Predictably, Donald Trump blamed Thursday’s market tumble on the Democrats, or more accurately, “Dumocrats.” As I’ve written for three decades, deflating a bubble is good news. If stock prices don’t reflect fundamental values, then we should want to see them fall. Otherwise, we are getting a misallocation of resources.
In the current case, the misallocation corresponds to $1 trillion a year (3.0 percent of GDP) going to the construction of data centers that will likely never pay off. The country would be much better served if this money went into housing, health care, childcare, education, and many other uses. If plunging stock prices stop the misallocation, it’s cause for celebration.
But let’s bring the story closer to home. Suppose Donald Trump has promised to give the “Elon Musk Corporation for Technology and Fascism (EMCTF)” $10 billion from the government each year for the indefinite future. Musk can treat this money as pure profit that he can use for Mars trip planning or electing right-wing politicians, as he chooses. If Musk sells shares in this outfit, at the current market-wide price-to-earnings ratio of 40, his company will have a market cap of $400 billion.
Now suppose a new Congress is less interested in supporting Elon Musk’s dreams and political agenda. The stock price of EMCTF would plummet. This is a plausible explanation for what happened on Thursday. Sorry to the folks who unwisely invested in EMCTF, but next time pick your investments more carefully.
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