Friday, September 24, 2010

The Inflationary Effects of Stock Grants

I've previously stated that I believe that, when an economy is operating normally*, the primary cause of inflation is debt-financed financial speculation. 

I'm going to restate my position and assert more broadly that the primary cause of inflation is financial speculation.  Why have I dropped the "debt-financed" qualifier?  Employee stock grants.

I live in the San Francisco Bay Area, the epicenter of the Internet Bubble.  In the mid-1990s, we had so many "Internet millionaires" bidding up the housing prices around here that our housing bubble started around 1995.  Today, we have the "Google millionaires."  And I personally have received a substantial sum of money by selling thousands of shares of stock I received through grants of stock and stock options.

The fact is that an employee who exercises a stock option is creating money from thin air as assuredly as and more effectively than any bank who engages in fractional reserve lending. 

I will update this post later with further thoughts on the matter, particularly regarding whether stock and option grants are a good idea or not.

*Hyperinflation is the pathological case where the market no longer believes that the sovereign will make good on its promise to back the currency.  The legitimacy of all currency, whether fiat currency or gold-backed currency, depends on the sovereign's guarantee of the currency.