Fleet of Foot

No longer needing to apply for leave, my first act of independence post-work was to head off to Australia and New Zealand for two and a half months. I had sold all my anchors. I had a flat in Cape Town that I bought in 2006, but then had to move to Johannesburg for work, before I got the chance to live in it. It felt like what you are supposed to do according to the textbook wealth-building script. “Getting on the property ladder” as soon as you have a secure income you can borrow against. 

Having studied investments and having some political (are low interest rates transferring wealth from savers to borrowers?) and ethical (do we fundamentally want housing to get more expensive?) issues with property as an asset class, I believed listed businesses made for a better Engine. Equities also allow you to sell little bits rather than the whole thing (although there are property funds). Owning a house is illiquid. Turning it into cash, especially if you are in a hurry, can be an expensive challenge. Equities are part shares, easily exchanged for cash, if the businesses are sufficiently large with enough shares in the market. I sold my house and gave away a lot of my stuff to the charity store 400 meters down the road. 

The manager of the charity shop was pleased he had first choice of the DVD and CD collection I built up over the years. I was pleased I was more fleet of foot.

Place to Sleep

It is not a mystery why there is not enough affordable housing. We have not built enough houses. There has been a multiple decade-long process of urbanization and population growth. There are not enough houses in the cities. 

More specifically, there are not enough houses close to the quality jobs and quality schools. Houses get smaller. Prices go up. Borrowing is provided to people to buy (if they can prove they have an income to support interest payments) which means more money chasing the same physical buildings. Interest rates are lowered so that borrowers are subsidized, and savers are penalized. 

Those holding cash have a wasting asset, being paid almost nothing for their savings, so that those borrowing that cash can inflate the cost of housing. The idea of borrowing to buy with 30-year paybacks matching our working lives, and tied to earnings, is as natural as breathing. We lend to people who can prove they don’t explicitly need the money. We lend as front loading of work-for-pay income. 

People who have bought property have seen “growth” for such a long time, we collectively think of homes as “safe as houses” investment. We are all forced buyers of somewhere to sleep. Whether we rent or buy. We can see the bricks and mortar. So the cycle continues. If we want to bring down the cost of housing, there need to be more houses. 

That would bring down the price of those with houses as investments.

Sleep

Matches

A Universal Basic Income is the opposite of a Handout. The 'No Strings' removal of who deserves the foundation, and who doesn't, removes the categorising of dependents. The guarantee provides a permanence that is independent of a relationship between the person giving and the person receiving. Viewed as a dividend, it gives everybody an ownership stake in society. It reinforces, and provides a moral foundation, for property rights. The Basic nature of the payment means all normal incentives remain. There isn't the huge marginal tax that normal applies to handouts - 'if you need it, you get it, if you get money elsewhere, you don't'. It isn't welfare, it is well fair. It is like providing a box of matches, and some kindling, but expecting people to collect their own firewood. 

Ideas in the Open

I have mixed feelings about Intellectual Property. I think we would be better off if we did our thinking in public. Open to the error correction of a million eyes, if what we are doing is worth their attention. Property allows investment. You can ring-fence the rewards.  It also restricts the knowledge to a smaller set of people. We don't always know what connections our ideas will allow others to make. We all see the world differently. In a world with zero transaction costs, perfect transparency, and the ability to replicate anything that has been done before - the rules of reward based on ring-fences will fall away. We will have to switch the economics of scarcity for the economics of abundance. The only thing that can't be copied is human relationships. Trust. Time. Context.

Fences

Cost of Living

One objection to a Universal Basic Income is that it doesn't solve the problem of rent/housing being too expensive. Yes! It isn't a silver bullet. It doesn't solve everything. In the same way as making loans available to people to make housing affordable doesn't magically build more houses. I think of housing as something we buy rather than an investment (I know this flies in the face of how most people think of home ownership). Stuff we buy only gets cheaper if supply increases. If there isn't enough, it will always be too expensive for those with not very much. The choices of someone receiving a UBI will remain tough. Basic won't make life easy. Many other problems will remain, but a Universal Basic Income will at least empower everyone with a voice in solving some of their own problems themselves.

Build Houses if you want affordable houses

Playing Live

One massive change brought about by communication technology is the ability of decisions, and control, to scale. Senior executives earn way higher than front line workers now, partly because the workers are paid their cog value, and partly because a decision, made once, can be replicated. A musician who can record something once, but keep 'Intellectual Property' over it can make far more than someone who only plays live. Labourers play live. In a world that is perfectly transparent, and where it is easy to replicate whatever anyone does, the only control those at the top have is property rights. Those have become easier to enforce (for now). In the past, there had to be delegation of control, and reward, because of distance. Communication technology changed that (for now). In a world where everything you can do can be copied and repeated immediately, the power will shift back to playing live. The real value people add isn't in doing things a second time. It is in relationships and creativity. It is in being present. You can't replicate that.

Community Wealth Fund

A Community Wealth Fund could finance an Unconditional Basic Income. A UBI is defined by the Basic Income Earth Network as "a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement". Over time, labour is transformed into capital. Who notionally 'owns' this capital is defined by property rights. In practice, ownership is just a number and an agreement. Our labour is transformed into capital if it is productive, and reinvested. As time passes, this capital grows and we build on it. It is cumulative. Hawking gets the benefit of Einstein and Newton. Einstein gets the benefit of Newton. Newton gets the benefit of giants. A Community Wealth Fund could formally recognise our privilege, as a clumsy best effort to give it a number. It could be built up by voluntary contributions. It could pay an equal share of the fruits out as an 'average' of a group of people's privilege. It would be tough to figure out how to do this for 7.5 Billion people. I think we can each be part of doing it for 150 people. The beautiful question is how to construct that 150? How to construct it in a way that can spread to 7.5 Billion.

Changing Incentives

'In the long run, we will require a justification for the distribution of resources that is not based on job-holding' (Basic Income - Philip Van Parijs) The justification for private property is largely that it is the best system we know of to incentivise people. We don't only live off our own labour. We don't start from scratch. Why do you think people are so obsessed with competitive parenting? If we are lucky enough to have parents or communities who pass something on to us, in the form of money or opportunity, we also benefit from the labours of those in the past. Just being lucky enough to be born today rather than 200 years ago means we benefit from the past. The fight of Hereditary privilege v Meritocracy still has an underlying belief that someone can be paid 'what they deserve' - because of effort, or skill, or any action that rewards the right behaviours. What happens if we get to the stage where human effort isn't needed... it is just wanted? Economics is the study of scarcity. What happens when we move on to the study of abundance?

Hereditary Privilege v Meritocracy v Abundance

Common Wealth

Property Rights help us invest our efforts with knowledge that we will be benefit from the fruits of our labour. Fruits come from a combination of Capital and Labour. We stand on the shoulders of giants. We produce far more fruit today than our ancestors because human knowledge is cumulative. 

Two challenges to Property Rights are (1) The First Mover, and (2)  The Veil of Ignorance.

When people first started to employ their labour, there would only have been shared resources. These resources would have been used from the abundance, and mixed with labour. Gradually there would have been more competition as resources grew more scarce, and, pre-'rule of law', force was used to take resources. We don't have full detail about the starting point, but we know it was dodgy. We know our ancestors, judged by today's moral standards, fail uniformly. Things as they stand are a fuzzy mix of today's rules and yesterday's first movers. To go forward, we need to be comfortable with a starting point.

Secondly new-comers need to be comfortable with their starting point. Our communal wealth today is not the same as that of our first conscious, common ancestors. We are born, at random, with differing genetics and geography. Much of our success depends on our starting point now. The 'Veil of Ignorance' suggests that in order to accept the rules, you have to be happy with the starting point of every player. 

An Unconditional Basic Income is analogous to a dividend on our communal wealth. It is impossible to determine what the level of that dividend should be and what our Common Capital is. 

Tax is partly re-distributive, but it is also partly a fee for use. If we are all common owners/custodians of the earth through our shared inheritance, the 'systems' our ancestors built belong to us all. The fee for use doesn't need a central government to decide how to spend it. It needs to go to the owners. It needs to go to everyone.

Welfare is redistributive. A UBI doesn't carry the stigma of charity. A UBI may simplify or reduce the need for welfare, but it is not welfare. It is part of the deal that allows people to accept the system that allows us to prosper. Why should someone in Poverty agree to accept the Rule of Law? What ownership do they have in that system? 

It is impossible to figure out what is common wealth, but if we can afford it (which we can), ending poverty through an unconditional basic income is the bare minimum.

'Olive Grove' by Van Gogh

Fruits of our labour, from shared wealth

2 by 1 by 1

We think of deflation as a bad thing. From a business perspective it is. Business is about solving problems, but if you solve them too well, it isn't good business. An ideal business is one which generates a regular, growing, stream of cash. It is one you can reinvest in, so that it is doing more 5 years down the line than it is doing today. It is one which is attractive, but not so attractive that other people stop doing what they are doing and come and compete with you. If they do try and compete with you, there should be barriers to entry. Reasons they shouldn't or can't do what you are doing.

As a 'business', the reason housing has been a good investment is because of the barriers to entry. There has been massive urbanisation and massive population growth. Most times, businesses make money because they have solved a problem well. In the case of property, there has been loads of money made because we haven't handled a challenge very well. All that has happened is there haven't been enough homes to go around. So we have made it easier to borrow to buy. All that does is makes more money available to make the prices even higher.

 The Urban Population grew larger than the Rural Population in 2010

The truth is, no matter how wealthy you are, you sleep for about a third of your life. When you close your eyes, there is less than a 2m by 1m by 1m space in the world that matters to you. If you wake up, and crack on with life, that is all you need. Obviously there are all sorts of things we want. And will pay for. Tap Water is almost free in most developed countries. Tap Housing should be too. If you want to make your water bubble and throw some flavouring in, awesome. But over time, we should get better at solving standard problems. Housing is a standard problem. If you buy a single house, and it is worth more years down the line, that means we have collectively done a bad job.

That is not to say you won't make money 'investing' in your house. If we carry on doing a bad job of solving the housing problem, people will carry on making money by being on the right side of the equation. I prefer the idea of thinking of money as an employee. Asking not only whether it will make money, but why it will make money. What is it doing that is useful? Why will that be more useful tomorrow than today? If the only answer is supply and demand, I will politely move on. Plenty of people won't and will do very well. 

House deflation would be a good thing. Unless you are invested in houses.

Tap Housing

When I was at university I remember feeling very uncomfortable about Collateralized Debt Obligations. We learnt how you could package loans into various bits that had different risk characteristics. The safer stuff could then be sold separately from the riskier stuff. The theory being that lots of people like low risk investments. The high risk bits spoil everything. If you could take away the smelly stuff and tie a pretty bow on it, there would be more access to finance for more people.

I felt uncomfortable but I didn't actually do anything about it. I also didn't spend a lot of time learning more about it, partly because I spent more time on the things I found interesting. When the Global Financial Crisis came along, it turned out these complicated debt instruments were a huge part of the cause. But I get zero brownie points for having steered clear of the stink and said nothing. Nassim Taleb rightly points out that you should get no credit for hindsight predictions where you have no skin in the game. 'I told you so's also don't mean very much if you are always predicting something, and it happens sometimes and not other times, but your predictions aren't reliable enough to know when.

After the GFC, the popularity of many areas of finance sunk to the levels of politicians, lawyers, and other areas we don't understand, and distrust. I talked about this in 'Bankers and Poets'. Just like toys and cars are more difficult to take apart and repair ourselves nowadays, some financial abstractions are so complicated, it becomes insanely difficult to understand them. We always trust there is someone else who does. Hope perhaps more than trust. We also start to personify organisations and professions rather than seeing them as a group of individuals. Too big.

One of the issues with feeling uncomfortable about something, is whether it is worth diving into to gain more comfort. Particularly when it is big and complicated. There is also a strong incentive to shut up about it until you feel like you can confidently say something worth while. We tend to 'stay private till we plonk'.

I am going to tentatively start diving into one area I feel uncomfortable about, because I think it is a really big issue. I am not an expert on property investment, but for a lot of people it is a really big deal. It is also an emotional thing. We live under roofs if we are lucky. Whether we own that roof or rent it is a big deal. It becomes a symbol of 'having made it'. The UK, where I live, has the same feeling toward property ownership as Kiwis have to Rugby. Land, power and identity have long been linked. It isn't a purely quantitative number crunching exercise.

I don't like the general investment case for property. I think the prices of property in certain places (e.g. London) are completely bonkers. It is like hiring an Uber Taxi to go out at 9pm on New Years Eve, and returning at 2am. When supply doesn't keep up with demand, prices go nuts. In my view, housing is a basic necessity. Like water. We should be as used to tap housing as we are to tap water. 

I think of investing in the same way as getting a job.  The Money is finding something productive to do. If you are buying houses, fixing them up, selling them and moving on, I can understand the job a little better. But it is you doing the work, not the house. If you are buying a house to live in, particularly if the house is bigger than you need, what exactly is the job? Beyond being a store of value, there is no inherent reason a house should go up in value just because it always has. One reason for the 'property ladder' going up is massive urbanisation has not been met by adequate building. The price going up has been a signal of 'not enough' rather than of a 'good job'. If anything, progress would be that the price of housing regularly went down... like basic food stuffs, like computers, like anything where the problem gets conquered.

As soon as you limit supply, prices spike. It doesn't mean that is what the thing is worth. I love Modigliani. I wouldn't pay $170.4m for one of his paintings.

Modigliani joins the Nine-Figure Club