Suppose that I own a share in an oil field. The oil is real wealth. The shares are paper wealth. The value of the oil is determined by supply and demand for oil. The value of the shares is determined by. . .? [“Paper wealth” is, like “carbon copy,” an anachronistic phrase in the digital era. Bear with me.]
I strongly agree with the conclusion you reach that most wealth is intangible and socially constructed. But... having concluded this, I don't think there's any going back to worrying about "the ratio of paper wealth to real output having gotten out of hand". It can't be out of hand because there's no fundamentally correct ratio.
Isn't the simpler answer that stock markets are deterministic, just like every other kind of market? That is: The price isn't the result of anything fundamental, but the byproduct of buyers and sellers searching out what society values in light of the passage of time and growth in money.
The government jacking up the money supply might change this results, but there's no way to "ring out" the money and return to a natural state. Because there is no natural state. It's like pouring more water into the ocean. You can't go back and unpour the water and collect up the individual water molecules you poured. You can't stop the ripples in the surface the pouring caused. All you can do is pour more or less water going forward.
A better prescription would be for the Fed to cut the growth of its balance sheet and for Governments to remove real growth-inhibiting obstacles like zoning, occupational licensing, restrictions on skilled immigration and international trade, and reducing structural deficits.
When the Park Avenue doctors go to get a mortgage, theoretically, the bank estimates their human capital in terms of expected future income in much the same way as those stockholders when deciding whether to underwrite the loan, and then expects to collect dividends for decades, all tethered to an asset which is a real thing - a piece of real estate.
The the extent that lots of people take out the biggest mortgages they can afford, it's almost like their "real wealth" of their future productive capacity has already been securitized, but in a way also tethered to an asset which is a real thing, a piece of real estate.
"But the values of paper wealth nowadays are particularly arbitrary and subject to rapid changes in crowd behavior, because so much of that wealth represents intangible assets."
Having plunged headlong into the BEA website, it still remains a mystery how various forms of wealth are included in gross domestic product. Having learned here to mistrust "GDP factory" models, it would be useful to know whether the Pediatricians, Inc., sale of shares would increase GDP? Does it get counted in gross private domestic investment or as a personal consumption expenditure by the person paying for a share? Or does it not get counted until Pediatricians, Inc does something with the amount they were paid for a share? And let's say each share of Pediatricians, Inc., has an individual serial number that distinguishes it from every other share sold. And let's say Pediatrician's Inc's unstated business model is to burn through the IPO money raised. Wouldn't a Pediatricians INC share then basically be just a non-fungible token? What difference is there between selling the two? Does BEA treat the two similarly for GDP calculations? With so many companies with neglible book values and no plan to ever pay a dividend included in the stock indexes, one gets the feeling there may not be a lot of difference between the two.
And from a GDP measurement perspective, let's say little Timmy breaks his arm and shows up at Pediatricians, Inc. to have it set. Let's say that the procedure is covered by his parents' employer sponsored family health insurance plan. Presumably, the insurance plan's profits are counted in GDP, Pediatricians, Inc has profits too that get counted, and presumably (?) the value of the insurance benefit gets counted as personal consumption expenditure. Now lets say Timmy's accident happened in Germany and he goes to the local government which sets it for him at no charge to him. Presumably, there is no GDP implication for the German accident at all: the German government's expenditure setting up and running the clinic is captured as government consumption expenditure and it makes no difference whether 10 broken arms get set, or none. If that is actually how GDP calculations work, and like I say I am curious but have no definitive answer, that would seem to imply that GDP comparisons between the US and other countries are like apples and oranges. Its all our red tape that makes us rich! Especially with Covid where the USA probably gets GDP increases in government consumption expenditures for paying for the vaccines and tests. At any rate, such questions keep me from reveling as heartily as I might otherwise in all the fantastic economic news we are enjoying due to President Biden's masterful management of the US economy.
Doesn’t it make sense for the government to reduce spending on income transfers but not on R&D, infrastructure, and other productive investments? This is where I part ways with traditional right of center economics. All government spending is not the same. It also seems like many of those income transfers are reducing now. Agreed it was a bit much particularly in the last stimulus bill but it should work it’s way out of the system.
You assume we prioritize containing inflation over supporting paper wealth. I'm not convinced. It'd be a fitting finale to the age of inequality if we "bail out" paper wealth via a regressive tax (inflation).
The only thing I would add is that it seems like a lot of value today is coming from “I value this stock at $100 because I believe in the future other people will value it at $110”. I don’t really care if the present value of the company’s assets and future earnings is worth $100. I care whether other people will value my share at $110 tomorrow.
In some sense that’s rational. But I think that makes things *really* volatile. An order of magnitude more volatile than just tastes changing to make oil back into gunk.
Excellent viewpoint.
However, a lot are "swimming naked" and we won't see them until the tide goes out.
I strongly agree with the conclusion you reach that most wealth is intangible and socially constructed. But... having concluded this, I don't think there's any going back to worrying about "the ratio of paper wealth to real output having gotten out of hand". It can't be out of hand because there's no fundamentally correct ratio.
Isn't the simpler answer that stock markets are deterministic, just like every other kind of market? That is: The price isn't the result of anything fundamental, but the byproduct of buyers and sellers searching out what society values in light of the passage of time and growth in money.
The government jacking up the money supply might change this results, but there's no way to "ring out" the money and return to a natural state. Because there is no natural state. It's like pouring more water into the ocean. You can't go back and unpour the water and collect up the individual water molecules you poured. You can't stop the ripples in the surface the pouring caused. All you can do is pour more or less water going forward.
A better prescription would be for the Fed to cut the growth of its balance sheet and for Governments to remove real growth-inhibiting obstacles like zoning, occupational licensing, restrictions on skilled immigration and international trade, and reducing structural deficits.
When the Park Avenue doctors go to get a mortgage, theoretically, the bank estimates their human capital in terms of expected future income in much the same way as those stockholders when deciding whether to underwrite the loan, and then expects to collect dividends for decades, all tethered to an asset which is a real thing - a piece of real estate.
The the extent that lots of people take out the biggest mortgages they can afford, it's almost like their "real wealth" of their future productive capacity has already been securitized, but in a way also tethered to an asset which is a real thing, a piece of real estate.
"But the values of paper wealth nowadays are particularly arbitrary and subject to rapid changes in crowd behavior, because so much of that wealth represents intangible assets."
Having plunged headlong into the BEA website, it still remains a mystery how various forms of wealth are included in gross domestic product. Having learned here to mistrust "GDP factory" models, it would be useful to know whether the Pediatricians, Inc., sale of shares would increase GDP? Does it get counted in gross private domestic investment or as a personal consumption expenditure by the person paying for a share? Or does it not get counted until Pediatricians, Inc does something with the amount they were paid for a share? And let's say each share of Pediatricians, Inc., has an individual serial number that distinguishes it from every other share sold. And let's say Pediatrician's Inc's unstated business model is to burn through the IPO money raised. Wouldn't a Pediatricians INC share then basically be just a non-fungible token? What difference is there between selling the two? Does BEA treat the two similarly for GDP calculations? With so many companies with neglible book values and no plan to ever pay a dividend included in the stock indexes, one gets the feeling there may not be a lot of difference between the two.
And from a GDP measurement perspective, let's say little Timmy breaks his arm and shows up at Pediatricians, Inc. to have it set. Let's say that the procedure is covered by his parents' employer sponsored family health insurance plan. Presumably, the insurance plan's profits are counted in GDP, Pediatricians, Inc has profits too that get counted, and presumably (?) the value of the insurance benefit gets counted as personal consumption expenditure. Now lets say Timmy's accident happened in Germany and he goes to the local government which sets it for him at no charge to him. Presumably, there is no GDP implication for the German accident at all: the German government's expenditure setting up and running the clinic is captured as government consumption expenditure and it makes no difference whether 10 broken arms get set, or none. If that is actually how GDP calculations work, and like I say I am curious but have no definitive answer, that would seem to imply that GDP comparisons between the US and other countries are like apples and oranges. Its all our red tape that makes us rich! Especially with Covid where the USA probably gets GDP increases in government consumption expenditures for paying for the vaccines and tests. At any rate, such questions keep me from reveling as heartily as I might otherwise in all the fantastic economic news we are enjoying due to President Biden's masterful management of the US economy.
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"Intangible" probably hides a lot of con men and their operations
Doesn’t it make sense for the government to reduce spending on income transfers but not on R&D, infrastructure, and other productive investments? This is where I part ways with traditional right of center economics. All government spending is not the same. It also seems like many of those income transfers are reducing now. Agreed it was a bit much particularly in the last stimulus bill but it should work it’s way out of the system.
You assume we prioritize containing inflation over supporting paper wealth. I'm not convinced. It'd be a fitting finale to the age of inequality if we "bail out" paper wealth via a regressive tax (inflation).
The only thing I would add is that it seems like a lot of value today is coming from “I value this stock at $100 because I believe in the future other people will value it at $110”. I don’t really care if the present value of the company’s assets and future earnings is worth $100. I care whether other people will value my share at $110 tomorrow.
In some sense that’s rational. But I think that makes things *really* volatile. An order of magnitude more volatile than just tastes changing to make oil back into gunk.