Re:Why is the stock market rallying when the economy is so bad?
by listenallyall on Monday May 11, 2020 @07:08AM
(#23140869)
Yes, obviously, stock markets are essential and efficient capital allocators, in aggregate. Perhaps I shouldn't have simplified. But a single retiree's $500k purchase of some megacorp's stock will have effectively zero impact, like a drop in the ocean. As you say, it's up to someone "eventually down the chain" to actually deploy the capital. Investing in an index fund adds even more layers. In contrast, a community bank deposit will get multiplied and quickly deployed directly to local businesses or homeowners.
The point being, `eanzenberg`'s idea that money in a savings account just sits there idly doing nothing, is false.
Re:Why is the stock market rallying when the economy is so bad?
by chii on Monday May 11, 2020 @10:40AM
(#23142617)
i would argue that money invested in stock market has an even higher investment velocity than a bank deposit.
after all, a bank cannot invest in risky assets. "eventually down the chain [of stock investments]" is very fast in terms of timing, and i guarantee you it is faster than a bank's loan process for small businesses.
that's absolutely not true.
The buying stocks (or indirectly via index funds) must mean somebody else is selling.
The person who sold the stocks will put the money obtained from the sale to use somewhere else. It moves capital just like any other economic transaction.
It may be that the seller will "just" buy another stock - and it looks like nothing's changed. But eventually a seller down the chain is either going to invest in something other than stocks (e.g., a bond), buy new IPO stocks, or to consume the money (e.g., retiree selling stocks to fund their living cost).
The problem with banks doing loaning is that they have to be conservative. They cannot loan out money that might not return - since they must return their depositor's money.
Investors, on the other hand, do not have this conservatism (for the right price). That's why stocks exist, and that's why bonds exist (for those willing to risk less than stocks).