Tag: finance

Time-shifting wealth

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I’d always been under the impression that the financial system was in the business of transferring wealth between people. For instance, money could leave your pocket and go into a bank. From there, it could make its way to other places, like the stock market, eventually ending up in the pockets of scam artists. One day you’re the hard-working schmuck, the next you’re the conman, and another you’re the lender of a loan. But whatever the scenario, I thought of the entire system—money, banks, governments, pawn brokers, stock markets and all that sort of thing—as the medium over which wealth changed hands.

That’s what is really going on, isn’t it?

Earlier today, it dawned upon me that from the perspective of an individual (me perhaps, or a company, or even a country!), the financial system only serves one purpose: To time-shift our wealth.

When you have more money on hand now than you possibly need, you move it into the future with the help of the financial system. You do this through your savings accounts, investments and other things of that nature. Likewise, when you’re in need of money that you don’t currently have, you again turn to the financial system (loans, credit cards, etc.) to draw from your future wealth.

I am not sure if this insight I’ve stumbled upon is a well-established notion, but I find it pretty cool. Putting things in the perspective of the individual (me) clarifies to me why trillions of dollars are being spent salvaging financial systems around the world. We don’t just want to give the CEO of Goldman Sachs yet another gold-plated yacht, we are desperate to hold onto our ability to time-shift our wealth; ensuring our decisions aren’t determined entirely by how much money we have in our pockets at any given time.

A beginner’s guide to being evil

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Part 1: Short selling

  1. Let’s say BigWig has 10,000 shares of Apple Corp. (worth, say, $150 each).
  2. JoeWeasel approaches BigWig and requests to “rent” these shares for a week, for say $50,000.
  3. BigWig sees this as a good deal, for once JoeWeasel returns his shares, in effect, he’s received $50,000 “for free.” So he says OK, and gives his shares over to JoeWeasel.
  4. JoeWeasel then immediately sells these shares (at $150 each) and receives $1,500,000 for it.
  5. JoeWeasel then writes a blog entry about how Steve Job’s cancer has resurfaced (or he had a heart attack or whatever). Once the media picks up on this, there is mass hysteria and panic—and the perceived value of Apple Corp. drops. Consequently, a drop in its share prices follows; so it’s now, say, $100 per share.
  6. JoeWeasel then quickly buys back 10,000 shares at this new lowered price of $1,000,000 using the $1,500,000 he pocketed a couple of days prior; netting him $500,000.
  7. At the end of the week, JoeWeasel returns the shares and $50,000 as a renting fee to BigWig.
  8. JoeWeasel walks away with $450,000 for a week’s hard work.
  9. In a few days, people realise that JoeWeasel was lying about Steve Job’s cancer, and the Apple Corp.’s share prices correct themselves—returning again to $150 per share. So BigWig didn’t really lose either.

This sort of thing really hurts my brain.