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The article says that because of expansionary monetary policy, "[Businesses] tended to borrow money and invest in their own shares." To me, this statement seems

The article says that because of expansionary monetary policy, "[Businesses] tended to borrow money and invest in their own shares." To me, this statement seems nonsensical. Here's why: Fed policy affects things by changing the aggregates. But stock ownership can never change in the aggregate. If you have extra money and you buy some stock, for every dollar you spent buying stocks, someone else now a has a dollar from selling you the stocks. A common myth is that money can go "into" an asset class. It cannot. It's impossible for extra money to end up invested in stocks in aggregate, because for every buyer there must be a seller. Individually, you may have less money, but that's balanced by someone else having even more money now. Stock sales will never change the aggregate money supply nor aggregate investment nor total stock ownership. So what is cringely saying here? I'd appreciate if anyone could explain the logic. I don't want to pre-judge, but my suspicion is that monetary policy is a subtle issue and that blaming the Fed is fun, both of which lead to mistakes such as this one. (In fairness, perhaps the author means to say that specifically IBM used low interest rates to buy stock and not that businesses generally did this. That is a charitable interpretation that makes more sense and deviates only a little from what was actually written.)

scholia 12y ago
He's channeling someone else, which is why the first three words in Cringely's article are "Economist David Stockman". See https://news.ycombinator.com/item?id=8085628 https://news.ycombinator.com/item?id=8085628
lkrubner 12y ago
About this: "It's impossible for extra money to end up invested in stocks in aggregate, because for every buyer there must be a seller." If I buy a share for $1, and then a year later sell it for $10, then the new buyer is putting $9 extra dollars into that asset class.
- tedsanders 12y ago
  If person A buys a share for $1, then another person must sell a share for $1. A year later, if person A sells a share for $10, then another person must buy a share for $10. At all times, someone is always holding the money created by the Fed. The money never "went in" to stocks. Sure, the valuation of the stocks changed, but the aggregate money supply and the aggregate stock ownership never changed.
  - snowwrestler 12y ago
    The money supply is constantly changed by the Fed in response to demand for cash, to maintain consistent inflation. In 2008 when everyone started selling their stocks, the Fed had to create massive amounts of money to match the appreciation of the stocks that were being sold. Thus, because the money supply grew in that situation, people said money was "coming out of" stocks. In reality it was value coming out of stocks, and the money was being created by the Fed. So think of it as shorthand for what's really happening.
    - tedsanders 12y ago
      Ah, but you're committing the very same fallacy! It's not possible that "everyone started selling their stocks" in 2008. That statement makes zero logical sense. Every seller was matched by a buyer. We might just as well say that everyone starting buying stocks in 2008. I think what often links stock prices with demand for money is risk preferences. If stocks become more volatile (which they tend to do while falling), investors deleverage. This deleveraging reduces the velocity of money and thereby increases the demand for cash. If unchecked, this will cause deflation and requires the Fed to create more money in response.
      - snowwrestler 12y ago
        Every seller was matched by a buyer but not at the same price. If a stock starts selling at $100/share and after 1,000,000 transactions is selling at $50/share, then some money came out of the stock despite the number of shares not changing.
        tedsanders 12y ago
        No, no, no. :) Every seller is matched by a buyer at the same price! I think you are making claims without thinking them all the way through. Let's go through an example: Imagine there is a company with 1,000 shares. Alice buys a share from Bob for $100. This trade implicitly values the company at $100,000. Later, Carol buys a share from Dave for $50. This new trade implicitly values the company at $50,000. The value of the company fluctuated by $50,000, but if you look at every trade, an equal number of dollars and shares were exchanged on each side. Alice lost $100 of money while Bob gained $100 of money. Carol lost $50 of money while Dave gained $50 of money. No money "came out" of the stock. The aggregate stock ownership stayed the same: 1,000 shares were owned both before and after. The aggregate money supply stayed the same: $150 were in people's pockets both before and after. The only thing that changed was the market consensus of the price of the company. The bottom line is that price changes of an asset class don't mean money is being soaked or released. Individual ownership can change, but aggregate ownership cannot. Does that sound reasonable? I hope this conversation is helpful for people reading this comment thread.

scholia 12y ago

He's channeling someone else, which is why the first three words in Cringely's article are "Economist David Stockman". See https://news.ycombinator.com/item?id=8085628 https://news.ycombinator.com/item?id=8085628

lkrubner 12y ago

About this: "It's impossible for extra money to end up invested in stocks in aggregate, because for every buyer there must be a seller." If I buy a share for $1, and then a year later sell it for $10, then the new buyer is putting $9 extra dollars into that asset class.

tedsanders 12y ago
If person A buys a share for $1, then another person must sell a share for $1. A year later, if person A sells a share for $10, then another person must buy a share for $10. At all times, someone is always holding the money created by the Fed. The money never "went in" to stocks. Sure, the valuation of the stocks changed, but the aggregate money supply and the aggregate stock ownership never changed.
- snowwrestler 12y ago
  The money supply is constantly changed by the Fed in response to demand for cash, to maintain consistent inflation. In 2008 when everyone started selling their stocks, the Fed had to create massive amounts of money to match the appreciation of the stocks that were being sold. Thus, because the money supply grew in that situation, people said money was "coming out of" stocks. In reality it was value coming out of stocks, and the money was being created by the Fed. So think of it as shorthand for what's really happening.
  - tedsanders 12y ago
    Ah, but you're committing the very same fallacy! It's not possible that "everyone started selling their stocks" in 2008. That statement makes zero logical sense. Every seller was matched by a buyer. We might just as well say that everyone starting buying stocks in 2008. I think what often links stock prices with demand for money is risk preferences. If stocks become more volatile (which they tend to do while falling), investors deleverage. This deleveraging reduces the velocity of money and thereby increases the demand for cash. If unchecked, this will cause deflation and requires the Fed to create more money in response.
    - snowwrestler 12y ago
      Every seller was matched by a buyer but not at the same price. If a stock starts selling at $100/share and after 1,000,000 transactions is selling at $50/share, then some money came out of the stock despite the number of shares not changing.
      - tedsanders 12y ago
        No, no, no. :) Every seller is matched by a buyer at the same price! I think you are making claims without thinking them all the way through. Let's go through an example: Imagine there is a company with 1,000 shares. Alice buys a share from Bob for $100. This trade implicitly values the company at $100,000. Later, Carol buys a share from Dave for $50. This new trade implicitly values the company at $50,000. The value of the company fluctuated by $50,000, but if you look at every trade, an equal number of dollars and shares were exchanged on each side. Alice lost $100 of money while Bob gained $100 of money. Carol lost $50 of money while Dave gained $50 of money. No money "came out" of the stock. The aggregate stock ownership stayed the same: 1,000 shares were owned both before and after. The aggregate money supply stayed the same: $150 were in people's pockets both before and after. The only thing that changed was the market consensus of the price of the company. The bottom line is that price changes of an asset class don't mean money is being soaked or released. Individual ownership can change, but aggregate ownership cannot. Does that sound reasonable? I hope this conversation is helpful for people reading this comment thread.