Because the money on one side of the sheet exactly balances the new ownership stake on the other. There is no goods or services gradient that makes the cash flow.

If a business is already bound by the abilities of its personnel rather than availability of resources, the investment won't do anything at all. If you buy 50% of a business with cash that makes it now worth twice as much as it was worth before, you haven't done anything more than move the cash you own in your own name to the cash you own in the name of your business.

That's not spending. That's just playing a shell game with yourself.

Loans are similar in that you are exchanging current cash for future cash of roughly equal value.

To create a cash flow in the economy, there has to be a gradient between producer and consumer. Food flows from farmer to eater, so cash flows back from eater to farmer. The eater cannot resell his food to someone else after he has eaten it. The eater has to produce something--some form of good or service that someone else can consume--in order to pay the farmer. Maybe the farmer gets sore feet. The eater could sell foot massages. Goods and services flow in one direction, and the cash flows in equal amounts in the opposite direction. And it mostly balances out.

Money can't just move around. It also has to change owners.

One might call passive investment "hoarding" because it does not really encourage economic activity.

See, "investment" is such a loaded term. Somebody who uses their savings to open a restaurant is clearly making an "investment", and this form of investment is directly positive for the economy.

When you put your money into e.g. an index fund, the situation is much less clear. You help drive up stock prices, but this does not immediately say anything about the real world. At the same time, the counterfactual is that you would have spent this money on consumption, or to buy a new car, or whatever.

Those latter actions directly increase the demand that companies see, which encourages those companies to expand, i.e. to increase real world economic activity.

Don't get me wrong: individual saving is a wonderful thing, and there are all sorts of good reasons for it. But if nobody consumes, the economy has no reason to grow...

This is a good response.

In theory, if I put $N into an equity, then someone else will get $N out, because efficient market and all that. That frees the same $N up for that other person to consume/invest.

In practice there is somewhat the detail of equities being bid up a bit by people wanting to own them.

I don't follow. If I buy stock during an IPO, the company gets the money to either reinvest or invest in something else.

If I buy stock post-IPO, that provides cash to someone else to either invest in additional stock or spend on consumables.

I don't agree that investing in any way relates to hoarding.

Basically, what VexXtreme said, but the operative word is the "might" in

> the money used to buy a share has to go to the seller of the said share, who might in turn use it to consume

It's really simple:

1. When you spend your money on consumption, there is a guarantee that the money is used for real world economic activity.

2. When you spend your money on building your business (the restaurant example in my comment), there is a guarantee that the money is used for real world economic activity.

3. When you put your money into an index fund, there is no guarantee that the money is used for real world economic activity.

It might be used in this way via indirect channels, but there is no guarantee - after all, the money might just remain stationary in a bank account, of which there are many - and so the positive economic effect is most likely less than in the first two cases. (Again, the positive effect for me as an individual who saves is obvious; I'm talking about the effect on economic activity.)

He seems to think that equities are some kind of sinkholes where the money simply gets tied up or disappears. He doesn't understand that the money used to buy a share has to go to the seller of the said share, who might in turn use it to consume. It's actually an incredibly common fallacy that keeps getting brought up time and again.

Not all of it is hoarding, but some of it is. The effects on the economy between letting your money sit in government bonds vs. purchasing a consumable cannot be even close. The worst is investing in foreign companies - that wealth completely disappears from the domestic economy. Stock options and commodities and currency speculation create no wealth, only move funds from one person to another. Even typical investments are mostly a closed loop where money moves from one wealthy investor to the next, never entering the general economy.

Our modern society exists because of accumulated wealth. Roads, buildings, computers, cars, refrigerators, factory equipment, power grids: those are accumulated wealth. (There are also intangible things that accumulate as well, but try landing on a desert island with a copy of Wikipedia and then attempting to build a computer.)

The American economy is over 70% consumption. This doesn't mean "increase consumption to increase the American economy." We will probably never get under 50% consumption, because we are a mature economy with creature comforts. But the more we invest, the more stuff our children will have.

Consumption is the easiest thing to gin up in the short term, so governments that are on rapid election cycles always can choose policies to bump them up. But, although I believe Keynesianism is correct when it says you should pump consumption to get out of a recession, I also believe Keynesianism is correct when it says you should not be encouraging consumption when not in a recession. You need to save when times are good and spend when times are bad.

This doesn't make sense at all. If I buy a gov't bond, my money goes to the gov't to spend (they certainly aren't saving anything).

If I send my money to a foreign company, the economy is global. It may or may not benefit my country, but it sure isn't being hoarded.