Hacker News Reader

Comment by bko | Hacker News Reader

> Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 -- exceeding the combined total from the past 19 years -- according to analysts at Bank of America Corp. and EPFR Global.

No discussion in the article about where this money came from. My guess is that it came from the direct covid payments and extended unemployment which amounted to ~$1.4 trillion.

Of course personal expenditures went down as well due to covid, but if you look at Personal Consumption Expenditures you'll see it went from $14 bn in Feb 2020 (monthly) to $13.7bn to $12bn in March and April, but it quickly recovered. Today its 16,291, or 10% higher than the 2020-01-01 level.

date PCE MoM diff

2020-01-01 14,770

2020-02-01 14,785 0%

2020-03-01 13,762 -7%

2020-04-01 12,022 -13%

2020-05-01 13,058 9%

2020-06-01 13,889 6%

2020-07-01 14,129 2%

2020-08-01 14,271 1%

2020-09-01 14,482 1%

https://fred.stlouisfed.org/series/PCE

View on HN

> No discussion in the article about where this money came from. My guess is that it came from the direct covid payments and extended unemployment which amounted to ~$1.4 trillion.

Interest rates are so low that money that would normally go into bonds and money market funds was diverted into the stock market.

Unemployment benefits did not prop the stock market up. People have to be unemployed to receive those benefits and the benefits are (excluding some periods of fuzzy COVID unemployment policy) less than normal wages, so unemployed people were suddenly receiving an influx of extra cash.

> Unemployment benefits did not prop the stock market up. People have to be unemployed to receive those benefits and the benefits are (excluding some periods of fuzzy COVID unemployment policy) less than normal wages, so unemployed people were suddenly receiving an influx of extra cash.

That's not necessarily true. A study found that 68% of unemployment workers who can receive benefits got payments greater than their lost earnings. The median replacement rate was 134% so the median unemployed person getting benefits got a 34% raise.

>> As a result, though, many people may now be eligible for substantially more money while unemployed than they made while they were working. A new analysis by Peter Ganong, Pascal Noel and Joseph Vavra, economists at the University of Chicago,1 uses government data from 2019 to estimate that 68 percent of unemployed workers who can receive benefits are eligible for payments that are greater than their lost earnings. They also found that the estimated median replacement rate — the share of a worker’s original weekly salary that is being replaced by unemployment benefits — is 134 percent, or more than one-third above their original wage. A substantial minority of those workers, particularly in low-wage professions like food service and janitorial work, may end up receiving more than 150 percent of their previous weekly salary.2

[0] https://fivethirtyeight.com/features/many-americans-are-gett...

Also, this is just personal observation, but literally everyone I know who was receiving those unemployment payments was also doing work on the side, like Instacart delivery. One of them used to work in a hospital, but she quit during the pandemic because (1) hospitals were dangerous obviously, and (2) according to her, this unemployment + some under the table set-your-own-hours sidegig she was doing paid significantly better.

The policy that enabled people to get raises through unemployment is long gone at this point though and has been for a while.

> No discussion in the article about where this money came from.

The reason why there is no discussion of it is that it's a category error. Money is not used up when spent, but is immediately available to the seller who can use it again as he becomes the buyer of something else. Money is a stock. Statements about the increasing sales of ETFs are statements about flows. All of those could have "come from" a single dollar. And still the dollar would remain, standing proud, undefeated, not-used-up, and waiting to be spent on something else in yet another flow.

But wait, there's more. When the government "gives money" via covid payments, that, too, is a flow. The government merely sells a bond for cash to the bond markets, and then sends a check to a household, who deposit the cash in a bank, and the bank uses that cash to buy a bond from the bond markets, thus returning the cash to the same money markets from which the government borrowed it.

All of the 6 Trillion dollars in deficit spending could, in theory, require only a small amount of cash to support, because again the dollar is a stock and the deficit spending is a flow.

So the point of all of this is to understand that money markets can be used to generate trillions in ETF flows, or to support trillions of deficit spending, with no problem at all. Thus you should never ask where money to make an investment comes from, because it always comes from the money markets.

Instead, you should ask "are these assets fairly valued"? As long as the answer is "yes", then there will be money to buy them, completely independent of how much cash there is in the economy. Never believe anyone who says "there isn't enough money" to fund some investment. That's always cope for "I can't convince the capital markets that this investment will earn a good return".

And by the same token, never believe anyone who says "the government is injecting money into the economy in order to fund more investments", because it's impossible for the government to increase or decrease the amount of money held by the non-financial sector - at least the way our financial markets are currently structured.

All the government can do is deficit spend and adjust interest rates. Money is neither an enabler nor a constraint on any investment decision, but lowering interest rates could turn previously unprofitable investments into profitable ones, which means they will be funded once the capital markets are convinced of their profitability, and this is true whether or not any stimulus spending is provided by the government.

/rant

And a dollar put into an ETF means the ETF spent a dollar on other equities. ie. A switch from direct holding to ETFs.

> And by the same token, never believe anyone who says "the government is injecting money into the economy in order to fund more investments", because it's impossible for the government to increase or decrease the amount of money held by the non-financial sector

This is false MMT midwittery.

Money is fungible, whether held in highly liquid market assets or cash. As long as the government pulls in consumption (e.g. flows) that would not be transacted absent its intervention, it is creating money.

That money may net out to zero, say via deflationary asset collapse of one party with price inflation of goods of another party does not mean money was not injected. It just means that one party stole wealth from another in a zero-sum exchange. Inflation does not happen all at once and the people receiving the injection of money are very happy to invest that in assets that will appreciate when the full impact of price inflation is realized.

Likewise, when the Fed props up risky assets as if they are riskless, and the banks holding those assets continue circulating trades as if nothing has happened, money is in a net increase. It means interest--the time-adjusted price of money--is being mispriced, and someone is eventually bound to be on the losing end of that pricing error.

> Money is fungible, whether held in highly liquid market assets or cash. As long as the government pulls in consumption (e.g. flows) that would not be transacted absent its intervention, it is creating money.

Please write more clearly and less stridently because this is very difficult to parse.

As best I can tell, you are redefining money to be anything "liquid", and then pointing out that if the government insures a bond or guarantees to repo it, for example, it becomes liquid and so total money has increased.

Well, OK, you can play definition games with your own private meaning of "money", and it's true that the term is a bit ill-defined, so more precise thinkers wouldn't speak of "money" at all, they'd speak of specific assets and liabilities (e.g. reserves, currency in circulation, deposits, etc) to avoid some interlocutor bumping in with "well akshually..."

But seeing as how I was on a public forum using commonly understood terms, I stuck with that informal language. Specifically, I was responding to a post trying to trace "where the money came from" to support an increase of ETFs, and I pointed out that it doesn't come from anywhere at all, because money is a stock and can support any flow. What matters is the return offered by the investment - if there is a good return, there will be money to fund the investment. That is true regardless of how you define money. It's a basic fact about stocks and flows.

A small stock can support a large flow and a large stock may have a small flow. The flow will be whatever it needs to be based on the return provided. So trying to trace "where the money comes from" when speaking of macro-economic investment is a goofy and unproductive thing to do.

But it's not nearly as unproductive as arguing "well akshually money is anything that is liquid and the government can make anything liquid" - as that statement adds no informational content to a discussion of ETF funding.

No bud. You're the "well akshually."

The obvious and correct identification of the problem is too much money in the system, and you don't understand how money flows through that system.

It is well known that money only truly gets created in the economy via new debt - when I take out a loan, the bank hands me cash that is backed by some small percentage of the holdings, determined by the govt and ruled by the interest rate of bonds.

This is why bond prices remain low, because banks are simply not lending enough/people aren't borrowing enough to allow rates to rise.

Reply on news.ycombinator.com