Monopoly Monetarism

(Thanks to Ricardo Scholman, one of the smartest economists I know)

I come from a world where equities held a well-documented equity risk premium and bond yields equated something close to nominal growth of economies, thus providing protection from inflation and a money growth component commensurate with the growth of real GDP. This a wonderful and understandable world.

This regime must have changed somewhere around my 50thbirthday in 2012. Having prided myself for a long time for understanding and sometimes anticipating significant regime changes that occurred before that milestone in my life, I guess the lack of mental flexibility one tends to get after that (hopefully) halfway point, apparently got in the way over the last few years.

Whereas all the hallmarks and warnings were in my face, it is only very recently that I’ve come around to accept that the world from which I come has not been simply been held in a coma but on oxygen, to be revived one big and very painful day for markets. My Universal Truths about asset pricing would be vindicated. I now realize it is dead. And buried. Joined the choir invisible, as John Cleese said about his dead parrot. I must now accept that some equities with no chance of ever creating a positive cash flow seem to be very acceptable stores of wealth. As are bonds that will not reward for inflation for the next 30 years and for which it even seems perfectly acceptable to pay for the honour of holding them.

The only acceptable explanation came from the friendliest and least exposed but possibly one of the best economists I know, Ricardo Scholman. A few years ago he painted a picture for me comparing the current state of affairs with a Monopoly game where the bank represented monetary authorities. (I added a few gimmicks to that comparison, Ricardo. Sorry). So allow me to now paint that picture:

Imagine we’re in a tournament where we are playing the age-old game of Monopoly. At some point a number of players at our table are getting so low on cash and assets (streets, houses and hotels) that it seems likely the game will end and all the fun is gone. Not only that, the richer players accepted debt from the poorer players, so as to get paid eventually as the game carried on. Confronted with the risk of not being able to cash in on that debt, and of course to keep the fun going, the players decide that the bank should simply lend everyone another – say – 1000 Monopoly currency. The fun continues and asset returns continue to rise in The Game, as the ever increasing number of hotels on the board clutter the streets.

In a game that is taking place at another table they even go so far as to agree that if somebody wants to re-pay the bank he will be penalised. One must invest in more streets, houses, hotels or mortgages, or pay a penalty.

In the above comparison the various tables represent the global currency blocks. Streets, houses and hotels represent (maybe not so) risky assets. Obviously the bank represents Central Banks. The fine to repay the bank would compare to negative (real and even nominal) interest rates.

The Game can actually go on for as long as the players decide to borrow from the bank, as combined, they ARE the bank.

Until recently I still held the hope and belief that Central Banks would be able to “normalize” both interest rates and its leverage. The desired path would of course be to eventually return to my well-known normalcy.

Remembering the analogy I’ve now come to realize that Central Banks will never be able to ask back they money they provided the players, because the game would stop. The game cannot stop: that one would need to sell hotels to the losers to finance the repayment. The loss of wealth…

Or imagine another currency block winning. Someone would tweet: Very Bad. The biggest table fears that another table is racing for the valued trophy and decided to rig the game. It weaponizes tools that were meant for fair trade under the motto of a risk to national security (Tariffs), it is weaponizing IT (US recently decided to get offensive to Russia’s IT environment), it is refusing the training and servicing of jet fighters of co-creating country and fellow Nato member, Turkey. It is ready to put the climate at risk (breaking Paris accords). That is to name only a few of the ruses to win The Game.

This has some dire consequences for the REAL world. Real workers, earning a modest daily living, are not playing Monopoly. As a result they will never join the ranks of the asset owners. Their hard earned savings are put to work in a world with an increasing amount of negative yielding safe assets. They cannot afford the volatility of risky assets, because they learned the hard way during the housing crisis what it means to have negative equity. The divide between The Game Players and the rest will increase. And the non-Players get angry, very angry. Populism flourishes. Oddly enough in the US they choose the biggest proponent of The Game to represent them. The poor in the US that may have never travelled abroad think that if the players at their table win, they will be fed by magical trickle-down economics. If only they would realize that The Players at their table are standing on their shoulders and upping the odds. 

Ray Dalio recently described that capitalists are good at growing, but not sharing the pie. By the way followed by the equally true: Socialists are good at dividing the pie, but bad at growing it.

It’s a sad fairytale, but I guess I must accept that the world has changed beyond the recognition of my long time experience in markets. Assets may have become future liabilities. Charles Ponzi would be proud.