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Comment by mitthrowaway2

4 days ago

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.