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The problem with purchasing assets in an environment like this is that you are transferring money from one cash hoarder to another. The velocity of money is low

The problem with purchasing assets in an environment like this is that you are transferring money from one cash hoarder to another. The velocity of money is low. In the stock example, companies are also wealthy entities that hold cash when interest rates are cheap. For example, in 2017 (when rate targets were just above 0%) Apple had hundreds of billions in cash in Ireland and other tax haven nations. When Abenomics began in Japan and the Bank of Japan introduced zero interest rates and quantitative easing and yield curve control, one of the first things that happened was that companies started building huge money stores. When inflation remains stubbornly low, there isn't a strong need to get rid of your cash because it isn't losing a lot of value and you take little risk. You may as well hold on to it. You're right that these economic activities are better than nothing but they aren't the kinds of activities that puts a generation of people to work and start building the kind of wealth that supports a family.

WalterBright 4y ago
You could imagine that a cash hoard is passed around rich people, but there's going to be someone in the chain who is going to spend it on something other than art. Because rich people simply do not hoard cash. They do not have Scrooge McDuck cash vaults. > companies started building huge money stores. They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested. > You may as well hold on to it. Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
- zeusk 4y ago
  > Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest. Not really, they'd rather buy treasuries and deposit at the FED for a risk-free 4-5% return and it shows in FRED data; roughly $2.5 Trillion dollars are currently held at just Fed's overnight repo facility. In return when banks do want to lend it out, poor people (often with bad or average credit) get ludicrous interest rates like 15-25%. https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD
- CoolestBeans 4y ago
  Right so continue the money cycle. Lets say you take out a loan from the bank. There’s a low interest rate but it’s not zero so you better do something with it because you’ll have to pay the bank back. Maybe you could start a business making widgets but that’s really risky. It would be smarter to buy an appreciating asset like some real estate or maybe a share in a company. And hey a lot of people are buying assets so you know that as long as rates stay low someone else can borrow money to buy it off you at a higher price and you can pay the bank back and pocket some money. Or worst case someone with money saved might take it off your hands. Thats fine but we didn’t actually provide a good or service to the economy! All that’s happening is money is just wizzing around in equities markets inflating asset prices at best or creating dangerous bubbles at worst. If neutral rates were higher then people with cash who want to invest would be more incentivized to buy a bond instead of a stock. But because the rate is higher the issuing company has to make at least that percentage to break even let alone make a profit. So they will need to make more widgets, which means they have to hire more people. The down side of course is that rates are so high that companies can’t make enough money to pay back debt holders so they default and fail and have to fire everyone.
- imtringued 4y ago
  > rich people simply do not hoard cash. 70% of the money supply in Germany is literally sitting in checking accounts. If people actually saved money by lending it via certificate of deposits according to classical economics then this number would be much lower. >They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested. The parent said cash hoarder to cash hoarder and that is true when you buy stocks or art and neither consume the newly obtained money nor lend it out. >Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest. As I said above, the money isn't lent out, new money is created with loans and the money that is being created is also kept in checking accounts so nobody is bringing their money to the bank in the way you imply. Money in checking accounts is essentially dead money. It is like the money in Scrooge McDuck's vault.
  - WalterBright 4y ago
    Banks loan out the money that is deposited. People don't borrow money in order to let it sit in a bank account, either.
    - spiralx 4y ago
      No they don't, bank loans create new money directly. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

WalterBright 4y ago

You could imagine that a cash hoard is passed around rich people, but there's going to be someone in the chain who is going to spend it on something other than art. Because rich people simply do not hoard cash. They do not have Scrooge McDuck cash vaults. > companies started building huge money stores. They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested. > You may as well hold on to it. Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.

zeusk 4y ago
> Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest. Not really, they'd rather buy treasuries and deposit at the FED for a risk-free 4-5% return and it shows in FRED data; roughly $2.5 Trillion dollars are currently held at just Fed's overnight repo facility. In return when banks do want to lend it out, poor people (often with bad or average credit) get ludicrous interest rates like 15-25%. https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD
CoolestBeans 4y ago
Right so continue the money cycle. Lets say you take out a loan from the bank. There’s a low interest rate but it’s not zero so you better do something with it because you’ll have to pay the bank back. Maybe you could start a business making widgets but that’s really risky. It would be smarter to buy an appreciating asset like some real estate or maybe a share in a company. And hey a lot of people are buying assets so you know that as long as rates stay low someone else can borrow money to buy it off you at a higher price and you can pay the bank back and pocket some money. Or worst case someone with money saved might take it off your hands. Thats fine but we didn’t actually provide a good or service to the economy! All that’s happening is money is just wizzing around in equities markets inflating asset prices at best or creating dangerous bubbles at worst. If neutral rates were higher then people with cash who want to invest would be more incentivized to buy a bond instead of a stock. But because the rate is higher the issuing company has to make at least that percentage to break even let alone make a profit. So they will need to make more widgets, which means they have to hire more people. The down side of course is that rates are so high that companies can’t make enough money to pay back debt holders so they default and fail and have to fire everyone.
imtringued 4y ago
> rich people simply do not hoard cash. 70% of the money supply in Germany is literally sitting in checking accounts. If people actually saved money by lending it via certificate of deposits according to classical economics then this number would be much lower. >They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested. The parent said cash hoarder to cash hoarder and that is true when you buy stocks or art and neither consume the newly obtained money nor lend it out. >Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest. As I said above, the money isn't lent out, new money is created with loans and the money that is being created is also kept in checking accounts so nobody is bringing their money to the bank in the way you imply. Money in checking accounts is essentially dead money. It is like the money in Scrooge McDuck's vault.
- WalterBright 4y ago
  Banks loan out the money that is deposited. People don't borrow money in order to let it sit in a bank account, either.
  - spiralx 4y ago
    No they don't, bank loans create new money directly. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...