4 ms·

I'm a real dummy when it comes to economics, so I have a question. What is the theory that buying assets like stocks boosts the economy? Doesn't this just creat

by notJim 6y ago

I'm a real dummy when it comes to economics, so I have a question. What is the theory that buying assets like stocks boosts the economy? Doesn't this just create incentives to hold on to those stocks, so that you can reap the growth? Given that most stocks by far are held by wealthy people, it's hard to see how this stimulates demand, since they already are able to buy what they want. Theoretically, they might eventually sell the assets and then start a new business or something, but this seems very indirect. Isn't it easier to just hold the stocks/real estate? I don't really understand why holding a stock is considering investing, since the company (where the actual employment and production happens) doesn't see a benefit.

lisper 6y ago
Holding stocks doesn't stimulate demand, it produces capital. In order to start a business you have to spend money to procure the means of production before you can open your doors. You can put up your own money, you can borrow it (debt financing) or you can raise it by selling an ownership interest in the business (stocks/equity financing). It's true that after the stock is issued, lots of financial games get played that don't actually help the economy, but most businesses would never have been started in the first place if not for the ability to issue stock.
- notJim 6y ago
  This is the clearest response so far. Thinking about the tech world, we have all this VC money, but all of that is based on the idea that eventually the company will IPO and the VCs will get huge returns. However, given that both VC valuations, and stock market valuations (like P/E ratios, IIRC) are arguably in bubble territory (many have argued this), it doesn't seem like the Fed buying more of these assets is very efficient.
  - lisper 6y ago
    The Fed buying up assets is a purely political move to prop up the markets, i.e. to protect investors at the expense of everyone else. It's a dick move for a lot of reasons, not least of which is that it effectively says: all rules are off. We, the Fed, will protect you, the shareholders, from all systemic risk by using our fiscal power to as a guarantor of valuations. That in turn causes more people to buy shares, because when all the risk is gone why the hell not? And that in turn disconnects prices from reality. It is welfare for the wealthy. I am a major beneficiary of this policy and I still think it sucks big fat honking weenies, particularly since it has been implemented by people who rail against welfare for the people who actually need it. The brazen hypocrisy makes me want to retch.
    - mrep 6y ago
      How is it a political move when basically every central bank in the world is doing the exact same thing? Also, they have not bought any equities. They are almost entirely just buying our own governments debt and mortgage backed securities as you can see in their balance sheet [0]. [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1 https://www.federalreserve.gov/releases/h41/current/h41.htm#...
      - lisper 6y ago
        > How is it a political move when basically every central bank in the world is doing the exact same thing? Um, because every central bank in the world is controlled by rich people?
kaycebasques 6y ago
> Given that most stocks by far are held by wealthy people I also won't pretend to be an expert here, but I think this is where your thinking may be going astray. There are lots of retirement-age people who are counting on their pension funds to fund their retirement. Pension fund managers assume steady growth in stocks, something like 7-10% per year. If stocks don't meet that threshold, major parts of the pension system run into big trouble. Pension plans have trillions of USD in assets. This article [1] estimates ~$9T. Retirement-age people in general are a powerful constituent. [1] https://www.investopedia.com/articles/credit-loans-mortgages/090116/what-do-pension-funds-typically-invest.asp https://www.investopedia.com/articles/credit-loans-mortgages...
- notJim 6y ago
  I always keep this paper from NBER handy https://www.nber.org/papers/w24085 https://www.nber.org/papers/w24085, especially this chart: https://imgur.com/h8Fo8yx https://imgur.com/h8Fo8yx. Stocks are in fact held primarily by the wealthy. This is a separate question though than whether they are also very important for retirement accounts. You are 100% right about that, even though middle-class retirement accounts represent a small share of the overall market.
- charwalker 6y ago
  Although many regular people have stocks held until retirement, they don't make up a majority of stock owners: https://finance.yahoo.com/news/the-richest-1-own-50-of-stocks-held-by-american-households-150758595.html https://finance.yahoo.com/news/the-richest-1-own-50-of-stock... And according to Wikipedia data, in 2016 84% of stock was owned by the top 10%. That leaves 16% of the market to everyone else, a very small %. https://money.com/stock-ownership-10-percent-richest/ https://money.com/stock-ownership-10-percent-richest/
ry_co 6y ago
The main way speculative investors benefit the company is that they hold stocks because they believe it will be more valuable in the future, so that they can sell it for a profit. This demand for the stock drives up the price. Since stock is essentially a portion of the company, this also drives up the valuation of the company. Since the company is more valuable, they can offer equity to investors for a higher price, allowing them to invest in their own business and grow. It's indirect, but it's a very real benefit. Edit: Adding to this, the company's reinvestment of funds generated by issuing stock drives demand in other places of the economy. Investing in your own business means spending money on people, infrastructure, and other goods you need to offer your company's service. This necessarily drives demand for these goods. Additionally, this creates cascading demand through the keynesian multiplier effect.
- notJim 6y ago
  Do companies routinely issue new stock to raise money? I thought it was a rare occurrence, obviously the IPO, and then occasionally afterward. Your edit is clear.
kalipsosu 6y ago
It suppose to work like that. But it does not apperantly. In the ideal world growth should mean more R&D. Mariana Mazzucato has several books in this topic. Check it out.
jcfrei 6y ago
In the US (and other countries) a lot of wealth is accumulated in 401ks or other pension like schemes. When people see that their retirement funds have a high value then they are more willing to spend money in the present. But since pensioners are spending less money on average than people in their working ages the effectiveness of stimulating demand via higher stock prices is limited.
mrep 6y ago
It's to fight deflation. With people losing their jobs and holding onto cash to prepare for economic hardship, businesses tend to lower prices to sell their supply as less people are buying. This rewards people for holding onto cash as it increases their buying power if they hold onto cash and wait to buy things. This can even cause a positive feedback loop called a deflationary spiral [0] where everyone is holding onto cash causing prices to fall, causing more people to hold onto cash and so on. That's really bad. You want people spending money and businesses investing money to grow the economy. By injecting money into the economy by buying assets, they hope to counteract deflation. Also, they have not bought any equities yet. They are mainly just buying our own governments debt and mortgage backed securities [1]. [0]: https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral [1]: https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1 https://www.federalreserve.gov/releases/h41/current/h41.htm#...
roenxi 6y ago
Buying and selling stock doesn't create any boost to the economy. But it is the engine for two very powerful positive effects: (1) If a person can start a successful new company, they get assets (stocks) that they can sell for money. This creates an extra incentive to start new companies. (2) Large investors (eg, Buffet-sized) have an incentive to buy significant stakes in companies and improve their management, then sell them to long-term investors. Being able to sell shares for a profit after improving the company creates an incentive to improve companies and then move on to the next one. And there are a couple of other things like that. So stock trading doesn't in itself do anything useful for the economy but it is the point in time where past decisions that did boost the economy are realised as a profit in dollars. It also creates a barometer for measuring what people with money think about a company's chances, which is useful information and hard to get otherwise. There is also a very helpful long-term effect where people who can accurately predict the future make money from stock trading, which means over time (in theory) company ownership becomes biased towards excellent long term planners.

by notJim 6y ago

lisper 6y ago

Holding stocks doesn't stimulate demand, it produces capital. In order to start a business you have to spend money to procure the means of production before you can open your doors. You can put up your own money, you can borrow it (debt financing) or you can raise it by selling an ownership interest in the business (stocks/equity financing). It's true that after the stock is issued, lots of financial games get played that don't actually help the economy, but most businesses would never have been started in the first place if not for the ability to issue stock.

notJim 6y ago
This is the clearest response so far. Thinking about the tech world, we have all this VC money, but all of that is based on the idea that eventually the company will IPO and the VCs will get huge returns. However, given that both VC valuations, and stock market valuations (like P/E ratios, IIRC) are arguably in bubble territory (many have argued this), it doesn't seem like the Fed buying more of these assets is very efficient.
- lisper 6y ago
  The Fed buying up assets is a purely political move to prop up the markets, i.e. to protect investors at the expense of everyone else. It's a dick move for a lot of reasons, not least of which is that it effectively says: all rules are off. We, the Fed, will protect you, the shareholders, from all systemic risk by using our fiscal power to as a guarantor of valuations. That in turn causes more people to buy shares, because when all the risk is gone why the hell not? And that in turn disconnects prices from reality. It is welfare for the wealthy. I am a major beneficiary of this policy and I still think it sucks big fat honking weenies, particularly since it has been implemented by people who rail against welfare for the people who actually need it. The brazen hypocrisy makes me want to retch.
  - mrep 6y ago
    How is it a political move when basically every central bank in the world is doing the exact same thing? Also, they have not bought any equities. They are almost entirely just buying our own governments debt and mortgage backed securities as you can see in their balance sheet [0]. [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1 https://www.federalreserve.gov/releases/h41/current/h41.htm#...
    - lisper 6y ago
      > How is it a political move when basically every central bank in the world is doing the exact same thing? Um, because every central bank in the world is controlled by rich people?

kaycebasques 6y ago

> Given that most stocks by far are held by wealthy people I also won't pretend to be an expert here, but I think this is where your thinking may be going astray. There are lots of retirement-age people who are counting on their pension funds to fund their retirement. Pension fund managers assume steady growth in stocks, something like 7-10% per year. If stocks don't meet that threshold, major parts of the pension system run into big trouble. Pension plans have trillions of USD in assets. This article [1] estimates ~$9T. Retirement-age people in general are a powerful constituent. [1] https://www.investopedia.com/articles/credit-loans-mortgages/090116/what-do-pension-funds-typically-invest.asp https://www.investopedia.com/articles/credit-loans-mortgages...

notJim 6y ago
I always keep this paper from NBER handy https://www.nber.org/papers/w24085 https://www.nber.org/papers/w24085, especially this chart: https://imgur.com/h8Fo8yx https://imgur.com/h8Fo8yx. Stocks are in fact held primarily by the wealthy. This is a separate question though than whether they are also very important for retirement accounts. You are 100% right about that, even though middle-class retirement accounts represent a small share of the overall market.
charwalker 6y ago
Although many regular people have stocks held until retirement, they don't make up a majority of stock owners: https://finance.yahoo.com/news/the-richest-1-own-50-of-stocks-held-by-american-households-150758595.html https://finance.yahoo.com/news/the-richest-1-own-50-of-stock... And according to Wikipedia data, in 2016 84% of stock was owned by the top 10%. That leaves 16% of the market to everyone else, a very small %. https://money.com/stock-ownership-10-percent-richest/ https://money.com/stock-ownership-10-percent-richest/

ry_co 6y ago

The main way speculative investors benefit the company is that they hold stocks because they believe it will be more valuable in the future, so that they can sell it for a profit. This demand for the stock drives up the price. Since stock is essentially a portion of the company, this also drives up the valuation of the company. Since the company is more valuable, they can offer equity to investors for a higher price, allowing them to invest in their own business and grow. It's indirect, but it's a very real benefit. Edit: Adding to this, the company's reinvestment of funds generated by issuing stock drives demand in other places of the economy. Investing in your own business means spending money on people, infrastructure, and other goods you need to offer your company's service. This necessarily drives demand for these goods. Additionally, this creates cascading demand through the keynesian multiplier effect.

notJim 6y ago
Do companies routinely issue new stock to raise money? I thought it was a rare occurrence, obviously the IPO, and then occasionally afterward. Your edit is clear.

kalipsosu 6y ago

It suppose to work like that. But it does not apperantly. In the ideal world growth should mean more R&D. Mariana Mazzucato has several books in this topic. Check it out.

jcfrei 6y ago

In the US (and other countries) a lot of wealth is accumulated in 401ks or other pension like schemes. When people see that their retirement funds have a high value then they are more willing to spend money in the present. But since pensioners are spending less money on average than people in their working ages the effectiveness of stimulating demand via higher stock prices is limited.

mrep 6y ago

It's to fight deflation. With people losing their jobs and holding onto cash to prepare for economic hardship, businesses tend to lower prices to sell their supply as less people are buying. This rewards people for holding onto cash as it increases their buying power if they hold onto cash and wait to buy things. This can even cause a positive feedback loop called a deflationary spiral [0] where everyone is holding onto cash causing prices to fall, causing more people to hold onto cash and so on. That's really bad. You want people spending money and businesses investing money to grow the economy. By injecting money into the economy by buying assets, they hope to counteract deflation. Also, they have not bought any equities yet. They are mainly just buying our own governments debt and mortgage backed securities [1]. [0]: https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral [1]: https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1 https://www.federalreserve.gov/releases/h41/current/h41.htm#...

roenxi 6y ago

Buying and selling stock doesn't create any boost to the economy. But it is the engine for two very powerful positive effects: (1) If a person can start a successful new company, they get assets (stocks) that they can sell for money. This creates an extra incentive to start new companies. (2) Large investors (eg, Buffet-sized) have an incentive to buy significant stakes in companies and improve their management, then sell them to long-term investors. Being able to sell shares for a profit after improving the company creates an incentive to improve companies and then move on to the next one. And there are a couple of other things like that. So stock trading doesn't in itself do anything useful for the economy but it is the point in time where past decisions that did boost the economy are realised as a profit in dollars. It also creates a barometer for measuring what people with money think about a company's chances, which is useful information and hard to get otherwise. There is also a very helpful long-term effect where people who can accurately predict the future make money from stock trading, which means over time (in theory) company ownership becomes biased towards excellent long term planners.