Paul Krugman: "What's good for the Dow isn't good for America"

The stock market's gains, he argued, paradoxically "reflect economic weaknesses, not strengths"

Published July 15, 2016 12:16PM (EDT)

 (AP/Lai Seng Sin)
(AP/Lai Seng Sin)

In his Friday New York Times column, Paul Krugman argued the stock market's gains paradoxically "reflect economic weaknesses, not strengths."

This paradox exists, he claimed, because there are "three big points of slippage between stock prices and the success of the economy in general."

The first, and arguably most significant, is that stock prices reflect corporate profits, not personal incomes. The second is that they reflect little more than the availability of investments, and the third is simply that there is very little relation anymore between stock prices and actual investment.

The rise in the stock market under Obama, then, occurred in part because

these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power — brand position, the advantages of an established network, or good old-fashioned monopoly. And companies making profits from such power can simultaneously have high stock prices and little reason to spend.

Consider the fact that the three most valuable companies in America are Apple, Google and Microsoft. None of the three spends large sums on bricks and mortar. In fact, all three are sitting on huge reserves of cash. When interest rates go down, they don’t have much incentive to spend more on expanding their businesses; they just keep raking in earnings, and the public becomes willing to pay more for a piece of those earnings...

Read the rest at The New York Times...

By Scott Eric Kaufman

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Bull Markets Business Paul Krugman The Economy