Quoth Tim Wunder:
> So in essence there are two types of finance in the system; one money creating and potentially inflationary and a second one that would not be. Yet as Erik Hake points out the second one, IPO and equity finance, is well documented to be at the center of MANY economic bubbles. What then is the mechanism by which equity finance can create bubbles if it is not money creation?
> Is equity finance somehow fundamentally backed up somewhere in the system by credit finance that is unseen? Or is it that equity finance plays such a small role in the system that it is practically irrelevant to the economy? I can't believe this last option is realistic, but it could be.
The mechanism that equity asset creation plays surely INVOLVES money creation, but it is not the IPO itself that creates the money. In the Roaring Twenties, margin lending by banks was money creation. In the Naughties, there were two very big sources of money creation tied up with the bubbles: one was mortgage lending by banks, the other was money creation through lending for investment in productive capacity. The money creation through lending for investment in productive capacity was, of course, occurring most strongly in places like China and India, and some of that come into the US through capital inflows to buy Mortgage Backed Securities.
If there are not one or more money creation processed involved, then an asset bubble would have to rest on nothing but an increase in leverage and otherwise economizing on the use of money balances in asset purchase transactions (in other less informative words, an increase in velocity of money). So it should be easier for a bubble to become established if it is also served by access to ongoing money creation.
International College Beijing
China Agricultural University