In order to understand the world of finance today – post-gold standard-, post- 2008 crisis-, zero rates- and QE- finance – it makes sense, sometimes, to turn to others than economists. A pertinent look from the outside may also bring to light some elements of comprehension. This is the case with Peter Thiel with his latest book, "Zero to One, Notes on Startups, or How to Build the Future", in which he offers several original and pertinent observations, especially on finance. Peter Thiel is well known – he is one of the great Silicon Valley entrepreneurs, founder of PayPal and Palantir, one of the early investors in Facebook, SpaceX and LinkedIn.
In his book, Peter Thiel talks about a very interesting notion, “indefinite finance”, which he describes thusly:
“The indefiniteness of finance can be bizarre. Think about what happens when successful entrepreneurs sell their company. What do they do with the money? In a financialized world, it unfolds like this:
- The founders don’t know what to do with it, so they give it to a large bank.
- The bankers don’t know what to do with it, so they diversify by spreading it across a portfolio of institutional investors.
- Institutional investors don’t know what to do with their managed capital, so they diversify by amassing a portfolio of stocks.
- Companies try to increase their share price by generating free cash flows. If they do, they issue dividends or buy back shares and the cycle repeats."
Nobody along the chain, at any moment, really knows what to do with the money. No one has any clear ideas for investing in the real economy – even businesses buy back their own shares. In this “indefinite” world, the players prefer what Thiel calls an “unlimited optionality”, meaning that money is more precious than whatever could be done with it. Money is no more a means toward an end, but an end in itself. This American entrepreneur abhors this way of thinking: “Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.”
What Peter Thiel does not mention, though, is that we are nearing the end of this logic with zero rates. This money that goes around is yielding less and less: hardly nothing on the bond market, still a little on the stock market (but for how long?), maybe a little here and there – emerging countries, commodities... oh, yeah, there is also high frequency trading, in which money changes hands at the speed of light... for nought. Nothing tangible there.
The end of the gold standard did away with the materiality of money. Gold is both money and matter, a real object that goes from mines to vaults. Money was freed from this weight, it has become electronic, it has inflated through debt, it has gone faster and faster for lesser and lesser yields... A word of advice: hang on to something real!
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.