Monday, April 23, 2012

A Corner on Everything

In 1979 and 1980, the brothers Nelson Bunker Hunt and William Herbert Hunt attempted to corner the world market in silver.  At one point, it was estimated that they held one third of the entire world supply, valued at several billion dollars.  As a result of their manipulations, the price of silver increased by over 800%.

The story ended badly, of course.  Rich though they were, the brothers needed to borrow money to finance their scheme.  Changes in the rules of the commodity exchanges were adopted to make it harder to purchase silver "on margin" (that is, with borrowed money). The price of silver began to fall, and the brothers were issued a $100m margin call which they were unable to meet.  This caused the silver price to crash.  Eventually, the legal fallout forced the brothers into bankruptcy.

The scheme was made possible because a couple of individuals had sufficient wealth to command a significant proportion of the world's stock of an important physical resource.  Suppose though that someone had enough money to corner the world market in a resource that is not just important but truly vital - like oil, or wheat, or maybe copper?  Of course no-one right now has anything like that level of wealth.  But remember the "decoupling" thesis? Believers in endless economic growth on a finite planet claim that, as wealth keeps growing, we will remain within physical limits because the physical fraction of each unit of wealth will become less - will indeed become arbitrarily small.

Let's conduct a thought experiment, then.  Mathematically, "decoupling" would mean that the value of the Earth's entire physical stock of some resource, when expressed as a multiple of (say) per capita income, would be expected to decrease steadily.  After sufficient "decoupling", the entire silver stock of the planet would be worth less than a teenager's weekly allowance.  Anyone could corner the market in silver, or copper, or any physical resource.

But obviously this is absurd.  If some greedy or crazy person corners the market in the entire physical substrate of our lives, the rest of the economy cannot continue unaffected!  Without the physical substrate, the "added value" that supposedly constitutes the remainder of global wealth would become nothing.

In its attempt to break free of the physical, "decoupling" perhaps has transgressed an ancient scripture.  "Remember that you are dust." (Genesis 3:19)

Acknowledgment: I got the idea from this blog post, which explains the argument at greater length and with graphs and calculations.

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