[lbo-talk] Once again, food prices

SA s11131978 at gmail.com
Wed Feb 9 12:35:42 PST 2011


On 2/9/2011 2:51 PM, Doug Henwood wrote:


>> I think you're confusing cause and effect here. When $60bn of new money flows into commodities via commodity funds, $60bn of old money flows out of commodities via non-fund types of investors.
> So? The trades happen at continuously higher prices, raising valuations. The influx of buyers caused that. It doesn't matter what the sellers do with the proceeds. But a position worth $1.0m last week is worth $1.05m this week.

Yes, but obviously that doesn't actually mean that $0.05m has flowed into that asset class ($1.05m-$1.0m). For example: right now, Coca-Cola's market cap is about $150bn. Its price is about $60. In extremis, if I placed an order to buy a *single share* of Coke at $90 (ignoring practical problems), Coke's market cap would rise by a total of $50 billion. In other words, my measly $90 "flowed into" Coke stocks, and the value of Coke's shares rose by $50 bn! That's why Marx called it "fictitious capital"!


>> This *really* gets it backward. Your saying money flows in and out and that causes psychology to change.
> Yes. It feeds on itself. This is how a bubble happens. Reflexivity, as George Soros likes to say.

Bubbles don't feed on themselves because people see more money going into an asset - they feed on themselves because people believe others in the future will be willing to pay them a higher price than the most recent price. In other words, it's people's psychology feeding on other people's psychology.

Isn't your position similar to that of a monetarist who just assumes that V is always constant? If that were true, then (in the case of financial markets) M would fully determine trading volumes (and therefore, holding the supply of assets constant, prices as well). But V isn't a constant. It goes up and down. And it's determined by people's beliefs.

Of course, I accept that that means M is important for financial markets, too. (Not just V.) But the M in question is the actual M: money, means of payment. Not the notional volume of financial assets. Now, it's true that money has increased a lot in the past two years. But before that, during the bubble years, not so much. M2/GDP stagnated during the bubbliest years in the late 90's and mid-00's, while assets/GDP exploded.

SA



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