That Sloshing Money
Jude Wanniski
December 9, 1996


Letters Editor
The Wall Street Journal
200 Liberty Street
New York, NY 10281

Dear Editor:

As Dow Jones & Co. has been publishing The Wall Street Journal for more than a century, it stands to reason you would have discovered by now that stock markets do not rise because "tons of money are sloshing around the world looking for a home." Your reporter Michael R. Sesit serves up this silly idea in "Global Banks Fuel Global Stock Markets' Record Run," in his Global Stock Markets column on December 3. True, he pins the idea on "analysts and money managers," naming two gentlemen from London as the sources of his wisdom.

Such "cash flow" analysis to explain the rising value of the nation's capital stock is the equivalent of saying "Housing starts are on the rise because tons of lumber, hammers and nails are sloshing around the world looking for a home." There is no way that sloshing money can drive up the value of equities. For every $100 for which Jones finds a home in the shares of Acme Widget, buying them from Smith, there are now $100 sloshing around in the pockets of Smith, looking for a home.

The value of total capitalization in the U.S. stock market has climbed by roughly $1 trillion this year. This is at least a hundred times the amount of all the money created by all the central banks on earth thusfar in 1996! If anything, the value of the nation's capital stock has risen so sharply because investors observe that our central bank, the Federal Reserve, has been so prudent this year in supplying new money. Dollars have become scarce relative to gold, the most monetary of all commodities. Instead of more dollars sloshing around, there are fewer than are being demanded, which results in the dollar being bid up and gold being bid down.

There are many good reasons why global stock markets are rising, most of them political. The wisdom of Fed Chairman Alan Greenspan is one of them. The wisdom of the American electorate on November 5, in electing a government that will remain divided but more harmonious, is another. Tons of money sloshing around is not even in the ballpark.


Jude Wanniski