Comment by JKCalhoun
4 days ago
The lines on the graph seem to be too close in lockstep for me to see anything causal or predictive in them.
The graph simply says to me: "More money has been invested in the market over time, the market has generally been worth more over time."
Money doesn't get invested in the market; when you put money into the market, someone else takes it out, because you're trading assets. What can happen is that the price of those assets goes up when more people have money that they want to invest, because the price has to rise to the point where there are as many sellers as buyers. So the market price can grow up, but there's no vault of money tied up in the market.
However, there can be money created by the market, because people and companies can borrow money while using the value of the assets they own as collateral. This borrowing does cause new money to appear from thin air, which means that the market is a source of money, not a sink. As this borrowed money increases the money supply just like physical money-printing would, the price of assets tends to rise along with it, as much of that borrowed money gets put towards buying those assets, increasing the number of buyers, and someone has to be convinced to sell.
This creates an unstable feedback loop of rising borrowing against rising asset prices causing higher asset prices, and it can of course operate in the reverse mode as well, where falling asset prices result in loans being called in, causing the money supply to shrink, pushing asset prices down even further.
(This crash is not a necessary outcome; if the assets correspond to productive investments and real growth, this results in abundance which can in various ways allow those debts to be held or paid off without falling asset prices.)
You described velocity of money https://en.m.wikipedia.org/wiki/Velocity_of_money
No, velocity of money is something else. As the wikipedia article says, it's the rate at which currency changes hands, ie, the rate at which transactions happen.
The phenomenon I described can happen with many or with few transactions. It only requires more buyers than sellers, and money creation through borrowing against the rising price of assets. Creation of money through borrowing is not an increase in the velocity of money, it's an increase in the supply of money.
You would have to look at that graph starting before 1971 when Nixon took us off the gold standard. when he did that it allowed the US to boroow more money based on nothing. The myth is that "More money has been invested in the market over time", when in fact more debt has been invested in the market.
I'm not sure that's exactly accurate.
The US was borrowing based on nothing and eventually people figured that out and wanted to trade the nothing for gold which prompted the US to "fix the glitch" and stop gold redemption.
It's not like leaving the gold standard caused us to borrow based on nothing; we already decided to do that.
Debt is money. Literally - the same contract that's a debt to one party is an asset to the other. And money is just any sufficiently liquid asset.