The Economics of Nihilism
Posted on January 8, 2010
The incredible thing about the financial crisis appears to be that whenever some hard evidence of fraud surfaces, financial stocks soar higher. Of course most intelligent people realized quite awhile ago that the crisis was simply an impetus for the largest fraudulent “transfer” of wealth in human economic history. One accepts that fact, and moves on, hoping at least to garner some wealth for oneself. Nevertheless, one would still expect that as details emerge of the fraud, and the continued printing of money for purchase of totally worthless securities becomes more transparent, stocks should drop dramatically. However, that has not been the case.
For example, when it was finally disclosed that GS got paid 100% on their worthless CDS via the bailout of AIG, GS stock proceeded to triple. Then, when the government mandated accounting fraud at the banks and reported meaningless stress tests, the banks stocks started a massive rally. And then just yesterday, as it came to light that Geithner instructed AIG to withhold critical information from public filings, once again financial stocks, like GS took off.
I’m not sure what to make of this action, other than to call attention to a new principle, I call, the economics of nihilism. Though I’m not exactly certain yet how the principle functions, it seems clear that as financial assets become divorced from any rational measures of value, and they are proven to be of worthless value, the prices of financial assets soar. It’s as if investors are relieved to have finally shaken off the shackles of rationality from the pricing of financial assets. Without the burden of rationality, or risk/reward, prices of infinity can be easily justified.
As to why nihilism doesn’t move prices towards zero, as opposed to infinity, that is a topic for another post. However, I suspect that since economic nihilism provides no justification for either price extreme, it is in the interest of the financial players to moves prices in a direction that provides the greatest profit. But, I also believe that there must be some psychological mechanism at work, where things of proven worthless value, actually become the highest valued objects in society. Incidentally, the price of gold throughout history seems to prove the existence of this mechanism, given the fact that gold has little practical value other than as a means of financial speculation.
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