Finance History Inheritance Mass Rentiers Politics Society

Central Banks or The Gold Mine of Monsieur de Cantillon

Unconventional Policies, Quantitative Easing, Monetary Bazooka: the last twelve years in economics have been dominated by a flood of new money aimed at creating inflation. And yet there is a puzzle: why is the money meant for everyone only showing up in the stock market? Where is the inflation? Why wages do not go up? Commentators believe this is an unprecedented situation. Well, it is not.

“Everybody agrees that the abundance of money, or an increase in its use in exchange, raises the price of everything. This truth is substantiated in experience by the quantity of money brought to Europe from America for the last two centuries.”

This words are by Richard Cantillon, author of the famous Essai, written sometime in the 1720s but published posthumously in 1755. In his time, as today, economists were convinced that all prices go up together when money is created: the so called “neutral money theory”, first exposed by no less than the philosopher John Locke.

Cantillon noted in his time, as we see today, that the reality was not following the theory: changes in the money supply have different and uneven consequences depending on where the new money is injected — and who the early receivers are. As the first receivers can spend the money at not-yet-adjusted prices for goods and services, they get an (unfair) advantage over later recipients whose incomes lag the increase in prices. In effect, by introducing new money into the system, early receivers are benefited at the expense of late receivers.

“If the increase in actual money comes from a state’s gold and silver mines, the mines’ owner, the entrepreneurs, the smelters, the refiners, and generally all those who work in them will increase their expenditure in line with their gains. At home they will consume more meat and wine or beer than they used to, and they will become accustomed to having better clothes, finer linen, and more ornate houses and other sought-after commodities.”

In contrast to those beneficiaries of new gold, he explicitly identifies the losers:

“Those who suffer first from this dearness and the increase in consumption will be the landlords during the term of their leases, then their servants and all the workers or people on fixed wages on which their families depend. All of them will have to reduce their expenditure in proportion to the new consumption.”

Cantillon concluded that who benefits when the state prints money is based on the institutional setup of that state. In the 18th century, this meant that the closer you were to the king and the wealthy, the more you obtained, and the further away you were, the more you were harmed. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.”

In Cantillon’s day, the basis of money was gold, so he wrote about what happened when a nation-state discovered a gold mine in its territory. Increasing the amount of gold in the realm would not just increase price levels, he observed, but would change who had wealth and who did not. As he put it, “doubling the quantity of money in a state, the prices of products and merchandise are not always doubled. The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.”

Cantillon went on to discuss how money would flow, basically noting that rich people near the mine would spend it on 18th century luxuries like servants and meat pies, prompting a general rise in prices. Eventually the money would get out to the populace, but until it did, working people would have to pay higher prices without access to the new money that mine owners had. So there would be inflation, with uneven distribution of purchasing power.

This theory does not imply that money creation is always biased towards the powerful, only that how money travels matter. There is no inherent money neutrality, such neutrality must be constructed by institutional arrangements.

The Gold Mine today

Today who is close to the Central Banks’ printer gets rich, exactly as who had a new mining privilege granted by the Crown became rich in Cantillon’s time. The only difference is that nowadays new rich do not spend all their gold in beer and meat, instead they invest in stocks and become even richer.

The rich cannot buy every service and product on the market, because they are satisfied with a few luxury items: so their money goes directly from the money printer (Cantillon’s gold mine) to the stock exchange. We can see it clearly in money aggregates and money velocity graphs: money is not moving, is buried minutes after it is born.

Money stock increases parabolically…
…but money velocity slows down and suddenly stops.

Central Banks create money and money has to travel through institutions, and right now, the institutions function well only for the top 1%. Eventually, some money will get to the rest of the population, but in the interim period before that money fully circulates, the wealthy can use their access to money to buy up physical or financial assets. Authorities and politicians celebrate stock markets’ records, but that is beneficial only for the top 1%. The bottom 50% does not get anything because they have no stocks at all.

Top 1% owns the majority of Corporate Stocks. The rest belongs the top 10%. Bottom 90% remains on the sidelines.

Central Banks usually see their role as printing money and distributing it to the economy, largely by moving money to banks and assuming they will in turn increase the amount of money available to everyone else equally. When faced with the harsh reality of increasing inequality, they reply that politicians should do their job through fiscal policy and alleviate the middle- and low-class sufferings.

Central banks just keep pushing bond and loan markets, but since most of population does not have access to substantial borrowings (a minority gets a mortgage to buy a house, but they cannot buy real estate every year) only the rich owners of corporations really benefit.

Loans to households are stable, only loans to firms seem sensible to stimulus by the central banks….
…along with public debt.

Southern Europeans countries use an unorthodox strategy to spill money to the population: public deficit. Since states are granted by the ECB a generous access to low or even negative rates, they pile up debt, and use it for public spending that should benefit the whole population.

But now, after Bitcoin breakthrough, a new solution would be possible: creating a digital counterpart of fiat currencies and filling an online wallet with money for every citizen. That would benefit everybody equally (even more the lower classes in proportion).

Public support and central banks digital helicopter money: in the future most of the advanced economies population could rely on a small rent.

Zombie banking and the future of work

Central bankers continue to present a future path of sustainable growth and inflation through zero or even negative interest rates, but what is happening in reality is that middle classes are destroyed.

As seen above they do not get money from banks, that instead have an incentive to convince companies to launch new investment projects with a low expected return. In theory, even a new project with a nominal return of zero (e.g. cash hoarding) is advantageous because the bank and the company save on negative interests.

This zombie projects and zombie companies bring with them decreasing productivity and income losses for the workers. Because productivity gains are the basis for real wage increases, negative interest rates become a burden for the young people, whose wages tend to decline in comparison to former generations.

Again, the younger generations will get only pain if they chase prosperity through an old-style career: the only way out of the crisis is joining the top 1% at their own table, investing and getting a rent. The real job of the future is to play the scarcity game and then, sitting on non-inflatable assets, do the work you love.

Finance Mass Rentiers Society

Bitcoin: A Clockwork Pie

Bitcoin is a new kind of asset, that has got much attention since its inception in 2009. It is a totally digital asset, for some is a currency, for others is a commodity or store of value. It is something so new that the opinions about it are contradictory and it is pretty hard to have a clear view.

We will skip a thorough explanation of what Bitcoin software is and how does it work. Useful material is available herehere and here. We will expose instead the Mass Rentiers view: an interpretation of what Bitcoin can be in a world of accumulated capital and unearned income. 

Bitcoin is a digital pie, divided in 21 million slices called bitcoins. Every single slice in turn can be divided in 100 million particles called satoshis. The baker of the pie is an algorithm, not a human, so the pie is set a priori.

Bitcoins can be exchanged, and every transaction is recorded in a public ledger, the so called ‘blockchain’. It is censorship-resistant: it means that no authority can modify a transaction. That implies that if you make a mistake, there is no way to go back, no entity can help. The Bitcoin blockchain is irreversible like time and it is designed to work like a clock. 

The ‘time’ of the blockchain is not the human time made of days, hours and minutes. It is an order, the order of the ledger: a mechanism by which every party can verify that one event took place before or after another. One cannot spend money that has not been received, nor can one spend money that is already spent; to achieve that, blockchain transactions are ordered unambiguously and immutably. The state of the chain is reflected by its blocks, and each new block produces a new state. The blockchain state moves forward one block at a time, and the average 10 minutes of a block is the smallest measure of blockchain time.

The Bitcoin clock works without the need for a trusted third party: it is independent from banks and works just with computer-nodes and the internet (it could also work offline, but synchronizing blocks online is much more convenient). 

The fact that Bitcoin is governed by an algorithm, and not by humans, could give cause for concern among many investors of the older generations. But year after year we are getting used to algorithms performing tasks in business, science and health care. We are experiencing a loss of control on our lives: algorithms have many advantages, are more stable, less whimsical than human in taking decisions. In an age of distrust towards banks, young investors are every day more confident in the reliability of the Bitcoin algorithm. 

Brave New World

Bitcoin is a pie and a clock, but it is also a new continent. Like land, bitcoins cannot be created, only discovered and traded. This land at the moment does not yield any income (but there many ‘farming’ projects under way). Like a new continent, who gets the land first, in the discovery phase, will be rich for long. Unlike land it does not require much efforts, travel and work to be maintained. A smartphone can be enough to stack some satoshis: what is really necessary is a little bit of study to grasp the underlying mechanisms.

Bitcoin introduces a new asset class: native digital assets. It is a revolution that reminds the dawn of financial markets and has similar risks of ending into nothing like tulips.

Bitcoin is not inflatable, the supply is fixed, so it should offer a hedge against monetary inflation. We will talk about monetary policies and the inflation they cause in the next post. At the moment we must recognize that tangible assets are still preferred by investors for that purpose. Although bonds have negative yield, stocks still have earnings and represent real, solid companies. And much more important: stocks and ETFs are bought systematically by central banks and at the same time companies like Apple do enormous buybacks, so stocks and ETFs have shorter supplies every month and revaluate even faster than fixed assets. There is a fierce competition for scarcity out there.

Bitcoin, compared to traditional assets, has the advantage of giving an anchor value: bitcoins owned, divided by 21 million, is a crystal-clear percentage of the pie and reinforces an idea of property. With Bitcoin it is really easy to understand how much one possesses of total wealth, whereas traditional financial assets increase their total every year, with immense jumps, like in 2009 and 2020, caused by unconventional policies of the Central Banks.

Total Assets in the US financial system. Notice the spikes in 2009 (Financial crisis) and 2020 (Covis-19 pandemic).

Brave New Gold

For centuries investors have looked for protection in precious metals and gold in particular, since states could issue debt and print their own money (fiat money) but could not control the supply of gold.

Gold tends to maintain its value overtime and is a hedge against fear. It is a store of value that conserves its purchasing power overtime, independent from governments and central banks policies. Therefore, gold is considered as an insurance asset, a store of value in times of uncertainty.

Now many commentators compare Bitcoin to gold because of its limited supply and independence from state authorities. They share also the lack of yield, like any commodity.

Gold is scarce, globally recognized and mining is limited. But the supply is not fixed and grows 1 to 2% every year. It is very difficult to store and impossible to ship, and investors cannot easily divide their stock in small fractions. It is hardware whereas Bitcoin is software, with all the advantages of numbers that travel at speed light on the Internet compared to a physical body. And then there is a general trend toward digitalization and virtualization of life. 

New generations, native digitals, put more trust in algorithms then in things. Their whole life is digital: commerce, banking, even sport. They watch other people playing videogames on YouTube. They do not understand the value of physical presence, they just live online.

Our digital life in numbers

Digital natives have no patience for the burden and difficulties of real material goods. They want their gold to be on their smartphones, they want to buy it online and send it with a tap. They already want Bitcoin although they cannot afford it. But the future belongs to them.

Central banks traditionally support fiat currencies accumulating gold reserves and major foreign currencies. In the future they will be managed by digital natives: the next generations of bankers will accumulate algorithmic reserves, totally decentralized and politically neutral, because it will be the only mean to keep their credibility in front of the markets. And the only decentralized and neutral asset at the moment is Bitcoin.

Cash Reserves Revolution

Many companies are sitting on a pile of cash, but cash has negative interest rates. Bitcoin would be a natural destination for Big Tech cash: it is digital and cannot be inflated. The move to digital cash reserves would be gigantic, we are talking trillions of dollars in the US technological sector alone. It would change the situation for good and could even lead Central Banks to need algorithmic reserves to keep credibility in front of companies whose reserves would reflate every year. Otherwise Big Tech giants could even build their own super-currency (Facebook is already working on it: project Libra).

The cash reserves of US tech companies are astronomical: thanks to negative interest rates, they are losing money every day.


Let us go now trough bubble analysis for Bitcoin. The key elements of our ReLLANPI synthesis are:

  • Retail involvement: is everyone already crazy about it?
  • Legislator role: is the price rise influenced positively or even caused by laws?
  • Liquidity and leverage: how much money is in the system? Is it sustainable? Do people invest their own money, or do they invest borrowed capitals?
  • Asset class: is it totally new? If not, what do historical data tell?
  • News: how much hype is around?
  • Product: is there a technological and/or financial innovation? How will it impact peoples’ lives? Is there still room for improvement/adoption?
  • Investment plan: do people invest following a plan and/or generic prudency or are they under psychological pressure? And you, do you have a plan?

Retail involvement: increasing, but still at an early stage.

Legislator role: at the moment legislators across the world are quite suspicious, but they cannot block Bitcoin, unless they stop the whole Internet; for sure they are not incentivizing its usage and try to apply Anti Money Laundering rules every time the border Bitcoin-fiat money is crossed.

Liquidity and leverage: the whole financial sense of Bitcoin lies in protecting people from the excessive liquidity of the last decades; but Bitcoin is not close to the source of it: the central banks printer works only for banks and corporations.

Asset class: absolutely new, not interconnected with traditional economy, could well crash to zero without repercussions, and no public intervention would be deemed necessary.

News: in the news every once in a while, not hyped in 2020.

Product: since the Computer Age the utility of digital money was apparent. Nowadays life digitalization and assets inflation are an everyday reality for most of the world population, and a digital store of value looks like a necessity. Probably still not easy enough for most of the potential users, but new apps are under development.

Investment plan: the core investors are so called Hodlers, they just hold bitcoins and wait. Wave of FOMO are periodical though.

Experimenting and curiosity bring always the unexpected. Learning about Bitcoin is as much about studying a new asset as opening the eyes on the trends of our digitalized societies and on the financial mechanisms that surround us, the Central Banks printer in particular. More about this in the next article.

Finance History Mass Rentiers Politics

One Bubble to rule them all: US Big Tech

Since 2020 financial markets are animated by an exponential growth of a select number of technological stocks. Various acronyms have been introduced for this group: the most common is FAANG (Facebook, Amazon, Apple, Netflix, Google). Other companies that are sometimes included are Tesla, Nvidia and Microsoft.

While all other stocks struggled with the effects of Covid-19 crisis, these companies surged to record highs against all odds.

Stocks set new record in summer 2020. But 99.9% of the titles did not recover from the collapse caused by the pandemic crisis

The Tech Bubble is nothing really new. There has been a similar one in the late 1990s, that peaked in the year 2000. It was better known as the Dot-Com bubble or Internet bubble.  Shouldn’t bubbles just burst? Well, this one has been reflated in twenty years. It’s probably a first in the history of economics and for sure there are good reasons. As railroads in the XIX Century, Internet did not die after the market crash: it developed and became the backbone of every service in the world. There were good, solid reasons to ‘buy Internet’ in the 1990s. Was it enough to just hold the dot-com stocks after their fall? No, most of them eventually disappeared, but a few champions survived and became strong, while new ones were created just a few years later: the best managed internet companies have become global monopolies and Tech Giants. Now everybody wants a share of them, again.

This time is different: the bubble that burst in the year 2000 is back in 2020, stronger and bigger

It is a clear case of FOMO (Fear of Missing Out). Market moralizers will be fast in criticizing retail traders when this mania will be over. But honestly, it absolutely makes sense to want to be part of tech craze. Look at the incredible performance of a stock like Amazon, compared to wages. In 2001 and 2002 the average price of one Amazon share was around 10$: today is 3.500$, 350 times more

Amazon stock exponential growth in logarithmic scale

It means that if you invested 30.000 dollars in a company that was already utterly famous (Jeff Bezos was Time Person of the Year in 1999) and that had almost the monopoly on e-commerce, that is the whole retail sales of the future, you would now be able to sell those shares for more than 10 million dollars . What if you had $30.000 as an annual salary? Today your wage would be just a little higher, around $33.000.

Median wage – real wage, without inflation – did not increase in generations: goodbye middle class

If we go back in time for another twenty years, the $100k that Forrest Gump invested in Apple’s stock would now be worth over 50 billion!

Forrest Gump would be a multi-billionaire today with this single investment

Low Interest Rates + Monopolies = Explosive Valuations 

The Tech Giants are monopolists within their own market, or at least have a dominant market share (Tesla is the only exception). This means that they will have a constant flow of income from their activity. On the other hand, if we want to invest in the bond market, thanks to a long lasting Zero Internet Rate Policy (ZIRP), there is no flow in sight for many years. This justifies very generous valuations for these stocks, where the sky is the limit. 

Real interest rates are negative: bond investors are actually losing money. Buying Big Tech is the only way left to get a rent under ZIRP.

In general monopolies, oligopolies and tech giants have always dominated the market. Tech was the protagonist in the hope and dreams of investors since World War II: at the beginning it was AT&T, then IBM, then Microsoft with Dot-Com companies, now Apple with Amazon, Google, Facebook and Microsoft again. 

But since at least 2010 something changed due to ZIRP. The only path left by monetary authorities to some form of gain from capital is investing in high risk assets. It is not really a free choice, or a speculation led by dreams of big gains: investors act like mice in a maze, following the only path leading to cheese.

And what happened in 2020 with COVID-19? The pandemic crisis brought pessimism in the future of the economy and even lower interest rates and that caused higher stock valuations. People consumed less and saved more, and that led to more investment in financial instruments. Plus, life became even more virtual and the Big Tech had just the right products for this point in time (cloud services, e-commerce, etc). All in all, it has been like pouring gas onto the fire.


In the last post we scrutinized past bubbles. We learned many lessons and summarised them in few key elements, ReLLANPI:

  • Retail involvement: is everyone already crazy about it?
  • Legislator role: is the price rise influenced positively or even caused by laws?
  • Liquidity and leverage: how much money is in the system? Is it sustainable? Do people invest their own money, or do they invest borrowed capitals?
  • Asset class: is it totally new? If not, what do historical data tell?
  • News: how much hype is around?
  • Product: is there a technological and/or financial innovation? How will it impact peoples’ lives? Is there still room for improvement/adoption?
  • Investment plan: do people invest following a plan and/or generic prudency or are they under psychological pressure? And you, do you have a plan?

Let us evaluate every factor for US Big Tech.

Retail involvement: it is no secret that retail investors are deeply involved. The more conservative ones put their money in passive funds that reproduce indexes where Apple and the other tech companies are predominant nowadays. The most daring use leverage, options and services like Robinhood. 

Billions invested in highly leveraged instruments mean actually trillions moved on the markets by trade-from-home amateurs.

Legislator: In the last twenty years these companies enjoyed clemency from the legislator. Not only has there been no antitrust procedure until now (with the notable exception of the EU market regulators against Microsoft 15 years ago), but Washington always defended their champions against foreign regulations and taxations. 

How long can this honeymoon last? It would be normal that at some point successful, almost monopolistic companies get regulatory and legal pushback. Some cracks are appearing on the surface, but it seems too early to expect serious changes. Political attention on user data usage has increased in recent years, especially in the EU, and that could jeopardize the business model of Facebook and Google. If China and Russia will continue to use these platforms to influence elections and to damage democracies, some sort of action on both sides of the Atlantic will be taken. Amazon has been criticized for many years in the US for the disruption of the retail market, whereas the EU pushes for a level playing field with brick and mortar competitors at least on taxation (they need the money too). Apple has good track record for privacy, but its App Store ‘30%’ policy has drawn calls for government action. Microsoft on the other hand is now viewed as utterly virtuous, although during the previous Tech Bubble it was targeted for breakup. 

Although no change in legislative attitude seems probable in the short term, in the medium and long term most tech monopolies will be regulated very differently (that is: they will actually be regulated and taxed), unless the market precedes the legislator, as happened for Microsoft last time.

Liquidity and leverage: this is the most important factor at the moment. The general framework for all markets in 2020 is that liquidity poured by Central Banks is so gargantuan that every asset class is in a bubble. 

Looks like a race: who will inflate this bubble more? Many central banks even buy stocks with freshly minted cash.

On top of that, it must be noticed that Tech companies sit on a hoard of cash, like dragons in old myths. 

And what do they do with all that cash? Not much at the moment: when they would move it, it could change the cash market for good. 

But Apple has been particularly creative, financially. Although Cupertino does not need cash at all, it asked the market for more at very low prices (the zero interest rates we talked above) through bond emissions, to corner its own stock!

At least 35% of all Apple stocks are in Apple’s own treasury

The history of Apple’s shares outstanding from 1996 to 2020 is shown above. Shares outstanding can be defined as the number of shares held by shareholders (including insiders) assuming conversion of all convertible debt, securities, warrants and options. This metric excludes the company’s treasury shares.

Apple shares outstanding for the quarter ending June 30, 2020 were 4.355B, a 5.36% decline year-over-year.

Apple 2019 shares outstanding were 4.649B, a 7.02% decline from 2018.

Apple 2018 shares outstanding were 5B, a 4.79% decline from 2017.

Apple 2017 shares outstanding were 5.252B, a 4.52% decline from 2016.

Due to a stock split on a 4-for-1 basis on August 28, 2020 all above numbers must be multiplied by four at the time of writing.

Apple shares are becoming increasingly rare, year after year, and that pushes its price higher and higher. Until market authorities or the legislator will stop this practice, Apple, instead of investing in new innovative ventures, will end up becoming the owner of Apple itself.

It is so crazy, that while Warren Buffet, through Berkshire Hathaway, owns ‘only’ one billion shares, more than nine billion have disappeared in Apple’s vault. And Buffet’s Apple position is so enormous that it represents 50% of its own portfolio (contrary to any wise advice on diversification) and a 5.9% stake in the Cupertino company.

Berkshire Hathaway portfolio, September 2020. 120 billion dollars out of 240 invested in a single title, Apple

Asset class: stocks are quintessential to modern economies and they are here to stay. This story has already been told: tech stocks, like all stocks, are subject to volatility, but you are buying a tangible good that will not disappear as a vision or a dream. 

News: at the moment there is a discrete interest by the media, but not really any excitement.

Product: Big Tech companies have monopolies in the most advanced technological markets and are still innovating. 

Investing plan: The market seems driven by incautious retail investors through services such as Robinhood that do not charge fees (but thrive selling their personal data) and a new boom in options trading (highly leveraged and very dangerous instruments, usually handled only by professionals).

Notice the acceleration after Covid boosted work-from-home

Is it a ‘bubble’ then? Under many indicators yes, but only changes in law and market liquidity can stop its race. 

In the end one rule stands: don’t bet against the central banks, they can make the impossible, possible.

Finance History Inheritance Literature Politics Society

A History of Bubbles

Piketty, as we have seen before, states very clearly that workers are getting poorer and enjoy no mobility due to r > g: return on capital goes from 4 to 5% whereas GDP growth is stuck between 0 and 1%.

What if you do not want to wait for the Government to do something about it? What if you want to repair the mobility elevator at least for yourself? In this case, financial markets offer a very powerful but also dangerous tool, a sort of nuclear lift: asset bubbles.

Riding a bubble, your small capital can increase a hundredfold in a short time. But you could also lose everything.

The usual narrative about bubbles is that bubbles are evil and they must be recognized to be avoided: they are like the Big Bad Wolf for the Little Red Riding Hood investor. That is often true of course, but tells only a part of the story. Bubbles, as any investment, represent a risk and an opportunity at the same time, require much knowledge and preparation to be managed, technical skills but also psychological ones; financial competences are not enough, a thorough knowledge of the business/product/industry in question must be acquired. 

Let us learn something about bubbles analysing a few of the most famous ones in history.

The Dutch Tulip Mania


Historical accounts are still under discussions for this very first and iconic bubble (1). We can underline a few facts: 

  • Tulips were a new asset class and as an asset class they did not last long.
  • Being a new asset class, a lack of historical data gave way to large swings in prices.
  • In a way, tulip bulbs were prototypes of something new and unknown, and as a technological breakthrough they inspired hopes that could not be limited by experience.
  • Only a small group of merchants was involved in the market, the effects on the overall economy of the boom and bust were negligible.
  • As a flower they proved really extraordinary: the Netherlands are still famous for their tulips!

The South Sea Bubble

The “night singer of shares” sold stock on the streets during the South Sea Bubble (Amsterdam, 1720)

At the very origin of the word ‘bubble’ (2), the South Sea crash gives us plenty of good lessons:

  • Business was not particularly new or innovative: only the financial formula changed.
  • A crucial active role was played by legislators, that were hired as testimonials and guarantors, and even passed a law to block any other competing ‘bubble’ (i.e. corporation).
  • A financial innovation swiftly mutated into a fraud.
  • The affluent classes were widely involved.
  • An economic crisis followed the crash.

There is a special story in the story: documents revealed for certain that even the great Isaac Newton incurred in heavy losses during the market frenzy (3):

“at the beginning of 1720, Newton had around 40% of his considerable wealth (comparable, based on average earnings, to around $30 million today) in South Sea stock, which can be thought of as a book-entry equivalent of shares. This stake had been acquired over some years, mostly at considerably lower prices.

But then, as the bubble was inflating, in April and May 1720, he sold most of that, at prices that were three to four times his cost. This liquidation appears to have stretched roughly over the period shown in the price chart. However, a few weeks after the last of those sales, in mid-June 1720, he appears to have jumped back into the market, at prices about double those at which he had sold. He then continued making further investments for himself until the end of August, just before the collapse of the bubble.

There had to be vigorous debates among all the executors and Hall about the prospects of the South Sea venture, with Hall likely the most fervent enthusiast. Those debates, together with the rapidly rising market price, apparently led Newton to change his mind.

It should be noted that Newton did become a truly ardent believer in the bubble, more ardent that other people in his circle, even though he started out as a sceptic and was slow to change his views. The Hall estate made some purchases of South Sea stock as late as the middle of September, when prices were in a free-fall and about half their peak level. However, this estate did keep a substantial fraction of its assets in a more stable investment, that of the Bank of England. On the other hand, Newton appears to have put all of his assets into South Sea stock.”

Newton in 1702 by Godfrey Kneller

Even one the greatest scientists in history and for sure a very rational man, under the pressure of continuous discussions, news, and an astonishing price rise, lost his principal. We then learn that a plan is necessary from the beginning. Probably if Newton did not liquidate completely his first very lucky investment, he would not have entered later.

In the same period, the great writer Daniel Defoe ran The Commentator, a newspaper that was likely subsidized by the government. He attacked the similar bubble plan designed by John Law in France and was vociferous in his condemnation of the various visionary London schemes, such as a company “For extracting Silver from Lead.” He called them various names, such as a “lunacy” caused by the “bubble infection.” (3)

The Railway Mania

‘Can you tell me how to make £10,000 HONESTLY in Railways?

The first high tech bubble, Railway Mania was really close to modern day disruptive technologies markets (4)(5)(6), but still the similarities with the South Sea were even more striking:

  • Strong role of the legislators: railroads were not centrally planned in Britain as in the rest of the world. Companies were required to submit a Bill to Parliament for approval of new railroad lines, there were no limits on the number of railroad companies and nearly anyone could form a railroad company and submit a Bill to Parliament. Financial viability of railroad lines was not a requirement for Parliament’s approval and most Bills were approved due to the fact that many Members of Parliament were heavily invested in railroad companies.
  • A technological innovation swiftly mutated into a fraud, with many impossible railway projects, that just worked in enriching their initiators.
  • Low interest rates, abundant liquidity in the system, was a key factor.
  • A rising pressure on the middleclass through newspapers news, discussions among peers and a constant rise of price: as railroad company shares continued to rise, investors became increasingly wrapped up in the speculative fervour and many middleclass families invested all of their savings into them. Many famous figures became involved in railroad stock speculation including Charles Darwin, Charles Babbage, John Stuart Mill, the Brontë sisters and Benjamin Disraeli.
  • An economic crisis followed the crash.
  • In the long run. railroad companies became lucrative in the strong hands of the big investors that bought them after they went bust.

As is noted on Wikipedia: 

“Unlike some stock market bubbles, there was a net tangible result from all the investment: a vast expansion of the British railway system, though perhaps at an inflated cost. Amongst the high number of impractical, overambitious and downright fraudulent schemes promoted during the mania were a good number of practical trunk routes (most notably the initial part of the Great Northern Railway and the trans-Pennine Woodhead route) and important freight lines (such as large parts of what would become the North Eastern Railway). These projects all required vast amounts of capital all of which had to be raised from private enterprise. The speculative frenzy of the mania made people much more willing to invest the large sums required for railway construction than they had been previously or would be in later years. Even many of the routes that failed when the mania collapsed became viable (if not lucrative) when each was in the hands of the larger company that had purchased it. A total of 6,220 miles (10,010 km) of railway line were built as a result of projects authorised between 1844 and 1846—by comparison, the total route mileage of the modern UK railway network is around 11,000 miles (18,000 km).”

The money lost by many small investors became, in a way, an unearned income for the next generations. And the technology did not die, it prospered and we still use it today.

Lessons learned

Bubbles are usually lucrative for a few and disastrous for many. The key elements that we have learned from history to assess new market trends are:

  • Retail involvement: is everyone already in?
  • Legislator role: is the price rise influenced positively or even caused by laws?
  • Liquidity and leverage: how much money is in the system? Is it sustainable? Do people invest their own money or borrowed capitals?
  • Asset class: is it totally new? If not, what do historical data tell?
  • News: how much hype is around?
  • Product: is there a technological and/or financial innovation? How will it impact people’s lives? Is there still room for improvement/adoption?
  • Investing plan: do people invest following a plan and/or generic prudency or are they under psychological pressure? And you, do you have a plan?

ReLLANPI is our swiss knife to analyse (and build plans for) today’s bubbles.







Finance History Inheritance Literature

Monsieur De Norpois’ bad advice

Since the 19th century, investors were faced with the choice between different asset classes. Psychologically, people prefer a fixed income: in their eyes, this stock does not fluctuate in value. Unfortunately they are brutally wrong. A very juicy portrait of a doubtful investor and a bad advisor is given in Marcel Proust’s In Search of Lost Time. Probably the most important novel of the 20th century, it is like a treatise in a poem, or better many treatises, including a small one on investments.

The second volume of this majestic work is In the Shadow of Young Girls in Flower (À l’ombre des jeunes filles en fleurs). In this book the Narrator receives an inheritance, after the death of his aunt Léonie. His father, a diplomat, consults his friend, colleague and role-model Marquis de Norpois, a very experienced diplomat, that considers himself also the best of judges in art, literature, and investments of course.

My father, who was trustee of this estate until I came of age, now consulted M. de Norpois with regard to a number of investments. He recommended certain stocks bearing a low rate of interest, which he considered particularly sound, notably English consols and Russian four per cents. “With absolutely first-class securities such as those,” said M. de Norpois, “even if your income from them is nothing very great you may be certain of never losing your capital.”

English consols yielded from 2 to 3%, depending on the emission, whereas Russian bonds, considered less safe, guaranteed a 4% fixed income. Not much, but those were times of gold standard, deflation and low interest rates (sounds familiar?)

More than three thousand pages later, at the end of the sixth volume The Fugitive (Albertine disparue), the Narrator has spent much money for his beloved Albertine. The affair is over (no spoiler), and he finds himself quite in lack of argent. This sad consideration follows:

But time had passed; the wisest judgments of the previous generation had been proved unwise by this generation, as had occurred in the past to M. Thiers who had said that railways could never prove successful. The stocks of which M. de Norpois had said to us: “even if your income from them is nothing very great, you may be certain of never losing any of your capital,” were, more often than not, those which had declined most in value.

A World War and revolutions across the globe provoked devaluations of bonds that seemed impossible in the previous years. French investors in particular lost gargantuan sums of money on Russian bonds that were repudiated by the new Soviet Union. The matter is still not solved after more than a century!

Whereas in 1996 The Chicago Tribune wrote emphatically (1):

For nearly eight decades Russia’s Imperial Bonds decorated European bathrooms and children’s playrooms as colorful but worthless wallpaper.

Sometimes the bonds surfaced at antique stores or as curios in the flea markets of Europe.

When Vladimir Lenin’s Bolsheviks unilaterally declared the debt on the czarist bonds null and void in 1918 they were rendered worthless.

This week, however, French families were rummaging through attics in a frantic search for the once-useless certificates their great-grandparents might have bought, then tossed into a dark corner in disgust.

Russian President Boris Yeltsin agreed Tuesday to repay a nominal value of between $80 and $100 for each of the 4 million czarist bonds believed to remain in circulation in France or to have survived the European wallpaper fad, for a total payout of around $400 million

Many descendants of the bondholders are still looking for money today (2):

Around 400,000 people are seeking 30 billion euros from Russia in payments for the bonds issued by the tsarist government (…)

Between 1880 and 1917 French citizens bought a total of 30 million Russian bonds. In January 1918 the head of the new revolutionary government Vladimir Lenin refused to pay off the bonds.

However, in the mid-1990s Russia signed an agreement with France over the Romanov government’s debts and paid Paris 330 million euros. Moscow asserts that the issue is over and there are no grounds to discuss any new payments.

Meanwhile, descendants of the original bond owners argue that this sum should be 100 times bigger.

Well, M. de Norpois’ advise did not prove very useful indeed. Today most investors make the same mistake: accepting low interest rates from Sovereign Issuers that are politically unstable, or in a constant economic recession. There is a sort of blindness in fixed income by investors. Most think that fixed income is risk free, but the risk is still there, many risks indeed: currency devaluation, inflation rise, interest rates rise, default.

The SEC itself seems to agree that investors’ awareness of bond risks is quite low:

Interest rate risk, a bulletin by the Office of Investor Education and Advocacy of the SEC

The only real rentier investment is the investment at technological frontier. Proust mentions railroads, that was high tech in the 1800s and old story in the next century. Every century has its own railroad: we will talk about this in a next post.



Finance History Inheritance Literature Mass Rentiers

A universal truth

It is a truth universally acknowledged that a single man in possession of a good fortune must be in want of a wife.

This is one of the most famous incipits in English literature: “Pride and Prejudice” by Jane Austen. We will focus on the fortune side of the equation, as money, that is unearned accumulated capital, plays a fundamental role in her books.

The novels by Jane Austen are set at the very beginning of the Industrial Revolution. In those times growth rate was around 0 percent and slowly accelerated to 1.5 percent during the 19th century. But compared to a rate of return of 5 percent, the gap between the rate of return and the growth rate did not change dramatically as compared to pre-industrial society.

Wealth was just perpetuated from one generation to the next generation, keeping the structure of society unchanged. There was always some sort of limited mobility – some people dilapidated the wealth or some people gained access to wealth through connections or other means.

This phenomenon has been explained with vast echo by French economist Thomas Piketty in his book “Capital in the Twenty-first Century.”

Piketty’s thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability

Piketty argues that in the 20th century, very unusual shocks altered this logic. The succession of World War I, the Great Depression and World War II reduced the return to capital to a very low level because of capital destruction, inflation and taxation to finance the war, and so the rate of return to capital between 1940 and 1945 was not 4 or 5 percent anymore: it fell to 1 percent or very close to 0 percent.

Then the growth rate after World War II increased enormously: many countries experienced growth rates of 4 or 5 percent per year in the 1950s, 1960s and 1970s, in particular USA, Japan and Western Europe, that were largely due to the post-war recovery. Very high growth rates made it easier to accumulate wealth and, for the first time in history, there was really significantly higher upward mobility.

The unusually high level of upward mobility during the post-war period was greatly facilitated by the large growth rate of labour income during these decades. But starting around 1980, a growth slowdown was experienced due to the fact that the post-war recovery was over and productivity growth rate fell around 1 to 1.5 percent — closer to the pre-World War I productivity growth rate.

Growth rate in the economy is a function of the growth rates of productivity and population. So there are two ways to make GDP rise: higher productivity, higher population (more people working) or both. Historically both have been very important. Having more people who can work comes from immigration and fertility and life expectancy increasing. But this part of growth is now going down, because people are having fewer children.

There is still very substantial growth as compared to pre-industrial societies, but this is not enough to counteract the fact that the rate of return to capital earnings can typically be 4 or 5 percent. In Piketty’s view we are back to 19th century at least.

Chart adapted by The New Yorker from the original in Thomas Piketty’s “Capital in the Twenty-first Century.”

Piketty calls for action, but it is evident that these forces are beyond the control of individuals and even of political powers. In the foreseeable future, demographics will be negative in rich countries and productivity will not increase very fast. 

And so, what can we do? If we surrender to the logic that our wealth will be a function of productivity and demographics, i.e. forces that we can not influence in any way, we are set to be powerless and in the end victims of the economic system. And yet we can fight.

First of all, even the poorest worker in an advanced economy is a Mr Darcy compared to the average worker of a poor country. Piketty forgets this simple fact: we live in a globalised world, where a middle class Lebanese family can hire a Sudanese to take care of the house, and a Slovakian manager can pay a Filipino to assist his ageing parents. The world is the stage now, and many, who Piketty laments are getting poorer, are still on the wealthy side.

Second, we do not depend on land or paper to accumulate wealth. We have digitalized financial markets, we can own shares of companies, obligations and currencies with a common mobile phone and an internet connection. It is incredibly simple to manage an estate today, and, although it is not easy to save money working, we can all round up our income with some unearned income.

Jobs, that traditional economists like Piketty believe to be the only way to earn a living, may be the hardest path to affluency. The easiest one is to understand how to invest fruitfully the unearned capital we already possess, and then do a job that we love.

We must change our mentality: stop thinking as working class heroes, and act instead like decadent aristocrats who want to stay on top. Because that is what we are.

Mass Rentiers

Standing on the Shoulders of Giants

We live in a world of unearned income.

We live in a time of unearned capital.

Welcome to the age of Mass Rentiers.

Nowadays working is not enough to make a decent living. Many explanations have been proposed. Income inequalities have been pointed out in particular as the major cause of this phenomenon. 

A few years ago, the French economist Thomas Piketty created a sensation with his book Capital in the Twenty-First Century.

As stated on Wikipedia (1) “[t]he book argues that the world today is returning towards “patrimonial capitalism”, in which much of the economy is dominated by inherited wealth: the power of this economic class is increasing, threatening to create an oligarchy.

Piketty bases his argument on a formula that relates the rate of return on capital (r) to economic growth (g), where r includes profits, dividends, interest, rents and other income from capital and g is measured as growth of society’s income or output. He argues that when the rate of growth is low, then wealth tends to accumulate more quickly from r than from labour and tends to accumulate more among the top 10% and 1%, increasing inequality. Thus, the fundamental force for divergence and greater wealth inequality can be summed up in the inequality r > g. He analyses inheritance from the perspective of the same formula.”

In Piketty’s view “inheritance” has a very negative effect on the economy and society.

What is “inheritance”? Broadly speaking, itis any good received from the previous generation. If we do not focus only on money and property, we must recognize that at present, humanity enjoys many inherited immaterial goods that are even more important than money: knowledge, art, nation states, civil liberties.

“We are dwarfs standing on the shoulder of giants”. That was a solid truth in the Middle Ages, a period of humility and trust in authorities.

Is this not much more true today? Now that we have accumulated so many goods thanks to past generations?

There are free countries we did not fight for. Civil liberties that we have not fought for  to obtain. Scientific knowledge we have not helped to increase by an inch, but which guarantees us a technological comfort our ancestors would associate with sheer magic.

The first world, the industrialized part of the globe, is definitely a world of “inheritance” in every aspect. “Unearned income” sounds slightly immoral but since most of our income is now unearned, we must deal with that and we must explore every aspect of our “inheritance” to realize what we really are: Mass Rentiers.