By John Reizner |
There is unsaid in our daily lives a social contract between all the players in our society. Individuals are able to live without unreasonable fear of harm because of this contract, unless one lives in an area where law and order has broken down.
This unseen force of confidence in our societal institutions perpetrates itself in our collective ordinary existences. The confidence that people have that society will not break down today into chaos allows them to believe that their persons, social, economic and spiritual freedoms will be protected from the actions of others in society or even from repressive actions by their own government. We have enacted laws to protect the innocent, and have institutional structures to protect our freedoms and to protect us from harm.
One can only look to the racial tension in communities such as Ferguson to see and understand citizens' mistrust of those who are supposed to uphold the law - to understand that the social contract that most of us enjoy does not extend to all citizens. This inequity threatens the fabric of society.
The strength of the American society and free economic system has been that persons coming from different cultures and countries can coexist peacefully while having ample opportunity to be upwardly mobile. This faith in our system of government and in our form of capitalism continues to draw immigrants from all over the globe to participate in our economy.
Over the 200 plus years of our country's history, we have survived recessions, depressions, World Wars, and even a Civil War, when the political and economic consensus were broken – and our democratic system has persisted. There is debate whether we are losing our civil liberties today because of the surveillance state imposed by the government due to the threat of terrorism.
I came of age during the period of the Vietnam War era, when American society was divided between the supporters of the war, and many young people, who opposed the war and exited from society by “dropping out” and joining the growing “hippie” counterculture. The confidence that many young people had in their government’s policies and its supporters was strained to say the least. Violent demonstrations against the war occurred regularly as well as occasional race riots. Some thought that the American system of peaceful co-existence between all of society’s players was threatened as fathers and sons opposed each other and mistrust between the establishment and young people ruled the day.
In 1966, the stock market had passed 1000; a level which would not be seen again for 16 years afterward. Inflation was beginning to brew as a result of high military spending necessary to sustain the war effort. Government had had a guns and butter policy – in other words, our society was rich enough to support a war and domestic spending – at the cost of the inflation racked 1970’s, when stock returns were quite poor and the Dow fell under 600 in mid-decade.
I was only thirteen and very impressionable when the movie “If”, directed by Lindsay Anderson, starring young Malcolm McDowell, premiered in London in 1968. A friend of the family escorted me to the box office for the movie, rated X in those days in New York City, and we sat down to watch the film, which was the telling of a repressive British private school. I don’t want to spoil the movie for you, (parental guidance strongly advised) but the social contract was broken in the movie between students and their elders – and results in a revolution at the end of the film. Of course, the film is called “If.” The contract, the confidence in their system, could not keep these British schoolboys, at least in the film, from uprooting the institutions with which they were surrounded.
The bond of confidence in our economic life, and specifically the level of confidence underlying levels in the stock market is crucial as movements in equities may precede or coincide with actual economic events such as recessions, banking or real estate crises.
Breaks in the market like the ones we have experienced recently stir up fears among investors that their financial welfare may be impaired if the decline in stocks turns into a rout. A potential breakdown in the stock market may precede a loss in confidence in the ability of our economic system to provide sustenance to the citizenry - as occurred after the 1929 crash – when there was great suffering - or in the aftermath of the 2008-9 financial crisis.
Fear causes many investors to lose confidence and a sense of security in their financial lives. They may act in a manner t contrary to their true economic interest; for example, selling stocks when they are at bargain levels. In that case, the investor loses “confidence” in the stock market as it falls, and does not believe that it will continue to be a good store of value and continue to appreciate over time – so he may sell his stocks while feeling fear in the belly. I write about the idea of not being led around by one’s emotions when investing in my article, Stock Market Investing and the Theory of Contrary Opinion here.
The exception to the rule of the viability of long term investment in the stock market is in the hands of our elected officials, who if they are not enlightened, may enact policies which cause the economy to fundamentally falter for an extended time, as in the 1930’s and 1970’s or in the present day experiment – or for the Federal Reserve to miscalculate and cause an ordinary recession to get deeper or to cause the economy to overheat. In my article, Hedge Funds, Derivatives, Debt, China and the Risk of Systemic Market Panic here, I wrote a bit of the systemic risks out there that preceded the economic and stock market breakdown that occurred in 2008-09.
So just as the social contract affirms the bonds holding our economic and political system together and permits its citizens the possibility of living full lives, the level of underlying confidence in our market system may be necessary to keep our stock market from unraveling completely. A loss of confidence in the economy, government or the stock market serves to threaten this bond with terrible consequences.
Note: This article is an update of a post that appeared on this website in 2007.