as investors hedge against currency debasement. For instance, buying gold over stocks in the last few years would have been more profitable, underscoring how monetary expansion fuels market growth.

This pattern isn't accidental; it's tied to economic realities. The S&P 500 has grown about 8% annually on average, matching the post-2008 M2 money supply expansion, leaving real returns flat. Meanwhile, total debt has outpaced GDP and tax receipts since the early 1980s, leading to declining productivity per dollar of debt. I examined how wages have lagged far behind, with the average hourly wage growing even slower than total wages, making financial assets the key driver filling the gap in economic output.

Digging deeper, I found that capital gains as a share of GDP surged during bull markets, reaching record highs like 8.8% in 2021. This isn't just about stocks; it includes real estate, but the focus here is on equities. Over the past 50 years, the S&P 500 has tracked the expansion of the monetary base closely, while wages have grown at only about a quarter of that rate, exacerbating inequality.

To illustrate, I calculated that it now takes around 200 hours of average work to buy one S&P 500 share, up from about 20 hours decades ago. This shows how financial assets have pulled away from everyday earnings. In the real economy, measures like the velocity of money and wages as a share of GDP have declined since the late 1990s, with corporate profits and the S&P 500 stepping in to boost GDP.

The government's role is crucial here; as deficits worsen, policies encourage financial asset growth to generate more capital gains taxes. For example, the preferential tax rate on long-term capital gains benefits the wealthy disproportionately, reducing federal collections by about $345 billion annually. This setup creates a cycle where the top 1%, owning most equities, help fund the government, making major market declines politically and economically unfeasible.

While small corrections might occur, anything substantial could spike the deficit, pushing yields up and risking a fiscal spiral. As I pieced this together, it became obvious that the incentives align to protect the market, though reforms like indexing capital gains to inflation could address some imbalances without drastic changes.

Reflecting on this analysis, it's fascinating how interconnected economic policies and market behaviors are, shaping not just wealth distribution but the nation's fiscal health for years to come.

Key Takeaways

• The stock market drives federal revenue through capital gains, incentivizing government support to prevent crashes.

• Financial assets grow faster than wages and GDP, widening wealth inequality and filling fiscal gaps.

• Policies favor market stability, as declines could exacerbate deficits and trigger economic instability.