Wednesday, May 11, 2022

The Financialization of the Everything Bubble


In a world awash in financialization, how is one to differentiate something from nothing?

The home you live in seems pretty tangible; it's framed with wood and finished with sheet rock and glass and stone.  It’s got a roof of asphalt or shake or slate, a paved drive and a yard of grass. 

It's also got "equity".  What a great term... “Equity”.  

People say "My house has equity" while bankers say "Your home has x amount of equity" almost as if this "equity" is a tangible attribute of the property, like the number of bedrooms or bathrooms.

But, the number of bathrooms doesn't decrease with adverse market conditions and neither can the home house more people when conditions improve.

So to an extent, "equity" is just a fiction... an ephemeral financial estimate of your net stake (after debt and transaction fees and with respect to current market conditions) in the house were you to liquidate it at this very moment.

But yet, it’s not a total farce as we all know people who have accomplished some substantial things with their "equity".  Real things, like educating their children or funding a vehicle purchase, a vacation or even covering critical matters like unexpected healthcare costs.

And therein lays the beauty and utility of traditional financialization.

A relatively simple conceptual framework is built up around a tangible asset, codified in a contract that once agreed to and executed, binds all parties to a specific performance based on expected conditions and norms.

Homeowners can access their real estate wealth without liquidating their actual property; farmers and wholesalers can make forward agreements (for delivery of real product) that are themselves fungible and able to be continuously traded into a secondary market of futures contracts for better, even more efficient agreements given ever changing conditions and considerations;  borrowers (both individuals and firms) can tap future expected income in the form of short or long-term credit while investors can hold stock in a business and, in so doing, share in the current profits and even the estimated value associated to future earnings.

All of this is made possible through the wondrous multitude of innovations in financialization.  
But too much financialization, as we have today, has worked to distort our sense of value, stoking our "animal spirits" and empowering the darker instincts of human nature.

Instead of freeing stranded value or binding voluntary parties to practical arrangements, rampant financialization has overwhelmed our sense of tangible value, ultimately stimulating immense mal-investment and inefficient and even absurd allocation of resources.

Whole cottage industries of dealers, brokers, agents, lawyers, underwriters and waves of other service-providers and middlemen have evolved over time to get their piece of our over-financialized economy while lawmakers, freed from the bounds of practical current accounting by epic monetary charades, craft policy in their never-ending quest to produce programs and initiatives that buy them votes. 

Over time, our whole economy has come to reflect, in one way or another, this distorted sense of value. 

As one fiction has piled atop another, we have gotten further and further from the fundamentals which, when taken together with our natural enthusiasm for technological progress, has made us apt to believe almost anything.

Should investors be suspicious of stocks with outlandish P/Es?

Can homes be so valuable that prices can continuously outpace incomes year in and year out?

Is $40 billion a fair amount to allocate to arm an ally in the support of the latest foreign policy concern? What about $1.37 trillion to fund 50 years of a supplemental nutrition program? 

Can an endlessly reproducible JPEG image or the “first tweet” really be worth millions if it's simply packaged and traded as an NFT?

Is $349 for an Andrew Dice Clay Cameo a fair price, particularly considering that you can get a Gary Busey for just $46 more or a Tommy Chong for $199 less?

What is a dollar actually worth?

Someday, possibly soon, we may really find out.