Replace the Stock Market with a Larger Bond Market
Article By: Ryan Wiseman
Many people believe that the stock market is the epitome of capitalism, but I believe capitalism could be made better, and our economies more stable, if we replaced our stock markets with a larger bond market. Why do I think this is the case. Take a look below to find out why.
Many people see the stock market as the bedrock of the capitalistic system we have in the United States. Do you think that is the case? If you asked the question, “What is capitalism?” – What would be your answer? For me, capitalism is having the ability to take your money, in this case, referred to as capital, and using it to make more money. The original money that you use is the capital, and the money you make from that original investment money is called ‘return on investment’ (ROI).
With this in mind, let’s ask another question: Do we need a stock market? My answer is an overwhelming NO! Our economy without the stock market would me more stable (less instability), less volatile, less chance of recessions and economic depressions happening, less real estate bubbles and other bubbles occurring in other economic sectors, less people losing their jobs due to less economic instability, less people losing their homes as a result of losing their jobs, and many, many other things as well.
You may think that the stock market is the epitome of capitalism, but it’s not. The essence of capitalism is being able to make money with your money, and you will find that, even with the stock market gone, you would still have literally hundreds of other ways to invest your money. You can invest in the bond market, real estate, invest in your own self to increase your ability to make a higher income, start a business, help someone else start a business as a venture capitalist, lend out money with interest, and these are just a few of the many ways you would still have to invest your money.
So, what is the purpose of the stock market anyway? You’ll find that the primary purpose of the stock market, and the reason why stock sales started in the first place a couple centuries ago, is to provide a way for businesses to raise the capital that they need to invest in their own business, to do things like increasing quality of their product, creating new products, expanding into new markets, as well as many other things. In fact, many times when businesses become more profitable by using that capital from their stock sales, they will then buy back their stock, thus becoming a private company again, rather than stay a publicly-owned corporation. If the stock market is gone, a business can still raise capital using other means, such as by having a bond sale.
Converting to a Larger Bond Market:
What I would suggest is replacing the stock market with a larger bond market. Businesses would be able to raise the capital they need for their expansion efforts, or whatever other reason they may need to raise capital, and eventually would pay back the owners of the bond. In this case, instead of a business buying back its public stock, it would instead pay back the owners of the bonds when the investors decided to cash out.
If a business wants set up a bond sale, they would need to go before a government regulatory commission, or a private organization that has the ability to do an in-depth analysis and assessment of the business, to see how much capital they are allowed to raise for the bond sale (similar to the approach that a mortgage lender would use to determine how much a potential homeowner could borrow for purchasing a home), and once they determined how big the bond sale could be, they then start selling the bonds to the public.
How to Set Up the Bonds:
The bonds would have a minimum term of 5 years, where the holder of the bond would have to wait at least 5 years before trying to cash out their bond. There would be a maximum term of 20-25 years. A person could cash out their bond anywhere from 5-25 years (min-max terms could be different depending on what is determined to be the best time period).
On top of this, when the holder of the bond tries to cash out their bond, they would be put on a waiting list, and the business would pay the holder of the bond only when they had enough extra earnings, in terms of profits, to cover the cost of that bond – from this standpoint the bond would be similar to what is known as an ‘income bond.’ This setup would ensure that businesses are never overloaded with too many people trying to cash out their bonds at the same time, financially straining the business with too much cost. This type of setup would ensure that businesses only paid bond holders when they had the money, thereby reducing the possible financial strain put on businesses. If a bond holder was put on a waiting queue, and had to wait 6 months before cashing out, they would receive all interest made until the cash out was made, not when they were put into the queue. Another benefit of this approach would be the creation of new businesses that would cash out your bond immediately for 90%-95% value at the moment, allowing the bond holder to get most of their cash immediately, while allowing the businesses to make a 5%-10% profit on their investment, in a matter of months, if they put themselves in the cash out queue immediately.
We could also put another safeguard in place on top of this – we could make sure that the bonds were ‘guaranteed bonds,’ where another company backed up the bond as an added measure of security, and would pay off the bond if the issuing company went bankrupt, or defaulted in some way or another. In fact, this type of setup could be made to be profitable for the company backing the bonds for the primary party – they could be paid a fee up front, and be paid a fee upon each bond’s cash out, and if they back up and guarantee bonds for many businesses, the sheer number of businesses that they back would help ensure its profitability.
The derivatives market is a vast marketplace worth $600-$700 trillion – compare that to the value of the present U.S. stock market, which is closer to $25-$30 trillion. And, these derivatives are a form of security whose value is backed by, or dependent upon, several different types of assets, including stocks, bonds, currency exchange rates, market indexes, interest rates, real estate mortgages, as well as many other types of commodities. With this being said, a large section of the derivatives market is based on the stock market, so any change to the stock market would affect the derivatives market, and cause potential instabilities in the economy at large, if the conversion from a stock market to a larger bond market is not done right.
So, how would we get rid of this possible instability? First, I would suggest that a conversion from the stock market to a larger bond market can be done properly by doing it slowly, over the course of time, perhaps over a period of 20 years, instead of doing it all at once cold-turkey. First, we can create a freeze, banning companies from selling any new stock and all new IPO’s, requiring that those businesses, if they want to raise capital, to use the type of bond market setup I recommended earlier. Secondly, through some type of lottery-system setup, we can require that business slowly buy back their own stock, and at a price that allows stock holders to make their money back at a profit. Every week, over the course of about 20 years, about 1/10th of 1% of the businesses in the stock market would be chosen, randomly through a lottery setup, to start buying back their stock, and would be given 1-3 years to do so, depending on how much time they need. Perhaps a tax-break is needed for businesses during this time period to allow them to do this more effectively.
This would allow the bond market to slowly grow while the stock market slowly shrank, which would allow for more stability in the market. The portion of the derivatives market that relied on stock market assets as their form of security would hypothetically be converted to a larger share of the derivatives market that relies on the bond market, and because it happened slowly over a period of years, most instability in the derivative market as a result of that conversion process would disappear. Since the bond market, if done using the rules I suggested earlier, would be fundamentally more stable in form than stock market prices for all parties involved, the derivatives market would also (theoretically) become more stable, and the economy would suffer from less volatility from that perspective, allowing businesses that make their money from the derivatives market to become more profitable, with less likelihood of failure or default.
So, if we practice this suggestion, and convert our stock markets to a larger bond market using the method that I suggested above, and using the type of bonds I suggested, this would be good for all parties and all people – businesses would still be able to raise the capital they need for their purposes and not be overburdened by excessive bond cash-outs as they would only pay them back as they had the extra earnings to do so, and investors would have the ability to make a profit with a higher probability of return than the stock market because of less volatility and other factors that generally affect the stock market. On top of this, the derivatives market would hypothetically be made more stable, new business sectors would open up, and the economy at large would be made stronger and more stable, allowing for less stress, less job losses, less foreclosures due to people not paying their mortgages due to lack of income, and so many other things. Let’s practice this scenario, not just in the United States, but make it worldwide.
In fact, I would really welcome talks on this idea by those who are experts, that is, those who are market experts and economists. Please, if you like this idea, encourage the experts to talk about this idea, tweaking the fine details while keeping the general suggestion intact, and possibly initiating this change. Let’s make the stock market a thing of the past and make life better for all of us.
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