16 - Capital Markets: A Store of Future Inflationary Potential

The significance of all this is that the funnelling of money into the capital markets acts as a temporary holding container for the inflation and the frequent asset bubbles which emerge are the manifestation of all that excess paper money which has been pumped into the economy.

It is important to note that the distribution of money between the two pools is not fixed and there is no dam between the markets other than the habits of the people. The public may choose to move their personal money supply from the stock market to automobiles and back again.

Consequently the two markets must comply with the law of prices not only separately but also as an aggregate. As money moves from one market to the other, prices must go down in the first and up in the second and vice versa.

Excess Money Has Not Yet Spilled into National Product Transactions

It is fortunate for us that we may not have yet experienced dramatic increases in the cost of the essential items we need to survive, namely food, fuel and water. But if something were to cause the money sloshing around in the capital markets to feed into the national product pool, we would see almighty price rises and a dangerous scramble for life’s essential items. This is what happened during the initial acceleration of the German inflation, leading to a catastrophic collapse of the currency and the nation.

“In due time, there being no dam between the markets, a leakage of excess money demand back from capital markets into national product will occur. There will always be that spoilsport in the capital casino who will take his winnings and buy national product with them. There will always be that footslogger selling national product who senses that there is surplus money demand over yonder among the capitalists and demand some of it by raising prices. It is inevitable. Excess money which starts out in the capital markets winds up back in national product. If luck is good, the excess money will merely redistribute itself proportionately between the two markets.”¹² “If luck is bad and people lose faith in all kinds of capital investments, there may be a general exodus of money from capital markets which will make the price inflation in national product much worse than the money inflation would seem to justify.”¹³

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