If you haven’t already read it, read Rich’s article on this: http://www.pcasd.com/the_us_government_will_not_choose_deflation

If you haven’t already read it, read Rich’s article on this: http://www.pcasd.com/the_us_government_will_not_choose_deflation

Mish is the man to explain the “sideline cash” theory. Great article and easy to understand.

From Mish:

I am stunned by the number of emails about sideline cash I have been receiving in response to Unrelenting Bullishness. Many people are telling me that money moves into stocks and that sideline cash is bullish. Here is one such email.

Jon writes: “If I sold $50 million of equity, and I now have $50 million in sideline cash, putting it back in the market (along with a million other people) would force the market up. Don’t try to make it any more complicated Also, don’t think of each transaction as a buyer and seller. If it was as simple as one buyer and one seller, the market would NEVER MOVE EVEN ONE POINT.”

Sadly, this kind of thinking is running rampant. Jon, if you sold $50 million in equities you would indeed have $50 million in sideline cash (minus transaction fees).

However, Jim (who bought those shares from you), had $50 million in sideline cash before and does not have it now. All that transpired is the transfer of $50 million in sideline cash from Jon to Jim. Yes, it is as simple as that.

Money does not flow into the stock market except during IPO and secondary offerings. Otherwise the same amount of sideline cash (minus transaction fees) existed before and after someone buys stocks.

more….
http://globaleconomicanalysis.blogspot.com/2008/11/sideline-cash-theory-revisited.html

Mish is the man to explain the “sideline cash” theory. Great article and easy to understand.

From Mish:

I am stunned by the number of emails about sideline cash I have been receiving in response to Unrelenting Bullishness. Many people are telling me that money moves into stocks and that sideline cash is bullish. Here is one such email.

Jon writes: “If I sold $50 million of equity, and I now have $50 million in sideline cash, putting it back in the market (along with a million other people) would force the market up. Don’t try to make it any more complicated Also, don’t think of each transaction as a buyer and seller. If it was as simple as one buyer and one seller, the market would NEVER MOVE EVEN ONE POINT.”

Sadly, this kind of thinking is running rampant. Jon, if you sold $50 million in equities you would indeed have $50 million in sideline cash (minus transaction fees).

However, Jim (who bought those shares from you), had $50 million in sideline cash before and does not have it now. All that transpired is the transfer of $50 million in sideline cash from Jon to Jim. Yes, it is as simple as that.

Money does not flow into the stock market except during IPO and secondary offerings. Otherwise the same amount of sideline cash (minus transaction fees) existed before and after someone buys stocks.

more….
http://globaleconomicanalysis.blogspot.com/2008/11/sideline-cash-theory-revisited.html

Mish is the man to explain the “sideline cash” theory. Great article and easy to understand.

From Mish:

I am stunned by the number of emails about sideline cash I have been receiving in response to Unrelenting Bullishness. Many people are telling me that money moves into stocks and that sideline cash is bullish. Here is one such email.

Jon writes: “If I sold $50 million of equity, and I now have $50 million in sideline cash, putting it back in the market (along with a million other people) would force the market up. Don’t try to make it any more complicated Also, don’t think of each transaction as a buyer and seller. If it was as simple as one buyer and one seller, the market would NEVER MOVE EVEN ONE POINT.”

Sadly, this kind of thinking is running rampant. Jon, if you sold $50 million in equities you would indeed have $50 million in sideline cash (minus transaction fees).

However, Jim (who bought those shares from you), had $50 million in sideline cash before and does not have it now. All that transpired is the transfer of $50 million in sideline cash from Jon to Jim. Yes, it is as simple as that.

Money does not flow into the stock market except during IPO and secondary offerings. Otherwise the same amount of sideline cash (minus transaction fees) existed before and after someone buys stocks.

more….
http://globaleconomicanalysis.blogspot.com/2008/11/sideline-cash-theory-revisited.html

I agree with the Jim Jon scenario. The declines in stock and real estate prices do not mean money/wealth disappeared. It merely changed hands. Who’s hands is it going into? The US’s creditors. Many of them are suffering some write downs as the US private sector defaults, but with all the bailouts, most of the private defaults are being socialized and absorbed by the government and replaced with new government issues (treasuries and greenbacks). Who’s lending the US all this money to provide these bailouts? China, Saudi Arabia, Russia. You know, our friends. So as our “friends” continue to sit on the sidelines and suck more wealth out of America, the day will eventually come when they get off the sidelines and start divesting themselves of that sideline money. Will it go into our stock market? Doubtful. Our real estate? Only if they want to be our landlords. Into raw materials for building up their own countries’ infrastructures and looking after their own people. I think this is very very likely. China would be much better served keeping their people making TV sets but distributing them throughout China instead of sending them here so we can give them worthless IOU’s as compensation. I can not think of (and I have never heard offered) a realistic scenario in which China extends us an infinite amount of seller financing, nor can I think of (or heard offered) a realistic scenario for the US government to ever make good on its debt. So most likely, the sideline money will cause shortages and severe inflation at home when it finally, inevitably starts to move.

I agree with the Jim Jon scenario. The declines in stock and real estate prices do not mean money/wealth disappeared. It merely changed hands. Who’s hands is it going into? The US’s creditors. Many of them are suffering some write downs as the US private sector defaults, but with all the bailouts, most of the private defaults are being socialized and absorbed by the government and replaced with new government issues (treasuries and greenbacks). Who’s lending the US all this money to provide these bailouts? China, Saudi Arabia, Russia. You know, our friends. So as our “friends” continue to sit on the sidelines and suck more wealth out of America, the day will eventually come when they get off the sidelines and start divesting themselves of that sideline money. Will it go into our stock market? Doubtful. Our real estate? Only if they want to be our landlords. Into raw materials for building up their own countries’ infrastructures and looking after their own people. I think this is very very likely. China would be much better served keeping their people making TV sets but distributing them throughout China instead of sending them here so we can give them worthless IOU’s as compensation. I can not think of (and I have never heard offered) a realistic scenario in which China extends us an infinite amount of seller financing, nor can I think of (or heard offered) a realistic scenario for the US government to ever make good on its debt. So most likely, the sideline money will cause shortages and severe inflation at home when it finally, inevitably starts to move.