New York Magazine
A Unified Theory
In a system rigged by the rich, outsiders have to make their own volatility.
Intelligencer’s Jebediah Reed spoke to Scott Galloway, a host of the New York and Vox Media podcasts Pivot and The Prof G Show, respectively, about the transformation of the economy.
One of the most valuable living artists is a guy who makes GIFs. A Reddit mob sent GameStop shares soaring. Meanwhile—in the midst of a once-in-a-century pandemic and an economic crisis—the stock market only goes up. Are these isolated things or part of something bigger?
I think it all comes back to one central theme: income inequality. Capitalism is sort of this gangster construct that leverages a species’ selfishness and creates all sorts of prosperity from that selfishness. But the key to successful capitalism has always been a middle class. At the turn of the millennium, America was the only superpower, and we had the most prosperous middle class in the world. In the past 20 years, the key feature of China’s rise into a superpower has been adding several hundred million people to its middle class. But for the past 50 years in America, we have decided to transfer wealth from the middle class to the shareholder class. The lower and middle classes haven’t done any worse, and they haven’t done any better but the share of income controlled by the top one percent has exploded. And I think that creates all sorts of externalities.
Externalities like GameStop.
GameStop was a mini-revolution. Young people want volatility. If you have assets and you’re already rich, you want to take volatility down. You want things to stay the way they are. But young people are willing to take risks because they can afford to lose everything. For the opportunity to double their money, they will risk losing everything. Imagine a person who has the least to lose: He’s in solitary confinement in a supermax-security prison. That person wants maximum volatility. He prays for such volatility, that there’s a revolution and they open the prison.
People under the age of 40 are fed up. They have less than half of the economic security, as measured by the ratio of wealth to income, that their parents did at their age. Their share of overall wealth has crashed. A lot of them are bored. A lot of them have some stimulus money in their pocket. And in the case of GameStop, they did what’s kind of a mob short squeeze. Normally, a short squeeze is where you force a person who is betting against a stock to buy it and the stock skyrockets. GameStop was being wildly overshorted by professional investors. What redditors found was that you could say to people, “Okay, this is a movement. This is an opportunity to stick it to the Man. If we all go buy some GameStop, this thing will scream upward.” This is a group of people saying, “Let’s go after baby-boomers, who continue to soak us,” and they create a narrative and a story.
What I think will emerge—what’s most tragic about the meme-stock movement—is that, sure, there are some people on Reddit who made some money, but when all this unwinds, we’re going to find out it was the same hedge funds and entrenched players who made the majority of the money. It’s ironic. It’s like trying to understand Trump voters who are voting for someone who’s going to take away their health care.
Still, the whole thing, the narrative of the movement, is that we have to stop this intergenerational wealth transfer from young to old. The meme-stock movement all comes down to one fact, and that is that for the first time in our nation’s history, a 30-year-old isn’t doing as well as his or her parents were at 30. That creates shame and rage.
So a phenomenon like GameStop is semi-disenfranchised young people with a little bit of money in their pockets finding a way to create volatility in a system that’s been rigged.
Creative destruction is good for young people and bad for the entrenched. The shedding of skin from existing players to new innovators—it’s a means of transferring wealth. Unless you let the winds of creative destruction blow, all you’re doing is cementing the wealth and status of the incumbents.
That brings us to COVID and the bailouts. The government pumping trillions
of new dollars into the economy.
The shareholder class played the pandemic like a Stradivarius in order to expand its wealth. These people have weaponized our elected representatives. From what I’m told, the average billionaire talks to a senator once a month. They influence policy. One of the more insidious methods of mass entrenchment is complexity. The more complex the tax code gets, the more there’s a transfer from the poor to the rich because you need expensive people to navigate it.
I believe that the trillions in bailouts from both the Trump and Biden administrations will ultimately be judged in history as a crime against the middle class in America and future generations. Something like a third of that money has gone to people. The rest has gone to corporations and governments. We have fetishized corporations. We have decided that we should be more humane and empathetic and loving toward corporations and more Darwinistic and harsh with individuals.
In theory, bailouts are an effort to prevent a financial crisis. But what this bailout has done, what it’s meant to have done, is protect and entrench an existing wealthy class.
For example, the Paycheck Protection Program is nothing but a crime against the young. Some of the wealthiest people in America are small-business owners. Giving them nearly a trillion dollars is mostly a direct subsidy to rich people to keep them rich.
The Strand Book Store in New York? Got a $1 million or $2 million PPP loan, with a couple hundred employees. And in theory, it’s all about the employees: We need to keep our employees. Well, okay. The Strand Book Store is owned by a senator’s wife who has a personal net worth probably in the tens of millions. What the government should have done is instead of roughly a third of that stimulus money going to people, the majority should have gone to people. And you should have let people decide which restaurants and which companies stay in business post-pandemic. All we have done with these stimulus packages, these bailout packages, is try to reduce volatility and keep the existing rich rich.
Imagine a great little restaurant that goes out of business. You think, Well, that’s a shame. Yeah. It’s a shame for the current 50-year-old owners. But it also means that the real estate and the supplies—dishes, the stove—go down in cost, and it gives a 28-year-old, a recent graduate of a Brooklyn culinary academy, her shot at owning a restaurant. Closures mean layoffs, of course. But new ventures quickly take up the slack. And in an empathetic— or even sane—system, direct payments to anyone affected could carry them through the transition.
In the 2008 financial crisis, we did stimulus, but stocks were allowed to fall. We basically said, “All right, we’re going into a massive recession, but what we need to do is make sure it’s not a depression.” Now, with covid, that’s not enough. We decided that not only is a depression not tolerable but recessions aren’t tolerable. We threw trillions at the problem—so much stimulus that the markets went up.
Assets have never been higher because we keep printing money and doing more stimulus. Yet as a percentage of GDP, wages have tanked. How do young people make money? Wages. And then who owns assets? Old rich people. So all we said is, “Okay, people who get the majority of their income through wages, i.e., young people, get screwed. And people who have the majority of their earnings or wealth in assets like real estate and stocks do really well.”
Explicitly or implicitly, we are making it clear that if you’re over the age of 60 or own assets, America’s mission is to maintain your wealth. So, in many ways, while we talk a big game about not wanting to be European, we’ve decided that we want to create dynasties.
What would a healthy capitalist response to COVID have looked like?
In World War II, one Chrysler factory in Michigan punched out more tanks than the entire Third Reich. We have not had a fullthroated capitalist response because the reality is that the sense of urgency hasn’t been there. If Amazon stock had gone down 70 percent, and not up 70 percent, in the past 12 months? When a van with a smile on it delivers my espresso pods tomorrow morning, someone in a white lab coat would be jumping out and jabbing me. The full-throated capitalist response is not happening here in the United States because the people who control the government have just not endured that much pain. As a matter of fact, it’s more like, “Stop, stop, it hurts so good.”
The dirty secret of the pandemic is that during one of the worst crises in history—as measured by death and velocity of death— you have the people who essentially control the government living their best lives. They
die at a lower rate, they get sick at a lower rate, and covid-19 for the shareholder class has meant more time on Netflix and more time with family—and their wealth has exploded.
I’m not saying that rich people aren’t empathetic. I’m not saying that rich people want people to die. But if this had impacted them—if this had cut their wealth in half instead of doubled their wealth—we would have made the responses in Taiwan and in Singapore and in South Korea look like amateur hour. If Walmart’s stock had been cut in half, instead of going up 50 percent, and if someone walked into one of its stores and refused to wear a mask, Walmart would have Tasered them and arrested them, instead of trying to thread this needle between liberty and public health.
We have decided, in this pandemic, that half a million people dying is bad but the nasdaq declining would be tragic because it would reduce the wealth of old people. And again, we don’t even want to acknowledge that if the nasdaq were to get cut in half, that’s bad for the existing rich, but it presents opportunities for the not yet rich.
So to go back to the 2008 crisis, stocks crashed. It meant that existing rich people were less rich. People who owned $1 million in Apple stock woke up and they owned $400,000 in Apple stock. But it gave a new generation the opportunity to buy Apple at nine times revenues instead of 30 times revenues. Quite frankly, the reason I’m economically secure is that as I was coming into my income-earning years in ’08, I was able to buy Apple and Amazon on sale. That is a transfer, if you will, of wealth from the existing rich to people who haven’t had a chance. If Brooklyn real estate goes from $2,000 a square foot to $1,000, it gives outsiders a chance to own real estate. Today, we’ve decided we don’t want those opportunities for young people.
Is that one way to look at NFTs? A new generation creating its own opportunity to get rich?
Rich people have always wanted to use their money to be more attractive to mates. And one of the ways you become more attractive is by owning things that are scarce. So, okay, only a limited number of people can own an original masterpiece of art. There’s only one Mona Lisa—but wait, we’ll do lithographs, where we create a kind of iron cast of it, print 200 of them and then break the cast. That’s a way of leveraging scarcity. NFTs are just another way of trying to tap into the top one percent’s desire to create additional forms of scarcity. It’s staggering, the market’s ability to produce a product when people have cash in hand.
Have you bought an NFT?
I don’t own an NFT or a single digital coin because I’ve always bought into the notion that you don’t buy anything you don’t understand. While I believe I understand crypto better than 99 percent of the population, I still don’t understand it.
How do you see bitcoin and ethereum, both up massively this year, in this broader context? Are they just another way of finding volatility in a rigged system, or is there genuine innovation that’s creating real value?
I see crypto as a mini-revolution, just like GameStop. The central banks and governments are all conspiring to create more money to keep the shareholder class wealthy. Young people think, That’s not good for me, so I’m going to exit the ecosystem and I’m going to create my own currency.
Typically, digitization, when it comes into any sector or asset class, starts creating a consolidation. The top few players soak up all of the value. What’s crazy is it’s happening in currency. So I think what you’re seeing is bitcoin is becoming a major currency. We’ll have the euro, the Chinese yuan, the dollar, maybe the yen— and bitcoin. And then everything else just gets hammered.
The heat around crypto is going to result in a lot of innovation. It’s going to be both very interesting and very frightening. I believe there is a nonzero probability that a prestige institution—let’s say Stanford—says, “All right, we’re coming out of the closet. We’re basically a hedge fund that educates the children of our investors. If you give $10 million, your kid’s getting in. And that’s what we’re about. We do good research, which has a societal benefit. We’ll admit a certain percentage of what we’ll call freakishly remarkable middle- or lower-income kids to make us feel better about ourselves, but we’re primarily an institution for overeducated academics. And also for the children of rich people.”
And then, “We’re issuing 100,000 Stanford coins. And each one of those coins, maybe it sits on the ethereum network and it has a set of smart contracts on top of it. And what it says is each owner of this coin can send one individual to any school of Stanford’s at any time. So if you have a 17-year-old or an 18-year-old, he or she gets to go to Stanford. If you’re 30, and you’re in private equity, and you want to take classes in finance, you can take them. If you want to come to Stanford events, if you want to use the career center, if you want to get invited to alumni events or football games, be part of the Stanford community, you have to own a coin. And every year, we’re going to increase the number of coins by 4 percent—that is, at population growth or slightly more than population growth.”
Now, what would those coins go for? I think those coins, conservatively, would go for $1 million each.
One criticism might be that Stanford loses its mission to educate those freakishly remarkable middle- and lower-income kids. But whoever owns the coins could make them conditional. “I want it to be kids from the following Zip Codes who are raised in homes with single parents with household incomes of less than $70,000.” In other words, wealthy people, or even the government, could buy coins and then put smart contracts on top of the coin to determine who gets that seat.
It sounds horrible, but there’s also a certain amount of transparency and clarity to that versus the weird dance that we have now with “Here’s $10 million, wink, wink. My kid will get in, right?”
What it gets rid of is the sailing coach at Stanford who raised hundreds of thousands of dollars and recommended that a kid of a rich person be admitted. That guy ended up with an anklet and home arrest because he effectively took bribes. You could just be more transparent and say, “Anyone who owns a million-dollar coin gets to send someone to Stanford.”
According to your calculations, minting the coins would be a $100 billion liquidity event for Stanford.
I think I’m being conservative. This has already been done. David Bowie said, “I’m going to securitize the royalties from my music catalogue.” He raised $55 million with a bond backed by his music earnings and used that money to secure additional rights to his past work. He paid off the bonds ten years later, and when he died in 2016, his estate was worth $100 million. He basically securitized future cash flows to pull his earnings forward and put them to better use. That’s what this would be, in essence.
Stanford could raise so much money. The university truly would become a hedge fund—a $130 billion hedge fund, including its existing endowment of about $30 billion. Let’s be conservative and say
the stock market returns 4 percent to 6 percent a year. You have $4 billion to $6 billion in operating income, which is greater than Stanford’s budget right now. And you issue another 2,000 to 4,000 coins, which is another $2 billion to $4 billion a year. So you have a self-sustaining entity that has an operating budget of $4 billion to $8 billion, which is dramatically more money than it spends now. I think you’re going to see more and more prestigious institutions adopt a coin strategy.
And let’s use another example: Jackson Memorial Hospital. I live in Delray Beach, Florida. The local hospital is Bethesda. If your kid breaks his arm and you have to go to the emergency room, fine. If you want to go give blood, fine. If you want to get a vasectomy, fine. But if you have late-stage lung cancer or you have leukemia, everybody here knows you go down to Jackson Memorial, which is the better hospital. It attracts better doctors, has more resources, is considered a tier-one, world-class teaching hospital.
Why wouldn’t it go to a coin strategy? “All right, we’re going to issue coins to 100,000 families. Anybody who wants a coin gets whatever medical treatment they want. No cost. You and your family get treated.” And by the way, again, if we want to adjust up or down for the social good, people might say, “When I die, I’m going to buy ten coins. They can be used for low-income families that need help.” “I’m going to give ten coins to a church for health care.” Whatever it might be.
There are a lot of wealthy families that would say, “Yeah, I want access to Jackson. And I also don’t want everyone to have access to it. I want scarcity value. I want a signal.” And it could raise billions of dollars overnight. I think that’s where we’re headed.
What’s an example of how corporations might use the same strategy?
The shareholder class played the pandemic like a Stradivarius. All these bailouts do is keep the rich rich.
I’ve advised a lot of luxury brands. Hermès is privately owned by a family; Chanel is privately owned by a family. They’re the two strongest luxury brands in the world, and they’re privately owned so they can do what they want. If I were Chanel, again, I would issue a million coins and expand it by just 20,000 new coins a year. And I’d say, “Anyone who owns a coin gets the following: They are the only ones in the world who are allowed to buy Chanel products. They’re assigned a fashion adviser, who has much better taste than them, who is available 24/7 and says, ‘I’m going to give you everything from your lipstick to your luggage to the right color blouse that brings out the color of your eyes.’” You get invited to special events. You have proprietary access to fashion shows and trips to Paris to the Chanel factory. You are the only person, or one of the few people, in Delray Beach who gets to wear Chanel.
And we take you to the next level of artisanship, fashion, and proximity to God. Because, at the end of the day, luxury items are about being more attractive to potential mates. But more than that, because the most beautiful artisanship in the world has been a function of places of worship, we instinctively believe that to be close to Bottega Veneta’s mesh bag is to be closer to God. So I think Chanel and Hermès could issue a million coins apiece and charge $10,000 per coin to start. And by the way, they don’t give away the clothes for free. They just charge them at cost, no markup. I think they could actually get $50,000 a coin. Times a million, that’s $50 billion. I think there’d be a rush on this shit like there’s no tomorrow. I think there are probably people out there who think, I would like access to Chanel for the rest of my life, and I’d like to be one of only a few who have access to it.
Think about it like this: For the woman who has everything, and the wealthy guy who’s constantly trying to think of a great gift for her, for $10,000, or whatever price, wouldn’t you give her a Chanel coin?
But all this innovation would only make the wealth gap worse, right? It’s rich people finding out how to get
richer and further rig the game.
One hundred percent. Crypto’s innovation is its ability to create what I’ll call credible scarcity. The credible-scarcity component of our existing currencies—they’re losing the credibility part. When the government decides to print $4 trillion in debt, in new money that we don’t really have a discernible plan to pay back, the scarcity value of money is losing its credibility.
Crypto is leveraging our instincts around scarcity. They’re so powerful. The moment you perceive that there’s not enough food, or when you hear that the pandemic closed a Walmart or an Amazon distribution center and there’s a shortage of toilet paper, you see people—at least in Florida—saying, “Honey, grab the Glock. We’re going to Publix.” When our species senses scarcity, we become obsessed and irrational. Luxury has always leveraged it, and now crypto is too.
It all taps straight into the human limbic system.
Crypto taps into our species’ immediate transition from “I sense credible scarcity” to “I become obsessed with it.” We don’t go, “Oh, you know what? There just aren’t that many Ferraris, so I don’t like them. I’m not attracted to them.” We go, “Oh my God, they only make 700 Ferraris a year? My whole fucking life, I’m going to work for a Ferrari. That’s what I want. I’m obsessed with it.”
As you can see, though, all of this heads toward a dystopian future where income inequality is going to get even greater. And we’re going to have to get used to the notion of redistribution of income or make a massive investment in retraining or vocational education for young people.
You must think that the child-care benefit in the latest stimulus is a step in the right direction, in that sense.
I would argue that the unsung hero of right now is Senator Michael Bennet of Colorado, who’s been talking about an earned-income tax credit for years. And I think his education and his proselytizing and work on it over the past several years resulted in it being a big part of this stimulus. It’s the best component. Households with less than $25,000 in income are going to increase their income by 20 percent, and a lot of that’s going to come from the child tax credit. I think that is overdue and outstanding—and a great investment.
The fact that young people have fewer prospects than we did at their age means the compact, the most important compact we have in any society, and that is hope for a younger generation, has been broken. And when that happens, you end up with revolution. Right now, we are having what I’ll call border skirmishes— meme stocks, for example—that could erupt into revolution. So we need to figure out a way to increase the prospects for the one-third of young people who are not going to college. America has become about “How do we take kids from the top one percent of income-earning households or freakishly remarkable kids and turn them into billionaires?” That’s not America. America is about giving the bottom 90 percent a chance to get into the top 10 percent. And we need to return to that. We need to make a massive investment and retransfer wealth.
You’re fairly critical of the COVID stimulus packages. Do you see any difference between the first two rounds, which came under the Trump administration, and the third round, done under Biden?
There’s a strong distinction. The way capitalism works is that you allow fullbody-contact violence at a corporate level, which creates competition, which creates innovation, which creates prosperity, and then it needs to sit on a bed of empathy in terms of taxation, such that you can redistribute—I’ll use the R-word!—to seniors so they have Social Security, or to the homeless, or to invest in infrastructure. In general, I think the basis of capitalism is that we should protect people, not companies. And where the first two stimulus packages were corrupt is that they were more about protecting companies than people. A majority went to entities, like small businesses, corporations, and state governments.
With the Biden stimulus, more than half of it goes to individuals, and the majority of that is going to people in the lower end. In my opinion, I don’t think a family of four making $150,000 should get $8,000, but still, there are some exciting things about this. If you divide the population into quintiles, the lowest quintile will see its income increase by 20 percent. So I would argue they still got this wrong, but it’s less wrong than the previous two. This third tranche is dramatically different.
Those stimulus programs are going straight onto the national debt—now approaching $30 trillion, up from $5 trillion in 2000. Are you worried about inflation?
The honest answer is: I don’t know. Modern Monetary Theory, to me, is frightening. This notion of “No, we can just continue to print money”—I think at some point, you have to pay it back. People say, “Well, the dollar hasn’t weakened.” But we’ve had universal money-printing. So relative to other currencies, the dollar is fine. It has still undercut the purchasing power of young people.
We’re in uncharted territory. Modern Monetary Theory was a theory, and now it’s in practice. We’ve been—I don’t want to say we’ve been forced, but we’ve opted to print an unprecedented amount of capital. My viewpoint is that it isn’t a problem until it is.
As the world’s reserve currency, we have more latitude to print money and do things than other countries. But at some point, I just don’t believe there’s a free lunch here.
There seems to be an abundance of capital everywhere. Special-purpose acquisition companies, for instance. SPACs raised close to $100 billion in the quarter that just closed, which is the same as the whole previous year, which itself was multiples higher than any year prior.
It’s crazy. I think of it as a couple of things. It’s a decentralization of power. In the old way, a company might go to Goldman Sachs and say, “We want to go public.” And Goldman’s operating committee, which approves IPOs, decides if its institutional buyers would want to own the stock. It makes a discretionary call around whether the company should be public. With spacs, executives get together and say, “We’re as smart as Goldman. We’ll get capital, and we’ll go decide who should be public.” To a certain extent, it’s a regression to the mean because the number of public companies has been cut in half in the past 20 years, so we’re just kind of catching up. And the other trend you’ve got to keep in mind is just never underestimate the market’s ability to create products when consumers have cash in hand. By the way, the investment banks still win because they collect fees on these spacs.
There were some early successes. Some of the initial spacs did really well—Virgin Galactic, Opendoor. And so, like any asset class that’s performing well, it has just attracted probably too much capital.
spacs aren’t a new innovation; they’ve just grown in popularity. spacs have underperformed the market over the long term because, generally speaking, again it goes back to scarcity. When a company passes muster with the Goldman’s operating committee that has to bless an IPO, it’s considered best of breed.
There’s no doubt that spacs are evidence of froth. A lot of these companies will be worth less than they are now, but some giants will be birthed from it. Some
of the most talented executives in the world are raising money and going hunting for companies. And it’s just part of the cycle. We’re in a part of the cycle where it’s great to be a seller.
What does that mean in practical terms?
I serve on boards, and all my advice comes in different shades of one color and that color is sell. Issue stock, sell assets, sell. I coach a lot of entrepreneurs, and if they call me and say they’re raising $20 million, I’ll say, “Raise 30 and take 10 off the table. And hope I’m wrong. Hope that thing doubles, and call me back and tell me what a fool I was.” It’s just a great time to sell across almost any asset class.
How long do you think this moment will last?
I’m 100 percent certain the market is going to correct. I’m almost 100 percent certain that neither I nor anyone else knows when. Plenty of pundits called the dot-com implosion perfectly, but the thing is, they called it in 1997, and the markets went up another 50 percent before it finally did crash. One investment strategy that has proved to be a terrible one is believing that you can time the market.
So much of it is about your personal situation. If you’re in your 60s and you have assets, you’re not looking to get rich; you’re looking to not get poor. So sell. But I sold my company L2 in 2017. I thought the markets were at all-time highs then. We sold our company for eight times revenues, which is extraordinary. Could we sell it for more now? Probably. So I can’t tell anybody for certain that this is the top.
So basically the world is more greedy than scared right now.
Oh, 100 percent. We’ve been to this movie before. The question is what do you do? Financial theory tells you that you always want to be in the market because there’s just a small number of days where the markets rocket upward, and you want to participate in that. It’s just very hard to time. I would just say that I think this is a great time, if you have assets, to diversify.
You have real estate at all-time highs. Art, all-time highs. And crypto setting a new high every day. The stock market’s setting all-time highs every day. Apple, for most of its life, has traded somewhere between call it 12 and 16 times earnings. It’s at 35 right now. This is just an environment where there’s been such incredible printing of money that assets are trading at incredibly rich valuations, whether it’s a private company that traditionally wouldn’t be thought of as a public company, or a cryptocurrency, or a Grayson Perry print, or beachfront real estate in Laguna Niguel.