OUT OF THIN AIR

I have a couple of mostly dormant brokerage accounts. In the past – before I went to grad school – I traded moderately actively, albeit on a small scale as befitted my income. Since I no longer have the time to devote to proper research (and buying stocks without that is essentially throwing money away) I don't do it much anymore. Over the summer I was able to give it a bit of attention, and in August I was able to execute a couple of trades that returned about a 50% profit in 2-3 weeks.

Lacking great amounts of capital, any transaction I could make in The Market is totally, almost unfathomably inconsequential. With literal trillions of dollars being moved around electronically on a daily basis, the dollar amount I bring to bear on the world financial markets is less than a spit in an ocean. I don't even register.

That said, I've found over time that my tolerance for the absurdity of the whole enterprise is in decline. Every time I make a profitable transaction now, I can't stop thinking, "Why do I have more money now? I didn't do anything." And I didn't. Nobody who plays this game does. It is a world in which nothing is produced and destroyed except money itself. One day you buy something for x dollars. The next, you sell it for 1.5x. Your personal profit is money created out of thin air.

And this, on a much larger scale, is the dominant profession of our financial (and social, and political) elite. They create ever more complex financial instruments out of other intangible financial assets and then they sell them to one another and everyone walks away with money even though nothing happened. The old saying about the stock markets being a form of liar's poker is a lie inasmuch as poker is a more legitimate enterprise. Real money changes hands between real people performing a transaction with a payout agreed upon in advance.

These people – our Producers, our Galtian heroes, our Job Creators – are people who don't actually make, create, or produce anything. It's all blips and clicks and algorithms and trades programmed to self-execute when defined parameters are met. It takes knowledge and a specific talent to do this successfully; that is indisputable. Regardless, I can never wrap my mind around how…intrinsically worthless are the "assets" involved in this game. The only thing that the hedge fund manager or the day trader creates is personal wealth. He buys something, sells it to someone else for more than he paid for it, and the buyer attempts to repeat the process. It's not a zero sum game. Inflation? Hell, the game of buying low and selling high can, in theory, continue indefinitely.

If it did, it still wouldn't create anything except personal profits. This brings us to familiar territory, to the cornerstone of the New Economy: servicing the personal consumption of the financial elite. They might not "create jobs" in the direct, tangible sense that the robber barons did, but think of all the peons needed in the service industry to tend to their mighty needs! Every time Chad from Harvard Business School makes a killing, another hotel chambermaid on St. Maarten is born. Another personal assistant rises from the Earth. Behold the mighty act of creation! Our economy is indeed a thing of splendor.

It should come as no surprise that an economy firmly rooted in nothingness has high levels of poverty and unemployment. The very rich and the very poor have in common that they do nothing. They simply are compensated differently for it.

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37 Responses to “OUT OF THIN AIR”

  1. Misterben Says:

    Terrific column, and this will stand as one of your most striking concluding paragraphs:

    "It should come as no surprise that an economy firmly rooted in nothingness has high levels of poverty and unemployment. The very rich and the very poor have in common that they do nothing. They simply are compensated differently for it."

  2. J. Dryden Says:

    Yet surely the very poor *would* do something if the very rich would permit them.

    I realize that economic despair breeds lethargy that the heartless often mistake for laziness (and may God damn the first racist who came up with that slur on those beaten into learned helplessness by systematic disenfranchisement and doubly damn the first listener who agreed with him), but can't we agree that the poor would do more if they could?

    But without education–just the basics of math and economics and access to the internet would allow just about anyone the opportunity to build a portfolio–or the income to allow such moderate amounts of discretionary investment–what the fuck else can they do but become a class so entirely defined by impoverished service that the "wage" in "wage slavery" seems like an insulting distinction without a difference?

    I dunno–maybe it doesn't look so bad to people living outside the Rust Belt (where Ed and I are, though geographically quite disparate.) But I can't imagine it looks great anywhere from Santa Fe to Sarasota.

    Ah well, we can still make meth. Lots and lots of meth.

  3. middle seaman Says:

    A lot of the stocks traded come from pension funds. That's is your and my money. The financial elite gets the permission to play with our old age income.

    Meanwhile, as citizens we vote in large numbers which is supposed to allow us to curtail the create nothing activities. Our representatives, however, get bought by the do nothing elite and give us the finger.

    Sometime, the do nothing want to have a war to move more money in their direction. We then go to war and the people who die in the wars are our impoverished people.

    So the do nothing actually do a lot, but not a lot of good.

  4. Gordon Says:

    Wonderful piece, evocative of some great images. Thanks

  5. Arslan Says:

    You should check out this guy named Marx some time. He had this pegged back in the 19th century.

  6. Talisker Says:

    Any market is supposed to be about efficient allocation of resources. A blacksmith can make farming tools and trade them to a farmer for grain. But the blacksmith doesn't want to mill his own flour and bake his own bread; blacksmithing is a much better use of his time and skills. So instead he sells tools and buys bread from a baker. "Money" is a convenient abstraction to enable this. It doesn't matter if the "money" is represented by silver coins, printed paper, or electronic data structures, so long as everyone in the marketplace agrees that it has value.

    So even this simple farming village depends on something totally abstract which has value only because people believe it does — pretty close to "nothing", in Ed's formulation.

    Scale up in size, specialization and technological advancement, and you have our complex economy. What a stock trader ideally "does" is allocate more resources to a company which can make good use of them. "Resources" are represented in the abstract by money, but in reality are things like raw materials, buildings, and human work. Widgets Incorporated has just launched the awesome HyperWidget, but needs to invest in bigger factories and better marketing. Ideally, their share price rises, they get more money to invest in production, and ultimately their stockholders get a return on their investment.

    The reason Ed makes a profit is that (a) he did some research on good companies to invest in, and (b) he has capital (ie. money) to buy shares with. One of these qualities would have been useless without the other. It may be unfair but it is at least clear.

    That's the ideal. Reality is a lot more messy and complicated, with imperfect information, speculative bubbles and rank dishonesty. Asset prices change in fractions of a second, with little or no connection to anything in the real world. Meanwhile our current financial elite have massively rigged the market in their favour, with insanely complex financial instruments being just one of many tools for doing so. As a result they get more money, which (a) is useful for further rigging of the system, and (b) helps them accumulate still more money, even *without* additional cheating.

  7. Anonymouse Says:

    Like many people, I work for a company that offers a 401k plan with a minute amount of matching funds. We have no choice in what stocks we have; that belongs to the company that my company hired to manage the 401k. We've been losing money for about 3 years now and I've stopped contributing to the 401k because I get a better Return On Investment just putting my spare change in a sock under my bed. At least that money doesn't disappear down a rabbit hole. And I'm not charged a "management fee" for the sock-under-the-bed money, as opposed to the 401k finance company.

    Remember when Chimpy the Wonder President wanted to dump Social Security into the stock market? Yeah, that would have worked out REALLY well, wouldn't it?

  8. Talisker Says:

    To sum up my lengthy comment above: The problem with our economy is not that it's based on nothing; but that manipulation of the nothing is so much more richly rewarded than productive activity.

  9. jazzbumpa Says:

    What you are describing is rent collection in it's purest and most advanced form. The assets being traded have been reduced [or raised - i'm not sure which] to the level of abstraction.

    The putative market value of sophisticated derivatives that no one can rationally evaluate is a large multiple of global total GDP.

    It's fucking insane, totally non value added, and siphons money away from real investment – to the impoverishment of us all.

    The only thing you get wrong is that the came cannot go on indefinitely. A day of reckoning always comes, as it did in 1929, and 2008.

    WASF!
    JzB

  10. c u n d gulag Says:

    Even the fictional John Galt made something.
    Most of the previous non-fictional uber-rich in this country, got wealthy by inventing things, or by building and running railroads, car companies, shipping firms, etc.
    For the most part, they made something.

    Now, often it's not what you make, or even what you know, but who you know.
    Connections from expensive prep schools and colleges are the key to getting the job you want. – that you expect, from going to those schools.

    And speed and information are capital.
    And the sooner you have the information, and the more information you have, the better you/your company can perform.

    Here's an article by the great Matt Taibbi about how some companies and individuals are "gaming" the system, by getting information before other people do:
    http://www.rollingstone.com/politics/blogs/taibblog/16-major-firms-may-have-received-early-data-from-thomson-reuters-20130905

    Today, our uber-rich come to the financial craps tables with loaded dice, and to the blackjack tables with stacked decks of cards.

    And then, when they inevitably win, they not only don't want to tip the croupier's, they're pissed when the croupiers and the rest of us plebes don't laud them and their efforts, and hail them as far superior to the rest of us.

    Not only do they want all of the money, they want – no, expect – us to love and respect them when they rob us blind, and horde their crumbs.

    Oh, and if those "people" aren't bad enough, and you want to meet the lowest of the low human vermin, look at these "investor's" who buy-up municipal tax liens on people, and then force them out of their homes when they can't pay the interest and late charges they tacked onto the original liens.
    This 76 year-old man originally owed $134 on a property tax bill, and was forced from his home. The "investor" (SOCIOPATHIC VULTURE!!!) gets to keep the money when the house is eventually sold.
    Not a bad payback for whatever it cost them to buy that $134 "investment."

    Don't oil the tumbrels, say I!
    And leave the axes and guillotines nice and rusty and dull.
    A quick trip to the executioners block, and one whack, is far too merciful.

  11. Major Kong Says:

    Might as well just go to Vegas and throw it all down on red at the roulette wheel.

  12. c u n d gulag Says:

    Ooops!
    Forgot the link to the article about those sociopathic vultures – aka: "investors."
    Here it is – and try not to think about wanting vengeance:
    http://www.washingtonpost.com/sf/investigative/2013/09/08/left-with-nothing/

  13. Hazy Davy Says:

    The classic answer: you helped to make the market more efficient.

    You created something in the same way that a piano tuner creates something.

    [Not that I believe that...]

  14. Stefan Says:

    Its like coin clipping. Except that clipping used to be illegal and people were burned to death sometimes.

  15. Arslan Says:

    As long as all the fictitious value is eventually redeemed with real commodities, the system works. As soon as it can't, you get a crisis.

  16. Dave Dell Says:

    We're on a downhill slide. The creation of "real wealth" that "made America great" was achieved by the abundance of virtually free natural resources and easily exploited labor. Millions of acres of "empty land" covered with a seemingly endless supply of top quality timber, abundant good water and good topsoil teeming with ready to "harvest" animal life.

    All used up except the easily exploited labor.

  17. Totoro Says:

    As the good major said in other ways, what you were doing was "day-trading". Good news, you made money. It could have gone the other way. Those of us who have invested in the long-term growth of companies use the same financial system you use. Predicting short-term price movements is perilous. Predicting which companies are likely to be worth more (because they did something useful) 10 years from now is much easier. I agree that there are people abusing the system for their own financial gain. The solution is to fix the system with things like transaction taxes to cut down on the number of trades/day. Another solution is to ensure that folks don't get immediate profits for something which kills the company 3 years from now. Not easy to implement, but better than walking away muttering "the game is rigged".

  18. GunstarGreen Says:

    And thus the fundamental hypocrisy at the core of The American Dreamâ„¢: hard work is supposed to be the path to success, but once you/your family's value gets above a certain threshold, the need to work to attain success is eliminated. Saving up a million dollars is damned hard if you don't have any to start with, but once you have that million dollars it's relatively trivial to invest it through one instrument or another for 5% ROI and have a permanent yearly income of $50,000 — about 25% more than the average full-time American worker. While most other people work their asses off for 40+ hours a week every week of the year, you sit on your ass doing nothing and make more than them. And if you decide to continue working on top of that? The game just tilts further and further and further into your favor, until eventually your children grow up having a permanent, guaranteed income FAR above the average wage in this country without ever having worked a day in their lives.

    Thus are born the modern American aristocrats, a.k.a. the business and political class. Executives get paid millions of dollar a year for running companies into the ground because they expect to get a shitload of money for no work — that's how it's been their entire lives. That's how it will be for their children, and so on down the line, generations of permanently-installed privilege and guaranteed wealth without effort. Meanwhile the average American scrabbles in the mud for scraps, and somewhere around half of them gladly prop up their modern-day bourgeoisie in the vain hope that one day, they too will be part of that class.

    No word yet on when this nation will have its Antoinette moment.

  19. Anubis Bard Says:

    Double, double toil and trouble;
    Fire burn and cauldron bubble.
    Cool it with a baboon's blood,
    Then the charm is firm and good.

    (Wm Shakespeare, Macbeth)

  20. HeidiB Says:

    I'm with Talisker on this one; ideally, the stock market serves a valuable function. When are you going to take on realtors? Now there's a group of people that produces nothing, and gets a 7% commission! It's an inflationary factor that's never discussed. BTW, sorry about the Cardinals.

  21. Well mostly Says:

    The stock market is to business what a fantasy football league is to football. Real teams have to crank it out. Players really play. Coaches really coach. Fans really drink beer. You have to be inside that system to participate or benefit. Anyone with a computer and a four hour erection can get in on the fantasy thing: thousands of times as many people, unlimited size and action. A way to get the thrills without the concussions.
    Once a company has sold stock into the market that's all it gets to work with. There are a few exceptions, but then the company has to really do stuff. Any action on a stock after that time is in the fantasy league of the market traders. Unless you are Warren or Carl or Bill, you don't own shit of the company assets. You've got a baseball card and you only make money if someone else wants your card enough to buy it at a profit to you. There is none of the so-called efficient allocation of resources going on after the stock goes into the market. Big myth. Ed's right: the card traders don't really do anything, they certainly don't play ball. But it is a way to let men with "issues" get busy with their big swinging dicks. And if they're big enough they have others manage their card collections. Then they are then two levels of abstraction away from anything real. That's the sweet spot for many. Idle, profitable and far removed from grinding out runs in the late innings or points in the fourth quarter Those are the folks who can hire us?????? Or not. And why would they want to get involved in the gritty day-to-day when they don't have to? By comparison the industrialists of yore look like manual laborers.

  22. jazzbumpa Says:

    Talisker has it exactly right, but i can't agree with HeidiB. We're trying to sell my late mother-in-law's house, located 75 miles away in another city in another state. We can't possibly do this ourselves. And the example doesn't have to be that extreme. Realtors have access to MLS and provide a lot of specific expertise that the rest of us don't usually have. It's a valuable service, and well worth paying for.

    Different story on the stock market. The average holding period is less than 30 seconds.

    Volume for the SP500 last Friday was 3,123, 880,000. Volumes in early Sept, 1953 were around 1,000,000. That's more than enough to provide all the liquidity a market needs. Today's volumes are 3000 times higher. That's pennies being skimmed out of the real economy into the hands of finance corporations the uber-wealthy thousands of times per day.

    Finance serves a valuable purpose, but it's become a dog wagging exercise in last several decades.

    http://angrybearblog.com/2012/01/where-has-all-money-gone-part-ii.html

    Also consider, if you have a $10 million stash, you can buy municipal bonds paying, say 3% and receive $300,000 a year, tax free, while doing absolutely nothing.

    I think I'll have another mai tai.

    JzB

  23. Matthew Says:

    Actually, the increased volume is helpful to the little guy as the bid/ask spread is basically 0 now (i.e. when you buy or sell a stock, you get the "market" price).

    The amount of rent being extracted by the high freq traders is not 3,123 times more than it was in 1953; they're fighting over a shrinking pie.

    The downside is increased fragility where we sometime have to "pause" or "reset" the market when the algorithms make mistakes.

  24. Dick Nixon Says:

    Speculators must be birds of the air: they neither sow nor reap–they simply gather up grain.

  25. ladiesbane Says:

    I'm sure I'm missing something — short night, long day, homework ate my brain — but are you talking about buying cheap and selling dear? The process you are describing sounds like when I buy a used book for $5 and sell it on eBay for $250. I did nothing, right? Except apply expertise learned during hard years as a book scout, which allowed me to identify a winning item, buy it at the offered rate, and sell it online. No one has to buy it, but they do, and I turn a hefty profit. I also risk losing money on the deal, which no one seems to think is unjust or appalling.

    (NB: when individuals offer to sell me their books for a pittance and I spot a gem, I notify that individual of the potential value and recommend they eBay it themselves. It's fair to assume businesses know their stuff; it's not fair to profit from a private individual's lack of expertise.)

    Or, better: my grandparents used to sell their excess potatoes to the regional broker. They got the going rate, but the broker merged our produce with all the other small farmer lots and wholesaled it all to a grocery chain for a good chunk of change. Our crop alone wasn't worth more than a few bucks a bushel, and once the root cellar is full, it's better to get extra cash than smell rotting potatoes. Why shouldn't the broker who bought our excess make money on his end of the transaction?

    As these transactions get larger, the concepts seem more abstract, but please tell me the material difference. I'm not being snarky or rhetorical, I'm just tired and not seeing it. Sorry to be dense, but it seems like the confusion lies with the fact that you are not using a wheelbarrow to move potatoes, but you are pushing electrons representing potatoes. Potatoes = money = work = stuff = services, right? These things are all bought, sold, and traded, and they are represented by blinking symbols on a screen. But they are not figments of the imagination. Your earnings or losses are as real as the things traded.

    Have you ever owned a business that involved buying or selling stocked merchandise, or one which employed other people? I'm just curious.

  26. Mo Says:

    ladiesbane -

    Read Matt Taibbi's chapter on commodity markets.

    And beware of making simple analogies to your own economic experiences, the stuff doesn't necessarily scale. As Paul Krugman frequently laments, running a country is not the same as balancing one's checkbook.

    Also beware the notion that economics can be sorted out with five minutes of contemplation, just as teabaggers like to do with global warming. You know that's not true. Vested interests manipulate information and lie just as the tobacco companies did. But there is a body of expertise that's been developed and that can be profitably mined. I follow Krugman's Krew for the trail to the diamonds.

    [as for me, with regard to your last question, yes.]

  27. Bitter Scribe Says:

    Ever read the passage in "Bonfire of the Vanities" where the bond trader hero or antihero or whatever he is tries to explain to his 7-year-old daughter just what it is he does for a living? I find it hilarious, and I don't even like Tom Wolfe much.

  28. Tor user Says:

    Ed's seeing the light re: parasitic jews.

  29. Phoenix Justice Says:

    Instead of investing in tangible items that can help provide for the future such as public infrastructure and public education, our nation is focused on investing in the intangible. Instead of making tangible items we are focused on making intangible wealth. That is all the bankers and the "trillies" are doing is creating more wealth and then protecting that wealth from the other 99%.

  30. Arslan Says:

    Tor user, you realize the overwhelming majority of stock traders aren't Jewish, right?

  31. Lepto Says:

    ladiesbane has it basically right. Obviously if a pension fund or private equity firm takes a large stake in a company, that can have a significant impact on the "real" economy via capital available to the company, forced changes to the board of directors, etc. etc. "The only thing that the hedge fund manager or the day trader creates is personal wealth." I mean that sentence is trivially false.

    It's hard to tell what activity you're specifically objecting to. I mean, "elites," banksters, right, but what exactly? Is your complaint about scale? Fine, one dude putting around in an E*Trade account doesn't matter to the "real" economy, but then neither does one individual consumer at the supermarket. Is your complaint about holding period? Fine, show me the bright line that separates a 30-year investment in Berkshire Hathaway from a five minute flip of AAPL shares. When does the financial activity morph from "respectable investment" to "eeevil nothingness"?

    I work in financial markets, was educated in philosophy and political theory, and consider myself firmly on the left. This post and most of the comments so far are a great example of why the left makes no progress in this country: you'd rather indulge in a lot of distracted moralistic hand-waving than learn some details about the structures you're trying to critique. Trade in your Matt Taibbi for a textbook or two and your arguments will go a lot farther.

  32. ladiesbane Says:

    Thanks, Mo. I've enjoyed what I've read from Matt Taibbi, and I appreciate that you have expertise in the area. My ex-husband was a business owner who very patiently explained economies of scale and so forth to me — which was illustrated nicely when the independent used/new bookstore where I worked was largely squeezed out of the new book trade by Costco and WalMart, who could afford to offer new bestsellers for less than cost as a marketing strategy. They also received a lower wholesale cost than we did for buying in bulk. And that was in the early 90s, after the S&L debacle and before the Bubble Era.

    But commodities are a separate animal. Which relates to my example, not Ed's, and I do realize the danger in analogizing. But I remain unilluminated at the crux of my question: how is Ed's small-scale online trading a business in "nothingness"? How is it different from potato brokerage? Why is one despicable and the other…not? And how is my analogy improperly universalizing but his isn't? Again, serious questions from a non-econ person.

    Or does the "business in nothingness" idea relate to the fact that gambling (small scale trading being little different from betting on horses) does not seem to involve production, trade, sale, or other transfer of goods? Except that it does, of course, if you believe that money can be a marker for the work you do, and the work you do is as real as digging potatoes.

  33. Da Moose Says:

    When 4 out of the 5 top tech news stories on Google news are about the latest iphone release, you know you are living in the Second Dark Ages.

  34. Frank in midtown Says:

    Your arms and legs demand the immediate removal of your brain, as it does nothing but use up all the glucose and oxygen.

  35. Tom Says:

    This blog is such a fuckin' circle jerk.

  36. ladiesbane Says:

    Tom, a lot of folks do frequent the joint because they love the content. I do, myself. But since my own direct experience as a commenter here has included arguments, insults, name-calling, misunderstandings, and plaintive-if-fatigued questioning, I really wonder what your circle jerks are like. "Homer, I don't know what you have planned for tonight, but count me out."

  37. Phoenician in a time of Romans Says:

    @Talisker : What a stock trader ideally "does" is allocate more resources to a company which can make good use of them.

    This would be the case if one party in the transaction was the company.

    The vast majority of the time, it is not. When Broker X buys shares of Company A from Person Y, and sells them to Person Z for a profit, Company A sees hide nor hair of that money.

    If you wish to propose restricting the stock market to transactions where the company involved must be either buying or selling its shares, go for it. Despite the screaming involved, that may work better than the current system.

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