Where’s all that money coming from?

June 18, 2014

Today, June 18, 2014; just before the chairman of the federal reserve stood up and ended her news conference, someone asked a fundamental question referring her to the Standard and Poor stock exchange’s surpassing its historic value, and asking if the federal reserve thought that such record heights for stocks were historically typical. Her response though almost subdued, perhaps because she was thinking of the irony implied in the question that might also have referenced Canada’s TSX exchange today at record levels while interest rates, the purview of the federal reserve and the Bank of Canada, are being kept historically low, sounded hushed but direct: stock markets are functioning at historic norms.

Now since I have no financial literacy, I’ve been wondering to myself for some time now how stock exchanges in North America could be doing record business while interest rates for those who might qualify like banks have been flirting with 0%. I would have thought that all the money purchasing stocks would have depleted investors’ funds so that there’d be no money to buy bonds. Historically I think that usually happens with the result that bond prices fall as their yields/rates increase. As a consequence of my amateurish interest in finance, I was unable to understand how there could be enough money to keep stocks and bond yields at record levels, stocks at historic highs and interest rates at historic lows. Now recently a financially literate BNN commentator said almost with a tone and contortions of flabbergasted surprise that banks were purchasing the stocks that are helping keep stock exchanges high; surprising, though everyone knows that the U. S.’s reserve and Canada’s central bank have been purchasing bonds, but that banks were also buying stocks seemed historically unusual. If banks are investing in both stocks and bonds, then their ” bi-polar” investment behaviour might explain how there can be enough money to keep bond yields low and stock values high, and a more significant concern that popped up during the chairman’s one hour news conference: the worth of U.S. capital.