Awful truth #23: It is not the job of government to prop-up the value of real estate and stocks.
“If something cannot go on forever, it will stop.”
Herbert Stein
“Growth for the sake of growth is the ideology of the cancer cell.”
Edward Abbey
A homeowner observes the value of his house in a “hot” real estate market rocketing upward and fancies himself growing wealthier each day. He is giddy and ignores the fact anyplace he might move to, should he sell, is now far more costly. Additionally, property taxes are based on a home’s value, so this cost increases, as well. These considerations are an adult notion unlikely to trouble him one iota.
The owner of a likewise exuberant stock is unlikely to ask a most sobering question: “Is the value of the stock reflective of its underlying business model and realistic current and future prospects for generating dividends?” He should realize—but likely won’t—a stock which never produces dividends, or ekes out ones far below an amount which justifies the stock price, is like a suitor who never steels himself to place a ring on the finger of his long-time love. It’s a cruel tease with no genuine love involved and destined to end badly.
We must understand a house is a place to live, not an investment. So-called housing “appreciation” is inflation. Money invested in the stock market increases a society’s wealth only if it is used to improve productivity and lay the foundation for both short and long-term profitability. A bloated stock price detached from the company’s ability to reliably generate dividends is willful delusion. In other words: Phantom equity is not real wealth.
But…
We love phantom equity, these pretend valuations we convince ourselves are real. The government loves phantom equity—see what we’re doing for you! Wall Street and its ilk love it and work like hell to promote it as a tangible thing worthy of bloated fees and bonuses. Phantom equity is far easier than building value through the prosaic work of competently running a business or government.
Phantom equity is the increase in a home’s value by $200,000, while the next place you live—or your heirs if you bequeath it to them—is $200,000 dearer. Phantom equity is the share of a company which never provides profits remotely justifying the stock price. Phantom equity is a stock price ginned upward by buybacks (sometimes done with borrowed money!), a flood of money from IRAs that has nowhere else to go, or the glorious hope a fool bigger than oneself can someday be found. Phantom equity is a stock price contingent on tax code monkey business rather than the sale of widgets at a profit. Phantom equity is the monetization of delusion—and making it collateral for real spending.
None of this is surprising. We are a world of self-delusion, from childhood until our final beat of heart. Our overlords are equally afflicted, as they believe we can borrow and print and catastrophically indebt ourselves, devalue our currency, export jobs and import goods and services. Particularly laughable is the notion these geniuses “insure” against losses, but then fight like hell against the so-called insurer being regulated as…wait for it…an insurance company. We are no longer whistling past the financial graveyard, but standing full-in the self-dug hole, surprised as hell as to how we got there and somehow can’t stop digging.
Above us, in the stratosphere where the privileged dwell, our betters demand the government prop up the value of stocks—and bail them out whenever the rickety financial system they both inflate and undermine implodes. The harm caused to the rest of us by this see-saw of speculation and disaster is given nary a thought—what are you, a commie!
Oh, we’re the commies? Our betters have their sweet dachas in the Hamptons, among other Edens in which they dwell. They are the ones conspiring against a truly free market economy with all the maniacal fervor of a Shining Path rebel. Corporate welfare is the manna of Wall Street socialism and would make a Bolshevik envious at the audacity.
Don’t be fooled when the Democrats rage against the oligarchy and Wall Street. This is kabuki theater for our enjoyment. When the vote comes to end tax breaks for carried interest or to stop insider trading in the hallowed halls of Congress, they are a comically reliable “no” vote.
Tis not a free market economy—at least for our betters. They need not suffer the consequences, the “creative destruction” such a market requires and which makes the reward for risks real and failures both stark and salubrious. Free market consequences are for the little people, those of us on the other side of the velvet rope.
A steady-state of realistic growth is preferred. Growth quantified by honest accounting. Growth that is sustainable and whose fruits are distributed fairly. There is nothing inherently bad with slow growth if the basic needs of the citizenry are met and financial crises avoided or at least greatly reduced in drama. But a common-sense economic worldview lacks the sizzle and swirl our monied overlords intend at our ultimate expense. Bloated bonuses require financial fuckery, a fiscal orgy without restraint or conscience. Restraint is for foolish Puritans who believe hard work, thrift, and honesty are virtues.
We are instead cursed with a financial system in which a rapidly growing malignant tumor is considered robust health, and the subsequently deceased patient is revived over and over. The propping-up interventions do not cure the disease, but further weaken the patient and imbue him with childish expectations and demands. These are a shot of morphine to a man with a compound fracture who is then led to believe he can run a marathon, sans any other treatment or rehabilitation. That the fatal malignancies grow ever larger, and the reviving requires greater and greater intervention, is not heeded as a blaring warning to knock this shit off before it’s too late.
And too late it probably is.
Do not be fooled. The people ultimately responsible, these Lords of Finance, are a hybrid of tapeworm and termite, a chimera we are told is not a pest, but a necessary component of an economy’s machinery. A well-fed and well-feted pest indeed: From the “Greenspan Put” to the tax code shenanigans to bailouts galore. Quantitative easing (i.e., the printing of money) is the arsonist’s accelerant. The government caters to them during the good times and steps in when they fuck things up and get into a self-inflicted pickle royale. The spoiled teenager wrecked the Maserati. A few peasants perish in the carnage. Poor boy. Here are the keys to a new engine of destruction.
There is an infamous story of the CEO of a large financial company who spent his days obsessively monitoring the price of the company’s shares on the stock exchange. This diverted his attention from meaningful efforts to improve the actual value of his company. Of course, this assumes—silly me—he possessed the talent required for meaningful efforts, which is highly doubtful. His company, like many others, was guilty of incompetence and willful malfeasance leading up to the catastrophic boondoggle known as the Great Recession.
Fast forward almost two decades. Nothing has changed. Too few of these vastly overpaid fools do worthwhile work. Our financial system is all flim-flam and connivence, abetted by the government. Stock prices über alles. Real estate prices über alles. Concocted tranches über alles. In other words: Phantom equity über alles. Thus, we find ourselves at present in the final stages of the Covid-bubble in both real estate and stock prices. These prices and the expected growth rates are not sustainable and never were. There exists no mathematics or fiscal legerdemain to save us. Not that many folks clamor for salvation.
On our merry way to the bursting, we can enjoy the Comedy of the Quants and the Minstrel Show of the Connivers. The swings of panic and euphoria associated with the daily gyrations of the stock markets is comical. We are plagued by a gaggle of financial pundits, and there is always a diarrhea of explanations for each day’s movement, whether it’s up, down, or sideways. The index levels are treated as if they are an accurate monitor of our economy’s health, and this is amplified greatly by the speed of today’s social media, which creates toxic immediacy, not time for reflection or mature thought. Patient investing and the Internet are mortal foes.
Gather around children for a bonus awful truth: The aggregate value of the stock markets is irrelevant. What matters is the value of individual companies and does it accurately reflect a proper business model and prospects for real profits rather than phantom equity with no foundation based in reality.
A stock price ginned up by mass psychosis or a hope that a bigger fool can be found is not the road to prosperity. It is the road to future bubbles and bursts, in which the little people are crushed, but our betters are made whole or somehow come out ahead in this vile financial Game of Thrones. The government is there to rescue the bigwigs, not you or I.
A fool once said that the fruits of stock speculation are taxed at a lower rate because the person incurred risk. This is socialism for our betters. Why should the taxpayers be roped into the person’s speculative endeavors? C’mon, be a big boy capitalist and fully take on the risk, rather than have the rest of us bear the burden to make your gambling…I mean investment…more lucrative. The risk should result in greater returns which are not subsidized by a greater tax benefit.
This and other direct government meddling causes tremendous distortion to our so-called free market economy. The value of assets should find a natural level based on real risk and real return, not artificial demand influenced by the government due to tax advantages or moral hazard. Far better a steady-state whose foundation is reality and whose growth upwards is a truly sustainable gradual rate.
The government’s job is not to prop up asset prices, be they homes or shares or tranches. Were that the case, I can save us a lot of angst: Pass a law that a house or stock or other “investment” vehicle can never be sold for less that its purchase price. There. I fixed it for us. You’re welcome.
The government’s job is to provide the physical and other infrastructure necessary for a society to thrive. A legal and justice system to keep the peace, respect property rights, prevent fraud, resolve contract disputes, adjudicate bankruptcies. Public works infrastructure the private sector can’t or won’t provide. Institutions which are the moral responsibility of government alone and would be unseemly to contract out to the private sector (e.g., prisons, military).
We must end distortion. This is doable. It shall be painful at first, but in the long-term our country and its economy are far better for it.
Things that distort the economy:
- Tax deductions.
- Borrowing for the privileged class not available to the unwashed masses. (Where does the money come from when the lender is the world’s largest debtor?)
- Different types of income or wealth gain taxed at different rates.
- Bailing out Wall Street and other moral hazard.
- Absurdly low interest rates.
- Indiscriminate borrowing and printing of money.
- Micromanagey regulations.
- Student loans for degrees having no hope of servicing this debt.
- Student loans which cannot be discharged in bankruptcy.
- Unfunded liabilities (Social Security, Medicare, pensions).
- Deliberately-induced inflation.
They want inflation?
Oh, yes indeedy. Tragically (for us), our betters want inflation, which for houses they call “appreciation.” They want inflation in home prices and stock prices and rents. Inflation for basic goods and services, also, if they can gin the system for a profit exceeding the inflation rate suffered by the unwashed masses.
In an ideal economy there is zero inflation, full employment, and the people’s needs are met. Home prices and rents are stable. Tax rates are predictable and the tax law is uncomplicated. Growth is real and shared fairly. Increased productivity and efficiency may even lower prices (ooh, the dreaded deflation monster!). Wage increases are a real improvement in one’s lot rather than an endless race against inflation. Risk is borne solely by the risk taker and may result in its own reward or catastrophe, with the latter allowed to play out in bankruptcy court if necessary.
Capitalism must not be a two-tiered system. Our betters must be held to the same rules and tax rates as the rest of us. They must also fully suffer the consequences of their folly. You know, just like us little people.
Allow me to paraphrase Mr. Stein, indecorously so: Forever is a fucking long time. Real shit happens well before then.
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