Tuesday, March 9, 2010

Idle cash on sidelines

"There was a farmer who harvested his field of corn. He sold all but 100 bushels. A few weeks later, he lent the 100 bushels of corn he had saved to a cereal maker, who gave the farmer an IOU that said “100 bushels of corn,” made a big box of corn flakes, and sold it. The next year, a famine struck. People looked hopefully at the farmer, seeing the note that said he had 100 bushels of corn. All that corn, just sitting on the sidelines! If only the farmer would put that corn on the sidelines to work, they thought, then everything would be fine...

One of the hurdles in thinking properly about the financial markets is to understand the idea of “equilibrium” – that all securities issued must be held; that savings must equal investment; that every share bought by someone must be sold by someone else.

… and that there's no such thing as “idle cash on the sidelines.”"

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