The reason behind stock market crashes / by kevin murray

All stock markets, suffer from the syndrome of booms and busts, of which, for those on the receiving end of the busts, one can find this to be rather devastating to not only their savings, but to their lifestyle or even to life, itself.  As much as governments try to control or to smooth out economic cycles, the reality is that because the stock market is a marketplace in which investors essentially vote with their dollars, this thus means that for every single second of every minute of every day that the market is open for business, such controls are never going to be robust enough, to effectively overcome the sentiment so expressed by those investors.


In America, as charted by, the total market capitalization of listed companies in the United States in 2007, was about $20 trillion, of which during the crash of 2008, this dropped to under $12 trillion in 2008, and as of 2017, stood at an astonishing $32.1 trillion. Not only does this clearly show that the total market capitalization is rather volatile, but it also demonstrates quite clearly that the stock market capitalization of this country does not correlate well with America's actual GDP growth, in which from 2008-2017, in not a single year, did the GDP even reach 3% per annum, and in fact, averaged only about 1.5% per annum during that period, yet the market capitalization of the stock market, increased at a rate far exceeding the actual goods and services so produced.


Quite obviously, this would so indicate, that the stock market has a mind of its own, of which, those investing in that market, by their buying and by their selling, determine the value of these publically traded companies.  This means, by implication that the "worth" of these publically traded companies are determined not so much by their sales or earnings, but in actuality by the bid price and the ask  price of those so trading in those securities.  This also indicates, that in a stock market in which each party to a trade, that is the buyer and the seller, have made a deal to trade for a certain stock price, that each side, believes that the deal is fair, or else the deal would not have been done at that price point.  So then, it would seem that the stock market takes into account, all actionable information and therefore is ever efficient, but this is belied by those booms that go bust, as well as by those busts that become booms.


The reason that the stock market crashes, even in mature markets such as in the United States, which has all sorts of regulations, controls, and even circuit breakers to stop all trading during steep drops, is that the transactions between a given buyer and a given seller are ultimately in the hands of those buyers and sellers.  Further to the point, in order for any market to continue to climb up, this is going to be dependent upon new money coming in, in order to therefore push those prices up, for without that new money, the fuel that propels the stock market, will dissipate, because all those that are already in the market, are already at a certain equilibrium. This, thus means, that markets crash, when they aren't any new investors, in addition to a significant amount of the current investors deciding that they just want out, and those selling are thereby willing to leave some money on the table, to get out, in their flight to safety or sanity, or both.