Depending on which expert is talking, the world is either falling into a
deflationary abyss or launching an inflationary moonshot. What's truly weird and
fascinating is that they're both right. The mountain of debt taken on in the
past few decades exerts a profoundly deflationary pull on the economies of
Europe and Japan, and to a lesser extent the US. At the same time the torrent
of currency flowing out of the world's central banks is swelling the accounts
of the super-rich who are converting it into real assets as fast as they can,
causing near-hyperinflation in some favored markets. Hence the spectacle of
Paul Krugman (and most Fed governors) complaining about low inflation and
warning of a deflationary death spiral, while things like this are happening:
This evening Christie's brought in the highest-ever total for an auction,
at their contemporary sale in New York, grossing $852.9 million across 75
lots. That figure beat the sale's formidable estimate of $630 million to $836
million, and more than doubled the $343.7 million that its rival, Sotheby's,
brought in at its contemporary art auction last night. The previous record
for an auction was $745 million, which was set back in May at Christie's
contemporary art auction in the same room.
The sale saw new artist records for 11 artists, among them Cy Twombly, Ed
Ruscha, Peter Doig, Martin Kippenberger, Sturtevant, and Seth Price.
Seventy-five of the eighty lots on offer found buyers, for an impressive
sell-through rate by lot of 94 percent.
Andy Warhol's Triple Elvis [Ferus Type] (1960) and Four Marlons (1966)
sold early as lots 9 and 10, going for $81.9 million and $69.6 million,
respectively. By the time the second figure was reached, the crowd--whether
reeling from the action or no longer capable of being surprised or just no
longer impressed by anything under $80 million--forgot to clap.
To say it was a hot room would be to put things mildly.
This is not a story from a deflationary world. Nor is the parabolic arc of
trophy real estate prices:
A penthouse flat in a Primrose Hill development has broken
the area's record for the highest price based on surface area. The new build
apartment has an asking price of more than £4,400 per square foot, around
four times the average for the location.
The property is in the St Edmund's Terrace development, a luxury complex
by developer CIT featuring 36 flats and a separate two bedroom townhouse, all
overlooking Primrose Hill.
With a surface area of 3,600 square foot, the asking price for the
penthouse apartment is in the region of £15,840,000, while prices in the
block start at £3.8 million for a two-bedroom flat.
The most expensive London home by surface area - a penthouse overlooking
Buckingham Palace - is reported to have sold off plan this year for
significantly more than the previous record of £5,000 per square foot.
To sum up, this place costs (at the current USD/Pound Sterling exchange
rate) $6,900 per square foot, or $25 million for a 3,600 square foot
penthouse. And it's not even the highest-priced place in town.
There are dozens of similar examples from around the world of rich people
tossing ridiculous sums at shiny baubles. But the process is not random: Each
case involves presumably well-informed investors swapping financial assets
like cash, stocks or bonds for real assets that exist in limited quantity and
can't be replicated by desperate governments.
So throw out those economic theories that require inflation OR deflation.
Apparently we've entered a time in which both can exist -- and rage --
simultaneously. And until this case of financial schizophrenia is resolved,
wealth will continue to flow from deflationary sectors -- savers who earn
negative real rates on their cash, workers who see their wages squeezed below
the poverty line while their employers report record profits, local
governments with shrinking taxe bases that force them to close libraries and
fire teachers -- to the owners of real assets who see their wealth march ever
higher and who have little else to do but buy more toys.
Sounds a little like the days before the French Revolution.
