M3 = stealing from the laborer to give to the investor?

[latefordinner]

In some economic circles, it's accepted as a given that one of the main reasons the stock market continues to climb even as the subprime market melts down and economic growth is slowing is because the fed keeps pumping money into the system at a rate far exceeding current economic growth. This will, of course, eventually result in inflation, but in the meantime those who are wealthy enough to have considerable amounts of money invested in equities get to take the bubble for a ride and get nice returns.

In this context then, I wonder if we could say that the financing of an equity bubble through jacking up M3 is a policy that harms those that have nothing invested more than it harms those who own considerable amounts of stocks.

[Dane S]

For now, but won't the investors be hurt much more when the bubble finally bursts?

[Copernicus]

If someone truly has nothing invested either on his own or by proxy through a retirement plan you can only impact him indirectly through economic effects. Every stock sale has a buyer and a seller and someone who is acquiring on the way up needs to get out before the artificiality of his gains is recognized. Those that suffer are the buyers who cant get out in time. In this scenario that would probably be the beneficiaries of institutional investors..pension funds, mutual funds etc.

[Copernicus]

There are a number of articles that discuss trying to time the market by tracking growth in money supply and the conclusion is either that it doesnt work or that it doesnt work as well as a buy and hold strategy. If the premise is that growth in M3 fuels growth in stock prices there would have to be some correlation.

Unless all of those analysts looking for trading strategies are missing something, the original premise is pretty well debunked.

My posted links using the URL UBB code doesnt work for some reason (error messsage about intranet settings?) clicking on this seems to work though :

http://www.marketwatch.com/News/Story/St...=mktw&dist=

[bobman0330]

There's a basically insurmountable stumbling block to this theory. Most workers are nearly indifferent to inflation. Inflation decreases the value of things that have a fixed value:
-Cash
-Fixed-rate debt
-Contracts specifying a nominal price for something.
Except to the extent that laborers hold cash or are tied to long-term, non-renegotiable labor contracts, they should be economically indifferent to high inflation. Obviously that's not perfectly true because of transaction costs, and because unpredictable inflation will create economic problems that hurt everyone, but it's broadly accurate.

The people hurt most by inflation are corporate bondholders, banks and investors in the prime (fixed) mortgage market, and people who hold lots of cash. Those people are (broadly-speaking) investors rather than laborers.

An asset bubble is necessarily zero sum, except to the extent that wealth effects drive excess consumptions. In conclusion, I believe that your proposed theory is not accurate.

[Copernicus]

I agree with your conclusion but i dont think youre responding to the original premise. I took that premise to mean that there is a direct link between M3 growth (presumaly beyond the growth justified by GNP growth) and the stock markets. You seem to be responding to some sort of indirect link resulting from inflation in the price of goods.

[nietzreznor]

[ QUOTE ]
There's a basically insurmountable stumbling block to this theory. Most workers are nearly indifferent to inflation. Inflation decreases the value of things that have a fixed value:
-Cash
-Fixed-rate debt
-Contracts specifying a nominal price for something.
Except to the extent that laborers hold cash or are tied to long-term, non-renegotiable labor contracts, they should be economically indifferent to high inflation. Obviously that's not perfectly true because of transaction costs, and because unpredictable inflation will create economic problems that hurt everyone, but it's broadly accurate.

The people hurt most by inflation are corporate bondholders, banks and investors in the prime (fixed) mortgage market, and people who hold lots of cash. Those people are (broadly-speaking) investors rather than laborers.

[/ QUOTE ]

This would only be true if inflation were an instantaneous process; but the people who inflate the money supply get it first, and essentially gain at the expense of people who see the 'new money' later (which would include workers). So nobody should be indifferent to high inflation--the banking and government elites gain enormously from it, and pretty much everyone else gets screwed.

[pvn]

[ QUOTE ]
For now, but won't the investors be hurt much more when the bubble finally bursts?

[/ QUOTE ]

Yes, but which investors? [img]/images/graemlins/smile.gif[/img] By the time it blows up, the politically connected have already reaped the windfall from their access to the money on the front end (before the dilutive action has moved through the whole economy).

[PLOlover]

interesting, I just read a thing that said that since 1960 the stock market has been flat after adjusting for inflation based on m3, it was +2% annually based on cpi, which as everyone knows the cpi underestimates inflation.

[Copernicus]

[ QUOTE ]
interesting, I just read a thing that said that since 1960 the stock market has been flat after adjusting for inflation based on m3, it was +2% annually based on cpi, which as everyone knows the cpi underestimates inflation.

[/ QUOTE ]

First of all cpi has been argued to overestimate inflation as often as it has to underestimate inflation. A national average has distortions for different groups of people and is bound to be wrong for many if not most of them.

Second it is no surprise that adjusting the market for M3 would flatten it, since M3 expands with the economy to accomodate the greater flow of funds that are necessary to accomodate the expansion. If M3 didnt expand at that rate it would dampen the ability of the economy to grow..that is why we're off the gold standard in the first place.

Based on CPI and the S&P 500 the adjusted increase is actual greater than 2.3% per year. If you measure from 1985 on, after the disasterous economic policies of Carter and Ford it is just under 3%. Neither of those reflect reinvestment of dividends either, which adds over 2% per year to those numbers and better reflect the true economic value of market investments.