Extinguishing "mirage" money

Most current estimates put the total wealth of the globe around 450-500 trillion dollars. This wealth is being continuously increased by the GDP of the nations and extinguished by depreciation of the wealth assets.


Into this situation, from 2000 to 2011, there has been a wave of intangible asset creation, mispricing real assets. This includes derivatives, swaps, futures and options in stocks, bonds and commodities as well as PM like gold. Fuelled by Greenspan and Bernanke, this has caused confusion as to how much wealth the world really has. Since these paper assets have infinite loops and liquidity waves pushing up or down various assets in interlinked ways, it is difficult to exactly pinpoint total global wealth - just like the Heisenberg uncertainty principle, you just cannot know.


Probable estimate for this uncertain wealth is 50-70 trillion dollars i.e about 10-15% of total global wealth is totally indeterminate. Probably, all of this is just fairy gold - meant to vanish when the sun rises.

Question is, what is the asset which will depreciate in value enough to make this 70 trillion dollars vanish? No market is this big and 70 trillion is around slightly more than one year's global GDP. Obviously, multiple assets have to depreciate to achieve this depreciation of wealth.

Another way to put it is that people did a lot of work which was wasteful and did not create wealth (rise in living standard). WOrk was wasted and is now gone. Americans moved houses in a musical chair, without creating wealth addition. A lot of financial instruments created the illusion of wealth and were not backed by real assets and so the wealth had to vanish.

But since no market is big enough to absorb this extent of depreciation, what will fall? Whichever asset seems likely to fall, investors are fleeing and trying to hide in another asset less likely to fall.

The first asset to fall was house prices - but this was location specific and instead of absorbing the fall, it only shifted loss from the asset holder (buyer) to the banks. THe banks were reluctant to let their assets fall - rightly, it should have been AMerican and European banks which should have been allowed to fail. But they were not allowed to fail and were bailed out. Probable size of the bank bad loan size (US and Europe and global) is only around 5 trillion - only 10% of the actual short fall in wealth. SO it alone was also not enough - a recession in living standards was also needed to extinguish the fairy wealth - which would have been assured by letting the banks fail. But the US govt and fed did not do this - and passed the buck to other people to take the fall.

THe second asset to fall was global stocks. Total market size is only about 40 trillion and this market (if it halved in value) could absorb only about a third of the global shortfall.

The bank bailout had the paradoxical effect of making the stocks rebound - and so no wealth cound be extinguished - fairy wealth was re-created in the form of the 2009-10 stock bounce.

THe third asset to fall was the dollar. But there was no inflation in USA because of the recession - instead there was risk of deflation. Even now, when deflation has receeded, there is no real inflation in dollars.

So the falling dollar, instead of extinguishing the global wealth deficit by inflating out of the problem, has paradoxically caused sufficient inflation of all other assets - stocks, bonds and gold - to offset the attempted devaluation of the dollar. There is no sign of stagflation also.


SO the imaginary wealth is still floating from asset class to asset class, refusing to be extinguished.

Ultimately, it is imaginary and will be extinguished. Smart people know this and leave every asset class just before it starts to show signs of extinguishing wealth. To me it looks as if this will continue like a never ending game of ping pong. On each bounce, some of the imaginary wealth will die out, hurting some people, but the ball will continue to keep bouncing for years - thanks to the financial ingenuity and complexity created by the Wall Street pros.


Gold is no safe haven in this scenario - it is only one of the asset classes into which people temporarily flee, pushing up prices, until it starts to looks shaky - when people flee gold into some other asset. SO gold is only fools gold - true fairy gold.

The only thing a participant has to do in this game is to hold the ball while it is rising and pass it on to someone else before it falls. In this game, there is no fundamental analysis involved - assets rise and fall for reasons other than fundamentals. You cannot put the rules of cricket into this game of ping pong - you cannot put the rules of fundamental analysis into this game of money. Only technical analysis will help.


There are two ways to play this game - one is the short term game - hit the ball and run. Other is to catch the ball, ride out a few falls, and then let go just before a bigger or perhaps even the biggest bounce of all. Both games are equally dangerous.

You might buy an asset just before fall and then sustain losses - and be the patsy who extinguished some of the fairy wealth. You might buy and asset and keep holding it for long time waiting for it to rise - only to find that you missed the selling chance and now the price will only fall never to rise - and again become the patsy who extinguished more of the fairy wealth.

One option is to spend the money as quickly as possible on useless gadgets or whatever - and extinguish your wealth but get a bang for your buck. Nobody can beat the AMericans at this game - they have already spent the surplus wealth of next 20 years.

Indians instinctively do not do this.


Understanding the situation should help one make a wise choice.

Real estate in this scenario can also serve as an extinguisher of wealth. You can buy at a high price and be left holding an empty shell of an asset for years to see any gain - or you can buy and exit quicky, timing the market and making notional gains - letting another sucker carry the asset, but then - you have to keep playing. As long as the music of liquidity keeps playing, you have to keep dancing - if you stop dancing you are OUT - you have lost your money on a useless asset.

Gold, Real Estate, Stocks, Bonds - they are all the same - as long as the global liquidity of imaginary wealth keeps sloshing around.

Being prudent in this scenario- spending less, making systematic investments, asset allocation - all can turn out to be foolish in time, for no fault of yours. BEst is to do what the AMericans do - spend it today on whatever strikes your fancy.

Dont stop to think about tomorrow (paraphrasing Fleetwood Mac)