Billionaire town!
Billionaire town! Charles Mudede
How to understand this madness? The combined wealth of two men in Seattle is now valued at $245 billion. One, Jeff Bezos, has $145.6 billion; the other, Bill Gates, now has $100 billion. The latter made nearly $10 billion last year alone. But any attempt to explain how this is at all possible, how a fortune of $90 billion grew nearly three times faster than the economy itself (2.9%) in 2018 (when one should expect, as the size of a fortune grows, that it, as a part, becomes more aligned with the whole—in the terms of population genetics, if this were not the case, it would be like radical founder effects thriving in a huge population) we must first abandon all of the leading ideas of orthodox economics.

The dominant thinking about money and wealth distribution almost all of us consume in newspapers, TV shows, and university classrooms will get us nowhere when it comes to the fortunes of Bezos and Gates.

The market, as neoclassical—standard—economics claims, does not signal the actual price or true value of something. It's not that kind of information processing mechanism. It has never done this. It will never do this. It has and will always just tell us the amount of risk that has entered a system. 200 years of booms and busts should make this fact as obvious as night and day. But it hasn't. And maybe the problem is the word market, like Pike Place Market, a place where sellers and buyers visibly meet and make things happen according to rules that are seemingly apparent. But in the real world, the laws are purely abstract, and therefore are cultural constructions that have their origin in political policies. The obscene fortunes of Bezos and Gates are not signs of a natural order but policy failure. The emotion proper to astronomical fortunes is not envy but the fear one feels when a plane is falling or a mass shooting has erupted. What the markets can only signal is how much political power will be needed to maintain the billions owned by a few when the excessive amount of risk built into their asset portfolios explodes.

Think of it this way: If risks are realized, this is called a crash; if they are ignored, this is called a boom. There is no other billionaire game in town than this expansion or explosion of risk. If you fail to understand this, you will predictably misread, say, the sharp spikes in rents for commercial and residential places. Or you will not understand why during a period of economic expansion, stores are empty or developers continue to construct luxury apartments when there is a hard and pressing demand for affordable ones.

Tracy Hadden Loh and Michael Rodriguez write in the article "Why is that house or storefront vacant?"

The financialization of real estate means that some of these properties are constrained by pro formas that require them to get a certain rent or default on their construction loan, or jeopardize their ability to refinance. This is common across all forms of income-producing property, including both commercial real estate like office buildings and residential product like multifamily rental apartment buildings.

The valuation of a building, and thus how much a bank will loan you on it, is based on the rental income. If your rents go down, your valuation goes down... This picture is further complicated by the embrace of real estate and infrastructure as asset class by portfolio landlords and equity investors. These finance giants can write off losses from one part of the portfolio against profits from another, increasing tolerance for vacancy.

This is not about supply and demand but a tolerance for risk.

When we read about Bezos's and Gates's hundreds of billions, do not think of it as the orderly money in your bank account or pocket or purse but as systematized risk abnormally inflating the worth of their fortunes. Meaning, when you learn two centibillionaires are in your town, you should freak the fuck out.