Last week, the combined market capitalization of 20 publicly traded companies in the United States surpassed the total GDP of the country. This should reflect prosperity, that everyone has enough opportunities to live, be comfortable, and that things are going together. Unfortunately, that is not the case.
The CEO of GoFundMe revealed that many Americans are now raising money online simple to buy groceries. This is quite a paradox, why? This paradox exists because market capitalization today is heavily driven by inflated stock prices; wealth that is disconnected from real economic contribution. It does not add to GDP, but it does grant certain individuals to have arbitrary an exorbitant purchasing power. In turn, this creates wide scale economic dispersity. I characterize this as a ‘funny money, unreal economy that does not translate to GDP and rise in standard of living but surely it contributes to hyperinflation.’
People seem to blame inflation solely on the Federal Reserve for printing more money. However, that is not the only reason. That’s just pointing finger at the Feds. Monetary expansion has been a persistent feature of the economy for years without triggering an equivalent rise in inflation. There is a disproportionate ratio of the amount of the money that the Feds print and rate of inflation. Is the Feds contributing to it? Yes, to a small extend in the current hyper inflated stock market but they are not solely responsible for it.
To understand the cascading impact of inflated wealth, let’s consider a simple scenario:
John works for XYZ company. As an employee he earns $100,000 annually and holds $100,000 worth of stock offered to him five years ago. Over this time, that stock multiplies tenfold. John now sets out to buy a house in the market with other buyers $100,000 annually. What do you think will happen housing market with people like Johns live as a small percent with lot of buyers with wages as the only source of income. Hyper increase in housing price. Bay Area, California is a classic example of this.
This is where the imbalance becomes real. Unreal economy devastating real economy with increase in price for essentials and non-essentials.
When more money, not tied to production, chases the same supply of homes, rentals, and essential goods, prices rise quickly. A husband and wife working for $25 an hour doesn’t stand a chance in that competition. They are priced out not because they are doing less, but because unreal money has made everything more expensive.
This month Oracle stock jumped 40% overnight and NVDIA crossed $5T. Overall stock market is skyrocketing, massive disproportionate purchasing power for the individuals’ holding stocks. At the same time, Fed is cut interest rate, macro monetary step to accelerate economic activities. These are economic contradiction; it does not make sense at the same time. The supply of housing increases and wages also increase. But it cannot keep up with the speed of funny money.
For young adults entering the real world today, the consequences are life-altering. Many 21-year-olds graduating into this economy:
- Struggle to rent or buy a home
- Delay marriage and family plans
- Feel financially stuck even before they begin
What was once known as the American Dream now seems increasingly unattainable for an entire generation.
Some staggering numbers:
- Market cap of 20 companies exceeds US GDP of $30T.
- NVDIA’s market cap is equal to Germany’s GDP and 2x the GDP of all African countries of 1.48B people.
Should these companies have a high stock value as a function of capital market? Yes, but this is outrageous and unjust as it marginalizes common American.
This article is a personal opinion of V K Vinod Sreekumar, Founder & CEO, PracticeSuite.
Citation to data source: duck.ai