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Economics/Stock market as part of money supply

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Question
Dear Michael,
Why isn't the stock market or the bond market part of the money supply (M0, M1, M2, or M3)? Or is the market capitalization of these markets already part of the broadest money supply?

Answer
Stocks and bonds themselves are not money but, rather, a representation of partial and temporary ownership in the company itself (in stocks), or in their future earnings (in bonds).  Companies gives stocks and bonds to investors in exchange for money, which is used by the company to expand operations.  That's why stock and bond markets are considered "capital markets" - companies utilize these markets to raise capital (money).  The money being spent to purchase these stocks and bonds is already part of the money supply, but is merely changing hands from investor to company.  Then the money changes hands again from company to supplier, as the company purchases non-cash assets.  

Whether the total value of the company's stock (it's capitalization) increases or decreases doesn't influence money supply at all because it doesn't actually change the amount of money available.  Stocks and bonds aren't money, regardless of their changes in value, but they can often be exchanged for money with other investors on the secondary market.  The money used in these transactions, though, is also already part of the money supply.

As overall prices increase, the amount of money doesn't change, but the speed with which individual dollars are exchanged (called monetary velocity) increases.

I hope that helps!

Economics

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Michael Taillard

Expertise

Accepts most economic questions

Experience

Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

Organizations
American Economics Association

Publications
http://www.barnesandnoble.com/s/michael%20taillard You can also check Proquest for a small selection of my research.

Education/Credentials
PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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