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Where Does Money Go When It's Taken Out of the Stock Market?

Name: CEW
City & State: Bainbridge Island, Wash.

Question: As the Dow continues to fall, I keep wondering where the money is going. Obviously, money is being pulled out of the stock market, even though we all are still buying and using products, and companies are still functioning. So where are "they" putting the money they pull out of the market?

Paul Solman: Well, the Dow has stopped falling since you wrote, but I'll answer the question anyway, since it's worth many trillions less than it was just a year ago.

"They" put the money they pull out of the market in the bank (regular deposits or maybe CDs). Or in U.S. Treasury bonds (Uncle Sam will pay you back in 30 years), notes (2-10 years), or bills (1 year or less). Or in commodities (gold, oil).

In should be noted, however, that when "their" stocks drop in value, or "their" houses drop in value, or "their" Andy Warhol soup cans drop in value, the loss simply vanishes as money to put anywhere else. As I keep trying to explain here, value is psychological: a symbol of desire. When the desire droops, so does the worth. My net worth is a lot less than it was a year ago and perhaps yours is too. But I, at least, have sold nothing. It's just that what I own is worth less.

But what, you might ask, does it mean when experts says people are taking their money and "putting it under the mattress"? And even if you might not ask, here's an answer:

Some folks are actually withdrawing the cash to stash somewhere around the house or in a safe deposit box, so that's obviously mattress-stuffing, metaphorically at least. Buying gold and other precious metals would have the same effect, to the extent the sellers didn't reinvest the money in the banking or shadow banking system. But the real action (or, rather, IN-action) is in the money people are depositing in banks that the banks aren't lending because businesses (and consumers) aren't borrowing. AND the Federal reserves that the government has been creating and also depositing in the banking system, but that the banks are redepositing with the Fed. That is, the Fed has electronically created hundreds of billions of dollars to stimulate the economy (see our recent piece). But the money is still sitting at the Fed because the banks have been afraid to lend; the rest of us, to borrow. In short, the amount of credit out there has been contracting, and that's the main mattress stuffing of the moment. Hundreds of billions that the banks won't or can't lend, and that they've been adding as reserves, which keeps the money out of circulation.

-- Posted April 6, 2009 | Comments (0) | Permalink