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 The markets are not producing capital because they aren't designed to.  All the capital is raised with the initial placement; after that, it's just speculation, and the "after that" is what the markets are really all about.
Precisely. "Investment" happens when someone buys stock or bonds in a primary issue, because this capitalises the issuer. Trading in the secondary market is speculation.

The function of the financial markets is to make shares and bonds liquid and therefore attractive to the casual investor. But the way liquid markets encourage investment is indirect and, as the graphs reproduced by NBBooks show, largely obsolete.

Keynes put it this way in The General Theory:

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except y reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets ovten facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) callms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are availale to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.

The brainless should not be in banking. — Willem Buitler
by Carrie (migeru at eurotrib dot com) on Tue May 26th, 2009 at 05:16:26 AM EST
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