None Dare Call it a 'Crash': Three Things You Need to Know About the Very Volatile Stock Market

It's has already been nick-named "the Great Fall of China."

And while the dramatic volatility at the New York Stock Exchange seems to be driven by an economic slowdown in that all-important country, both the U.S. domestic economy and the global economy are actually plagued by plenty of other problems. So before you panic over the plunge - or begin celebrating over the "buying opportunity" that declining stock prices present - consider these three important points.

Problems in China Are Not New

Casual observers in the U.S. may be accustomed to thinking of China as an economic superpower that continually buys our federal government’s debt and seems to always be in “growth” mode. Add to this the fact that while the U.S. economy reportedly sputters along at somewhere between 3 and 4 percent annual growth, China has grown at approximately 10 percent annually for the past four years or so, and is now believed to be “slowing” to an annual rate of about 7 percent (a fact that has been widely reported by more thoughtful business news publications yet largely ignored on Wall Street).

An investor gestures in front of screens showing share prices at a securities firm in Hangzhou, in eastern China's Zhejiang province on August 24, 2015. Shanghai shares nosedived 8.49 percent on August 24 as Beijing's latest market intervention failed to restore confidence, with concern mounting about the stalling economy. (Photo: STR/AFP/Getty Images)

It may be, however, that China’s economic contraction is more about a humanitarian and human rights crisis, than it is about imports, exports and trade. Since the early 1990’s China has gradually evolved towards private ownership of property and global free trade, both of which are essential ingredients necessary for a nation to produce wealth. Yet several other essential ingredients are missing.

Basic human rights like the freedom of speech, freedom of dissent, freedom of religion, and the right to both succeed and to fail in business transactions without threat of government interference – these are essential ingredients for prosperity as well, yet they are mostly non-existent in China. And while Christianity is widely believed to be spreading rapidly in China, the fact that the government there often seeks to repress open religious expression is probably what prevents the clear formulation of what is known by some economists as a “moral-cultural system,” a concept first noted by former U.S. Ambassador Michael Novak (and which I reiterated in my latest book, “The Virtues of Capitalism”).

As Novak characterizes it, a society needs a legal system in order to enable economic productivity, but it also needs a moral-cultural system – a system of commonly held beliefs and attitudes, which are generally articulated and upheld by religious institutions, and that seek to ensure the dignity of all human beings and prevent people from being used as merely a means to economic ends. A society’s moral-cultural system directly contributes to a society’s economic output, in that it helps humanize the marketplace, sustaining the hard work and human creativity necessary for a thriving economy.

Back in the 1990’s President Bill Clinton and members of Congress expressed at least some concern over China’s human rights’ track record as they contemplated a permanent, normal trade relationship with China, although their concerns weren’t great enough to hold-back the trade process (President Clinton eventually sought permanent normal trading status with China in 1998, a process which was finalized by President George W. Bush in 2001).

But today, some quarter-century later, it may very well be the case that China is now running low on human capital because of its disregard for people.

"China never really fully got the free-market thing" notes Steve Moore, Wall Street Journal writer and Chief Economist at the non-profit Heritage Foundation of Washington, D.C.

“We used to think that economic freedom would lead to political and religious freedom” he told me in a recent talk radio interview, “but that hasn't worked out so well. There is still so much political and religious persecution in China that a lot of people are now trying to leave that country. Frankly I think China is suffering with a bit of a brain-drain right now."

The U.S. Has Plenty of Economic Problems, Too

Since the days of last decade’s “great recession,” the U.S. economy has continued to suffer with weak job creation, painfully high numbers of Americans no longer trying to work and simply checking out of the workforce, government regulations having a smothering effect on American businesses, a recent spike in demand for free food from food banks, and the disproportionate proliferation of part-time jobs.

Traders work on the floor of the New York Stock Exchange during morning trading on August 10, 2011 in New York City. (Photo by Mario Tama/Getty Images)

Yet despite all these real, tangible problems, most of the dominant financial news media in the U.S. have sought to perpetuate the narrative that our economy is “in recovery mode.” Our alleged economic recovery is so accepted as gospel truth on Wall Street that most of the chatter there has turned from “what other kinds of economic stimulus might we need from the government?” (note: Wall Street’s over-reliance on government intervention is a part of our problem) to “when will the government start raising interest rates to reflect our growing economy?”

But along with real, present economic problems, Americans’ political preferences don’t bode well for our economic future, either.

Presumed Democrat presidential nominee Hillary Clinton is conducting a campaign that bares essentially no resemblance to the reasonable, centrist economic policies of her husband President Bill Clinton, and instead looks more like those of her competitor, socialist U.S. Sen. Bernie Sanders (I-Vt.).

The fact that both of these candidates can get traction from voters by bashing successful American businesses and threatening to raise income and capital gains taxes, all the while promising things like “free” college tuition, demonstrates to global investors just how hostile the U.S. has become to successful business enterprise and genuine wealth creation. Entitlement policies are not the same as economic growth policies, and Americans’ present proclivity towards entitlement does not send an inviting message to those who might otherwise grow their business in the U.S.

The Culture of Wall Street Doesn’t Distinguish Between “Speculating” and “Investing”

It may come as a surprise, but over the past four years some of America’s most lucrative publicly traded companies have frequently not been the big winners in the stock market. The culture of Wall Street, empowered by the on-going “sugar high” of artificially low interest rates and other means of economic stimuli from the U.S. Federal Reserve, prefers to dabble in new, sexy, “glam stock” businesses that are seemingly more exciting than the tested and proven enterprises, yet are ultimately far more risky.

Right now, three of the most lucrative companies in America are Exxon Mobil, pharmaceutical and home health products manufacturer Johnson and Johnson, and Microsoft. All three of these companies produce products that most of the world needs and consumes, even during recessions, and all three are reporting solid cash flow and substantial earnings.

Yet despite the solid financial foundations of each of these three companies, their respective stock prices are lower than the sexier, more glamorous Netflix and Tesla Motors – this, despite the fact that both Netflix and Tesla have yet to produce any profits.

As long as our government continues to use our money to “stimulate” Wall Street, stock traders will likely remain emboldened to “speculate” with glam stocks. But more thoughtful Americans should beware: actual “investments” are not honored at the New York Stock Exchange these days, and blaming all our problems in China is short-sighted.

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