Andrew and Barney are shipwrecked on an island with nothing but their clothes, the cash in their wallets, and a book Andrew has. Barney pays Andrew $100 for the book since he hasn't read it but Andrew already had. Later, after finishing it Andrew is able to buy it back for $80 because it's old to both of them but has a bit of sentimental value for Andrew. The dollar denominated wealth on the island has gone down by $20 but the same stuff and same number of dollars are there.

The consumer price index on the island has gone from $100 for the basket of one book, to $80 for the same basket, causing an increase in the measured value of currency equal and opposite to the decline in the price of the good. If you made the CPI more realistic by including other goods on the island, this website would show the dollar go up as the stock market (of booksellers with an interest in book prices) went down.

The book is an asset in this example. CPI isn't relevant, because trading the book does not affect it.

The book doesn't represent any invested capital, so let's not say that it is an asset. Instead, let's say that there are shares in a book making company, tracked in the index, and also books, which will be in the CPI.

The value of being able to make one book per day is linked to the price of a book, which means that on the island, the CPI and the stock market have to rise and fall together. That causes the stock market and currency to move inversely.

Do you want an answer to your original question or do you want to try and argue that the stock market and currency move inversely?

Because if you want an answer, you aren't making changes to the example that will help you understand. You're introducing confusing factors that are not needed. The original example gave a neat little illustration of how wealth-as-measured can drop without money disappearing. Don't bring CPI in to it (and stock prices don't drive the CPI so that is a reasonable assumption).

If you want to argue that the two move inversely then go ahead and don't mind me, but you might like to add in some evidence or case studies. And you'll need to be precise about real vs nominal, and probably start modelling other effects.

My original question was how wealth-as-measured could disappear when dollars were included, not how demand for stocks could shift to demand for dollars. In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological) - and that is not what we see happening on the linked page. That's what my question is.

> In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological)

this is incorrect

I mean the value of the dollar as measured by the CPI.

You do mean that, but it doesn't have a lot of bearing on the correctness of your argument. I suspect you've assumed that wealth is neither created or destroyed somewhere in your logic, because what you are saying would make sense if that was an assumption. But that would be a poor assumption if you've made it.

CPI is a tool for adjusting the value of a dollar, but it doesn't have any bearing on the value of the total economy vs the value of all the dollars in existence. All the dollars in existence might buy the entire economy many times over or they might buy a tiny fraction of it. And that ratio changes continuously (both from money creation and economic activity). There is no inverse relationship mediated by the CPI.

There are three charts on the linked website - bonds, dollars and stocks. None of them are exactly measures of wealth. My question is about how their properties as mutual numeraires could allow them to all fall at the same time.

People are willing to pay fewer dollars for each asset class.

People can't be willing to pay fewer dollars for the third asset class, which is dollars.

you absolutely can pay fewer dollars for dollars delivered at some point in the future

tautologically the price of one dollar will always be one dollar but they can be less willing to spend those dollars on anything, and simultaneously less willing to sell assets they already own for dollars.

I liked this explanation. Although to attach to it - in this example the price of the book is set by magic/intuition to illustrate the effect. In the real world, the prices are set by less flexible forces of supply, demand and people estimating valuation - usually in a way that means the price has to fall in some relatively narrow band. But after the dust settles on those inflexible forces, it ends up looking the same as this example.

I would expect the demand for the book to go down since the entire population has read it.

Of course, you could use the pages to help start a fire for warmth or cooking fish you will be catching.

> How can everything go down at once, doesn't the money have to go somewhere?

How can everything go up at once, doesn't the money have to come from somewhere?

Certainly we can have everything go up whenever we find more resources than we consume. Natural resources, when exploited create value for all. A more energy and resource rich world causes everything to go up.

Why is it so hard to understand that increasing energy and resource constraints causes everything to go down?

And, more specific to our situation, much of the perceived value is credit. If I owe you $100,000, as long as you know I'll pay, you can consider that part of your value. But if I don't make enough to pay you, suddenly you aren't going to get that money.

Our entire global economy is massively over-leveraged and the only way to maintain that is perpetual growth, in a real sense of having access to ever more energy and resources. When the future delivers less than expected we start seeing that value disappear from the books.

No, the money doesn't have to go anywhere. Nor does it have to come from anywhere when everything goes up at once. Because there is no money involved. It's sort of like asking "where do the pounds go when I lose weight?"

You are conflating using "dollars" when used as a unit to measure the value something, with "dollars" as an asset in the economy when used to conduct trade. This confusion is easy to make (and widespread) because we use the same word for both things.

The vast majority of wealth in an economy is not in monetary form. It's in hard and soft assets: land, buildings, cars/trucks, factories, raw materials, home appliances, copyrights, patents, film libraries, etc. The economic value of all those things is just measured in dollars.

Money (cash) is not wealth. Wealth can be created, or destroyed. The clearest explanation I've read for this was a PG essay: http://www.paulgraham.com/wealth.html specifically the "Money Is Not Wealth", "The Pie Fallacy", and "Craftsmen" sections. Of course this essay has a positive/optimistic take on it, but certainly wealth can be destroyed as well.

That's true, but I am not aware of any wealth indices, only price indices, and price indices can only increase and decrease relative to each other.

> I am not aware of any wealth indices

Term you’re looking for is “benchmark.”

The stock prices capture sentiment. The price people are willing to pay given all the other places their money could go.

People are selling in anticipation of the market going lower, to cover debts, to take advantage of lower asset prices, opportunity costs, margin calls, etc.

When they sell they're wanting money, an equal amount of money to the stock they're selling. That should make the dollar go up by the amount the stock went down.

(I don't really believe this, because it clearly does not describe the chart, but it makes sense and I want to understand why it doesn't work like that.)

Because money is a notational bookkeeping exercise at this point in time and has been since the dollar went off the gold standard. It can't be affected by demand for things as small as stocks, but only its relative demand to other notational currencies.

The total US stock market cap is $45T[1] and M2 is $20T[2]. Are you sure currency prices can't be influenced by the stock market?

[1] https://www.statista.com/statistics/1277195/nyse-nasdaq-comp... [2] https://www.federalreserve.gov/releases/h6/current/default.h...

I think that just furthers the point- there isn't enough 'money' in M2 to 'pay' for all the stocks in the stock market. Yet there that value sits and real estate is another 20+ trillion in land value.

In other words the actual 'money' is a transactional grease for the wheels of commerce- notational/bookkeeping mechanism.

The sale of Apple (the largest value stock in America) as a whole probably couldn't be accomplished in cash only, but even if it was, it'd be mostly notational numbers in an account somewhere and wouldn't 'flood the market' with dollars and crash the value of the currency.

A change in preferences from holding dollar reserves to holding stocks could change the value of the USD, that's what I am saying.

Except that you've got a Federal Reserve actively ensuring that there aren't too many (or too few) dollars in circulation for the level of interest rate they want to maintain. They do it by buying and selling bonds rather than stocks, but the principle is the same. So we don't have to worry about shifts in portfolio preferences leading to an unexpected oversupply or undersupply of dollars

But more people wanting to hold AAPL instead of hold cash absolutely will reduce the amount of AAPL stock your $1k is able to buy, of course

Maintaining an interest rate isn't the same as maintaining a fixed rate of CPI growth, especially not in the short run.

Sure, but we're not talking about fixing the rate of CPI growth (stock prices aren't a constituent part of that and don't have a fixed relationship with it).

We're talking about the effect of wealth holders wanting more of their investments in stocks or more of them in cash on the USD. An increase in demand for the liquidity of currency holdings, or an increase in demand for stocks due to perceived improved returns could affect the dollar through knockon effects on availability of credit, but the interest rate for that credit is the price of the bit the Fed fixes.

Change in preferring the Yen or the Euro, maybe, but I've never read/seen anything that would reinforce the idea that the dollar would be weakened by preference for holding other assets whose values are ultimately figured by their worth _in dollars_.

Money doesn't go into the stock market. If you buy a stock from me today, I can use the exact same money to buy bread tomorrow. That money keeps circulating in the economy, it doesn't go into or out of the stock market.

Exactly. The current stock price is just the last price it traded at, or some measure of supposed liquidity or depth in the market at some price. That liquidity just exists as unfilled orders or quotes on the order book on an exchange and can vanish in an instant.

The other thing is that buying stock for a company A isn't the same as "investing in" company A, since company A doesn't get your money...it's a secondary market!

As buffet says, the stock market is a voting machine in the short term and a weighing machine in the long-term.

It circulates in theory. In practice people keep saving ever greater amounts of money.

Short unambiguous answer is yes. However, the destination doesn’t have to be limited to stock/bond markets. Think property, gold or toilet paper rolls. Last one is a joke.

It’s hard to accurately measure investments flowing into property (what part of the world?). There are many variables to consider and I don’t think there’s a single trend that will end up as a winner. My hypothesis is that we will see many (eg. very wealthy doing X in Y country/city, middle class doing A in B country/city, etc).

>Think property, gold or toilet paper rolls. Last one is a joke.

Since corporations produce commodities, wouldn't gold and toilet paper be on the stock market?

I guess gold reserves (as opposed to production) and property would have a lot of ownership outside the S&P 500. I wonder if there are any super-broad indices that include them in a cap-weighted form.

Unrealized gains can simply evaporate. If a crap company has a 1 B valuation and it fails, that money is gone. The value in stockholders portfolio just goes down, not to anywhere in particular.

Recent noahpinion episode about this very topic:

https://noahpinion.substack.com/p/where-does-the-wealth-go-w...

According to that explanation, the index value of a dollar should still go up when the price of all assets goes down.