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Labour Theory of Value – Take Down

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Labour Theory of Value
In case you missed it Bitcoin hit significant new highs over the weekend and is currently trading at a whopping 10k – who would have thought.

Michael Lewitt’s latest letter begins with questioning whether financial markets are in a bubble as witnessed through a 2017 lens:
• A painting (which may be fake) sold for $450 million.
• Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000.
• The Bank of Japan and the European Central Bank bought $2 trillion of assets.
• Global debt rose above $225 trillion to more than 324% of global GDP.
• US corporations sold a record $1.75 trillion in bonds.
• European high-yield bonds traded at a yield under 2%.
• Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
• Illinois, insolvent, sold 3.75% bonds to bondholders fighting for allocations.
• Global stock market capitalization skyrocketed $15 trillion to over $85 trillion.
• The market cap of the FANGs increased by more than $1 trillion.
• S&P500 volatility dropped to 50-year lows & Treasury volatility to 30-year lows.
• Tesla sold 5% bonds with no covenants as it burned $4+ billion in cash & produced very few cars.

Many people have asked me what I think about Bitcoin’s price. My view some time ago and even more so now is that we are in a manic bubble phase, however I still believe in the idea behind crypto currency. I will discuss my views on fiat currency and whether crypto fulfils the needs to be an ultimate store of wealth another time. For todays thought piece I wanted to focus on the Labour Theory of Value.

It is clear from the valuations mentioned above the Labour Theory of Value cannot be applicable. The theory simply put uses the cost of producing the good as the determinant of value. So the more factors of production (people, land, capital) used to create something the more expensive it becomes.

This theory of value was used by many classical economists such as Adam Smith and David Riccardo, it was also strongly supported by Carl Marx. I am not too sure how these guys would explain the price of Leonardo Da Vinci’s “Salvator Mundi” or the price of an eBook sold via Amazon at close to the price of the hard copy or the price of a “mined” Bitcoin.

Fortunately a more sensible group of economists from the Austrian School put forward a more palatable theory called the Subjective Theory of Value which takes the individual preferences of the consumer into the derivation of value. This theory greatly improves our understanding of value, but coming back to the question of whether we are experiencing bubble valuations across a host of asset classes at the moment I don’t believe we can rely on these theories to answer the question.

I have my own theory of stable equilibrium value. I started writing about it in an unfinished book call the “Market Complex” which incorporates Carl Jung’s theory of the Collective Unconscious into the pricing mechanism. I can summarise the values we are currently seeing across the global capital markets as being under the spell of enantiodromia.

Looking forward to more profitable trading together.
The PsyQuation Team

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