If the Great American and Worldwide Economic Collapse doesn’t happen in the next few weeks, then it is just being put off for future date. The current economic “crisis” is not a random fluke, or a series of unfortunate events, or merely the fault of greedy and foolish CEOs on Wall Street. The whole stock market system, even in its better days, is a house of cards just waiting to crash under the weight of the massive selfish dreams that arguably all participants hoist upon it. Allow me to explain. First, some brief and basic background for those to whom the stock exchange is a big mystery.
We all know about loans and interest. Someone gives you a chunk of money up front for some need or desire that you have, and you gradually pay the amount back plus some additional percentage for the priviledge of having received the entire chunk at the time when you needed or wanted it. [In the Law of Moses, the Hebrews were forbidden from charging interest to their countrymen, although they were allowed to charge interest to foreigners (Deut 23:19-20). The main reason for the prohibition against charging interest appears to be God’s compassion for the poor amongst His people (Ex 22:25). I believe a principled application of this today is to view the interest charged on “luxury loans” (like mortgages on American-sized houses) as an acceptable practice; however, we as Christians should lend freely to those who are truly in need, expecting nothing in return (Luke 6:34-35), and should oppose interest and financial burdens that oppress the poor (Deut 24:14). But these issues are not our focus at the moment.]
Banks loan money to many people. Bonds are essentially the same thing in reverse. A bond is a kind of a loan funded by many people for an organization (like a company or even a government). You give money to the organization to support something it wants to do, perhaps expand business into a new area, and the organization either gradually, or at some fixed point in time (agreed to in advance) pays back your money plus interest. If everything goes well, everybody wins. The organization is able to use the money you and all of the other bond holders gave them to expand business and make even more money, and thus in essence, through the interest paid back you gain a share of the rewards.
Stocks can be thought of as bonds that don’t have a fixed pay back amount or pay back date. You purchase stock in a company and, generally, the more successful the company is, the more they pay you back (through what are called “dividends”). If the investment doesn’t turn out so successful, then the organization doesn’t pay you back as much. Instead of getting paid back a fixed percentage of how much you invested, you get paid back proportionate to how successful the new venture actually is. Makes sense, right? With stocks, you also essentially “own” a piece of the company; you get voting rights in decisions that are made. This is important for rich, big players in the stock market world, but in practice it is not very significant for the average guy.
So far so good. On an abstract level it sounds fine. I think stocks and bonds make a lot of sense in theory, and are not inherently immoral. Effectively you say, “Here, I believe in what you are trying to do. I’ll go in with you on the risk of the investment. If the idea works, we’ll share the benefits. If it doesn’t, we’ll share the losses.”
But now enter trading into the picture, and the reality of human nature starts to darken things dramatically. What happens when I buy a stock in a company, their performance is less than I hoped or expected, and thus my financial returns are disappointing? Well, in practice what happens is that you hope you can find someone who will buy that under-performing stock from you at a price which is higher than what you expect to get out of holding on to the stock yourself. Very quickly, the stock market becomes the stock exchange. Stocks are moving rapidly from one “investor” to the next. It is no longer a matter of, “I believe in this company, I’m going to invest in them and share the risk, share the profits and share the losses,” but rather it is entirely a game of, “I’m going to stick with this investment and get the most out of it as long as I expect things to go well, but when I start to think that things don’t look so good I’m going to dump it off on someone else.” (Hmmm, sounds remarkably like the American dating and marriage scene.)
“So, Zach, what is the problem?,” you ask. If I am tired of Susan, oops, I mean Stock A, and you are ready to give Stock A a try, then why shouldn’t I sell it to you? It is a mutal decision between consenting adults, right? I’m ready to sell Stock A, you are ready to buy it, so I sell it to you. Isn’t that how just how all markets in this world work? Well, not quite.
You see, if I go downtown to the farmers’ market, I find crates of apples and peaches. The farmers labored long and hard to tend their orchards, harvest the crops, and transport their produce to a location near my home. In the process the farmer also incurred many expenses. I give him money and he gives me fruit. It is a good trade. We are both happy and WILL CONTINUE to be happy about the trade with no regrets in the future. We both worked hard at our jobs in order to gain something useful (apples in his case, cash in mine). He has more apples than he needs, and not enough cash. I have more cash than I need, and not enough apples. We trade, and we both are the better for it.
With stock exchanges, at least one person in the chain is mathematically guaranteed to end up disappointed. There are positive numbers and there are negative numbers. If you end up getting more returns out of the stock than what you paid, you are happy. If you end up getting less than what you paid, you are sad. When the farmer brings his apples to the market, his is injecting added value into the system. In contrast, in the day-to-day busyness of the stock exchange, there are no goods or services being produced! It is a zero-sum game. [Some people will disagree with me on that, and technically they are right. However, in the reality of how things work, the system is close enough to a zero-sum game that speaking of it as such is a perfectly valid approximation.] The only way I can win is for someone else to lose. Put another way, if a stock purchase between you and me is “good” for me then that means it is “bad” for you, and vice versa. (Yes, exceptions to this rule can be imagined, but I stand by these statements as accurate representations of general trends and the reality of the way the system works, as opposed to theoretical abstractions.)
To put it yet another way, what you really hope for in the stock exchange is to be able to capitalize on stupid people. If you buy a stock from someone, you are hoping that they are making a mistake. You are hoping that the price is going to shoot up and you are going to get the benefit for yourself, while the previous owner looks on with a sullen face and deep regret.
So, no, the stock exchange is not like other ways of making money. When I work hard for my boss and he pays me wages, I don’t wish for his stupidity or his failure, nor he for mine. In fact, both of us are better off if neither of us is stupid and if both of us succeed. When I buy groceries at the store, it is not a matter of my gain in exchange for someone else’s loss, or vice versa. But the stock market, for all practical purposes, is a quest to profit through someone else’s misfortune or mistake.
But then, you may ask, if my interpretation of the stock exchange is correct, then what about the apparent mathematical-miracle we observe that most people gain on the stock market, and net profits for all participants seem to significantly exceed net losses? Here is an analogy. As with all analogies, it is not perfect; and I have taken some poetic liberties. But please just hear the main point. Say that a bunch of us are gathered together in a room, and we all have some cash in our wallets. I find a scrap of paper on the floor and have a bright idea. “This is a magic piece of paper,” I tell you, “I’ll sell it to you for $5.” Deal. You go to the next guy, “This is a magic piece of paper, I’ll sell it to you for $10.” Deal. You got back the $5 that you gave to me, and made $5 of your own. The next guy sells the magic piece of paper for $15, the next guy sells it for $20, or $22, or $30, or whatever. The point is, as the price keeps going up, everybody makes money! Hooray! (Sound like any spam emails you have received lately? Yep, in terms of mathematics and virture, the stock market system is no different from those schemes.) The problem is, the selling of the “magic” piece of paper at higher and higher prices can’t continue forever. Just like musical chairs, one person is always left holding the paper. You hope that you aren’t the last guy in the chain. At some point, someone is not going to be able to sell the paper for a higher price than what he paid for it. But the thing is, what does the guy do who paid $200 for the “magical” piece of paper? He’s going to say, “Well maybe I can sell it for $190 and at least recoup most of my losses.” The next guy comes to the same realization and sells it for $180. At some point, the “magical” piece of paper is old and worn at tattered and crumbles to pieces. The last guy left holding it simply loses the $70 that he paid for a piece of junk and vows to be more shrewd next time. In summary, one guys lost $70, several guys lost $10, and together they subsidised all the people who made $5 or $10 by passing the “magic” paper from one person to the next.
Taking this analogy into the realm of the real stock exchange: stock prices can’t go up forever. Every company, like every human being, has to die at some point. Market crashes happen. Massive organizations suddenly go under. Mathematically, every dollar and cent ever gained by any individual has to be matched by an equal dollar and cent lost by another individual. Perhaps the big winners and the big losers are separated by decades. Perhaps everyone can be a “winner” for one, or two, or three generations. But eventually everything has to net to zero. Whoever is left standing when the music stops foots the bill for everyone else who came before. In other words, those who are stock holders when the stock crashes INEVITABLY come are the ones who pay the bill for those who saw great gains in the previous decades. Perhaps the next cycle of accounting and balancing out is now upon us.
I have taken a moral (and secondarily, financial) stand against the stock exchange for several years now on the basis that in an essentially closed system, everything ultimately has to add up to zero. Some people have made light of my interpretation, and my simplistic mathematical model, of the stock exchange, but I hope that in light of recent events many people will see and understand this perspective and take it seriously. The way you make money through the stock exchange is either:
- By getting a good stock at a low price and thus essentially saying to the person who sold it to you, “Sorry buddy, you made a big mistake, didn’t you?,” or
- By helping to blow up an artificial economic bubble that eventually MUST burst — perhaps very soon, or perhaps in an upcoming generation.
An economy that rests on this kind of my-gain-for-someone-else’s-loss stock exchange is not a healthy economy. It is not godly by any stretch of the imagination, but even in terms of mere secular pragmatism and mathematics this kind of system can’t hold up forever. It is destined for failure. The best you can hope for in this kind of system is that the inevitable Great Economic Collapse doesn’t happen in your lifetime. Of course, in doing so you are hoping that it happens to your children or grandchildren instead.
I urge you, dear Christian friend, let us store up our investments safely and securely in heaven (Matt 6:19-22); then we will be free to live as those who reside in a kingdom that cannot be shaken (Heb 12:28). And if the current U.S. band-aid economic plan somehow manages to avert total economic collapse and keep the worm infested shell of the stock market running for another temporary period of time, I urge you to see the stock exchange as unloving way to relate to your neighbor. The problems run much deeper than regulatory reforms and executive salary caps can even begin to touch. To “succeed” financially based on someone else’s loss is to fail morally, even if you do so on a much smaller scale than the “bad guy” CEOs.