On 2/9/2011 10:21 AM, Doug Henwood wrote:
>> "All the money?" Doesn't every trade have two equal--and opposite--sides?
> Oh right. Markets can never go up or down because for every seller there's a buyer, and vice versa. Perfect balance!
But this isn't a trivial point. The claim that for every buyer there's a seller is true. That's why explaining financial price movements by reference to "amounts of money" flowing into this or that asset can only be true in a metaphorical or shorthand sense. The real cause, of course, is that the price *at which* the amounts of money on both sides balance has gone up. I know, I know - everybody already knows this. But it means that financial price movements have to be explained by reference to changes in people's perceptions and expectations about the future - not by referring to "amounts" of money, which always end up in balance, whether prices are rising or falling.
I don't know much about the commodities markets, but in the run-up to the crisis, there was a major boom in prices. Many people blamed it on speculation. That might be true, but note that prices then collapsed when the crisis hit - even though the "amounts of money" available to invest had massively *increased*! (Because of monetary easing,) So the boom and the collapse were both about changes in perceptions and expectations, not about changing amounts of money.
SA