Money, the Stock Market, and the Bifurcation of Purchasing Power

Persons and units of enterprise require monetary reserves.  Individuals and pension funds save for retirement; Insurance companies build reserves in order to pay future claims.  Firms save for future investment opportunities.  It is legitimate to have a stash, as long as it is for a good future use rather than presently idle without purpose.

A person’s reserves of money for a purpose may be kept under the mattress, in a checking or savings account, in a money-market fund, in less or more risky bonds, in riskier stocks, etc.

While the rise and fall of real and intrinsic equity values are a matter of the economic process’s relations among technical coefficients being properly honored, stock prices may rise with 1) speculative optimism, or 2) the Central Bank’s artifice of flooding the stock and bond markets with funds which cause the estimated ownership values to rise.  Artificially derived increases in estimated and current equity values may stimulate increased consumption and investment expenditures which would tend to swell, i.e. distort, the pricings within the operative circuits of the economy. Conversely, decreases in estimated equity values may induce decreased expenditures which would tend to reduce, i.e. distort, the pricings within the operative circuits of the economy.  Inordinate speculation and flooding and draining are inordinate.

There can and does occur a bifurcation of purchasing power in the operative circuits vs. in the secondary markets of the Redistributive Function.  A model of the economy will calculate values of its representative consumer goods and values of its representative capital goods.  These values will be in some normative ratio of one to the other, which ratio will vary normatively as the process goes through its phases of expansion.  However, an artificial flooding of the stock and bond markets by the Fed’s open-market purchases tends to push stock and bond values above the norm.  So, in order to purchase stocks and bonds, one must pay more than the normative amount of money.  Thus purchasing power in the secondary stock and bond markets might be weakened, while purchasing power in the operative circuits might remain stable or actually decline.  This is a bifurcation of purchasing power and a pathology of money issuance and asset valuation.

Similar reasoning may be applied to the relativities in situations  where, despite higher wages, rampant inflation might reduce purchasing power in the basic circuit while relatively higher surplus incomes might, on a net basis, increase purchasing power in the redistributive stock and bond markets.