Does investing in stocks have a positive or negative effect on the economy?
Stefany asks:
Supposedly, investing large amounts of money in post-IPO stocks simply locks that money away, and pulls it out of circulation. Is that true, and what effect does this have on the economy as a whole? (Is a lot of people with a lot of wealth sitting on their money, with it invested in stocks and only growing value for said people, a good thing or a bad thing?)
Supposedly, investing large amounts of money in post-IPO stocks simply locks that money away, and pulls it out of circulation. Is that true, and what effect does this have on the economy as a whole? (Is a lot of people with a lot of wealth sitting on their money, with it invested in stocks and only growing value for said people, a good thing or a bad thing?)
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Investing or saving money does not take it of circulation or lock it up. It may lock up that wealth for the person doing the investing, but he or she wrote a check to someone, who then cashed it. In an IPO, you are investing the money in a company. That company will take the money and buy machines or hire people. The only way to destroy money is to pay back a loan, and even that isn’t “bad”, as the bank can then make a new loan and re-create that money.
I have noticed a popular theme in the media is that spending is better for the economy than saving. This is simply not the case- saving money provides more capital for investment, which will grow the economy over time. Consumption is merely an indicator of how we’re doing. Looked at from that perspective, sitting on your wealth is an excellent thing.
Anon is taking a very ‘classical’ or ‘conservative’ view of things which is probably too simplistic. Since they began writing, economists have puzzled over the very things that you mention - why it is that an economy has booms and busts, why there seems to be too much savings and gluts and other times scarcities. Although one might expect this in a few markets from time to time or in agricultural economies linked to the weather, you would think that these fluctuations would cancel each other out and that in general overall output and employment would be constant.
Keynes tried to mathematically model the feeling among economists that people can save too much - and it his inferior thinking that survives to this day. Recessions are caused by hoarding, by saving, by people desiring money for future purchases. And this amount is more than investor’s desires for investing. I say inferior not because I don’t believe it, but because it is difficult to understand exactly what mechanisms interfere with the market to produce these results.
Buying post IPO stock does not change the amount of money in the economy because what you pay someone else gets so the net effect is zero. Saving in economics is refraining from consumption and if consumption plus expenditures on new investments falls the economy slows but if everything is consumed the economy can not grow.
Note: Most of the variation over the business cycle is due to the change in expenditures by business ( investment). People try to keep their consumption at a constant level, and more or less do unless they lose their jobs.