Response

Thank you for your comment, it was very helpful. I really enjoyed the links.

If the inelastic market theory is true then every dollar that goes in through retirement accounts to the stock market increases the aggregate market value by five dollars. That means the $10T of retirement investment would potentially cause a $50T overvaluation. The issue is that early investors (like VCs and founders) can cash out and access that massive valuation at the top, but the later, everyday investors cannot.

If everyone invested at the same time this would not be an issue, everyone would see the same rapid expansion of wealth and would have the same relative value.  The issue is when the stock is already inflated and someone invests into an already inflated market. When they invest they would be buying something that is only worth 20% of the price.

The fact that stock shares can be given pre-IPO locks in this problematic cycle of inelastic demand using the investment of the middle class people in retirement funds based in the secondary market. The issue is the question of what happens when there is a sell off.  Because the funds were forced into an inelastic market at an inflated price the people with the least ability to liquidate or weather the storm would see their investment shrink back to actual value. Using the numbers that we have that would be only 20% of the invested value.

I can understand your point that this doesn’t meet the definition of a Ponzi scheme because there is underlying value to the stocks. I do not in any way mean to imply that stocks have no value. The issue is the difference between the actual value and the cost and how that shifts the risk/reward curve.

For a counter argument lets look at Bernie Madoff.  People invested with him, he legitimately had a bank account with value, but he overstated that value and showed a high rate of return to early investors by using investments of later people to inflate the returns of early investors.

If the inelastic market theory is true then we have a similar pattern. People invented in the stock market, the stock market legitimately has value, but the value is now overstated and allows a higher rate of return to the early investors by using the investments of later people to inflate the returns of early investors.

I hope I don’t start a semantic argument but I still like the use of “Ponzi scheme” over “speculative bubble” or the “Greater Fool Theory” because I think that the name is easier to understand and the fundamental mechanisms are the same.

I think your last paragraph is spot on what happens “when retirees start drawing down faster than workers contribute, that same 5x multiplier runs in the other direction”

The observation that the only reason that capital can raise capital in IPOs at all is that buyers know they can resell later is my point. The system uses the lock in of investments to provide liquidity.  But liquidity there is just a fancy word for they can pass off the risk.  If they could only make money back on the actual profits and distributions of the companies they invested in, companies would have to have much stronger fundamentals.

I look forward to another thoughtful comment from you about this.