by Dmitry Orlov
Club Orlov (January 26 2016)
If you have been paying attention, you may have noticed that the global financial markets are currently in meltdown mode. Apparently, the world has hit diminishing returns on making stuff. There is simply too much of everything, be it oil wells, container ships, skyscrapers, cars or houses. Because of this, the world has also hit diminishing returns on borrowing money to build and sell more stuff, because the stuff we build doesn’t sell. And because it doesn’t sell, the price of stuff that’s already been made keeps going down, lowering its value as loan collateral and making the problem worse.
One solution that’s been proposed is to convert from a products economy to a services economy. For instance, instead of making widgets, everybody gives each other backrubs. This works great in theory. The backrub industry doesn’t generate an ever-expanding inventory of backrubs that then have to be unloaded. But there are some problems with this plan. The first problem is that too few people have enough money saved up to spend on backrubs, so they would have to get the backrubs on credit. Another problem is that, unlike a widget, a backrub is not a productive asset, and doesn’t help you pay off the money you had to borrow to pay for the backrub. Lastly, a backrub, once you have received it, isn’t worth very much. You can’t auction it off, and you can’t use it as collateral for a loan.
These are big problems, and one proposed solution is to create good, well-paying jobs that put money in people’s pockets – money that they can then spent on backrubs. This is best done by investing in productivity improvements: send people to school, invest in high technology and so on. It’s an intuitively obvious idea: productive workers are easier to employ than unproductive workers, because the stuff they make ends up cheaper, and people can afford to buy more of it. Whether they do buy more of it is debatable, especially if there is more than enough of it already and nobody has any extra money saved. Still, the theory makes sense.
But this theory doesn’t seem to be working all that well: no matter how much money we put into automation – robotic assembly lines, internet-based virtualization, what have you – the number of unemployed workers isn’t going down at all. And it’s even worse with driverless cars. In theory, they are great: if the driver doesn’t have to do the driving, then she can spend the time giving her passengers backrubs. But no matter how much money we throw at driverless cars, the number of unemployed drivers, or unemployed massage therapists, isn’t going down.
But even if we give up on trying to stimulate demand through job creation and just let everyone starve, we can still put our faith in rich people. There are people who are as rich as entire countries! Surely they can spend and consume on everyone else’s behalf, and make the economy boom. But it turns out that it’s very hard for just one person to consume as much as an entire country. To make that happen, it’s necessary to pay people to consume on one’s behalf. But if other people can spend your money just like you, then that defeats the purpose of being wealthier than everyone else, and all that hard work of swindling people and of gaming the markets would turn out to have been in vain.
* * * * *
But here is a solution that is so stunningly simple and elegant that somebody must have thought of it already. Alas, make a note: I am the first!
The solution is this: sell everything and go long blivets. Blivets are geometrically impossible objects: they can be drawn, but, by their nature, they cannot be manufactured. This solves a major problem with the futures markets, which is that people can actually take delivery of their futures contracts. This means that the stuff being speculated on actually has to exist. And this means that what some people have the audacity to call “the real economy” actually has to exist. What a nuisance!
For example, the gold futures market trades 300 times more gold than physically exists. [Update: the number just went up to 542.] This means that if just 0.3% [Update: 0.18%] of futures contracts resulted in deliveries, the vaults would be empty and there would be nothing to trade. The horrible thing is, unreasonable people, who take delivery of their gold, do exist: the Chinese, the Russians and various other nations with cash on hand or US Treasuries to liquidate keep doing this. Promoting “regime change” and looting various countries’ gold reserves helps a bit (Iraq, Libya and Ukraine have been looted already; Syria should have been looted by now if it weren’t for those pesky Russians!). But the eventual outcome of all this is force majeur: somebody wants to take delivery, but the vaults are empty.
A similar problem exists with the biggest futures market in the world: in crude oil. Here, traders have been having a merry old time taking advantage of a notional glut, driving the price of crude lower and lower. They could drive it as low as $1 a barrel, but then what? The problem is, nobody on earth can produce oil that cheaply, and so a day will come when somebody will demand delivery on their $1 per barrel crude contract, and the only response will be an echo, as tumbleweeds blow across the abandoned oil fields.
You should have guessed the moral of the story by now: if you are going to “ephemeralize” the entire economy – the workers/consumers along with their productive capacity – you better switch to trading in things that are ephemeral too, or you’ll risk a market implosion, deflation, deleveraging and financial collapse followed by poltitical, commercial, social and cultural collapse in four-part cacophony with many screaming refrains and a shrieking, tumultuous coda. I am not kidding. I wrote the book on that.
This is where blivets would be such a great help. A blivet is by definition a “paper blivet” because a “physical blivet” is a physical impossibility. If you demanded physical delivery of your blivets, people would simply laugh at you, twirl their fingers around their temples and roll their eyes. That would be cra-cra, like demanding your rights under the US constitution, or pretending that climate change is a conspiracy theory.
Blivets are composed of the purest financial ether – even more ethereal than Bitcoins (those long strings of magical digits that get their value from an algorithm, a block chain, and a “coolness factor”). Bitcoins are ethereal too, but they have to be physically mined by burning lots of electricity in running big computer farms, and this causes a big problem: Bitcoins are scarce.
Now, some people claim that scarcity is what gives things value, but that’s clearly nonsense. Look at the US dollar: the number of dollars has been expanding out of all proportion to the growth of the US economy, but has there been any hyperinflation? Of course not! The problem isn’t with printing money; the problem is with giving it to regular people, who don’t know that they should only invest it in blivets. Instead, they do economically destructive things – like buying food for their children and heating their houses during winter. That’s what causes hyperinflation, not the money-printing! There are only two potential problems with money-printing: not printing enough money, and not printing it fast enough.
There are still a couple of problems with my proposed blivetization of the global economy, but these too can be solved by dint of financial innovation.
First, there is the problem of the blivet futures market potentially going down instead of up. We don’t like it when markets go down; so how do we prevent that from ever happening? Here’s an idea: introduce the so-called Schrodinger’s Blivet: if you are short blivets, then, when your contract expires, the clearing house may demand that you deliver on it, in which case a simple rule applies: based on a flip of a coin, it is determined whether your blivets exist or not. This requires those who are shorting blivets to maintain a rather large reserve, and would make them a lot less interested in wrecking the market. Because of this, blivet prices may stagnate sometimes, but over time they should go up monotonically.
Second, there is the problem of where to get additional capital to sink into blivets. You’ve liquidated all your other holdings, you are long blivets, but how is the blivet market supposed to expand? If it doesn’t expand, then that means a lack of growth, and we don’t like it when there isn’t growth. With all other productive capacities idled and no wealth generation occurring outside the blivet market, where is that new investment capital going to come from? Here’s an idea: it’s called Auto-Rehypothecation. Whenever you pledge blivets as collateral for a loan (which you invest in blivets, of course) the loan itself automatically becomes available to be used as collateral for another loan.
Thanks to these financial innovations, blivet valuations should go through the roof in no time, and keep going. In fact, they may go up so high that it may become necessary to start quoting blivets in scientific notation instead of simple decimals. Eventually it may even make sense to drop the mantissa and just quote the exponent. Why, with all physical constraints removed, the number of blivets being traded will be set free to exceed the number of atoms in the observable universe!
Problem solved! I’ll take 10**82 blivets, please!