>
> To show how what I mean, let me give a very simple example (which deals
> with specific capitalists, just for clarity's sake). Let's say you and I are
> both capitalists. You happen to own a share of stock. And by coincidence, we
> both have accounts at the same bank. Okay, I've just earned $100 in profits,
> so I happily deposit the money in my bank account. Now I have to decide what
> to do with it: Do I use the money to undertake more "real investment" in my
> company? Or do I use it to buy your share of stock (thus "sending" the money
> into financial markets)? I look around and see no profitable real investment
> opportunities, so I decide to play the stock market. I buy your share for
> $100 by writing you a check which you deposit in your bank account (at the
> same bank). But wait! No sooner have I bought your stock than it dawns on me
> that I've overlooked some really juicy "real" investment in my company that
> could make me much richer. What to do? I've already shot my wad! My $100 is
> gone! Or is it? Where exactly did my $100 go? It "went" from my bank account
> to your bank account within the same bank, which is to say it stayed in the
> same place. What do banks do with the money you deposit with them? They try
> to lend it out to someone, obviously. So I'm in luck. I just talk to the
> bank director and he lends me back the $100, creating a deposit in my
> account. Now I can write a check to whoever I have to buy the capital
> equipment from to undertake the real investment.
>
> That's how money is created. As long as money can be created, heavy volumes
> of financial-market transactions can happen alongside *either* lots of real
> investment or a very little real investment. There is absolutely no causal
> connection between each amount. It's like saying: "Those drug fiends in
> Hollywood use so much coke, there's not going to be enough Coke to buy at
> the store!" "The price of fish is through the roof! Must be cause all those
> hippies love Phish so much." Etc.
You are right that there is no _simple_ causal link between financial transactions and real investment, but there are certainly causal links. Your story needs to be embedded in a broader macroeconomic framework, because there is a lot neglected here. Even if we keep it confined to the small section of the economy represented by you, your company, Charles, and the bank, things are more complicated than you allow.
Most importantly, you need to bring the bank balance sheet in (especially considering its importance in the current crisis). In your story, if we assume nothing else changes in the economy while all these transactions between you, Charles, and this bank you share, what happens to the bank balance sheet? When you deposit the initial $100 profit, assuming the company that paid the dividend banks with another bank, your bank increases its reserves by $100 in base money and its deposit liabilities by $100. You buy Charles's stock for $100. Nothing changes on your bank's balance sheet. Your balance sheet maintains the same value of assets, but your assets are now less liquid, because you own the shares rather than the bank deposit.
Now you regret the loss of liquidity because you want to make a 'real' investment in your company. The bank lends you $100 (it makes no sense to say whether this is 'the same $100' or not, it's just an extension of the bank's liabilities). Since we assumed the profit from your company came from another bank, we have to assume that when you put it back in the company, your bank loses that $100 of base money reserves again. At the same time your $100 deposit at the bank is extinguished, although you still owe the bank $100.
What is the end result of all these balance sheet changes sparked by the original 'real' income of $100 and your decision to borrow from the bank to reinvest?
You: Assets: +$200 ($100 in shares, $100 in the 'real' investment in your company), liabilities +$100 (borrowed from your bank), net worth: +$100, none of it liquid
Charles: Assets: +$0, Liabilities: +0, net worth +0 but a shift in the balance sheet to liquid holdings because the shares are exchanged for bank money
The bank: Assets: +$100 (in the loan to you), Liabilities: +$100 (Charles's deposit); net worth: +0
BUT CRUCIALLY, the bank loses liquidity. It has $100 more in demand deposit liabilities relative to its reserves and relative to its capital than it started with. And this really matters because the bank has a limited capacity to extend its liabilities relative to these things. The limits are both prudential and legal. So there really is a scarcity involved here, even though it is in a complex relationship with income flows involving production in the 'real' economy.
To keep developing this story, you'd have to follow what Charles does with his extra liquidity, the real _and_ monetary income flows resulting from your company's purchase of investment goods, the bank's asset and liability management and its interaction with monetary policy, and so on... and it quickly becomes apparent how impossible it is to talk about these things without a comprehensively macroeconomic perspective.
Cheers, Mike Beggs