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The Market and the Economy

October 20, 1987

There is one crucial truth to keep in mind in the face of the staggering collapse of stock market prices: This is not a measure of the American economy, nor does it measure the health of American industry.

This is not to downplay the seriousness of the crash, which will have wide repercussions--nearly all of them bad. But it is useful to remember that in the world at large, commerce and industry in the United States--and the record high employment that has been created by continued expansion of the economy--are the envy of most. There may be no choicer place for investment. The weaknesses in the economy--including the federal deficit driven by undertaxation, the increasing consumer indebtedness and a stubborn trade imbalance--in no way justify the failure of confidence reflected in the sell-off of stocks.

There has always been a discrepancy between economic performance and stock market fluctuations. The "casino" spirit of recent years, with the development of investment opportunities only indirectly related to the profit and loss of individual enterprises, has increased concern about the relevance of the market and the legitimacy of much that goes on in the market. But nothing, nothing at all, had prepared Wall Street or the nation for the collapse of recent days, and in particular for the 508.32 decline in the Dow Jones industrial index on Monday.

Panic is a dangerous element of economics. By definition, it lacks a rational base. The hysteria can feed itself. That was evident in what transpired on Friday and again on Monday. The result can be damaging beyond the market itself. But the damage can be controlled and limited. The stock market remains an effective tool for those seriously concerned with buying shares of on-going, profitable enterprises. It remains a dangerous place, more dangerous than most realized until Monday, for those playing for short-term gains and goals only marginally related to the ownership of successful enterprises.

If this mad aberration remains uncorrected, many will suffer in the face of spiraling interest rates, inflationary pressures and the weakened ability of markets to finance business expansion. And with those losses will rise profound questions about the adequacy of the controls of the stock market itself and the rules that regulate it.

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