Quoted from taylor34:
So let me get this straight. So a bunch of people losing their jobs and not paying taxes leading to greater budget shortfall = stocks go up? Is that the theory?
Well if the market goes up with higher unemployment it is because “unemployment numbers cool risk of higher inflation and more aggressive rate hikes”. If the market drops “higher unemployment causes fear in market of a slowing economy”
It’s pretty easy to be a financial writer huh?
I was focusing on the deficit over employment and will try to keep this as simple as possible. Because it’s not so simple I will miss a lot. I will give it a shot.
Many people think the deficit is bad - like credit card debt!
- Really only way to have economy grow is with deficits because it adds money to economy. If one disagrees answer - “how do we grow the economy with the same amount of money and none added?”
-If the deficit money is put “to the right places which will make people’s lives better” and this creates assets people value and net worth runs well ahead of deficits that’s what we want.
-but the money may touch a few hands to get to the right places.
- much of the money circles in the economy and it finds its way to a smart place.
- innovation is usually always the best place to have the money end up.
And keep in mind money has no real value. It’s based upon “what people will do for it” whatever that means. It’s really a currency for folks believing in the system and….I don’t know “the dream?”.
Now the deficit money usually starts with govt spending. This can be “unfortunate” because they don’t “nail it” very much and there is also a fight on “where the money goes”. If it starts in a less efficient place it still tends to stay in the economy, passes around and can still end up in more efficient areas
-say money goes for a new bridges to replace older ones. That’s alright money spent. The money goes to pay for workers in construction, concrete, steel, machinery and on down the line.
-the workers and business owners get paid and pay for food, rent and mortgages but also may buy computers or invest in the stock market.
-the deficit money added for the bridges may give incentive for steel, concrete, machinery companies to invest in innovation and come out with better manufacturing methods and products.
- the second hand money invested in the stock market may end up in companies that make better medical, technology, agriculture products etc..
Goal is to have a deficit dollar add to better lives for all of us and part of this is higher net worth or assets. If someone can start a computer company out of their garage for $10,000 and get to a point where their company can sell an iPhone at a price most anyone can afford to own and does own and their company is now worth $2 trillion then I would you say “adding to the deficit was worth it!”. That’s good value. No? What about “the dream?”
-so $10,000 to $2 trillion?! That’s a lot of “real money”. Like investors put in $2T to get it that high! Eh no and not even close. So net worth or “wealth” “assets” are very leveraged.
-Some folks think there are actual dollars out there for the value of every stock bond or house we own. Like we put in $2T to get Apple that high right? Actually not even close. It’s leveraged. And we can find this out quick if a group of us sells the same asset all at once.
- you can look at the debt clock for an “ok” way to see debt to net worth balance. The upper left is the national debt (SCARY!!) but the lower left is assets. You can see it way outruns the debt. Assets are going up now but last year they were dropping lower.
So sorry Jeff Bezos you don’t have $100 Billion in “realish” cash. You have old book company stock that did better as the business you ran adapted and grew.
So what happens if a lot of deficit money goes to inefficient places?
- well inflation can happen. Look at 2020/21 when we had blow out deficits. Too much “realish” type money went out with too few places to spend it. Sure money went towards food and rent, but also found it’s way into too much money for household goods and home improvements, which didn’t add any innovation. Collectibles went higher but that’s just one owner getting more money on an item from someone else - no innovation. A ton of money went to the stock market and helped innovation investment but caused rampant speculation, so company higher ups were rewarded before performing. Wall Street was rewarded for investing in any crappy start up. Hoarding happened also - no innovation - a mess and along came inflation.
- like a lot of deficit spending a good chunk of the 2020/21 money tended to rise up to large businesses and Wall Street in the end. $1500 stimulus went to someone to help buy food and pay for utilities but a chunk went to Goggle in online searches, Amazon, Apple, online app ordering,banks and of course Wall Street.
- a lot of the 2020/21 is still out there so perhaps it will go to more efficient areas soon.
And keep in mind - Wall Street loves adding to the deficit. Why? Because they know part of it will come to them after it changes hands enough times. Add companies to that along with Wall Street. The larger companies know the money will come their way. The money usually finds its way higher up sooner or later. Those in power love deficits also. Most at least. More money to send out means more power.
My basic view is “as long as large companies, their founders and workers come up with innovation and great products that are good for us all then they deserve to have the “leveraged” net worth and assets. We are not perfect no but the US is a lot better at this than most of the world.
And a great example of all of this is say you have a lower income person today go back in time 30 years and visit the richest person in the world. The richest! The lower income “person from the future” shows the richest person their cell phone and casually explains what it can do (pretend they brought 5G with them Lol). The richest person would be shocked and more shocked to hear they are no big deal and pretty much everyone has one. That’s innovation that benefits all.
Perhaps it’s a trade off - the wealthy get wealthier and lower lag but have better lives due to better products and innovation and they can even be at lower prices than the past. We don’t pay $1 long distance like 40 years ago. In many ways we all live better than the richest people 20 or 30 years ago whatever income bracket we are in. This is good.
Its complex. I just scratched the surface, may not have explained this well and may not be right. Still learning and have it a shot.
So many other side topics on Deficits and the flow of money.
Hope this made you think and not bored you too much.