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Reality Catches Up with the Stock Market

Reality Catches Up with the Stock Market

Small Savers Pay Big Price

For Immediate Release: December 4, 2000

Contact: David Levy, 202-293-5380 ext. 208

With the NASDAQ now down close to 50 percent from its recent peak, the stock market appears to be moving towards more rational valuations. While the decline is likely to continue -- overall price to earnings ratios are still far above their previous post-war highs -- it is important to recognize some of the consequences of this downturn.

The reversal in the stock market is likely to lead to a significant slowdown, if not a recession, as consumption falls off in its wake. Investment will probably trail off as well, as many of the high tech firms that had depended on the stock market for capital now find this door closed to them. The large debt built up in recent years in both the household and corporate sectors will also seriously constrain spending in both sectors.

An economic downturn could cost millions of workers their jobs and create insecurity for tens of millions of other workers who fear losing their jobs. In addition, the plunge in the market will destroy much of the savings of many workers who may be near retirement. In recent years workers have increasingly been drawn into the stock market, and traditional defined benefit pension plans have been largely replaced by defined contribution plans. This means that the current market decline may substantially reduce the retirement income of millions of workers.

Few prominent figures in government, business, or economics felt it appropriate to warn workers about the impact of a market downturn. Instead, they focused public attention on the possibility of shortfalls in the Social Security trust fund projected for the distant future.

Dean Baker, the co-director of the Center for Economic and Policy Research (CEPR), is one of the few economists in the nation who did the analysis showing why a stock market decline was inevitable, and the likely consequences of a downturn. His recent papers include "Double Bubble: The Over-Valuation of the Stock Market and the Dollar" and "The Costs of the Stock Market Bubble."

 

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