The Hubble bubble theory of the continuous expansion of the financial universe

The Hubble bubble theory of the continuous expansion of the financial universe

Izabella Kaminska | Dec 06 19:28 | 29 comments | Share

Part of the BITCOINMANIA SERIES

Or something like it. We’re not, after all, physicists. Though, feel free to read about the Hubble Bubble theory here. What we probably should be referring to is Hubble’s flow, the rate at which expansion of the universe occurs.All of which is a whimsical way of suggesting that perhaps Larry Summers has a point. Perhaps bubbles are part of our collective universal nature? A phenomenon that should be embraced as an unstoppable physical force, one that will find a way no matter what.

The proof is out there if we look hard enough. Latest manifestation: Bitcoin.

If we go with that notion, then perhaps inflating asset bubbles one after the other isn’t such a bad idea. Perhaps it’s even necessary?

One needs only take a gander at this rather inspired Onion piece from 2008 to get the point. A flavour of the sentiment:

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to† begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.

It’s Keynes’ coalmine thought experiment in bubble rather than distributive income form.

And that, we’d argue, is the main problem with it.

Bubble-nomics represents wealth distribution on increasingly unequal terms. Anyone, after all, can win in the bubble casino, because it has nothing to do with skill or making a solid contribution to society — one just needs a token to play the game. In fact, there’s no need to even be right about the fundamentals. There’s no meritocracy involved at all. It’s all a giant lottery based on arbitrary luck. (Though it helps to be a good judge of human nature so as to identify the asset class that’s fit for pumping.)

But whether it’s tech stocks that will never make worthwhile revenue, commodities that will never be consumed, houses that will never be used, or crypto currencies that will just help to squander wealth — it doesn’t really matter. The key is to be first in identifying the trend, and the first in identifying the exit.

If this really is the future of investing, value itself is warping in front of our very eyes. We’re now part of a society that seems to have more wealth than sense in many quarters (much of it not earned meritocratically at all) and zero want to spread it about productively to areas that really need it — largely because there’s not enoughprofit guarantee in doing so, or because the consequences of investment eradicatesocial hierarchy, status and positioning.

Hence the fear of equitable money debasement, or basic income that helps society grow together in a new economy, rather than individually by lottery.

There is one other point to note; as cyclicality sees the wealth mirage in one asset class wane and transfer over to another in ever more volatile and crisis-inducing fashion, central banks and governments are increasingly be needed to smooth over periods of disruption. The net result: an overall decline of volatility in intervention-prone asset classes.

This, though, is no good for speculators, who thrive on volatility. The notable consequence: a cottage industry in newer, fancier (and more volatility-prone) asset classes, marketed to investors with gusto. Recent examples: everything from synthetic CDOs to the rise of commodities, FX, volatility and entirely virtual units as asset classes in their own right.

If the financial engineering gets too saucy to be believable meanwhile, the sell-side marketing departments of the big banks — whose business models depend on continued financial intermediation, wealth asymmetry and speculation — can be trusted to keep the enigma of value going.

On which note, here’s Steven Englander at Citi talking up Bitcoin, and causing theZerohedge crowd to go insane about the prospect of a privately managed ponzi scheme finally replacing the state-managed ponzi scheme which has been so incredibly bad at defending global wealth, purchasing power and stability. (That’s sarcasm if you haven’t guessed.)

Reserve managers are likely wondering whether Bitcoin is the answer to their most perplexing problem – where to find a pure store of value, how to avoid currencies backed by erratic central banks and how to dethrone the USD from its perch in the international monetary system. Bitcoin is much more interesting than the IMF’s SDRs from a reserve manager perspective because it is independent of major currencies. The reserve manager operational problem is two-fold: 1) how to sell a truckload of USD, and to a lesser degree EUR and JPY, without excessively depressing the value of the USD that they are selling and 2) what to buy when there are few attractive, liquid alternative. Bitcoin doesn’t avoid 1) but addresses 2) to some degree.

Bitcoin with its inelastic supply and deflationary bias would look attractive to reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply. As a group, reserve managers are conservative and probably would like to see how Bitcoin evolves. Given the reserves management problem discussed above, there is some incentive for the biggest reserve managers to encourage development of this market to see if it is viable in the long term. Even if it ends up just as a transactions vehicle, countries may choose to transact in Bitcoin or the like, if it enables them to reduce the overhang of USD that they need to hold because of its role in international trade and finance.

Yup, that would be a respectable FX analyst advocating a global reserve substitute which sees wealth distributed to those who have the ability and inclination to waste energy resources solving fancy crytographic puzzles, rather than in investing in infrastructure, services and resources for the world. And strangely enough he doesn’t think Bitcoin’s deflationary feature is a flaw either.

Though, to be fair, he follows up on Friday with a reference to the currency’s more notable flaw:

While the makers of Bitcoin seem to have gone to a lot of trouble to make it look like gold, finite supply and increasing marginal cost of production. The difficulty is that a clever chap can go out and create ‘Nitcoin’ with similar increasing costs of production and finite supply, and someone else can create ‘Gitcoin’. So there is an infinite supply of Gold-like Bitcoins, each with finite supply and increasing production costs, but together with infinite supply and very leisurely increasing production costs. How much of an anonymity premium Bitcoin transactors are willing to pay is another question.

Englander, though, is not alone in legitimising the currency this week.

He joins BoAML’s David Woo, who put a fair value of no more than than $1,300 per Bitcoin on Thursday, based mostly on the coin’s potential as a payments mechanism, a money transfer service and as a store of value.

FT Alphaville spoke with Woo on Friday and asked him about what prompted the note in the first place? Woo said it was because people had been asking whether Bitcoin was just a fad or whether it could become a major threat to fiat currency. He fancied trying to give it a fair value.

As it turns out, he was overwhelmed by the interest his report received from institutional investors and clients alike. As he noted to us:

I was amazed by the feedback on the report. I’ve been in this business for a long time, but I’ve never seen anything like this. There is a public fascination with Bitcoin. Or perhaps there is something more to it.

The internet is about the liberation of the average guy, Bitcoin is a liberation of the repression of central banks.

He stressed, however, that some positive aspects of his report were overstretched by the media. His main point, he told us, was that the currency was looking overpriced at current levels. He added he was aware of the currency’s risks and flaws, among them its lack of cashflow, lack of propriety ownership and its tendency towards volatility.

That said, like Englander, Woo attributed much of his Bitcoin open-mindedness to a general disdain for the “money printing” policies of central banks, which he warned would unquestionably have inflationary consequences soon enough.

Which suggests thinking about Bitcoin inherently can’t just be about trying to find its fundamentals. Confronting its sociopolitical aspects, whether you welcome them or not, is impossible to avoid.

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End note: We’re prepared to accept that bubble-nomics may be the only viable way to support a technologically disrupted economy. But if we’re going to have bubbles, can we at least have them in asset classes that make the world a marginally better place?