Billionaires Gone Wild: Why a Globalization-Fueled Art Bubble Spells Trouble For You and Me


Why should you care about the fetishes of the super-rich? Because what they’re up to could portend big trouble for the rest of us.  When gazillionaires go on art buying-sprees, past history suggests that certain bad things could happen.

Crazy at the Top

Globalization, as you have undoubtedly noticed, is creating massive concentrations of private wealth all over the planet. According to the Forbes Billionaires report in 2013, the ranks of the world's billionaires have swollen to all-time highs, counting both the number of billionaires (1,426) and record net worth ($5.4 trillion).

That’s a sign of rising inequality, which is bad. What the 0.01 percent is doing with the money is quite worrisome, too.

When extreme amounts of excess capital gather at the top, the rich will compete with each other and seek to super-size their status. But they have a problem: once you have the houses, the yacht, the helicopter, and so on, what can you do with all that cash? You could do something economically useful, like start a business that makes things that are actually beneficial to people. But that’s not what the new bumper crop of high rollers is doing, for all their praises of themselves as job creators. Far from job creators, they more interested in becoming speculators and pleasure-seekers.

For the Big Kahuna, nothing is so alluring as art, and right now, the art market is on fire. Freshly minted connoisseurs from every region of the globe have been engaged in bidding wars at Sotheby’s and Christie’s: buyers from Asia, the Middle East, and Latin America are competing with Europeans and Americans to get their hands on the hottest treasures. In November, auction houses beat all previous records when New York-based Christie’s unloaded Francis Bacon’s Three Studies of Lucian Freud for a cool $142.4 million and sold the priciest work by a living artist, Jeff Koons’ giant steel sculpture, Balloon Dog (Orange), for $58.4 million.

Lots of people see all this art selling for millions and imagine that the rich are simply making a smart financial investment. Not so, say researchers. Studying sales of art between 1972 and 2010, a group of finance professors demonstrated that art purchases only returned an average of 6.5 percent — about what you could expect from investing in bonds, but with far more risk.

Art is a weird commodity, as much about bragging rights and treasure hunting as it is about finance. The market for art really makes a mockery of the old efficient market hypothesis: it’s opaque, easy to manipulate, and price is often unrelated to quality. But it might tell us one thing: who is about to get screwed.

Bubble Trouble

You may say that big art sales are a good thing — artists have to pay their bills, and so do curators, gallery workers, museum professionals, and others involved in the show. But there are several signs that the art world is in a bubble that could burst not only in the faces of those folks, but the rest of us, too.

Felix Salmon of Reuters and others suggest that the art market is now reaching a dangerously speculative bubble stage, and you can tell because people are starting to flip out. Art-flippers like hedge-fund billionaire Steven A. Cohen (recently nailed for insider trading), appear to be in the process of unloading big works of art on the assumption that it’s time to get out of the market. That would make the current buyers feel like suckers if and when the bubble bursts, and it would wreak havoc on folks whose jobs depend on art sales.

But there’s something more. A couple of days ago, the legendary short seller Jim Chanos, who makes his money by spotting overvalued stocks, warned investors that they may need to be a little cautious right now — and if you have a pension or a 401(k) plan, this means you, too.

He points out that a sharp rise in the stock of Sotheby's has historic correlations to peaks in the stock market in general.

When there’s excess in the marketplace, he notes, Sotheby's stock often moves from about $10 to $50, then collapses. On Tuesday, November 19, Sotheby’s was trading on the New York Stock Exchange at $51.96, up substantially from $34, where it started in 2013.


The skyrocketing stock price of Sotheby’s, in other words, is a warning sign that the whole stock market may be overvalued and headed for trouble. Sophisticated traders might use this information to rearrange their portfolios and reduce their exposure, but that’s not so easy for the regular person, who may not know about this correlation, and even if she did, faces restrictions on frequent trading that may prevent her from moving quickly when trouble starts brewing. As usual, the little guy will get be left holding the bag when things blow up.

What’s happening in the art world is a symptom of a weakness in the world economy that economists are frantically trying to grapple with right now. Recently, Larry Summers made some remarks at an IMF conference that sent a lot of folks into a tizzy. He warned about something called “secular stagnation” — a phrase that strikes fear into the heart of mainstream economic thinkers. Secular stagnation is just a fancy term for a sucky long-term global economy. The reason it has the mainstream economists freaked out is that they were all counting on the economy returning to the pre-2008 mode of growth.

Ain’t gonna happen, unless we decide to do something other than shovel money toward the top.

Unfortunately, Larry Summers, and even Paul Krugman, can’t quite shed the old neoclassical economic models. Unable to face the reality that monetary policy is not going to fix things, they conclude the only way out of this mess is to promote asset bubbles, like the commercial real estate bubble of the Reagan years, to juice the economy. Big problem with this: asset bubbles distribute money toward the rich and leave the rest of us stranded. That happened with the dot-com bubble, and again with the recent housing bubble. Yes, some of the rich investors feel pain when an asset bubble bursts, but it is the ordinary investors who wind up really hurting, and many of them never recover.

Take the case of art: watching the rich invest to celebratory headlines, middle-class folks jumped into the game when prices were high, and they will be left with little more than nice (or even really ugly) things on their wall when the bubble goes bust (or not even that when the repo man comes). People further down the economic ladder will lose jobs when the economy shudders. And so on.

Promoting asset bubbles is a really dumb way of thinking about the economy and society. What we really want are policies that promote things like investment in infrastructure, education and jobs programs — the kinds of things that get the economy humming for everyone. That’s what we did in the post-war period, and it worked out very well, creating a robust middle-class and relatively low levels of income inequality.

What we need are jobs and economic justice. Not more bubbles and billionaires.

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