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The Stock Market
This discussion of needed changes in the stock market is taken from LIARS! Vol. 1: Scout to the Pole. In this discussion, Nanook ( italics) is talking with Ben in the radio shack.
“So, back to your question about fixing Social Security. No. It can’t be fixed just by adjusting the amount of money withheld from working people. Eventually, there will be so many people receiving Social Security money for so many years that the working population will not be able to afford it. Then, remember I told you about discussions to add medical coverage for retired people as well. It will be financed the same way. These programs will compound each other to increase the problem.”
“So, why don’t we just change the way these are financed and put them on an investment basis like the stock market?”
“Man! You’re a very hungry animal, I see. Open wide for a few more boots to get stuffed in.
The STOCK MARKET is one of the BIGGEST SCAMS the world has ever seen! What do you know about it?”
“Well, people buy shares of stock in companies. As the companies grow, the price of the stock goes up. The people then sell the stock and make a profit.”
“That’s it? That’s how you think it works?”
“Yeh … ???? I guess?”
“Well, you have a lot to learn.
Two stage stock market
First off, let’s divide the stock market into two separate stages. Stage one, which I call the PRIMARY STOCK MARKET, is related to corporate startup and growth. Stage two, which I call the SECONDARY STOCK MARKET is purely related to stock price appreciation.
In stage one, a company needs money to start up or grow. One way to get it is through a loan from a bank. Of course, the company has to pay it back. Another approach is to issue STOCK. Stock is a contract that gives a person ownership in a company. The more stock a person buys, the more of the company they own. In return for their investment of that money, an investor expects a return. By return, I mean getting back all the money they invested plus more in addition. One way they can get the addition is from dividends. The other way is to sell the stock at a higher price than they bought it for.
In stage two, the stock is typically owned by a lot of investors. For one reason or another, situations arise where a stock holder wants to sell their stock. So, they sell it to someone else interested in buying it. That is, stock investors buy and sell stock from each other.
Do you follow so far?”
“Yeh. I think so. In stage one, people interact with a company. In stage two, they interact with each other.”
“OK. Good. Now let’s look at these two stages and ask the following question: who makes money in the process. First, let’s look at stage one.
In stage one, the company is the primary receiver. They make money in two ways. First they get cash by selling the stock. Second, they invest the cash in equipment or product development. Their sales and income go up if they have a good plan.
There will be some outside firms lined up to handle the stock sales transactions. These are the investment bankers and brokers. They will make money by charging a fee for their service.
Then there will be the investors. They make money by getting dividends from company profits and by selling the stock at a higher price than they paid for it.
So far, so good?”
“Yeh. I think so. Everyone is making money.”
“RIGHT! Now lets look at stage two.
Who makes money in this process? Does the company make any money when people trade stock? No. The company is out of the process. Do the stock brokers make money? Sure! Lots of it. Every time a share changes hands, the stock brokers take a fee.
AND now, the most important question. Do the investors make money?”
“Hmmm. Let me think about this. If you can sell a stock for more than you bought it, the answer is yes. But if you can’t the answer is no.”
“Correct. And that’s where this whole business of the secondary stock market breaks down. The secondary price appreciation stage is a BIG SCAM. It’s just another version of a PONZI SCHEME!”
“It’s a PONZI SCHEME. There was this guy named Ponzi who started businesses. The way you got paid as a salesman in his business was to get other people to sign up to be salesmen. That is, once you were part of the business, which cost you a fee, a primary activity for you was to go out and get other people to buy into the business. You would get a cut on their membership fee and a cut on their sales. Those new members would then go out and get others to join and get a cut of their membership. Do you see the problem?”
“Sure. It’s like a chain letter. In order for the process to keep going, the company has to keep getting larger. Eventually, it won’t be able to grow any more because there are a finite number of people in the world. So the last guys to buy in will get screwed.”
“Bingo! And that’s what happens with the secondary stock market. The stock keeps getting sold. As long as the price is going up, everyone except the last buyer is making money. Eventually, something happens to stop the run up and someone gets screwed. And it’s ALWAYS the public because the companies and the brokers don’t hold any of the value.”
“OK. But what about all the information in the Wall Street Journal about how well companies are doing and all the price listings in the local newspapers.”
“All of that information is part of the SCAM. Everyone passing that information around is making money from stock sales. But it’s all a smokescreen. Let’s say a company has issued a million shares of stock at one dollar per share. From that, they get $900,000 because they have to pay $100,000 in fees. How much do they have?”
“OK. They have $900,000.”
“Right. Now let’s say the day after they sell the stock, a lot of people get interested in it and the trading pushes the price of the stock to five dollars. How much money does the company have now?”
“I get it. They still only have $900,000.”
“Bingo! And what happens if the stock price plunges to ten cents a share?”
“I get it. They still have $900,000.”
“Bingo! That’s the whole point. The only value of all that market analysis and all the data is to influence the secondary investors to buy and sell the stock. In the primary market, a company, because it sells a product, is able to make a profit that they can distribute to their investors. EVERYONE in the process can gain. This process has a POSITIVE REAL VALUE. But in the secondary market, eventually, someone has to lose. And because the brokers take money for every trade, it actually HAS to produce a NEGATIVE SUM for the investors. The secondary market has a NEGATIVE REAL VALUE. That is, the secondary stock market is exactly equivalent to a gambling casino running a Ponzi scheme.”
“Wow! So, why doesn’t the government stop this?”
“Because the people who control what the government does are the people running this SCAM. Over 20% of all individually held stock is owned by 0.1 percent of the citizens. 40% is held by investment companies. You also have to remember that the people in the government, who could stop all of this, have their money in the SCAM. They were formerly bankers who made huge profits running the scam, and are continuing to make a lot of profit by doing so.”
“Whoa! This is a pretty scary thing, isn’t it.”
“You bet. And it’s especially scary when people start talking about using stocks to bail out Social Security. That was why I started down this line of discussion. You asked about financing Social Security with investments like the stock market. If we ever did that, if we ever allowed pension funds to invest in the stock market, all that Social Security money would create the largest run up in stock market prices the world has ever seen. But as soon as the Social Security money was in the market, there would also be the biggest stock market crash the world has ever seen. And Social Security would be destroyed. Of course, the people who are already wealthy, who have the BIG FINANCIAL INVESTMENT ADVISORS watching their money, would get in on the run up and out before the top. So, in the end, the wealthy class would shoot up to become a super wealthy class, and the average person, who is relying on their pension funds and Social Security to save them, would literally starve to death.”
“You don’t think that could possibly happen, do you?”
“It sure can. And the U.S. government would be helpless to bail them out because any tax money used as a bail out would be coming from the same people who lost all the money. And then Karl Marx’s prediction would come true. What do you think I’m spending all this time up here trying to figure it out. If you think the wealthy people who control our government care a hoot about the poor, forget it. The U.S. is the wealthiest country on earth. We have the resources and technical know how to wipe out poverty over night. The reason it hasn’t happened is because of the greed of the wealthy class and the power brokers in the government who are in cahoots with them. They’re greedy for the money and greedy to keep the poor working for them doing the dirty work.”
“So, why don’t the people do anything about it?”
“IGNORANCE! It’s the ignorance of people who believe in the tooth fairy called SOCIALISM and the ignorance of people who believe in the casino called CAPITALISM. It’s the ignorance of people that believe their elected officials care a hoot about them in the face of overwhelming evidence that they don’t.”