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A comment on u/DeepFuckingValue and the GameStop Reddit mania. Parent comment

Re:u/DeepFuckingValue and the GameStop Reddit mania by smaddox on Friday January 29, 2021 @09:06PM (#25965288)
There's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total demand, which results in lower prices.

When stocks drop, excess income and capitol drops, reducing demand in the wider market. Companies come under pressure to cut costs, and end up doing layoffs. This further lowers demand, resulting in a feedback loop.

This is all described by Minsky's financial instability-hypothesis. And Steve Keen has built fully dynamic mathematical models that exhibit the process.

[ Parent | on HN ]
Re:u/DeepFuckingValue and the GameStop Reddit mania by codeisawesome on Saturday January 30, 2021 @12:05AM (#25966314)
Okay - that begins to explain the problem a bit. So people being afraid and just holding on to their newfound gains in just cash or say, T-bills - can depress the entire economy by a lack of interest in stocks. Structurally it seems a little problematic though that companies would depend so much on issuing stock to fund their operations or even growth - ideally they should be able to do that with revenue (or even debt)...
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