Great reminder of the big picture. Maintaining a "zoomed out" perspective is an important defense mechanism, keeping us from getting lost in the moment.
I have always disliked the assets verses debt equation. Assets can very greatly in value over time and debts are still owed no matter how much the assets fluctuate. In the case where debts are extinguished before being paid off, this leads to many other issues surrounding the viability of the financial system.
I don't think the government knows how many actual dollars are in circulation. Maybe the financial system seems smaller, but with all those quadrillions of possible derivatives floating around it sure looks to be gigantic. Interesting article to contemplate further.
Fortunately, household debt isn’t too huge on an aggregate… about $20tr difference between the “gross” and “net worth” .
As far as the circulation; you are right to point out that there are vast webs of derivatives and other securities that all exist as a buildout from base money
To the author: Respectfully, you do not seem to be knowing what you are talking about. Or, more precisely, even with the quantity theory of money in mind, you are engaging merely in platitudes.
Why don’t you elaborate on what you disagree with? There are also 48 previous articles written here that provide more detailed views of money, credit, banking and value. This piece is intentionally simplified to make a fundamental point about valuation
Thank you for your reply. I must apologize for being intentionally rude. This is because while economics is called the "dismal science," it is not this dismal so we would have to engage in such platitudes. So you believe you are making a "fundamental point about valuation?" And many of your uninitiated readers are all falling all over themselves how well you explain it. Let me ask you: Are you an economist, in which case you should know you are writing platitudes, or are you one of those journos who (1) think they can write expertly on any subject because (2) they got their doctorate in "journalism" by studying courses such as "Internet and You" and "How to Understand Science 101." I am sorry that I cannot be more encouraging and I again profusely apologize for being so rude. But I am 78 years old, I have been around (in case of any doubt, my advanced degree is from the oldest engineering school in the world founded in 1707, no it is not MIT that was founded some 150 years later) and I just see too many articles engaging in platitudes as they discuss the obvious.
Respectfully, at the expense of beating a dead horse, I said quite clearly: Platitudes restating the obvious. No more needs to be said about this subject.
Excellent big picture view of how silly the concept of market cap is. I combine this with Hussman’s description of how once an asset is issued, it must be held by someone until retired, whether equity, cash, or bond. Like a hot potato. There is never cash on the sidelines. Every share is always owned by someone, it’s just the last transaction price to swap into cash that changes. Great stuff. Thank you.
Wow, a little bit late but I love this, makes me think and I love to read people that makes me think, read this finishing the work of today so extra coffee needed ;)
Though I think you bring up a good point that gets missed when we think about monetary creation.
It is easy to focus on the small dollar amounts and say, what could this mean relative to the $140,000,000,000 of US asset value out there, but actually, the amount of "cash" and functional equivalents like bank deposits is a tiny fraction. When monetary+fiscal stimulus adds trillions of cash and deposits to plug an economic hole, it makes a big difference in the overall level of liquidity in the system.
What you are describing is similar to "money illusion" or "wealth illusion". Inflated prices are giving people the illusion to be wealthy. If houses double in price, many people feel rich and increase their spending, feeding the bubble. In reality, they are only rich, if they sell their house at the inflated price. But they don't do it and if all wanted to do it, it would not be possible and prices would immediately collaps.
It's important to understand these bubble dynamics. It will help you to sell in time.
Excellent metaphor! Buybacks in general and debt financed buybacks in particular are interesting puppets to keep an eye on, easier to notice when step changes occur
Absolutely! And incredibly important flow into equity markets, one that has powered markets higher over the past decade. The second half of the year shows a significant decrease in buybacks as corporate profitability comes under pressure. Thanks again for reading!
You've heard of "Just-In-Time-Inventory" ??? Just-In-Time-Banking :) ...Great Perspective, Thanks!
Thanks TMF3! glad you enjoyed
Hahaha excellent, I love that phase
Absolutely brilliant, brother!
Glad you appreciated it
Great reminder of the big picture. Maintaining a "zoomed out" perspective is an important defense mechanism, keeping us from getting lost in the moment.
Always a good reminder. Thanks John
Great framework. Especially pertinent as market elasticity changes (e.g., passive investing, NIMBY home building, BTC limited supply, etc.).
Great points to include!
I have always disliked the assets verses debt equation. Assets can very greatly in value over time and debts are still owed no matter how much the assets fluctuate. In the case where debts are extinguished before being paid off, this leads to many other issues surrounding the viability of the financial system.
I don't think the government knows how many actual dollars are in circulation. Maybe the financial system seems smaller, but with all those quadrillions of possible derivatives floating around it sure looks to be gigantic. Interesting article to contemplate further.
Fortunately, household debt isn’t too huge on an aggregate… about $20tr difference between the “gross” and “net worth” .
As far as the circulation; you are right to point out that there are vast webs of derivatives and other securities that all exist as a buildout from base money
To the author: Respectfully, you do not seem to be knowing what you are talking about. Or, more precisely, even with the quantity theory of money in mind, you are engaging merely in platitudes.
Why don’t you elaborate on what you disagree with? There are also 48 previous articles written here that provide more detailed views of money, credit, banking and value. This piece is intentionally simplified to make a fundamental point about valuation
Thank you for your reply. I must apologize for being intentionally rude. This is because while economics is called the "dismal science," it is not this dismal so we would have to engage in such platitudes. So you believe you are making a "fundamental point about valuation?" And many of your uninitiated readers are all falling all over themselves how well you explain it. Let me ask you: Are you an economist, in which case you should know you are writing platitudes, or are you one of those journos who (1) think they can write expertly on any subject because (2) they got their doctorate in "journalism" by studying courses such as "Internet and You" and "How to Understand Science 101." I am sorry that I cannot be more encouraging and I again profusely apologize for being so rude. But I am 78 years old, I have been around (in case of any doubt, my advanced degree is from the oldest engineering school in the world founded in 1707, no it is not MIT that was founded some 150 years later) and I just see too many articles engaging in platitudes as they discuss the obvious.
Second opportunity and still no substantive explanation of your disagreement, only incorrect assumptions.
Respectfully, at the expense of beating a dead horse, I said quite clearly: Platitudes restating the obvious. No more needs to be said about this subject.
This was a major eye opener to me. This has been under my nose my whole life, but never brought to the forefront of my mind before.
Assets are levered to their moving supply.
Many thanks
It’s one of those things that everyone kinda “knows” but is always helpful to reason through as a reminder. Thanks
Excellent big picture view of how silly the concept of market cap is. I combine this with Hussman’s description of how once an asset is issued, it must be held by someone until retired, whether equity, cash, or bond. Like a hot potato. There is never cash on the sidelines. Every share is always owned by someone, it’s just the last transaction price to swap into cash that changes. Great stuff. Thank you.
Exactly! That’s a great way to think about it. Often we only focus on one side of the transaction because that’s all we see.
note1 : should that be be $15 $trillion? (...$15 billion of cash and bank deposits included)
Yes. Thank you for noting this typo - it has been corrected.
Wow, a little bit late but I love this, makes me think and I love to read people that makes me think, read this finishing the work of today so extra coffee needed ;)
Thanks TLBS!
What does this say about that nonsense Bitcoin ?
It certainly says a lot about the "market capitalization" of the crypto universe!
(Sarcastic voice) It seems like the solution to all this is simply creating several hundred trillion dollar coins…. That’ll fix everything! Haha.
Though I think you bring up a good point that gets missed when we think about monetary creation.
It is easy to focus on the small dollar amounts and say, what could this mean relative to the $140,000,000,000 of US asset value out there, but actually, the amount of "cash" and functional equivalents like bank deposits is a tiny fraction. When monetary+fiscal stimulus adds trillions of cash and deposits to plug an economic hole, it makes a big difference in the overall level of liquidity in the system.
What you are describing is similar to "money illusion" or "wealth illusion". Inflated prices are giving people the illusion to be wealthy. If houses double in price, many people feel rich and increase their spending, feeding the bubble. In reality, they are only rich, if they sell their house at the inflated price. But they don't do it and if all wanted to do it, it would not be possible and prices would immediately collaps.
It's important to understand these bubble dynamics. It will help you to sell in time.
Absolutely - the insiders know the game, and know when to sell. "true believers" are often the ones holding the bag.
https://thelastbearstanding.substack.com/p/the-inside-game
Excellent metaphor! Buybacks in general and debt financed buybacks in particular are interesting puppets to keep an eye on, easier to notice when step changes occur
Absolutely! And incredibly important flow into equity markets, one that has powered markets higher over the past decade. The second half of the year shows a significant decrease in buybacks as corporate profitability comes under pressure. Thanks again for reading!