Stock market - no connection company/share - money isn't lost?

[Gerenuk]

Stock market - no connection company/share - money isn't lost?!?

I've spoken to some hobby stock market "users" but none of them could convincingly explain the basic share system without ending up in circular arguments.

1)
My impression is that there is no logical connection at all between stock prices and the actual company!? It is only because some analysts (who therefore earn money) claim there is, so it seems just a psychological craze.

OK, one real connection is the right to vote about the company politics, but if one share holder keeps like 51% then the other 49% are valueless?
And I know sometimes divident is a real value of a share, but some shares don't even give divident?

Most people told me shares have a value because people want them and people want them because they have value. That's a circular argument. I could sell stones to people and claim they will find others who want to buy them. Obviously that wouldn't work, but apparently it does if you call the stones "shares" and make them virtual?

Theory: A share without divident, where someone intends to keep 51% of the share, is completely valueless

2)
I told the people that with every transaction the total sum of the money is constant (i.e. take bank accounts of all participants and add their deposits - please add no other numbers; in the end the supermarket accepts money only). So whatever money someone wins, another one has to lose. Therefore the more experienced half of traders at the stock market wins money and the less experienced half loses money.

Theory: So I better not enter the stock market without being above average in knowledge?!

Can someone comment on this? But please refer to my arguments and do not restate the circular arguments.

 

[mgb_phys]

My impression is that there is no logical connection at all between stock prices and the actual company!? It is only because some analysts (who therefore earn money) claim there is, so it seems just a psychological craze.

The share price is a measure of the future valueof the company - if you think the company is going to do well then more people will want to own it and so the shares go up. If you thinkthe company will go bust then the shares will eventually be worthless and the valuewill go down.

OK, one real connection is the right to vote about the company politics, but if one share holder keeps like 51% then the other 49% are valueless?

Most owners of shares don't want to run the company - they just want the managers to do whatever it takes to make the share price go up.
This is a problem since the share holders are only concerned with what will increase the value this year so they can sell on the news of improved profits, if the company goes bust next year because of the changes that's no loss to them.

And I know sometimes divident is a real value of a share, but some shares don't even give divident?

Dividends can also be a bad thing for a company - if you are pay a dividend you are saying, we can't think of anything to do with this money, like invest in new products or technology which will make a profit. Here take it and invest it in the shares of oither companies.
Thats why companies like Apple don't pay dividends, they are ussually paid by utilities / monopolies that have fixed markets and no competition.

Most people told me shares have a value because people want them and people want them because they have value. That's a circular argument. I could sell stones to people and claim they will find others who want to buy them. Obviously that wouldn't work, but apparently it does if you call the stones "shares" and make them virtual?

If you have an expectation that something will go up in value in the future you can sell it for a profit, wether its shares, art, antiques, houses, rocks or tulip bulbs.

Theory: A share without divident, where someone intends to keep 51% of the share, is completely valueless

Not if you think people wil want to buy it for more in the future.
There is another way to cash in a share - if another company wants to buy that company.

I told the people that with every transaction the total sum of the money is constant (i.e. take bank accounts of all participants and add their deposits - please add no other numbers; in the end the supermarket accepts money only). So whatever money someone wins, another one has to lose. Therefore the more experienced half of traders at the stock market wins money and the less experienced half loses money.

Not quite. The stock market isn't a real market in that the value of shares can go up and down without anyone buying them.
If you bought a house 20years ago and suddenly the area becomes fashionable and houses cost $1M are you a millionaire? Yes if you sell - but if you don't sell then you haven't gained anything. Similairly if houseprices drop 50% have you lost $1/2M ?

It's the same with stock markets - "the $Billions wiped off shares" in the headlines isn't real money - it never existed.

 

[russ_watters]

1)
My impression is that there is no logical connection at all between stock prices and the actual company!? It is only because some analysts (who therefore earn money) claim there is, so it seems just a psychological craze.

You are essentialy correct, but it isn't just stocks: in a market economy, prices of everything are set by supply and demand. Someone wants some stock, someone else has stock to sell, they negotiate over price, and come to an agreement.

Now, just like when you buy a car, there is an intrinsic value to the metal and labor that went into building it, so too with stock: if you own a piece of the company, you own a piece of the assets of the company.

OK, one real connection is the right to vote about the company politics, but if one share holder keeps like 51% then the other 49% are valueless?

The vote isn't a very big benefit, but no one buys stock just for the purpose of voting anyway. People buy stock to make money - voting is just a way to control how the company makes you that money. Small investors don't have the time to get that deep into the companies they invest in anyway - they let the board of directors run it. It works out pretty much the same anyway: instead of voting to make a company well run, you pick stocks of companies that are well run. You could say, you vote with your stock purchase.

And I know sometimes divident is a real value of a share, but some shares don't even give divident?

Correct. A divided is essentialy sharing of the profit of the company.

Most people told me shares have a value because people want them and people want them because they have value. That's a circular argument. I could sell stones to people and claim they will find others who want to buy them. Obviously that wouldn't work...

Welcome to Economics 101. Yes, it quite obviously does work.

..but apparently it does if you call the stones "shares" and make them virtual?

Shares, cars, baseball cards, bread, whatever. Nothing "virtual" about any of them. I'm not even really sure what you mean by that word.

Theory: A share without divident, where someone intends to keep 51% of the share, is completely valueless

Speaking of circular arguments, that one is just wrong at face value. A stock that sells for $1 has a value of $1 by definition. You can't just choose to call it valueless.

2)
I told the people that with every transaction the total sum of the money is constant (i.e. take bank accounts of all participants and add their deposits - please add no other numbers; in the end the supermarket accepts money only). So whatever money someone wins, another one has to lose. Therefore the more experienced half of traders at the stock market wins money and the less experienced half loses money.

It is only zero sum if those are the only two transaction types, but they aren't. It isn't just one person buying stock and another person selling stock. You also have a person giving the company time and the company paying them for it. You also have the company giving a person a car and the person paying them for it.

And not all of those transactions are zero sum either. The person giving the company time didn't pay for that time, they get it free with life. So they are generating money from scratch. And the company doesn't sell cars for exactly what it costs to make them, it makes a little profit (it has to, otherwise, companies could never grow). Now all those transactions go together and add to the value of the company.

Oh, and being zero sum doesn't necessarily mean there is a winner and a loser: If I buy $1 worth of stock from you, $1-$1=0, but $1=$1 too. We both made out exactly the same in the transaction.

Theory: So I better not enter the stock market without being above average in knowledge?!

No. The key here is the free time thing from above. Because time is value added to the economy, the economy will always increase in value over the long term. Therefore, the average of all companies will always increase in value over the long term. So if you select a prudent investment, you can be confident that over the long term, it will make money. In fact, over any 15 year period in the past 100+ years, money invested in large stocks (ie, the Dow 30 or S&P 500) produced a positive return. And over it's history, it has averaged about 8% a year.

Can someone comment on this? But please refer to my arguments and do not restate the circular arguments.

Heh - we get comments like that a lot here. What you need to understand is that just because you ask a question, that doesn't mean the answer will directly address the question. Why? When you don't understand something, oftentimes that means that you don't even know what questions to ask or how to ask them. So we need to correct your questions before we even answer them.

 

[Gerenuk]

If you have an expectation that something will go up in value in the future you can sell it for a profit, wether its shares, art, antiques, houses, rocks or tulip bulbs.

Not if you think people wil want to buy it for more in the future.
There is another way to cash in a share - if another company wants to buy that company.

Hmm, that's the unsatisfactory argument I got before. I try to explain myself better:
Why does a value go up? Because people will want to buy it for more money? Why do they want to buy it? Because they think someone else will pay even more?
Well, that's the circular argument again. What is eventually the real value of a share?
I mean by that circular argument I could sell stones to people and they would happily trade them?! I could say the stones relate to my health and provide news and predictions.

Real goods have real value. Some people buy art to really keep it and look at it. Houses you can live in. Tulips are also nice to watch and keep.
Just shares are bought to get rid of them again.

Let me sum up:
The final real value for a share so far is
- divident (if existent)
- voting right (if no-one else secures a majority)

It's the same with stock markets - "the $Billions wiped off shares" in the headlines isn't real money - it never existed.

These billions are not exactly wiped off? I mean someone received these billions when people bought the shares. By my argument (2) money actually never disappears?!
Now that guy sits there and laughs: "Why did you give me money for no real value?"

 

[russ_watters]

Hmm, that's the unsatisfactory argument I got before. I try to explain myself better:
Why does a value go up? Because people will want to buy it for more money? Why do they want to buy it? Because they think someone else will pay even more?
Well, that's the circular argument again. What is eventually the real value of a share?

It may be circular, but it is how it works. And quite clearly, it does work.

I mean by that circular argument I could sell stones to people and they would happily trade them?! I could say the stones relate to my health and provide news and predictions.

Sure! If you can convince people to want them. Good luck!

Real goods have real value. Some people buy art to really keep it and look at it. Houses you can live in. Tulips are also nice to watch and keep.
Just shares are bought to get rid of them again.

Like we said, shares are a piece of ownership of a company. Companies have real value.

These billions are not exactly wiped off? I mean someone received these billions when people bought the shares. By my argument (2) money actually never disappears?!
Now that guy sits there and laughs: "Why did you give me money for no real value?"

The guy who sold was able to predict the future than the guy who bought. Neither thinks they got scammed, though, if they understand how the stock market works and why.

 

[Gerenuk]

You are essentialy correct, but it isn't just stocks: in a market economy, prices of everything are set by supply and demand.

I know that system, but still there must be a logical reason for someone to demand something.

if you own a piece of the company, you own a piece of the assets of the company.

I would understand if I could go there and say: "Well, here is 40% of the shares. I want that factory over there for a big party". I think you can't do that. So what is that paper worth that say "Well, done. You own 40% of the company", if there is no way whatsoever to make a change?

Small investors don't have the time to get that deep into the companies they invest in anyway - they let the board of directors run it.

Shares, cars, baseball cards, bread, whatever.

That's different things. A car you can drive. Bread you can eat. But shares you can only get rid off to someone who also wants to get rid of them?

And not all of those transactions are zero sum either. The person giving the company time didn't pay for that time, they get it free with life. So they are generating money from scratch. And the company doesn't sell cars for exactly what it costs to make them, it makes a little profit (it has to, otherwise, companies could never grow). Now all those transactions go together and add to the value of the company.

Hmm, I sort of heard arguments like this before, but it's not quite what I thought of in my suggestion.
Please let me play the following game and tell me at what very instant I would be surprised:
I write down the names of all existent share holders and ask at their banks for the dollars on their account. I plainly add all these numbers. I do this every minute. For example one day I have the numbers A,B,C another day the numbers A+T,B-T,C. The sum is always constant as one transaction is for one price only. I do not care about shares or time or whatever, but I just play my game. Can you tell me the point at which the sum of my numbers will not be constant anymore? Please do not modify my game as that's what someone could theoretically do for real.

Heh - we get comments like that a lot here. What you need to understand is that just because you ask a question, that doesn't mean the answer will directly address the question. Why? When you don't understand something, oftentimes that means that you don't even know what questions to ask or how to ask them.

But it should be as close as possible to my way of thinking. I'm teaching students maths and I always try explain everything in their words. You know much more about stock market than I do. I maybe you can rephrase the book knowledge into my suggestions.
For example the "game" from above can't be wrong. That's something I could do, even if someone claims it's stupid. But what will be the outcome of this stupid addition? Will I show that the total amount of money is constant?

(Well, you could argue that the country prints new money. Then I would say the total amount of money is a linear function of time which corrected for inflation is again constant.)

 

[Gerenuk]

It may be circular, but it is how it works. And quite clearly, it does work.

It used to make sense before too many people entered the market just for speculation. I'm not surprised that so many people lose money with shares, as the real value of shares is far below the market prices. Analysts know that, but they won't tell that secret as they make a good living on it.

The guy who sold was able to predict the future than the guy who bought. Neither thinks they got scammed, though, if they understand how the stock market works and why.

So the answer is "yes"? All the money that people have lost, someone else has gained (earlier)?

 

[Dale]

Hmm, I sort of heard arguments like this before, but it's not quite what I thought of in my suggestion.
Please let me play the following game and tell me at what very instant I would be surprised:
I write down the names of all existent share holders and ask at their banks for the dollars on their account. I plainly add all these numbers. I do this every minute. For example one day I have the numbers A,B,C another day the numbers A+T,B-T,C. The sum is always constant as one transaction is for one price only. I do not care about shares or time or whatever, but I just play my game. Can you tell me the point at which the sum of my numbers will not be constant anymore? Please do not modify my game as that's what someone could theoretically do for real.

Why would the numbers be A,B,C one day and A+T,B-T,C another day? In other words, why would T dollars go from B to A in your game?

 

[Astronuc]

I could sell stones to people and claim they will find others who want to buy them. Obviously that wouldn't work, but apparently it does if you call the stones "shares" and make them virtual?

Too late - it's been done. Ever hear of 'pet rock'?

Pet Rocks were a 1970s fad conceived in Los Gatos, California by advertising executive Gary Dahl. The first Pet Rocks were ordinary gray stones bought at a builder's supply store and marketed as if they were live pets. The fad lasted about six months, ending with the Christmas season in December 1975. During its short run, the Pet Rock made Dahl a millionaire.

http://en.wikipedia.org/wiki/Pet_Rock

And people fret about the stock market.

 

[Gerenuk]

Why would the numbers be A,B,C one day and A+T,B-T,C another day? In other words, why would T dollars go from B to A in your game?

Oh, that's because someone bought an apple or a share from somebody else. In my game I disregard the value that people attribute to apples or shares and just add the money.

 

[Gerenuk]

Too late - it's been done. Ever hear of 'pet rock'?

Ah OK. That sort of answers my question.
Seems like stock market is - similarly - nowadays mostly a psychological phenomenon having nothing to do with economical reasoning. And as soon as a new generation gets the hang of it, people will notice that shares are completely overpriced. Crashes come since trading with nothing is bizarre and volatile.

Don't get me wrong. I do see that there is some intrinsic value to shares (divident, voting), but to me it seems that most of the price fluctuations are rather a psychological hype.

Of course, when you buy "real goods" such as oil or gold, then that's a completely different story. Because there in principle you can claim your belonging even if it's only 40% of the total.

 

[Dale]

Oh, that's because someone bought an apple or a share from somebody else. In my game I disregard the value that people attribute to apples or shares and just add the money.

If you disregard the value of the apples or shares then what is the value of the dollars?

Spoiler

The dollars themselves have no intrinsic value. It is only the ability to exchange dollars for things of intrinsic value that gives any value to the dollars. I.e. the value of a dollar is only as an agreed-upon medium of exchange between other things with intrinsic value.

 

[Gerenuk]

If you disregard the value of the apples or shares then what is the value of the dollars?

Spoiler

The dollars themselves have no intrinsic value. It is only the ability to exchange dollars for things of intrinsic value that gives any value to the dollars. I.e. the value of a dollar is only as an agreed-upon medium of exchange between other things with intrinsic value.

I know all this. OK, then let be more clear and please try to understand what I mean.
I play my game. I add all the bank accounts no matter how stupid that is. Will the sum I get always be constant (all participants are included and state money printing, i.e. inflation, is corrected for)? Yes or no? No digression please.

 

[mgb_phys]

No the economy is not a zero sum game, like a game of poker where for someone to gain someone has to lose.
It is quite possible (and generally happens) for the overall economy to grow.
As a simple example, if you spend $100 mining a ton of nickel and sell it for $200 to someone who turns it into batteries and sells them for $1000 to somebody who puts them into laptops and sells them for $2000 the economy has gained real value.
The nickel doesn't have a value of $100/ton it has grown in value by people adding extra work and skill.

Note "real goods" such as oil or gold are often worse than shares. Since they can be bought or sold they have a price which varies as a result of future market expectation rather than their use.
Especially gold which is bought as an alternative to holding an individual currency will have gone up during the crisis. You might want to buy gold if you think the dollar is going to fall, if you think your bank is going to go bust, if you think your small country's local currency is going to become worthless. Because of this extra demand gold price will rise.

 

[Gerenuk]

No the economy is not a zero sum game, like a game of poker where for someone to gain someone has to lose.
It is quite possible (and generally happens) for the overall economy to grow.
As a simple example, if you spend $100 mining a ton of nickel and sell it for $200 to someone who turns it into batteries and sells them for $1000 to somebody who puts them into laptops and sells them for $2000 the economy has gained real value.
The nickel doesn't have a value of $100/ton it has grown in value by people adding extra work and skill.

I find it hard to understand why people do not refer to the question and recite book knowledge. I will try to explain your example in my model. Please refer to it:

Person
A           B          C         D          E
0$          100$     200$    1000$    2000$   <-B buy mining equipment from A
100$       Ni        200$    1000$    2000$   <-mining by B
100$       200$    Batt      1000$    2000$   <-battery production by C
100$       200$    1000$    Laptop  2000$   <-laptop production by D
100$       200$    1000$    2000$   Laptop  <-laptop sold from D to E

Note that the sum of dollars in each row is constant. That's exactly my "game".

 

[CRGreathouse]

Man, you're going to have a ton of fun with velocity...

 

[CRGreathouse]

Let me sum up:
The final real value for a share so far is
- divident (if existent)
- voting right (if no-one else secures a majority)

If someone will buy a share of stock from you, its value is what someone will pay you for it. If no one is willing to buy it from you, or you're not willing to sell it, you get:

• Dividends as long as the company pays them
• Voting rights, if your share is voting class
• The present value of the salvage value of the company, minus its liabilities, divided by the number of shares of stock, at the time that it is dissolved.

 

[CRGreathouse]

These billions are not exactly wiped off? I mean someone received these billions when people bought the shares. By my argument (2) money actually never disappears?!
Now that guy sits there and laughs: "Why did you give me money for no real value?"

Maybe an example will help.

A company has an IPO and offers a million shares of stock at $20 each; all are sold.
Paper value: $20 million = 1 million * $20
Money that has changed hands: $20 million
Total paid (by current investors) to buy the stock: $20 million

The company spends $5 million on R&D; investors don't care one way or the other. 50,000 shares are sold at $20 apiece, bought by other investors.
Paper value: $20 million = 1 million * $20
Money that has changed hands: $21 million
Total paid (by current investors) to buy the stock: $20 million

The company announces that they have a new product that's come out of R&D. Investors think it will be profitable and buy 80,000 shares (from other stockholders) at $25 apiece.
Paper value: $25 million = 1 million * $25
Money that has changed hands: $23 million
Total paid (by current investors) to buy the stock: $20.16 million

 

[Dale]

I find it hard to understand why people do not refer to the question and recite book knowledge. I will try to explain your example in my model. Please refer to it:

Person
A           B          C         D          E
0$          100$     200$    1000$    2000$   <-B buy mining equipment from A
100$       Ni        200$    1000$    2000$   <-mining by B
100$       200$    Batt      1000$    2000$   <-battery production by C
100$       200$    1000$    Laptop  2000$   <-laptop production by D
100$       200$    1000$    2000$   Laptop  <-laptop sold from D to E

Note that the sum of dollars in each row is constant. That's exactly my "game".

This is an excellent example which shows exactly how an economy is not a zero sum game. The sum of each row is not constant
$3300
$3300 + Ni = $3500
$3300 + Batt = $4300
$3300 + Laptop = $5300
$3300 + Laptop = $5300

The value of the economy as a whole has increased and now includes the value of new assets/goods that have real intrinsic value that is reflected in their price. Thus, even if you have a fixed supply of money the value of an economy is not a zero sum game.

 

[Gerenuk]

This is an excellent example which shows exactly how an economy is not a zero sum game. The sum of each row is not constant
$3300
$3300 + Ni = $3500
$3300 + Batt = $4300
$3300 + Laptop = $5300
$3300 + Laptop = $5300

The value of the economy as a whole has increased and now includes the value of new assets/goods that have real intrinsic value that is reflected in their price. Thus, even if you have a fixed supply of money the value of an economy is not a zero sum game.

Please read my post carefully. I sum up dollars only. Nothing else and I said before no matter if it makes sense. Just the 3300$ dollars for my game.

(the reason I sum up dollars only is because I want to buy chocolate after and the supermarket accepts money only - no laptops)

So is the sum of dollars constant or not?

 

[Gerenuk]

Maybe an example will help.
A company has an IPO and offers a million shares of stock at $20 each; all are sold.
Paper value: $20 million = 1 million * $20
Money that has changed hands: $20 million
Total paid (by current investors) to buy the stock: $20 million

The company spends $5 million on R&D; investors don't care one way or the other. 50,000 shares are sold at $20 apiece, bought by other investors.
Paper value: $20 million = 1 million * $20
Money that has changed hands: $21 million
Total paid (by current investors) to buy the stock: $20 million

The company announces that they have a new product that's come out of R&D. Investors think it will be profitable and buy 80,000 shares (from other stockholders) at $25 apiece.
Paper value: $25 million = 1 million * $25
Money that has changed hands: $23 million
Total paid (by current investors) to buy the stock: $20.16 million

OK, then let me put it again into my table. Feel free to say where the table goes wrong.

Company    InvestorsA  Scientists  InvestorsB  InvestorsC
0$+S         20m$        0$           1m$        2m$
20m$         0$+S        0$           1m$        2m$         <- shares sold
15m$         0$+S        5m$          1m$        2m$         <- R&D
15m$         1$+S        5m$          0m$+S      2m$         <- investors B buy 50000 shares 
15m$         3m$+S       5m$          0m$+S      0m$+S       <- investors C buy 80000 shares

So again the sum of dollars in each row is constant. Right?

I claim the company and the scientists are happy to have 20m$. And the investors in principle own nothing (or just the 3m$ in fact in you were lucky to sell the shares).

 

[CRGreathouse]

First, remember I was addressing the question about paper value and whether billions are created and destroyed.

Company    InvestorsA  Scientists  InvestorsB  InvestorsC
0$+S         20m$        0$           1m$        2m$
20m$         0$+S        0$           1m$        2m$         <- shares sold
15m$         0$+S        5m$          1m$        2m$         <- R&D
15m$         1$+S        5m$          0m$+S      2m$         <- investors B buy 50000 shares 
15m$         3m$+S       5m$          0m$+S      0m$+S       <- investors C buy 80000 shares

So again the sum of dollars in each row is constant. Right?

Yes, in this example -- I wasn't trying to show that dollars change. They do, though: banks create money all the time (look up the term velocity, I even gave a link earlier in the thread) as does the Federal reserve (by buying bonds). The Fed also destroys money by selling bonds.

The chart is wrong in one sense, though. The company didn't have stock to begin with; it just created it out of thin air. It may do so again later, selling as much as it likes.

 

[Gerenuk]

Yes, in this example -- I wasn't trying to show that dollars change. They do, though: banks create money all the time (look up the term velocity, I even gave a link earlier in the thread) as does the Federal reserve (by buying bonds). The Fed also destroys money by selling bonds.

The term velocity just refers to how much money moves. I can write down the velocity between each row, but that wouldn't change the intermediate states.

I'm not exactly sure what bonds are. Can I not include all buyers and sellers of whatever goods to make my table work again?

The chart is wrong in one sense, though. The company didn't have stock to begin with; it just created it out of thin air. It may do so again later, selling as much as it likes.

That's right. The shares are created. But as I count dollars only it doesn't really matter. The "+S" marks are just for illustration.

 

[russ_watters]

Please read my post carefully. I sum up dollars only. Nothing else and I said before no matter if it makes sense. Just the 3300$ dollars for my game.

(the reason I sum up dollars only is because I want to buy chocolate after and the supermarket accepts money only - no laptops)

So is the sum of dollars constant or not?

So sell the laptop and buy the chocolate. You're writing the rules of the game, but you are not entitled to write the rules of economics. And your game does not match how economics works.

So what is the point of this thread? You asked that we follow your way of thinking. Ok, you're right - if people thought the way you did and economics was structured the way your thinking structures it, economics wouldn't work. Is that all you're asking or do you actually want to know how economics works? If you want to know how economics works, then we need to be able to show you the flaws in your reasoning. This is a very simple point of logic. I am stymied that you would use such a method for teaching people math! What if one of your kids says to you that 1+1=3?

 

[CRGreathouse]

The term velocity just refers to how much money moves. I can write down the velocity between each row, but that wouldn't change the intermediate states.

No.

I have $100 and I deposit it into a bank. The bank loans you $90; you deposit this and the bank lends Joe $75, who deposits it in turn. Now we have $265 in the bank between the three of us: that's velocity. $100 turned into $265.

I'm not exactly sure what bonds are. Can I not include all buyers and sellers of whatever goods to make my table work again?

No, because the money is created. The Fed didn't take money it had sitting around to buy the bonds; it just created some for that purpose.

 

[Dale]

Please read my post carefully. I sum up dollars only. Nothing else and I said before no matter if it makes sense. Just the 3300$ dollars for my game.

(the reason I sum up dollars only is because I want to buy chocolate after and the supermarket accepts money only - no laptops)

So is the sum of dollars constant or not?

The sum of the dollars does not represent the value of the economy. Your original point, the motivation for your game, was to substantiate your claim that "whatever money someone wins, another one has to lose". But in your example nobody lost anything. Person A gained $100, B gained $100, C gained $800, D gained $1000, and E broke even. The gain to the whole economy is $2000, and no individual lost anything. The consumer broke even and all of the producers gained an amount equal to the value they added to the economy.

You are committing a logical fallacy called petitio principii or "begging the question".

 

[Gerenuk]

So sell the laptop and buy the chocolate. You're writing the rules of the game, but you are not entitled to write the rules of economics. And your game does not match how economics works.

Oh c'mon. I could extend my table to someone selling the laptop with the same conclusion that the sum of money isn't lost. There are no rule of economics. It's all due to logical reasoning of the people.

My game is an action that I can do for real and I was asking what the result would be. Agree? Yes or no? It really seems like some people are theologists here who instead of answering try to change the topic.

So what is the point of this thread? You asked that we follow your way of thinking. Ok, you're right - if people thought the way you did and economics was structured the way your thinking structures it, economics wouldn't work. Is that all you're asking or do you actually want to know how economics works? If you want to know how economics works, then we need to be able to show you the flaws in your reasoning. This is a very simple point of logic.

You don't have to think my way, by I suggest that you try to think by yourself. Because so far you have only repeating what you heard from others and not made any own thoughts. People without any economics knowledge find it very easy to understand. They say "Yes, the sum of money is constant. But what's your point?". I answer: "I don't know, but at least you answer the question and that's a starting point for discussion".

I am stymied that you would use such a method for teaching people math! What if one of your kids says to you that 1+1=3?

If you don't want mind-less people full of vague book knowledge you better make them think. If they say 1+1=3 I can show them why that is wrong. I would never say "That's a stupid question - you cannot ask it. I will explain to you why 2+2=4"

I might be completely wrong with my arguments, but to show that you should actually refer to them and not change the question.

 

[Gerenuk]

The sum of the dollars does not represent the value of the economy.

I didn't state that. Call the sum of dollars "SOD" and my question is how SOD changes with time.

Your original point, the motivation for your game, was to substantiate your claim that "whatever money someone wins, another one has to lose". But in your example nobody lost anything. Person A gained $100, B gained $100, C gained $800, D gained $1000, and E broke even.

As you write correctly I asked who has how much real dollar bills. And a laptop by no means looks like a dollar bill.

You are committing a logical fallacy called petitio principii or "begging the question".

That's not the same. If tomorrow I phone all the banks, ask for the deposits of all the people and then add all these numbers: Will a black-hole appear and destroy the Earth or what will happen to prevent me from adding these numbers?

 

[Gerenuk]

No.

I have $100 and I deposit it into a bank. The bank loans you $90; you deposit this and the bank lends Joe $75, who deposits it in turn. Now we have $265 in the bank between the three of us: that's velocity. $100 turned into $265.

Could you write that down in my sort of table? I'm not 100% sure what's going on there.

No, because the money is created. The Fed didn't take money it had sitting around to buy the bonds; it just created some for that purpose.

You mean it prints new money? Yes, if that component matters, then I should rather state the sum of all money is whatever has been printed. Just by knowing what the government additionally creates, I could normalize the total sum.

 

[Dale]

I didn't state that. Call the sum of dollars "SOD" and my question is how SOD changes with time.

The point is that the sum of dollars is not an indication of the value of an economy, and therefore it is not true that "whatever money someone wins, another one has to lose". In the absence of any goods, what is the value of a dollar? In the absence of any dollars what is the value of a laptop? The dollar has no intrinsic value, its only use is to simplify multi-partner bartering for items like the laptop that do have intrinsic value.

Even in an artificial situation like yours, where you make the assumption that the sum of dollars is constant, the only way for one person to gain at anothers expense would be by theft. If all transactions are through free-market trade then everyone wins.

That's not the same.

It is the same. You are clearly committing the logical fallacy known as "begging the question". You are setting up an artificial situation where you are assuming your desired conclusion. That is the definition of petitio principii. It is obvious that your game keeps the "sum of dollars" constant, you designed it that way. I am trying to show one aspect of you how a real economy works by using exactly your example.

By the way, I think it is funny how you commit an obvious logical fallacy and then accuse us of not thinking for ourselves when we refuse to get ensnared by it. You have a funny definition of "thinking for ourselves" which apparently means surrendering our logic for your fallacy.

 

[CRGreathouse]

You mean it prints new money? Yes, if that component matters, then I should rather state the sum of all money is whatever has been printed. Just by knowing what the government additionally creates, I could normalize the total sum.

Actually no, I don't mean printing new money, although printing new money can change the total as well.

Could you write that down in my sort of table? I'm not 100% sure what's going on there.

Here's a basic summary of what I'm talking about -- does this explain it for you?
http://moneygirl.quickanddirtytips.com/money-how-banks-work.aspx

 

[Gerenuk]

The point is that the sum of dollars is not an indication of the value of an economy, and therefore it is not true that "whatever money someone wins, another one has to lose".

OK, I'm not a native English speaker, but please tell at which position in the sentence:
"Is the sum of all dollar bills constant?" or "If some receives a dollar bill, will someone else have given it away?" the word "economy" appears?

In the absence of any goods, what is the value of a dollar? In the absence of any dollars what is the value of a laptop?

I repeat myself here, but I don't mind. Stop asking about economy or value or whatever. Just tell if the sum of dollar bills is constant.

Even in an artificial situation like yours, where you make the assumption that the sum of dollars is constant, the only way for one person to gain at anothers expense would be by theft. If all transactions are through free-market trade then everyone wins.

Sorry. I give up here. The situation is your own real example. Just what I type into my calculator might seem artifical. There is no assumption whatsoever. In my tables there was no theft. In the tables I drew someone is bound to lose the dollar bills.
There is clearly a communication problem here. Maybe someone else can settle this point.

It is obvious that your game keeps the "sum of dollars" constant, you designed it that way. I am trying to show one aspect of you how a real economy works by using exactly your example.

Please note that I basically translated your real economy examples into a clearcut table. And in fact no-one complained that there was anything wrong with it. It is one-to-one.

By the way, I think it is funny how you commit an obvious logical fallacy and then accuse us of not thinking for ourselves when we refuse to get ensnared by it. You have a funny definition of "thinking for ourselves" which apparently means surrendering our logic for your fallacy.

Logical fallacies can be disproven. But not by ignoring them.
It is true that I'm not completely using the same wording as you do. If you have superior knowledge, then why can't you play on another persons ground?

 

[CRGreathouse]

First, note that I replied to you above (post #31) -- we posted at about the same time.

OK, I'm not a native English speaker, but please tell at which position in the sentence:
"Is the sum of all dollar bills constant?" or "If some receives a dollar bill, will someone else have given it away?" the word "economy" appears?

At first you were asking about money:
"I told the people that with every transaction the total sum of the money is constant (i.e. take bank accounts of all participants and add their deposits - please add no other numbers; in the end the supermarket accepts money only)."

It's easy to show that even without government action, the total sum of money in all bank accounts isn't constant, as I explained in my last two posts.

Then you asked about dollar bills, which of course are different. Most of my dollars are in a bank; very few are in the form of bills or coins. But that sum changes too, through printing of new bills, destruction of existing bills, accidental loss or destruction of bills, and such.

Sorry. I give up here. The situation is your own real example. Just what I type into my calculator might seem artifical. There is no assumption whatsoever. In my tables there was no theft. In the tables I drew someone is bound to lose the dollar bills.
There is clearly a communication problem here. Maybe someone else can settle this point.

There's no disagreement here between you and DaleSpam. DaleSpam says that without theft no one is worse off in terms of dollars + goods; you say that some people have fewer dollars.

Please note that I basically translated your real economy examples into a clearcut table. And in fact no-one complained that there was anything wrong with it. It is one-to-one.

That example doesn't change the total number of dollars, but several examples in this thread have.

 

[Gerenuk]

Here's a basic summary of what I'm talking about -- does this explain it for you?
http://moneygirl.quickanddirtytips.com/money-how-banks-work.aspx

I think I understand the principle.

Then let me make my table more detailed in order to make my sum-theorem work again. I call money that is put into a bank account property of the bank. So effectively now I really count only absolutely real dollar bills and no virtual numbers in computers.

Here is the table for the text from the link:

Me           BankA         Person    BankB      Person
1000$        0$            0$        0$         0$
0$           1000$         0$        0$         0$   <- deposit 1000$
0$           100$          900$      0$         0$   <-loan 900$
0$           100$          0$        900$       0$    <-deposit 900$
0$           100$          0$        90$        810$  <-loan 810$

Is that correct? The sum of real dollar bills is constant.
One day of the year is chocolate day, when all people can buy chocolate for real dollar bills. Am I right in the conclusion that chocolate will be bought for 1000$ in total? What ever I lose over the course of all these transactions (I actually started with 1000$) someone will win.

 

[Gerenuk]

At first you were asking about money:
"I told the people that with every transaction the total sum of the money is constant (i.e. take bank accounts of all participants and add their deposits - please add no other numbers; in the end the supermarket accepts money only)."

It's easy to show that even without government action, the total sum of money in all bank accounts isn't constant, as I explained in my last two posts.

You are right. I need to ask about real coins or bills only. I forgot that banks tell you they keep the money for you where in fact they don't. Please consider my last post for this.

But that sum changes too, through printing of new bills, destruction of existing bills, accidental loss or destruction of bills, and such.

Let's keep some simplicity. It's probably possible to include these changes, but that makes all the statements a bit more complicating. One could include computer crashes a stock markets and many other things.

There's no disagreement here between you and DaleSpam. DaleSpam says that without theft no one is worse off in terms of dollars + goods; you say that some people have fewer dollars.

I know there is no disagreement. But there is no relation between my question and his answer either.
The first point I wanted to clarify the some people have fewer dollars. Next I would like to know what happens on chocolate day when everyone is allowed to buy chocolate, but with real money only.

That example doesn't change the total number of dollars, but several examples in this thread have.

Didn't I translate all examples to tables?

 

[Gerenuk]

I'm not sure how scientifically minded people are here. As common in science I would like to consider a model society and ask if stock market would work there:

People on an island trade with shares. There is no bank system, just ordinary dollar bills. No bills are lost or printed. On chocolate day not everyone can be a winner.

I think this has all essential ingredients to examine the stock market, but if someone disagrees then I'm not sure how to explain that.

 

[CRGreathouse]

One day of the year is chocolate day, when all people can buy chocolate for real dollar bills. Am I right in the conclusion that chocolate will be bought for 1000$ in total? What ever I lose over the course of all these transactions (I actually started with 1000$) someone will win.

There are less than $1000 in bills circulating, because the bank needs to hold something like $250 in reserve. But then again just because a dollar bill is used to buy chocolate doesn't mean the very same dollar bill can't be used to buy chocolate again -- the chocolate man pays for cocoa and milk with some of the dollar bills he gets, and the suppliers in turn buy chocolate from him.

In short, counting dollar bills tells you nothing even when only dollar bills are accepted. And they aren't the only things that are accepted -- checks and credit cards would be the obvious first counterexamples in the 'real world'.

 

[Gerenuk]

There are less than $1000 in bills circulating, because the bank needs to hold something like $250 in reserve.
...
In short, counting dollar bills tells you nothing even when only dollar bills are accepted. And they aren't the only things that are accepted -- checks and credit cards would be the obvious first counterexamples in the 'real world'.

I have to think what that would mean in the tables. Maybe it's possible to include all this, but that would make the explanation long and complicating.
That's why I propose the simplified island model above. I mean stock market is not just working because banks need to hold reserves and because you can use your credit card to pay at the store?!

But then again just because a dollar bill is used to buy chocolate doesn't mean the very same dollar bill can't be used to buy chocolate again -- the chocolate man pays for cocoa and milk with some of the dollar bills he gets, and the suppliers in turn buy chocolate from him.

That's correct.
I think I invented chocolate day to quantify the dollar bill wealth at one particular instant (and to justify why I count dollar bills only). So maybe chocolate day should be a one day event where the chocolate supplier doesn't use the money.

 

[CRGreathouse]

I know there is no disagreement. But there is no relation between my question and his answer either.
The first point I wanted to clarify the some people have fewer dollars. Next I would like to know what happens on chocolate day when everyone is allowed to buy chocolate, but with real money only.

You're not talking about real money. You're talking about currency. The money in my bank account is real money, even though it's not currency.

M2, by most accounts, is real money. Your measure is narrower than M0.

Didn't I translate all examples to tables?

You changed your measurement from dollars to dollar bills. Here's the discussion, in a nutshell:
You argue that dollars are constant -- fractional reserve is a counterexample.
You argue that dollars are constant -- Fed OMC is a counterexample.
You say you mean dollar bills instead.
You argue that dollar bills are constant -- printing dollar bills is a counterexample.
You say you're renormalize to exclude this.
You argue that dollar bills are constant -- currency destruction/loss/etc. are counterexamples.
You say "Let's keep some simplicity" and exclude them.


So your current argument is:
Unless someone prints or destroys a dollar bill, the number of dollar bills remains constant.

This is true. It is, however, entirely unrelated to your original post, in particular "Therefore the more experienced half of traders at the stock market wins money and the less experienced half loses money.".

Stock traders don't hoard dollar bills; on the contrary, they generally keep almost all of their assets in stocks/bonds/funds. The large majority of their money not in stocks/bonds/funds would be in checking or savings accounts; only a tiny fraction of their money would be in currency. A stock trader who is wiped out may have as much or more currency than a trader who is successful -- it's not hard to have $100 in your pocket; you care much more about whether your portfolio is worth $1 million or $500.

 

[CRGreathouse]

I think I invented chocolate day to quantify the dollar bill wealth at one particular instant (and to justify why I count dollar bills only). So maybe chocolate day should be a one day event where the chocolate supplier doesn't use the money.

In that case, as I mentioned, there is a net destruction of money by your standard in that example: not all of the $1000 is available for buying chocolate, because some of it is sitting in reserve.

 

[Gerenuk]

You're not talking about real money. You're talking about currency. The money in my bank account is real money, even though it's not currency.

M2, by most accounts, is real money. Your measure is narrower than M0.

Sorry, for not using the correct terms. By "real" I meant what I can actually touch. That's why I wrote dollar bills in later posts.

So your current argument is:
Unless someone prints or destroys a dollar bill, the number of dollar bills remains constant.

This is true. It is, however, entirely unrelated to your original post, in particular "Therefore the more experienced half of traders at the stock market wins money and the less experienced half loses money.".

Sorry to have you confused. I think the term "money" had a special meaning of mine. I could give it a new name and rewrite the question.

you care much more about whether your portfolio is worth $1 million or $500.

True.
Just to understand why a single thought of a few people can cause a crisis, even though nothing real has happened, I was trying to make all this business in low-level real world terms.
Of course it is always possible to include more complications - even programming errors in the bank software. But that doesn't help to understand the basic principle.
Maybe the island toy model can help. It doesn't have a banking system and all it's complications. But that has nothing directly to do with the stock market.
The question is whether the island model will have a stock market system.

 

[Gerenuk]

In that case, as I mentioned, there is a net destruction of money by your standard in that example: not all of the $1000 is available for buying chocolate, because some of it is sitting in reserve.

That's right. The reserve rule complicates the considerations. I'd have to think what it actually means.

So do you think in the bank-less island society a stock market would be possible?

 

[TVP45]

I could sell stones to people and claim they will find others who want to buy them. Obviously that wouldn't work, ...

Diamonds?

 

[CRGreathouse]

I'm not sure how scientifically minded people are here. As common in science I would like to consider a model society and ask if stock market would work there:

People on an island trade with shares. There is no bank system, just ordinary dollar bills. No bills are lost or printed. On chocolate day not everyone can be a winner.

I think this has all essential ingredients to examine the stock market, but if someone disagrees then I'm not sure how to explain that.

What's behind the shares? There's a difference between money (which has value only because it is a medium of exchange) and stock (which represents a claim to a portion of a thing). If the island has productive companies and the stock works there just as it does here, so there is a great deal of wealth beyond the total value of the cash, here's how it would work.

There are a million dollar bills and a ten million dollars worth of stock. The strange chocolate man comes to the island saying that he will accept only dollar bills (but not new printed ones) that he intends to keep until the end of the day. For some reason, everyone really wants to buy the chocolate.

A few people have dollar bills with them and buy some chocolate. Others realize that they, too, want to buy chocolate so they sell their stock for dollar bills. Soon everyone is selling stock, and it takes more and more stock to buy a dollar bill. Dollar bills are in demand!

Someone sets up a market stall near the center of the island to buy dollar bills from people. He's offering stock in exchange for dollar bills, but not his own -- he's working as an agent for wealthy stockowners who want more dollars. Since it's more convenient to work with this man, everyone who wants to own more stock and isn't so sure about the chocolate man converges to the spot.

At the end of the day, most of the island's dollar bills are in the hands of the strange chocolate man. People who chose to buy the stock now own much larger parts of the island's traditional companies. People who sold their stock now have the greatly-desired chocolate. One man never heard about the whole thing; he still has his stock and his cash, just as before.​

If you substitute "kg of gallium" for "dollar bills", "inventor" for "strange chocolate man", and "gallium-based processor" for "chocolate", you now have the story of the discovery that gallium actually had a practical use. Those who happened to have gallium [mines] at the time of the discovery were fortunate enough to make money because of the sudden 'external' demand for gallium. Your fable tells the unlikely story of a sudden external demand for dollar bills, which are less likely to have an actual use than gallium.

 

[CRGreathouse]

Maybe the island toy model can help. It doesn't have a banking system and all it's complications. But that has nothing directly to do with the stock market.
The question is whether the island model will have a stock market system.

Your example has very little to do with what you're trying to understand. It has everything to do with the unnatural sudden demand for dollar bills, which is unlike the real-world situations you're thinking about.

In the real world, a sudden demand for dollar bills simply results in more money being printed. Amusingly, while the Fed can create dollars, it does not create dollars by printing money: just dollar bills. It sells the dollar bills to banks and destroys the (non-physical) money it gets in exchange, keeping the total constant for the transaction.

 

[Gerenuk]

At the end of the day, most of the island's dollar bills are in the hands of the strange chocolate man. People who chose to buy the stock now own much larger parts of the island's traditional companies. People who sold their stock now have the greatly-desired chocolate. One man never heard about the whole thing; he still has his stock and his cash, just as before.[/i][/INDENT]

I'm glad your using the model. Tell me if I missed something in your story.
So everything is working as expected. The one point where I would disagree is that people with shares will own the companies. I mean they are told so, but how would that ever make a difference in their lives if there is no way to profit from owning shares?
If I were a real owner or manager I'd make a living on it, i.e. I'd receive money (just like dividents).

Those who happened to have gallium [mines] at the time of the discovery were fortunate enough to make money because of the sudden 'external' demand for gallium.

That makes sense to me as owning mines probably meant that you receive money from selling gallium (i.e. a way to profit apart from selling the share).

Sorry if I haven't put a new idea in here. Maybe this diagram will help:
(there must be someone out there who is able to put stock market into mathematical form, as mathematics contrary to words can pinpoint the meaning of something.)
If a share is sold from A to B to C, then this makes sense
ValueToA = ValueToB = ValueToC = MoneyThatCCanReceiveFromCompany
But if there is never an "end-value" then
ValueToA = ValueToB = ValueToC = ValueToD = ... ??
could just as well be all zero. What I am trying to say is that at some point there must be someone who profits from having a share by other means than just selling the share.

 

[CRGreathouse]

What I am trying to say is that at some point there must be someone who profits from having a share by other means than just selling the share.

The ways are:
* The company pays dividends
* The company is dissolved, with the residual value being divided amongst the stockholders
* The company is acquired, with the purchase price divided amongst the stockholders

 

[CRGreathouse]

That makes sense to me as owning mines probably meant that you receive money from selling gallium (i.e. a way to profit apart from selling the share).

You totally missed the analogy. The chunks of gallium (or gallium mines, but ignore that since that's confusing you) aren't the shares of stock. They're the dollar bills.

 

[Gerenuk]

You totally missed the analogy. The chunks of gallium (or gallium mines, but ignore that since that's confusing you) aren't the shares of stock. They're the dollar bills.

I admit I sort of felt there was a point behind the dollar bills, that I didn't understand.
I was just saying why the gallium example makes sense to me without any analogy needed. So in principle I should transform this understandable gallium example back to the dollar bills.

 

[Gerenuk]

The ways are:
* The company pays dividends
* The company is dissolved, with the residual value being divided amongst the stockholders
* The company is acquired, with the purchase price divided amongst the stockholders

That's something that explains the stock markets - at least if these possibilities are there. I just had the impression that these non-reselling values are too unlikely, far in the future or even non-existent to explain large price fluctuations.

It's not easy to understand how a single thought can cause a crisis, when nothing has happened to real goods.