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

Persons and units of enterprise require 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 for mere present self-aggrandizement.

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 realand 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 causing 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. the secondary markets.  A model of the economy will calculate a value of its representative consumer goods and a value of its representative capital goods.  These values will be in some normative ratio of one to the other.  The act of flooding the stock and bond markets 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 stock and bond market has been weakened, while purchasing power in other markets might remain stable.  This is a bifurcation of purchasing power and a pathology of money issuance and asset valuation.