Cash is Always on the Side-Line

Whenever there is a transaction, cash goes from one set of hands to another. The seller gets the cash and the buyer gets the goods. The amount of cash before and after the transaction is unchanged. The goods are unchanged as well. The seller is happy for the cash and the buyer is happy for the goods. The only changes are the distribution of goods and cash as well as the sentiment of the actors. There's equilibrium.

Cash never moves into goods or out of them. Cash changes hands. It's therefore wrong to suggest that cash has been put into the stock market, or that cash has been taken out of it. The stock market is not a pool in which money is put for subsequent withdrawals. The stock market is not a bank account, it's a market, a place where assets are exchanged for cash. Relative to the stock market or any other markets, cash is always on the side-lines.

However, cash is not a constant. It can be made abundant through credit expansion, and it can be made scarce by credit contraction. The volume of cash on the side-lines fluctuates, affecting the price people are willing to pay for goods and services. When cash is abundant, prices of most things tend to go up. When cash is scarce, prices tend to go down. But there's no telling for sure where these moves will be seen. Price moves due to credit depend on the sentiment of the individuals involved. If there's a feeling that things have become expensive, the sentiment may be to pay down debt. Here too, there is a balance. Some people may continue to leverage up while others de-leverage.

The promise of continued cheap credit from central banks may lead us to believe that the stock market will continue up. However, it's already at an all time high relative to many alternatives. The stock market may not be the favoured place to trade with the extra cash coming in. There's no way of telling precisely what cheap credit will do in the future. All we know is that it will tend to push prices up for certain goods. But even that is uncertain. There's always the possibility that credit becomes expensive, in which case people will rush to pay down their debt, with cash becoming scarce in the process.

Going forward, we have central banks and policy makers increasingly directing their credit expansions towards Main Street where sentiment is very different from Wall Street. It's therefore far from certain that this extra cash will drive stock prices higher. More likely, we'll see credit card debt being repaid and prices of everyday goods going up.

Federal reserve note

By National Museum of American History - Image by Godot13, Public Domain, Link