Saturday, April 28, 2012

That's just how capitalism works

An asteroid worth $20 trillion, and people who want to mine it:

Planetary Resources is the asteroid-mining company launched Tuesday in Seattle, with backing from Microsoft and Google billionaires, along with the equally prominent James Cameron and Ross Perot Jr. Its object is to completely dismember poor little rocks like Amun.
That’s because Amun is a goldmine — well, not gold so much. But it does contain a cool $8 trillion worth of platinum, an essential precious metal used in everything from jewelry to fuel cells to computers (and one that’s currently trading at the same rate as gold — $1500 an ounce.) On Earth, only a few hundred tonnes of the stuff are produced every year...He also found 3554 Amun to contain another $8 trillion in iron and nickel, and a mere $6 trillion worth of cobalt. So, the total payout from one unassuming asteroid? $20,000,000,000,000.
That’s what got Planetary Resources co-founder Peter Diamandis so excited. “There are $20 trillion checks up there waiting to be cashed,” he enthused at a space development conference in 2006. 

Of course, there is no real sense in which this asteroid is worth $20 trillion, and I'm not talking about the article's questionable arithmetic.  For some perspective, that's larger than America's entire GDP of $14.6 trillion.  I think we can safely say this supply shock would have a massive downward effect on market prices.

Ah, a concession:
Of course, there’s a catch. You couldn’t offload all those metals on the world market at once, for fear of crashing their prices. But the company would still own that much in equity, which would allow them to borrow against it. They would be that wealthy, to all intents and purposes. That’s just how capitalism works. 
Okay, that's just not how capitalism works.  You're telling me that if I own this space rock, worth $20 trillion only if I don't do anything with it, someone will be willing to loan me $20 trillion, because after all, if I default on the loan, they can have my rock which is worth $20 trillion so long as they don't do anything with it?  And where does this lender come up with the $20 trillion? Certainly not from Arun, which we aren't allowed to actually use in any way.  And if we can't even use this wonderful new space rock to augment our wealth, we're stuck with the fact that nobody actually has $20 trillion.  Add a few of Arun's friends and we quickly surpass the entire wealth of the world!  I mean, suppose I am magically able to sell a few of these asteroids and I end up with $1000 trillion.  Then I can buy, what, more goods and services than actually exist in the world?  Incoherent.  You can't buy things that don't exist.

You can't create value from nothing.  If someone tells me a rock is worth $20 trillion, I want to know where the value is coming from.  What is the real value of this rock to our society?  The answer has little to do with the current market price of platinum.  This asteroid's real value comes from the productive uses to which it will be put, now or in the future.  If a few of these rocks land on earth, will it magically double our standard of living?  Will we magically have twice as much food because everyone is so rich in precious metals?

Platinum is not a "fundamentally" valuable object.  I feel like this asteroid would normally be the hypothetical construct of a reductio ad absurdum argument to make this point, but somehow the point needs to be made even in a discussion about the actual asteroid.



Of course, smart investors may still want to mislead others into thinking Arun is a $20 trillion find.

3 comments:

  1. Exogenous CombustionApril 29, 2012 at 9:53 AM

    I think the best way of saying this is that the price of any stock should be the net present value of its future stream of dividends forever.

    I think (perhaps) the reporter's confusion is embedded in the idea that you can truncate the above statement to say the price of any stock should be the net present value of dividends until some liquidation date T, at which point you get the net present value of the selling price as well.

    But that selling price is just the NPV of dividends from T to infinity. Fundamentally, you have to be getting fruits from your Lucas Tree.

    No conflict with what you're saying, just a way that might be convenient to think about it.

    The interesting thing to me would be what the empirical effect on prices of platinum would be in anticipation of a rock like this being present but not-currently mined. It would be a very powerful study of dynamics, simply because of the size of the asteroid compared to current market.

    I really liked the Planetary Resource idea: very encouraging in an important way, nice potential natural resource shock.

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  2. EC, so I think that's how one would normally have to argue this point, to say "this is how the asset should be priced, and it doesn't equal $20 trillion." In this case, when we're literally talking about trillions of dollars, there's an easy proof by contradiction that the price doesn't equal $20 trillion, even without saying specifically how the price will be formed. $20 trillion is too high a price to possibly pay.

    Though they both say the reporter is wrong, in some sense these arguments accomplish completely different things. Your point is richer, but it requires some sophistication, and maybe it is ultimately not as definitive and convincing to a non-economist. They could say, "well that's how your theory says things should be priced but what if people do something else?" My argument attacks the reporter's misunderstanding on a much more fundamental level: no, this is physically impossible, you are believing in something that's physically impossible.

    And honestly, the fact that they're believing something that's physically impossible is what really bothers me, not so much the fact that they don't understand asset pricing.

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