Audible gasps filled the room Wednesday as someone dropped $450.3 million — not to modernize subway signals on one line or fund two days’ worth of New York City’s budget, but to buy a painting: “Salvator Mundi” by Leonardo da Vinci.
After the Christie’s auction, the art world raged over what the painting is really “worth.” But the dilemma isn’t about paintings. It’s about how to value anything in a global financial market that’s more surrealist than classical.
What is anything worth? Traditional economics tells you that something is worth what it costs to make, plus a profit for the maker and the seller.
Newfound global wealth has distorted the market for other scarce goods.
That’s your first problem with da Vinci: The 16th-century artist isn’t making them anymore. Fifteen of his paintings are in museums, but virtually never go up for sale. If your kid needs a da Vinci for Christmas, you can’t pass this one up.
If five people want a “scarce good,” its price goes up. Thirty years ago, there were fewer people bidding on such goods. Russian and Chinese oligarchs were scarce themselves, the latter because America hadn’t yet run up deficits to buy cheap imports.
Newfound global wealth has distorted the market for other scarce goods. They’re not making land in Manhattan, or Brooklyn, or London, or Hong Kong, anymore. So trying to buy an apartment in one of these places is like trying to buy a da Vinci. The libertarian answer is to build more skyscrapers, everywhere. But cities are supposed to grow organically, not to satisfy the demand for empty space created by an imbalanced global economy.
The second problem with Salvator Mundi is how to value anything in a world awash in money. After the financial crisis, rich people around the world should have lost a bundle in investments like mortgage bonds and bank stocks. But Western governments bailed out the rich by creating more money to replace the money that would have been lost — and then some.
Say you were going to buy a sandwich, but you can’t find that $10 you had in your pocket. Suddenly, someone dumps $1,000 on your head.
Problem solved, but what to do with the rest of the found money? Between 1989 and 2007, the global money supply increased from 94 percent to 98 percent of GDP; today, it’s 126 percent. In the West alone, that’s an extra $10 trillion.
That gives the people who got that money the same problem they had before: what to invest in, while never risking a loss?
Powerful investors have solved this problem by making up their own values. They can do this because they are often big governments, so nobody tells them not to.
Uber, for example, is supposedly worth $68 billion, according to its early investors. But new investors don’t want to pay that equivalent in stock price. Old investors, though, like the Saudi government, don’t want their shares valued at a new, lower price.
Uber is solving this problem by having two different prices for the same investment. Some people will pay a price implying a worth of $68 billion; some will pay implying a worth of $48 billion. This is fine as long as they don’t share a ride together.
In that light, $450.3 million for a da Vinci sounds reasonable. At least the da Vinci exists, whereas Uber’s profits do not.
But does the da Vinci exist? That’s the last problem with financial markets: groupthink. Christie’s isn’t guaranteeing this is really a da Vinci. Instead, there’s “consensus” among experts that it is — despite contrarians saying that he may have worked on it a little, at best, and that his minimal work was destroyed by clumsy restoration.
Groupthink fuels economic bubbles. It’s fine that the stock market has gone up 80 percent in half a decade for no apparent reason...
Groupthink fuels economic bubbles. It’s fine that the stock market has gone up 80 percent in half a decade for no apparent reason. It’s normal for even insolvent cities like Chicago to borrow at low interest rates. Venezuela, a once-wealthy Latin American country, has defaulted on debt, and nobody cares. The Russians, not very solvent themselves, are bailing them out.
Christie’s limited warranty on Salvator Mundi expires in five years. It’s equally reasonable to guess that by then, the painting will be worth $10,000, or $3 billion. Such wild unknowns aren’t the foundation of a healthy economy.
This piece originally appeared at the New York Post