I'm not an economics expert, but here is a link to a great article written by a couple of professors who are:
THE STOCK MARKET
The article is entitled "The Market is Shorting Obama's Stimulus". The Stock Market is a public forum for buying and selling shares in a corporation. When a private company makes the decision to "go public", what they are doing, in essence, is saying "We don't have enough money as is to pursue our plans to grow our business. We need to raise more money." Let's say that the company needs to raise $50 million. They decide to sell 10 million shares at $5 each to raise the money.
We, as investors, say "We will buy shares in your company and, in return, when you make more money, you will pay us a share of the profits ('dividends')." I buy 100 shares in the company for $500, and I become a part-owner in the company. When the company takes that $50 million and generates a profit and they decide to pay a $0.50 dividend on each share, I make a $50 that year on my investment.
SUPPLY & DEMAND
That is the primary stock market. Over the years, a secondary market has evolved. The most basic law of economics is "Supply & Demand". As some stocks became consistent money-makers for investors, more and more people wanted to buy those stocks. (In other words, there was an increased "demand" for shares in the company.) But the number of shares was limited to the original 1 million. (In other words, the "supply" of shares was fixed.)
What happens when demand is greater than supply? We see the result every Christmas with the hot items. Whether it's the Tickle-Me Elmo or the Nintendo Wii, the result is the same. People are willing to pay $350 for a $250 Nintendo Wii system.
(The opposite is also true: If supply is greater than demand, than sellers have to reduce the price in order to give incentive for people to buy, like exactly what is happening in the auto market right now.)
So investors were willing to pay me $6 for the $5 share, because they anticipate that they will end up making more money in the end.
MAKING A PROFIT
This secondary market created another phenomenon. Investors started seeing the values of stocks increase because of the increased demand, and they anticipated that the stocks would continue to increase. So they would buy the $5 for $6, not because they wanted to earn the dividends, but because they figured that stock would soon go to $7, and they could sell the stock at a $1 profit on their investment.
Many of the stocks in the stock market today don't even pay dividends; investors today mainly buy stocks because they anticipate that the value of the stock will increase.
THE SHORT SELL
All of this background is to define what is meant in the article by the market "shorting" Obama's Stimulus plan. The idea of a short sell is a method to make money when you anticipate that the value of a stock is going to drop.
As an example, six months ago, you could have made a deal to sell gas to a person at $3.95/gallon because that's what gas cost at the time. But if the person didn't come to collect their gas until today, you could buy the gas you're selling to them at $1.65/gallon, which means you would make $2.30/gallon profit.
Investors in the stock market who anticipate a stock is going to go down in value "sell" stocks they don't actually own at current prices. Then when it comes time for them to actually buy the stocks, if the price has gone down, they can make a profit. (If, by chance, the price has gone up, then they lose money on the transaction, just like as if gas had gone from $3.95 to $4.95 -- I would lose $1/gallon on the transaction.)
THE MARKET AS A FUTURE INDICATOR OF ECONOMIC PERFORMANCE
Because investors spend a large percentage of their time studying the companies and their forecasts and earnings reports and the market, the Stock Market is generally a good indicator of what is going to happen to economic growth in the future. When the stock market is up, economic growth is positive; when the stock market is down, the future doesn't look good for the economy.
Investors are selling (and short selling) stocks right now. What does that mean they anticipate is going to happen in the market in the near future?
The Dow Jones Industrial Average is a group of stocks from a variety of industries that are averaged to give investors some sort of indication on how the stock market as a whole is performing. Here is how the Dow Jones has reacted to the attempts of the government to "fix" the economy:
- 10/04/2008 - Mortgage Bailout Passes: Dow Drops 508 points
- 11/05/2008 - Obama Elected: Dow Drops 444 points
- 01/20/2008 - Obama Sworn in as President: Dow Drops 332 points
- 02/13/2008 - House and Senate Pass Stimulus: Dow Drops 298 points
- 02/18/2008 - Obama Signs Stimulus: Dow Drops 90 points
- 02/19/2008 - Obama Unveils Mortgage Plan: Dow Drops 100 points
I'm sensing a pattern here...
To give some perspective, let's say that my personal finances were looking bad. What would be the solution? If I was starting to miss payments and it was looking like I might lose everything, which would be the proper approach:
A) Mortgage my house, cars, television and everything I could think of to get more money so I could have cash on hand to make all of my payments, and then start building an addition on to my house.
B) Cut back spending, sell my home and cars if needed, and put more time and money into education so that I can get a raise at work.
Hmmmm... This is a tough one.
Does President Obama not recognize this? Of course he does! He's a smart man. He graduated with a Juris Doctorate from the best and most rigorous universities in the world: Harvard University. You have to be extremely smart to get a degree from Harvard! (Unless you earned an MBA from Harvard and your name is George W. Bush, that is... Then you're stupid and must have cheated.)
So why is President Obama and the Democratic congress pursuing plans that are making matters worse? There has to be an ulterior motive. The answer is that President Obama is a smart man. He sees this as a great opportunity to infuse his ideology into the government and further his agenda at a time where we "can't afford to spend time" debating whether it is good for our country or not. He is spreading fear far and wide so that we will make rash decisions.
HOPE AND CHANGE
Hope is not lost. Governor Bobby Jindal and other Republican governors who have said that they will not accept stimulus funds (although the Dems were clever enough to include a clause that forces them to) show us that there are some true conservatives out there.
I have had the thought cross my mind time and time again about how things would have been different if Mitt Romney had been able to get momentum a little bit earlier and had been the Republican nominee. Romney is a true conservative who understands how money works and has a proven track record in business. Here is a snippet from Wikipedia about Romney and the 2002 Olympics:
"Romney served as president and CEO of the 2002 Olympic Winter Games held in Salt Lake City. In 1999, before Romney was hired, the event was running $379 million short of its revenue benchmarks. Plans were being made to scale back the games in order to compensate for the fiscal crisis. The Games were also damaged by allegations of bribery involving top officials, including then Salt Lake Olympic Committee (SLOC) President and CEO Frank Joklik. Joklik and SLOC vice president Dave Johnson were forced to resign.
"On February 11, 1999, Romney was hired as the new president and CEO of the Salt Lake Organizing Committee. Romney revamped the organization's leadership and policies, reduced budgets, and boosted fund raising. He also worked to ensure the safety of the Games following the terrorist attacks of September 11, 2001 by coordinating a $300 million security budget. Despite the initial fiscal shortfall, the Games ended up clearing a profit of $100 million, not counting the $224.5 million in security costs contributed by outside sources.
"Romney contributed $1 million to the Olympics, and donated the $825,000 salary he earned as President and CEO to charity."
I wonder what the Dow Jones would have done on November 6th if Mitt Romney had been elected President.
Whether it's Jindal or Romney or another true conservative, 2012 won't get here fast enough for me. Thank goodness we at least have congressional elections in 2010. The way things are heading, I imagine at those elections the dominating theme of "Change" will still hold true.