Fred wrote: > I agree, with an IPO, new money does enter the system. > After that, the shares are just exchanged. > > If a firm is profitable, then money enters the system by increasing > corporate or partnership assets, and if a firm has losses, > money leaves the > system, by decreasing assets. Money enters with IPOs and profits, and > leaves with losses.
What "system" are we talking about? The whole economic system of the world? Or some limited sub-system, like the NYSE (stock market)? In any case, profits & losses don't really exist, they are two names of the same calculation of an individual company's total revenue - total costs; positive or negative. Calculated for a set historical time period. Surely some "money - share" sub-system exists where the underlying values of the company, whether profits/losses or asset valuations, are excluded. (Not to mention the need to define what "money" is) But generally the important question is "how much money is in the (sub)system"? And however it is calculated, for that particular "money - system", it makes sense to treat the system as having money/ value leave or enter the system, based on changes in "how much money" is there. > > If the share price increases, the first investor can sell at a > > higher price; this is new money entering the system. > > But the seller receives that money, so the money leaves the > system as soon > as it comes in. If a person sells shares and uses the money > to buy a car, > that money is no longer in the stock market. Some money must > also be paid > to the brokers, and that money also leaves the stock market. In my view, the new buyer's new money is represented by the value, as measured by market price, of his new owned shares. "How much money"? = the #shares * the price. "How much money in the whole stock market"? = total #shares * relevant price/specific share. The market capitalization; or a firm's market capitalization, or the individual's portfolio value -- marked to market. (I don't see how you claim that profits/losses do affect the quantity of money in the stock market, but real stock purchases do not -- though I also think it's not so important.) But a problem is that the last, marginal purchase price determines the whole capitalization. In a fairly stable market, this doesn't matter much. Returning to Jonathan's original question: > I was wondering if someone can explain to me if the > precipitous > drop in the U.S. Equity and Debt markets have been solely as > a result of > money actually leaving the system to go into more secure > things like money > market instruments, or is it merely that supply has > outstripped demand and > there is not enough money to go around. > There was a valuation bubble -- irrational exuberance (for 3 years after Greenspan warned of it!) Investors were buying shares at higher prices than a year, or month, or week before, because "everybody else" was doing so, and "making money", as measured by their own portfolio market values. It was basically a pyramid scheme, whereby everybody is depending on some "bigger" fool, later, to pay them off. So much that Amazon, a big new dot com company which had NEVER made a profit, had a higher market capitalization than ALL the auto companies combined. Those 1999, early 2000 investors soon had very expensive shares whose market prices were 10% or 1% or 0.1% of the value they paid -- or were totally worthless. THAT problem, in America, is already "fixed". The share-price bubble burst, most shares are trading at more normal Price/Earnings ratios, and the dotcoms know that they at least have to have a hope of making a profit, soon, in order to get more new money. Lots of investors (most?), but not Warren Buffet, have lost tons of money. (In most normal times, there IS a big relationship between making profit and share price.) The mal-investment and "overinvestments", made before the bubble burst, have not all been resolved yet, nor the mis-employment. And prolly not the Sili Valley real estate "bubble" (?); not yet. Tom Grey's ideas, anyway
