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GameStop Reveals All that’s Wrong with the Economy’s Incentives


  • GameStop (+19.20%) episode reveals just how closely tied the fortunes of Americans are with the health of the stock market
  • Retirement incomes increasingly linked to the performance of the market are precarious, with the U.S. economy due for a shift from a focus on asset inflation, to economic wealth creation

While much has been made of the GameStop trading fiasco, regardless of whether one takes the view that flash mobs or retail investors stormed a rigged financial system, the episode reveals how broken the incentive mechanism in the markets currently is.

Since the deregulation drive of the 1980s, led by then-U.S. President Ronald Reagan, central bank intervention to smooth out the business cycle using monetary policy has become the norm.

The abandonment of the Bretton Woods exchange rate system (that ties the value of fiat currencies like the dollar, to gold) and the rise of shareholder capitalism have dramatically reshaped the U.S. economy from one where prosperity was based on secure employment and income growth, to one in which the focus was on ever-rising asset prices as a measure of economic health.

Case in point – the prospect of a short term US$1.9 trillion fiscal stimulus package out of Washington is pushing stocks to record highs, distorting the traditional role of markets, which is to reflect the creation of value and prospects.

And that has resulted in a perversion of U.S. pension funds and other retirement accounts, where a large proportion of personal consumption expenditure is derived from ever-increasing asset prices, with such growth difficult, should there be a major correction.

That is one reason why the GameStop debacle has unnerved people – it’s a reminder of just how dependent Americans have become on the markets, which can be very volatile.

The transformation of markets to become the key driver of the economy and benchmark indicator of economic health, puts more short-term pressure on companies which cut costs by outsourcing, automating, using less union labor and dumping defined benefit pensions for 401(k) plans, which puts the responsibility of growing retirement nest eggs squarely on the shoulders of individuals.

And that’s not good.

Because if an army of Redditors have the ability to move not just a single stock, but entire indices, that makes the fortunes of entire retirement portfolios, which are more than ever tied to the fortunes of the stock market, appear extremely precarious.

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© Copyright of Novum Global Consultancy Pte Ltd {2020, 2021}. All rights reserved.

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