This is the Age of Speculation

Remember when a house was something you lived in? And when shares were a claim on dividends? We don’t. But those days are making a comeback.

You live in the age of speculation, where you have to buy stuff to get rich. Which is inherently odd. How could buying stuff make you richer? Unless it’s a productive asset like an apple tree that makes apples, or a cow that makes milk, surely stuff doesn’t make your richer in and of itself?

Actually in this day and age you can buy stuff and it goes up in price, even if it doesn’t actually change. Heck, a house depreciates over time and it still goes up in price every year…in Australia anyway.

But take money out of the economy and you’ll realise that buying stuff doesn’t make you richer. Lifting the monetary veil, as economists say, and dealing in real stuff only, will make you realise the facade. The house that doubled in price is the same house. Probably with a few cracks to boot.

Adding in money, debt and inflation just highlights how inequality grows and insiders become richer. It creates a situation where borrowing to buy stuff becomes profitable. That’s also inherently odd. Borrowing worsens your financial position. It’s all about investing those borrowings into something that is productive.

But when borrowing to buy just about anything regardless of returns is what makes you wealthy, such as negatively geared property investments or internet stocks with no earnings, then borrowing capacity is the key to riches. And the rich have the most borrowing capacity.

So money, debt and inflation cause a redistribution of wealth, not an enhancement. At least in the age of speculation that’s their effect.

This housing ladder type of wealth accumulation remains a treadmill in real terms — once you take out money and look at the real world. Speculating on assets is a kind of zero sum game. You’re not actually getting anywhere — measured in real stuff — if you buy a house and it gets more expensive. And yet, financial wheeling and dealing is the source of Australia’s wealth because that’s measured in money, not real stuff.

Of course, financial valuations can disappear a lot quicker than real stuff.

That happens when debt hits some sort of constraint. Usually interest expense. Hence the fact that government controls interest rates. When people can’t afford to pay their debts and begin to sell stuff, all hell breaks loose. The price of stuff falls instead of going up.

This cycle is what played out in Europe and the US in 2008. A lot of people couldn’t afford the debt that would make them richer. You know the rest by now.

The same fate lies in wait for Australia. And when the banks need bailouts, our government’s debt to GDP will go Greek too. Actually, it will go Spanish. Spain had its debt to GDP under control until house prices fell and banks needed bailouts.

In ancient societies, when the debt constraint was reached, rulers would declare a debt jubilee. Debts would be cancelled en masse. The Rosetta Stone and some of the other earliest records of history are documents relating to such jubilees.

But Europe and America decided to try and keep the game going a little longer in 2008. They bailed out banks and lowered interest rates to try and reflate the bubble. That makes things interesting for investors.

In a world where bailouts and monetary policy determine wealth, as opposed to making real stuff, politics and academic ideology are an investors bread and butter.

We left the White House broke’ admits Hillary Clinton in her new book. Despite some accounting gimmicks which pushed the national budget into a positive briefly, we’re inclined to agree. (We’re not allowed to give ‘personal financial advice’, so we’re interpreting Hillary’s comments as referring to the national budget, even though they refer to her personal one. After all, it’s as candid an admission as you’ll get from a Clinton.)

Notice how the presidential cycle seems to run the stock market? A president comes in just as stock markets are in the midst of a crash. And then the markets rally once they’ve found their political feet. Eventually the politician’s fixes are exposed as a fraud and the markets tank again.


With the next election coming in 2016, we’ll have a crash by 2015 at the latest.

This makes sense given the need for periodic government bailouts to keep the economy afloat. And the way voters blame the government for everything. At least they’re right about the source of the problem.

Why you’d ask the guy who created the problem to fix it is a question only voters can answer. Why voting for someone else would ever make a difference beats us too. As our favourite meme says, ‘Government — if you think the problems we create are bad, just wait until you see our solutions.’

Government — if you think the problems we create are bad, just wait until you see our solutions
Source: The Pessimist


So where does all this politics and monetary policy leave a country in the end? David Cay Johnston, whose CV is very long and full of economics and journalism posts, points out the following about the US economy and its victims:

‘Coming out of the Great Depression eight decades ago, the vast majority fared vastly better than most people have coming out of the Great Recession, which officially ended on June 30 six years ago.

‘It may be jarring to hear that the vast majority of Americans, the 90 percent, enjoyed bigger income gains in the 1930s than in recent years, but that is what the data show.

‘The data also indicate tandem increases in both want and wealth, with the vast majority worse off in 2013 than in 2009, while those at the apex of the economy are enjoying a much larger — and growing — share of national income.’

The idea that economists could compare 1930s data to today’s is ridiculous. Unless you’re an economist and are paid to take the data at face value. You have to ignore how living standards, welfare cheques and household makeup have completely changed since the Great Depression.
Then you can come up with conclusions like the one in a Pew Charitable Trusts survey. It found two thirds of generation X households had less wealth than their parents held at the same age. Here’s the interesting bit: That’s despite the fact that most earn more.

Earning more, but less wealthy?

Yes, this is the downside of the age of speculation. It is what debt bubbles do to fake financial wealth. William Emmons, senior economic adviser at the St. Louis Fed’s Center for Household Financial Stability explained on Bloomberg that ‘the group aged 35 to 44 fared badly in part because its members had taken on debt to buy real estate at just the wrong moment.

Measured in real stuff, households are no doubt vastly wealthier. If they didn’t default on debt. But buying at ‘the wrong moment’ now determines your lot in life. It has replaced learning, working and saving.

Try convincing generation Y to learn, work and save when their prospects are determined by timing.

But Markets and Money isn’t about parental advice. If the financial world is fake and susceptible to implosion, what do you do with your wealth?

One thing politicians can’t fudge and central bankers can’t create out of thin air is real stuff. They can meddle with property zoning laws, allow the gold price to be ‘fixed’ by banks and fund tradies to stuff houses with flammable insulation. All of these mess with real stuff, but it’s a lot less influence than what they get up to in financial terms, where they have complete control.

So investing in real stuff needs to be part of your wealth strategy. If you can handle volatility in the currency, that is. Remember, an ounce of gold doesn’t change. The value of money is all over the place these days. Ironically, often that’s largely because gold speculators in financial markets need to sell out of their positions to cover their debts elsewhere.

Of course, in red China, they had a go at manipulating real stuff too. And now the rehypothecation scandal is unwinding. But what is it?

More on that tomorrow.

Nick Hubble
for Markets and Money Australia

Join Markets and Money on Google+

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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