the fickle billions of our super-rich

It would be a mistake for a billionaire to take anything more serious than recognizing and estimating his wealth gap. Who wants to be a millionaire,

Most religions try to lead people to virtue and away from the pursuit of wealth by showing the impermanence of wealth. The evidence for that proposition comes from the strangest places: the rare ranks of billionaires.

Gautam Adani has overtaken Mukesh Ambani as the richest billionaire in India and Asia with a net worth of over $100 billion. The gap between the net worth of the richest man, Elon Musk, and the second richest, Jeff Bezos, has exceeded $100 billion. Mr Musk, who was worth just $20 billion in 2020, is now worth $264.6 billion. According to Forbes, there are a massive $2,668 billionaires in the world.

Two kinds of people wake up in the morning and wonder if the wealth gap between them and the billionaire next door has widened while they sleep. A lot includes insecure billionaires, poignant about their portrayal in the media, especially in comparison to other billionaires. The second group consists of warriors of inequality, eager to pounce on any sign that reinforces their vision of a grim world of harshly baseless, no matter the extent to which globalized development has changed the way we organize production. It has helped lift more people out of absolute poverty than in any previous form.

But even for us ordinary mortals who don’t belong to any of these groups, these zingy billionaire headlines are cause for concern. At one level, the volatility in the order and magnitude of the richest of the rich is puzzling. On the other hand, it seems to dilute the value of honest, hard work – if some people’s wealth increases by a factor of 10 by the passage of a few weeks, what value, mere hard work?

loose monetary policy

Therefore, it is useful to look at billions of billionaires in perspective. These are mostly the result of loose monetary policy and irrational investor expectations by the central banks of the rich world. If a billionaire sells a double-digit ratio of his stake in a company, its value will decrease. If someone else wants to borrow money by pledging his shares, the margin the bank asks him to give will reflect the volatility in the valuation of the stock market.

The rich world’s central banks bought assets worth about $9.5 trillion during the pandemic. Then, additional financial aid has been given by the governments of the world. US fiscal effort was 25% of GDP, forget the irony of the land of hostility towards the big government leading the world in pandemic support as a proportion of GDP. Margaret Thatcher’s political heirs in the UK supported 18% of GDP. Moody’s estimates the global average of fiscal support at 10% of GDP (India has made up with less than 3% of GDP).

A portion of fiscal support is financed by asset purchases by central banks, so adding the two together to arrive at the total additional liquidity creation to keep economies afloat would do a double count. Still, assuming that about 40% of the additional fiscal support was funded through means other than monetary expansion, the total amount of additional liquidity created to tackle the pandemic would be something like $13.5 trillion. With policy interest rates down to zero, a lot of excess liquidity found its way into the world’s stock markets, driving up asset prices.

Lower interest rates compounded the effect. The value of a stock reflects the present value of its future income stream. That value depends on the rate used to discount future income. The cost of ₹ 110 is ₹ 100 today, if the rate of discount is 10%. The same value of ₹110 will be more than ₹104, when the discount rate is 5%, and more than ₹107, when the discount rate is 2%. The bloated valuation of stocks as a result of ultra-low interest rates is one reason billionaire net worth balloons, and billionaires count.

Now that monetary tightening has begun, it will drive stock prices down twice: There will be less money around the capital markets, and rising interest rates will increase the discount rate applied to future earnings, lowering valuations. The total wealth of billionaires is expected to decline along with the total number of billionaires.

investor sentiment

Then, there’s the problem of unrealistic expectations driving up the price of shares. We’re all familiar with the meme stock phenomenon in the US. The GameStop saga, fueled by social media, rests on investor sentiment, not the company’s ability to generate revenue and profit.

The net worth of the richest billionaire Elon Musk depends more on emotions than others. Tesla, Mr. Musk’s company, is no doubt a leading electric car maker. No, Mr. Musk is not the 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 the new cryptocurrency is enough to increase its value.

Tesla is valued more than all other major automakers combined. This valuation does not carry any economic meaning. Electric cars are the cars of the future, for sure, but every mainstream carmaker has strong plans to go electric, too. There’s no real reason to expect Tesla to corner the market on a scale that would justify its astronomical valuation. Tesla’s twelve-month earnings per share has been negative since 2011, and only turned positive in June 2020, when its price-earnings ratio stood at 511. The P/E exceeded 1,100 by the end of 2020. This has come down to 212 by April 12, 2022.

But what about Mr. Musk’s space venture? It has a viable business, no doubt, but SpaceX is kept privately as a separate company. So are Neuralink, the brain-computer interface company, and the tunneling boring company. Their future prospects don’t enter Tesla’s valuation directly. But Mr. Musk’s boosters point to a holding company for all Musk enterprises that would be valued at $3 trillion. And so it can be, provided Mr. Musk tweets the right stuff at the exact time his adoring investors smoke the right stuff.

The net worth of billionaires depends on reversible policy action and investor sentiment by central banks and governments. Now, some consider the wisdom of the crowd to be superior to the wisdom of the wise. This is baldness, whether it is a case of lynch mobs or a stock market bubble. Every stock market bubble – from the tulip craze of the 1630s and the South Sea bubble that erupted in the 1720s to the tech boom of the late 1990s – has been the creation of a crowd.

How seriously should we take the billions generated by the reversal policy and greed of the mob? The answer, as they say, is blowing in the wind – strong wind, one must add, in times of these extreme weather events.

(TK Arun is a senior journalist and columnist)