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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: Mr. BSL who wrote (12428)3/13/2000 12:35:00 AM
From: Nandu  Read Replies (1) of 15132
 
Wouldn't the money Peter got from selling his Cisco come from Paul's money market account?

Mr. BSL, try adding the following factors to your thinking to understand the wealth effect.

Peter doesn't have to sell his Cisco. He can borrow on his unrealized capital gains to buy his $1 million hovel in Silly Con Valley.

Paul can buy on margin. Only half the money that Peter got need to have come from Paul's money market account.

Peter, without selling his Cisco, will spend more of his normal income, because he doesn't have to save anymore. His Cisco has made him rich.

Cisco itself can spend its inflated stock to buy up other companies with inflated valuations thus helping the above effects to "trickle down".
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