Trickle-up economics always wins

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There was a story in the i paper yesterday about how some of the UK’s billionaires ‘lost’ huge amounts of money in a single day as a result of the Trump-induced stock market crash. My heart bleeds for them, of course, although I’ve been unable to find a small enough violin to mark the occasion with sad music. The question, though, is ‘where did the money go?’. After all, basic book-keeping tells us that a loss in one place must be balanced by a gain somewhere else: if the money has ‘gone’ it must have ‘gone’ somewhere.

The truth, of course, is that the money hasn’t gone anywhere; it was never there in the first place. At the time of writing the story, those billionaires still own all the assets they owned the previous day – all that changed was the theoretical cash value of those assets if they decided to sell them at a particular point in time. Even if they did suddenly decide to sell them, they won’t have ‘lost’ the difference between one day’s valuation and the next day’s valuation. The amount that they will have ‘lost’ will be the difference between what they paid for the assets and what they receive from them at the point of sale, adjusted for inflation. In most cases, that ‘loss’ will be negative, i.e. they will have made a profit not a loss. It’s just that the profit will be less than the profit that they would have made had they sold them a day earlier. An asset whose price is inherently volatile and bears little relationship to the underlying value of the property concerned is a remarkably poor way of measuring wealth, and the idea that company owners and long-term investors make a profit or loss on a day-by-day basis as the price of shares varies is nonsense.

That’s not to say that there are no winners or losers, however. People who own shares more indirectly – for example in pension funds – and reach a point where they have little option but to sell will certainly find that, even if they’ve still made a net profit over the whole term of their investment, their retirement plans may have to change dramatically as a result of the actions of the madman in the White House, because they will receive less than they were expecting. It is they, rather than the billionaires, who are the real losers. There are people who have profited as well. People who have, or can access, sufficient funds to buy and sell shares on a daily or even hourly basis can take advantage of all those forced to cash in their savings at a low price by buying low and selling when the stock bounces up again. It’s even easier if they have advance warning of Trump’s actions, a hint of which he was kind enough to give them just a few hours before reversing his tariff decision.

The White House itself has released a video apparently showing Trump congratulating some of his billionaire buddies for making a killing on the back of his actions. “He made $2.5 billion today, and he made $900 million. That’s not bad,” said His Orangeness. There were some real winners and some real losers as a result of Trump’s actions, but they weren’t the billionaires highlighted in the story referred to at the outset. The winners were the people in a position to speculate and gamble on the stock markets, and the losers were those who depended on stability and certainty for their retirement. Surprise, surprise, the net result was that money and wealth flowed from the many into the hands of the few. Trickle-up economics always wins through in the end.

Following the money

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Trump’s attitude to the stock markets varies. When the US stock markets are riding high, Trump is quick to claim it as a vindication of his brilliant economic policies. When they take a dive (as they have done a few times recently, usually in response to wildly fluctuating tariff policies), he claims that he doesn’t pay any attention to what the markets are doing. If his chosen indicator doesn’t show the result he wants, then (like Groucho Marx with principles) he has others.

Whether a stock market movement in a particular direction is a good thing or a bad thing depends on one’s perspective, but it really isn't a very good measure of economic success. For those whose wealth is measured largely in terms of the value of shareholdings – such as, to pick names almost entirely at random, Elon Musk or Donald Trump – a fall in share prices can suddenly make you look a lot poorer, whilst a rise can make you look a lot richer. So: from that perspective, rising share prices good, falling share prices bad. On the other hand, for a wealthy person who wants to acquire more wealth, falling share prices creates good opportunities to buy up assets cheaply, especially if you know, or have reason to believe, that any fall (such as that induced by an on-off tariff policy sending prices yo-yoing) will be followed by a rise. And that’s true, even if there is no insider trading happening.

It underlines one of the issues with a casino-style stock market. Traditional economic theory suggests that the stock market is a means of matching available capital with investment opportunities, but it’s long since become divorced from that (which is why the government’s floated suggestions of replacing cash ISAs with stocks and shares ISAs do not achieve the aim of getting people to invest in businesses). In a casino stock market, share prices no longer bear any clear relationship to the value of the underlying assets. For some investors, there is at least a partial relationship with expected future profit flows in the form of dividends, but day to day share prices depend mostly on expectations of the way those prices will move, with the gamblers and speculators more interested in making money from large and frequent trades on small marginal changes in share price than in the future prospects or dividends of the company whose shares are being traded.

The result is that there are a small number of people making a great deal of money out of Trump’s capriciousness. By what I’m sure is nothing more than complete coincidence, many of them will be among Trump’s donors and supporters. Who’d have thought it?

Gamblers with systems

Tweet The massive failure and subsequent rescue of a Wall Street trader last week underlines the extent to which the trading floors of stock exchanges have been transformed from places which allocate capital to companies to casinos. 

The company itself blamed an ‘IT glitch’ for automatically placing  huge volumes of trades which sent the Wall Street share prices of 148 companies into a state of wild fluctuation.  Details of the ‘glitch’ have yet to be revealed, but as an ex computer programmer, ‘IT Glitch’ is not a term I can relate to. 

On this occasion, the computers may have done some silly things, but they were only acting on the instructions of their programmers – the glitch is ultimately a human one.  The human telling the computer what to do got it wrong – and the result of what was probably a very small error was the collapse of a company which lost £283 million in 45 minutes.

The response of the company’s CEO was remarkably sanguine – “Technology breaks”, he said.  It’s the reaction of a gambler, and like most gamblers, he and his company are unlikely to change their ways.

The fact that so much money can be won or lost in such a short period should worry us more than it appears to do in practice.  Much of the ‘trading’ on world stock exchanges is now automated.  Computers running sophisticated algorithms decide when to buy and when to sell; trading the same stocks over and over, thousands of times a minute, trying to leverage tiny differences in price by sheer volume and frequency of trading.  

Different computers using different algorithms compete with each other in tiny fractions of a second.  It’s even got to the point where the computer centres are being moved to be nearer to the exchanges – the time lost by a message travelling at the speed of light over a distance of just a few miles can put them at a disadvantage in this particular casino.

Whether the stocks and shares being bought and sold between the varying computer programs actually exist or not is an interesting but largely irrelevant question from the perspective of those involved.  All of this has nothing to do with the business of ensuring that companies employing real people to produce real goods in the real world have access to the capital they need, nor with investing in pension and insurance funds. 

It’s a casino, pure and simple.  And if there’s one thing worse than a compulsive gambler, it’s a gambler who has a ‘system’ with which he thinks he can break the casino.

With the exception of the shareholders in one particular company, who have seen the value of their shareholding plummet, we’ve got away with it this time.  There’s no guarantee that the next ‘glitch’ won’t have much more impact on us.  The best way of doing that is to put these people in real casinos, and leave them only their own money to play with.