It would be a mistake to take billionaire spotting and gauging their wealth gap as anything more serious than Kaun Banega Crorepati.
Most religions try to steer people towards virtue and away from the pursuit of wealth by positing the impermanence of wealth. Proof of that proposition comes from the strangest of places: the rarefied ranks of the billionaires themselves.
Gautam Adani has overtaken Mukesh Ambani as India’s and Asia’s richest billionaire, with a net worth well over $100 billion. The gap between the net worth of the richest man, Elon Musk, and of the second richest, Jeff Bezos, has widened by over $100 billion. Mr. Musk, worth a mere $20 billion in 2020, is now worth $264.6 billion. The world at large has 2,668 dollar billionaires, according to Forbes.
Two kinds of people wake up in the morning wondering if the wealth gap between themselves and the billionaire next door had gone up while they slept. One lot comprises the insecure billionaires, touchy about their portrayal in the media, particularly in comparison with other billionaires. The other group consists of the inequality warriors, eager to pounce on any sign that fortifies their vision of a grim world of inexorable immiseration, never mind that globalised growth has helped more people climb out of absolute poverty than any previous form of organising production.
But even for us ordinary mortals, who belong to neither of these groups, these zinging billionaire headlines are a cause for concern. At one level, evanescence in the order and magnitude of the richest of the rich is perplexing. At another, it seems to erode the value of honest, hard work — if just the passage of a few weeks makes the wealth of some people go up by a factor of 10, what worth, mere toil?
Loose monetary policy
It is, therefore, useful to see the billionaires’ billions in perspective. These are mostly the result of loose monetary policy by the rich world’s central banks, and irrational investor expectations. If a billionaire sold a double-digit proportion of his stake in a company, his value would come crashing down. If another sought to borrow money by pledging her shares, the margin the bank asks her to put up would reveal the fluff in stock market valuation.
Rich world central banks bought assets worth some $9.5 trillion during the pandemic. Then, there has been additional fiscal support by the world’s governments. The U.S. fiscal effort amounted to 25% of GDP, forget the irony of the land of hostility to Big Government leading the world in pandemic support as a proportion of GDP. Margaret Thatcher’s political successors in the U.K. dished up support to the tune of 18% of GDP. Moody’s estimates the global average of fiscal support at 10% of GDP (India made do with less than 3% of GDP).
Part of the fiscal support is financed by asset purchases by central banks, so adding the two together to arrive at the total extra liquidity creation to keep economies afloat would entail double counting. Still, assuming that about 40% of the extra fiscal support was funded by means other than monetary expansion, the total amount of additional liquidity created to combat the pandemic would come to something like $13.5 trillion. With policy interest rates skimming zero, a lot of the additional liquidity found its way into the world’s stock markets, pushing up asset prices.
Low interest rates compounded the effect. The value of a stock is supposed to reflect the value at present of its future stream of incomes. That value depends on the rate used to discount future incomes. ₹110 next year is worth ₹100 today, if the rate of discount is 10%. That same ₹110 would be worth more than ₹104, when the discount rate is 5%, and over ₹107, when the discount rate is 2%. Bloated valuation of stocks as a result of ultra-low interest rates is one reason for the ballooning of billionaire net worth, and of the billionaire count itself.
Now that monetary tightening has begun, it would depress stock prices twice over: there would be less money sloshing around the capital markets, and rising interest rates would raise the discount rate applied to future earnings, deflating valuations. Expect billionaire net worth to deflate, along with the total billionaire count.
Investors’ sentiment
Then, there is the problem of unreal expectations in jacking up the price of stocks. We are all familiar with the phenomenon of meme stocks in the U.S. The GameStop saga hinged on investor sentiment, fuelled by social media, and not the ability of the company to generate revenue and profits.
The richest billionaire Elon Musk’s net worth depends on sentiment more than in the case of others. Tesla, Mr. Musk’s company, is a pioneering electric car maker, no doubt. No, Mr. Musk is not a founder, but had the sense to buy into the company, and then hijacked its management. Just one tweet from Mr. Musk about his interest in a new cryptocurrency is enough for its value to surge.
Tesla is valued more than all other major automakers combined. This valuation makes no kind of economic sense. Electric cars are the cars of the future, sure, but every mainstream car maker also has strong plans for going electric. There is no real reason to expect Tesla to corner the market on a scale that would justify its astronomic valuation. Tesla’s trailing twelve-month earning per share stayed negative from 2011 onward, and turned positive only in June 2020, when its price-earning ratio was 511. The P/E soared to over 1,100 by end-2020. It has tanked to 212 by April 12, 2022.
But what of Mr. Musk’s space venture? It has a viable business, no doubt, but SpaceX is privately held as a separate company. So are Neuralink, the brain-computer interface company, and the tunnel-making Boring Company. Their future prospects do not directly enter Tesla’s valuation. But Mr. Musk’s boosters hint at a holding company for all Musk enterprises that would be valued at $3 trillion. And so it could, provided Mr. Musk tweets the right stuff precisely when his worshipful investors smoke the right stuff.
Billionaire net worth depends on reversible policy action by central banks and governments, and on investor sentiment. Now, some hold the wisdom of crowds to be superior to the wisdom of the discerning. This is balderdash, whether in the case of lynch mobs or stock market bubbles. Every stock market bubble — from the Tulip mania of the 1630s and the South Sea Bubble that burst in 1720 to the tech boom of the late 1990s — has been the creation of crowds.
How seriously should we take the billions produced by reversible policy and the greed of crowds? The answer, as they say, is blowing in the wind — strong wind, one should add, in these times of extreme weather events.
(TK Arun is a senior journalist and columnist)
Published - April 18, 2022 12:30 am IST
