The Economic Way of Thinking

What Does "Stock Market Sell-Off" Mean?

From Armen Alchian's text:  When stock prices fall, we often hear that there was a "sell-off on Wall Street."  Why not say there was a surge to demand stocks, that is, a surge to buy?  Why do they always say the former?

Note that volume usually increases dramatically when there is such a "sell-off" or a "dumping of stocks in light of bad news and fear." Also, and this is important, for every successful seller there must be a successful buyer, and for every successful buyer, there is a successful seller.

So, can you explain where the error is?  Can supply and demand explain the higher volume and lower stock prices during the so-called sell-off?

Answer this question clearly and cogently

Joseph Schumpeter claimed that capitalism would give way to socialism largely for ideological reasons. This does not seem to have happened, at least directly. But might it be happening indirectly? Consider, for instance, a significant change that has occurred in the economic organization of debtor-creditor contracts. Not too long ago, lenders held their loans in their portfolios. They would lose if the borrower defaulted, which gave the lender a strong incentive to monitor the borrower, particularly for large loans. Now, lenders split their loans into numerous small pieces and disperse them throughout the economy. (For instance, many people who hold mutual funds and retirement accounts will find that they are holding small pieces of large loans made by commercial banks.) The burden of non-performing loans is thus dispersed throughout the economy rather than residing with the original lender. Does this development weaken the incentive offenders to monitor borrowers and thereby weaken overall economic performance? That is, can market transactions generate institutional arrangements that impair the market economy? However you address this topic, do so clearly and cogently.

Hat tip to Richard Wagner for being brilliant and having asked this question 3 years ago on a PhD field exam.

Gasoline Prices Continue to Fall

An anecdotal observation from so many people:  "Gas prices go up more quickly than they fall.  It happens every time."  (How many times have I heard this?)   "They're trying to keep us addicted. We will feel assured of a while.  Make new plans and commitments.  Once locked in, they'll jack up the prices again."

Well, this time the fall has been quick and also significant. If they're trying to keep us hooked, that emerges in the global market for oil and oil futures.  But do our conspiracy theorists know that the U.S. contribution to the global market is somewhere around an 8% share. So those who want to keep us "addicted" to gasoline must be all those outside contributers.  OPEC, I suppose. Or is it?

Look at the commodity futures market.  I suppose those in power are also trying to keep us addicted to the S&P 500 stocks, corn, wheat, beans, copper, lead, aluminum, zinc, gold, silver, and cattle feed.

I guess the conspiracy die-hards will now claim "That all makes sense to me." It gets tiring.