I am trying to understand how much the stock market can drop before we destroy realized value (cash). Or how much money is not used in the economy, but rather it is tied to the stock market.
Leaving aside any drops, the entire market cant be sold/liquidated at once at it's current market cap / value. The current "value" / market cap of any given stock / the market is based on whatever tiny fraction of shares traded today.
Outside the ~ 5 Trillion USD that went to primary market (IPOs, secondary offerings and share issuances) since 1970 and flowed to the actual companies, there is a significant amount of cash that is tied in the secondary market speculating the value of the stocks instead of e.g. providing liquidity to the economy. I am trying to understand how much is that.
Hmm, not really. If you buy some shares from me for $1000, we settle and I give you the shares and you give me the $1000, and I can spend the $1000 on plane tickets or wine or put it in the bank or whatever, there is no $1000 that is "tied" to any shares.
Perhaps you value those shares at $1000 on your balance sheet as their "book value" or "cost basis" or whatever, but the $1000 doesn't exist (you gave it to me), all you have is shares.
I think the answer to that question is close zero. The US economy doesn't need more liquidity, and is essentially maxed out.
When you add large amounts of liquidity, you get proportional inflation/devaluation destroying the money you have added.
Covid Stimulus and related inflation showed how they economy cant even handle hundreds of billions more liquidity in the hands of consumers, let alone tens of trillions. The worker productive capacity doesn't exist to make and sell more stuff, so stocks and real-estate soak up as much liquidity as they can, and inflation takes the rest.
If the money in circulation doubled tomorrow, I would expect rent and eggs to double as well, because there isnt actually more stuff. In this way, excess liquidity and associated inflation heavily favors holders of debt, equity, capital, and real-estate.
As a well off American, I expect I would be the winner. My house dollar value of my house and 401k would double, while my mortgage would stay the same.
I would be cautious about using this assumption or analysis to answer those questions, and your phrasing.
Cash is different than realized value, as anyone who has watched their cash inflate away will tell you as they use it for kindling.
Similarly, money tied up in the stock market doesn't mean it could be used in the economy. In many ways, the economy is not money limited and adding more does nothing.
