Here's our pretend duo, Q and A (inspired by my conversations with clients), discussing liquidity, the market, basic economics, international trade and government intervention:
Q: You like to talk about cash on the sidelines, and on corporate balance sheets, as if something wonderful is going to happen when that cash gets put to use. But, as it relates to the stock market, if I buy a thousand dollars worth of stock from Joe, I now own the stock, and Joe has the thousand dollars. Nothing changes except for who owns what. There's still the stock and there's still the thousand dollars. No cash off the sidelines.
A: Well, forgetting taxes, that's true if Joe's aim is to hold onto the cash and later buy more stock with it. If instead, for example, he turns it over to Apple in exchange for an iPad, and if Apple's management isn't going to buy a stock with it, there'll be, for the moment anyway, a thousand less dollars on the sidelines.
Q: But even if he buys an iPad the thousand dollars is still out there, "sidelines" or not. And the stock is still out there, so what's the difference?
A: Well, the thousand dollars is still out there, as is the stock, but a new iPad is now in play. And when Joe shows his pals his new iPad they'll want iPads too, as will their pals and their pals pals and their pals pals pals. The rush of new demand will put pressure on Apple's production capacity and---along with investing (that thousand, plus some of the other hundred and forty billion it holds in cash) to increase capacity---could inspire its management to increase the price per iPad. Folks wanting iPads, if they want them bad enough (they will), will work harder and/or smarter, to produce other stuff (maybe stepping it up at work---increasing production---and earning a raise) or skimp on something that, in their view (the only view that counts), brings less value to their lives than a new iPad would. Samsung's management notices all the money Apple's making and gets busy working on a comparably, or lower, priced wiz bang gadget of their own---creating jobs in the process.
Q: Yeah, jobs in South Korea!
A: Well, now, think about it. No American has to set foot in South Korea to buy a Samsung tablet. The bringing of the Samsung product to the U.S. market---the transporting across the country, the selling and servicing, etc.---creates demand for U.S. labor. But even if that weren't the case---if Samsung products in America didn't produce a single American job---Americans having the freedom to transact in a competitive global market, getting the biggest bang for their buck, will free up resources that will create employment for other Americans in numerous industries.
Q: Yeah but that's a huge hit to Apple.
A: It's a huge incentive to Apple. For Apple, worried about Samsung, will have to get busy investing some of those profits in the development of its next wiz bang, life-enhancing, gadget---creating jobs in the process.
Q: Yeah, but the fact that Samsung is taking U.S. marketshare away from a U.S. company can't, on balance, be a good thing.
A: Oh but it so can, especially "on balance". You see when a U.S. citizen spends a U.S. dollar on a South Korean product---being that U.S. dollars are claims against U.S. stuff---he is doing wonders for U.S. exporters (and the U.S. jobs market) as South Koreans spend those U.S. dollars. You see imports always lead to exports, and vice versa.
Q: Alright, so tell me, why then isn't the economy booming? Why is unemployment still so high?
A: Of course that's the mystery. Ask ten economists and you'll get twenty different answers. Although too many would tell you it's all about consumption; that Washington and the Fed need to boost consumption by injecting more stimulus "into the economy"---that is, spend and print more money. I'm with the few who think they're wrong: Consumer spending recently hit its all-time high, and here we sit, atop the slowest recovery in recorded history. I say, therefore, that it's more about production. Corporate producers (not knowing what, in terms of taxes and regulations, awaits) remain idle atop record cash balances, and, alas, more folks are presently living on government assistance (not producing) than ever before. I.e., Uncle Sam can come up with any number of new stimulus schemes, and the Fed can print dollars into oblivion, but until policymakers either get out of the way (that's a fantasy), or at least come to terms on tax policy, etc., that'll last beyond the next election cycle, we won't (likely) see the kind of capital investment needed to really get this economy humming.
Q: So all that wonderful stuff going on with Apple, Samsung, etc., isn't happening like you just described?
A: Oh it is, but not at the pace it could, or should, be?
Q: So you're saying government is the problem?