In an interview with Richard Wolff ( -What's Behind The Market Meltdown), he said that the stock market has a crash every 4-7 years. His point was that inherently the market crashes, and it's just a natural state of the market to do so.
I've been bothered by this comment, and I think I know why. There seems to be a misunderstanding of how the stock market works. The implication seems to be that capitalism is unstable and crashes regularly.
I don't believe this is the case. I think that the stock market is doing what it was built to do - correct itself to reflect the actual state of the economy. It's a negative feedback loop (Negative and positive feedback loops) - one that naturally balances to reflect its actual state. This means a stock market crash is a necessary correction, not an abberant flaw in the system.
The stock market is healing itself - not punishing its users.
There is no direct cause-effect in the stock market, it's a large mass of people acting with it simultaneously in a producer-product (The producer-product relationship) model. Every single producer effects the product.
In the case of a market crash, the product is the crash. That means that there are a lot of moving actors (producers) that make the crash occur. Heavy manipulation of the interest rates and massive stimulus ( -What's Behind The Market Meltdown) is a producer that distorts the view of the economy. An distorted chart gives the incorrect information to the buyer/seller, so they're buying and selling with false information. Because they can only see the market through teh lens of the distorted chart, it's difficult to see the actual health of the market.
Eventually the systemic problems become visible, and the buyers and sellers no longer have confidence in the chart. They become confused ( -What's Behind The Market Meltdown) (price discovery) and look elsewhere for information and start to sell off until their confidence is restored. Once their confidence level and the price match, they start to buy/sell as usual, but at a much lower level. Stock market corrected after price discovery.
#systems #toolong #trading
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