The edible gold indicator (III)

Does a gilded birthday cake presage the end of the economic cycle?

Edible gold cake

I ate gold, for the third time ever, this week. The last time was late 2006; the time before was 1999. This might mean something.

In 1999 and 2006, I thought it meant something because, for unrelated reasons, it was obvious that an economic/financial cycle had gone much too far, and was about to end. Literally eating gold, at the manic height of a bubble, was too funny not to comment on.

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Fin de cycle

The edible gold indicator (II)

Early in 2006, I decided that the world was in a real estate finance bubble. I could detect a faint odor of euphoric greed—the smell that in 1999 concentrated in Silicon Valley into a stench of insanity.

I spent most of my time during the rest of the year learning about mortgage finance. By August, I was confident enough in my understanding of what was going on that I took large short positions in various banks, mortgage-related stocks, and mortgage debt derivatives. (A “short position” is an inverse investment: you make money if the value of something goes down, and lose money if it goes up.)

My calculations showed that the market had to crash by early 2007 at the latest. The money was going to run out. In one way, my timing was exactly right: August 2006 was the actual peak for US housing.

The financial market crash came two years later, though. What I had failed to take into account was that the late stage of a bubble is driven by fraud. The same was true in the late 90s, so I had a warning that I failed to heed. Then, WorldCom’s lies about its growth rate drove a trillion dollars of malinvestment. In 2006–2007, lying was systematically routinized at every stage of the mortgage finance process, resulting in several trillion dollars of malinvestment.

Continue reading “Fin de cycle”

The edible gold indicator (I)

What does it mean when people eat money?

I sent this letter to my father in mid-1999, when I was running a San Francisco technology company:

Dear Dad,

I don’t know if you remember my college friend Richard? He’s now professing at Yale. He’s established a custom that whenever he’s in the Bay Area visiting his parents, he and I go out for dinner at a different extravagant restaurant.

This is on the theory that we are both rich. He’s rich because he has a deal with Microsoft that they give him a million dollars a year in exchange for however much of his time he feels like giving them. Apparently he once off-handedly told them something that made them tens of millions of dollars and so they figure it’s worth hoping he’ll do it again. I am also theoretically rich because I own most of a company that is supposedly worth squidloads, although I have no actual cash-type money.

It seems that every time he is here, the restaurant we go to is more absurd. It’s a sign of the times…

The one we went to last night specializes in “tall food”, the latest thing, in which the chef, by divers architectonic stratagems, contrives to elevate food, using only its own structural integrity, as far as possible off the plate. That the meal was not particularly tasty was surely not the point, as it was undoubtedly impressive.

I ordered a custardy dessert that was richly marbled with real gold leaf. How could I not, having read of such things only in history books? Roman emperors and robber barons. Richard and I decided to pass on the $300 half-bottle of Sauternes—he regretfully, and I derisively.

When our desserts arrived, and he was tapping his dubiously with his spoon—there being no obvious way to consume it without first toppling it, which (as it was considerably taller than its plate was wide) would seem to entail sprawling it across the tablecloth—

“You know what this is?” I asked: “This is fin de siecle decadence, is what this is.  And it will end badly.”



Six months later the US stock market reached its all-time peak of overvaluation, immediately followed by its worst crash since the 1930s.

That was not as badly as I expected it to end—because a new bubble was blown within a year. (The subject of a post to come.)

Gold is biologically inert: tasteless, non-toxic, and indigestible. It goes straight through.

What does it mean when people eat money?

I read Thorstein Veblen’s Theory of the Leisure Class later that year. The book is famous for introducing the concept of “conspicuous consumption.” It made a big impression on me, and is still a big part of how I see the world. Veblen published it in 1899, exactly a hundred years earlier, when he was at Stanford, in the age of the San Francisco Robber Barons—the city’s last big boom.

Veblen’s work has a lot to say about why people eat gold during financial bubbles. But I don’t think he has the whole explanation. Maybe some other stories I can tell will add to the picture…