A Note About The Ponziness of Things
Ponzi schemes seem to be everywhere. Ever since Evergrande started running in to trouble late last year we have been hearing that the entire Chinese property development sector is effectively a gigantic state-sponsored Ponzi scheme. A closer inspection seems to reveal that yes, they take the money coming into pay the money that needs to go out and there's an intricate web of credit and debt that gets created around the developer and their suppliers and it's all very complicated with shadow-banking and political intrigue and local government interference and... yet there's a simple thing going on. The newer customers are paying to cash out the older customers and by any measure, that's how a Ponzi scheme works.
That's the part that got me thinking about a few other things that are like that. Which ever way you look at it, the crypto market - as opposed to cryptocurrencies themselves is in most part, - is a Ponzi scheme. The next coin is being financed by the next investor coming in, and the earlier holder of the currency exits with cash. The only thing that keeps it from being an outright Ponzi scheme is that you could in practice, lose money in the transaction along the way. You might be inclined to cash out at a price below what you bought in at, for whatever reason. Plenty of people are in that position. And yet, over time the value of Bitcoin has gone up and most other major cryptocurrencies have found an upward trend so it's less than even chance that people are losing money as they cash out. It even begs the question, given how much Bitcoin has gained since its inception, why the hell would you risk getting out?
This is without getting to what a cryptocurrency actually is, which is a bunch of blockchain data without any dividends or payouts. The existence of the currency is as virtual as the off-the-plan apartment that people bought from Evergrande and the other Chinese developers. It's not physically there, and let's face it, can you really use that as collateral? In a way the piece of paper you get for putting your money down to Evergrande to build you an apartment seems a lot more prudentially secure than crypto - but it's still just a piece of paper.
Faith in Pieces of Paper
That then got me to thinking about the equities market. There's a video out there on Youtube where Peter Lynch explains that the bourse tends to gain an average of 8% a year, so if you did nothing but sit on the index you would double your investment in 8 years or so. Overall, Peter Lynch is talking about a bias towards the inflation of asset value, much like the crypto market as a whole has behaved. And that asset inflation and the way traders buy in and out of it in turn, had me thinking that the equities market as an aggregate was a giant Ponzi scheme. That is to say, it is a kind of scam that depends on the next sucker coming along and putting down a great sum of money for the same bit of paper.
The trick is what is on the paper. If the paper has no underlying value, it's fraudulent. But value is like what meaning is with Wittgenstein, and totally 'socially-determined'. Worse still, not only does it fluctuate, it is assumed to fluctuate and that is built into its existence. Therefore - as with porn - fraud has the quality of being understood to be what it is only when one sees it. Otherwise it's a slippery slope of ideas, valuations, projections, perceptions and public opinion. You might think bank shares are solid - but that's only because they pay dividends. When is the last time you felt you truly owned a piece of the business on the basis that you owned shares? How solid do you feel partial ownership over a company that doesn't deliver dividends? How confident do you feel about the valuations of a penny-dreadful lithium mining explorer that overnight becomes worth over a dollar a share on the back of a few announcements and estimates? Do you really believe in that valuation of that piece of paper? That is to say the fraudulence of any financial instrument might all be very relative.
The reductio ad absurdum of this is paper currency. We are all putting trust into piece of paper. It is deeply ingrained. Even the biggest goldbug who fears and hates inflation thinks the paper bills in their bank accounts stand for something. The paper currency represents a divided up bit of our faith that a sovereign government will pay up on its debts. So when we buy financial instruments like shares and bonds and derivatives and collateralised debt obligations (CDOs, read 'contract-for-dickheads'), we're exchanging our faith in the sovereign government to pay up its debts with the fluctuating promise of a payout somewhere down the line, also in the same faith sovereign government promissory notes that we happen to think are money.
But money is important: that's why we call it money.
The Risk Management Machine
All of the above is just to say we accept money. And because we accept money we accept banks. And because we accept banks we accept bonds. And because we accept bonds, we accept a bourse that transacts the bonds and equities. And because we accept all of those things, we accept the more arcane financial products. And by extension of all these things we accept cryptocurrencies.
And yet this sits at odds with existence of Ponzi schemes that we accept for years and years and then the draconian sentences are handed out to Ponzi-schemers. Fraud is bad - it goes without saying - but it flies in the face of our acceptance of things like Evergrande and other Chinese developers or Bernie Madoff's amazing 8% returns year after year regardless of market fluctuations. Society seems to let these things go for years on end.
I think the regulators' collective blindness comes down to a couple of things. One is that while Ponzi/Madoff/Evergande/Chinese Developers were completely unregulated scams, they produced seemingly credible outcomes for their investors over a very long time. If the market as an aggregate was already a Ponzi scheme, any quiet Ponzi scheme operating inside of it looks legit. Even if it is robbing the big game customers and disrupting the monopoly.
Of course, Ponzi schemes collapse because eventually it runs out of investors with money. What the legal/legitimate market does, is spread out the buying and selling over time so it meets the demands of newcomers to the market. Just when mom-and-dad investors run out of steam, the next generation meme-stonks-bros come along and become new players. The equities markets depends on the new sucker being born every minute - it just can't be every second or every hour. What the aim of the bourse is, is to create an outcome where all participants in good faith have a shot at getting some kind of roughly okay outcome over a long duration. The effect Peter Lynch doesn't arise out of nowhere - it arises out of a collective need for stability that bolsters an abstract system supported by our faith in what money is and how it is valued by everybody else.
Should we be worried? Probably. But how the hell are we going to unravel the layers and layers of faith in paper that forms the foundation capitalism?
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