Friday, October 24, 2008

Amateur, Armature, Armchair Finance Pundit

Here's a pretty simpleminded idea that I think might be right. Since 1995 we've seen a number of asset-price hyper-inflation bubbles. Basically, various classes of assets have gotten very expensive, very quickly. Then, suddenly, they have become cheaper.

Right now the markets are crashing. While commodities may continue to get more expensive, hard assets (like real estate) will fall in price. Those with the money to buy will be able to snap up some bargains and end up owning a lot of stuff. This is familiar stuff.

Here's my thought. If you sell something when the prices are high, you've got a lot of cash. The normal thing to do is to lend that cash to someone else in order to earn interest on it. (Holding on to cash is generally unwise because it loses value. You should "put it to work" as they say.) People willing to lend out money: that's what we suddenly ran out of. The credit markets "froze", remember?

A lot of reasons have been suggested. But what about this one: suppose there was widespread anticipation among the super-rich of an asset-price collapse. If you know there's going to be a lot of cheap stuff lying around to buy soon, you hold on to your cash. In fact, holding on to your cash (as you know) contracts credit (thus the money supply, in at least one sense) and decreases demand. As demand decreases, prices fall further.

You keep holding on to your cash. Prices plunge. Your money becomes worth more and more. And then, when the economy is in ruins, you buy. Suddenly you own half the world.

Or all of it. The amount of "fictional wealth" has been growing at a staggering rate. There is much more money floating around than real stuff to buy it with. (Because so many assets have been, as they say, "derivative".) It is conceivable that a small group of very rich people (maybe 1000, maybe a 500, I really don't know) will soon have enough money on them to buy, well, yes, everything. Prices just have to fall to their natural levels (or maybe a bit further.) And that seems to be happening.

Yes, I'm just thinking out loud. Any thoughts?


Presskorn said...

I guess there are two problems with this piece of reasoning:

1. Its assumption that global economy will experience genuine deflation and not just low general inflation rates due to drops in the real estate market. That is to say, while we might experience deflation in the real estate market, it seems a very pessimistic hypothesis that all markets will deflate globally. And why would rich people only want to buy property; it’s seems that they already have enough mansions as it stands….
2. Its assumption (I know; half-joking) that 500 rich might buy the world, when the economy is in ruins. Well, if they try to do that then the world will, so to speak, be in demand and prices will rise thus halting their attempt at a world take-over.

So my advice to all the readers of Pangrammaticon, who are simultaneously brokers on Wall Street is: Keep putting your money to work. Just as in basic human anatomy, holding on to your liquids is never a real option. (Say not with Marx: And all that is solid melts into thin air; but rather: And all that is liquid crystallizes into solids….)

PS: I always wondered about the verb in this famous Marx-quote – Why would he write “melts” and not rather something like “vaporizes”…

Thomas said...

in re 2: the idea is that it's a coordinated effort. A conspiracy, if you will. Each asset will be bought only once.

in re 1: yes, I am expecting genuine deflation. (I know I could be quite wrong about that.) But there's another thing. Money is created out of nothing as debt in the current system. That means that, even without deflation, and given the various highly leveraged derivative assets out there, it is conceivable that at a particular moment (helped along by Henry Poulsen's billions) a few players will hold enough cash to buy all the real stuff.

I'm not saying they actually will buy it. I'm saying they will effectively be able to buy whatever they want.