by Elizabeth Herridge
26 June 2016
Recently, I was reading the New York Times and was struck by an article in which the global — and specifically the Federal Reserve’s – target inflation number was said to be 2%. Thinking of the spiralling prices achieved in the art market since the global economic crisis of 2008, I had to laugh.
Clearly, any notion of a 2% inflationary environment in the art market is ridiculous of late. What is driving the pricing in that market, then? Is it the availability of ‘cheap’ money in an effectively zero interest rate environment? Or currency speculation/arbitrage opportunities? Or money laundering?
Looking beyond these ‘usual suspects’, I came up with several other possibilities. This article presents them for consideration.
The first possibility is that the different way we now calculate the time value of money, because of the shift in our perception of time produced by the onslaught of technology, is affecting pricing in the art market.
The second possibility is that this shift in our perception of time has caused a higher level of anxiety in the population, and that we seek to mitigate this anxiety through the purchase of tangible objects such as artworks.
Another possible reason is the revamped commission structures of auction houses and dealers. Buyers at auction face premiums of 25% or more on top of the hammer price. The public is now used to paying these higher premiums, and one supposes that private dealers are also profiting from this by increasing their prices – and revenues – by an equivalent amount, thus raising price levels across the board.
I should admit that the last time I wrote about the art market and inflation, in 2009 for Cassone, the online art magazine, I got it quite wrong. At the time, I based my predictions on an historic economic model regarding growth in the money supply and the anticipated and consequent inflation. The Fed’s subsequent monetary policy, which effectively reduced interest rates to zero and increased the money supply, instead resulted in a lack of inflation!
Chastened by that foray into economic forecasting, I would suggest that some factors exist in the current environment that were previously unknown or nonexistent and whose effect could not have been anticipated.
One such element is the truncation of time – in other words, the now astonishing speed at which information is communicated and received. This phenomenon has had the effect of altering our sense of time. For example, it used to be that the ‘time value of money’ could easily be calculated. This new ‘shortening’ or compression of time (possibly, the unconsciously perceived acceleration of the same periods) has had the result that previous rates of return on investment are now expected within shorter periods of time and seem subject to a ‘multiplier’ effect, as they have increased exponentially.
Elements that used to signal the passage of time – the daily newspaper and seasonal produce, for example – are now available at any time and on demand. Subtle changes in climate have blurred the seasons, making them less distinct and causing confusion as to the pace of time and where we are situated in it. The year seems to pass much more quickly than it used to, people say. One wonders whether this is simply a mathematical function, where twelve months is an increasingly smaller percentage of one’s age and is thus a seemingly shorter period of time, or whether there has been an actual change in our perception of time.
Experiences help us to mark moments of change, moments in time. The blurring of these due to this new phenomenon of the acceleration of time has produced the destabilising effect of increased anxiety. How is this being mitigated? One solace might be in the ownership of tangible items, which provide a few things that a hefty bank balance cannot. By ‘tangible’, I am not just referring to objects that one can hold in one’s hand, but to all material objects and images. This perhaps explains the increased demand and spiralling prices that we are seeing in the art and auction market.
For illustration purposes, let’s take a small Henry Moore limited edition bronze. If one is lucky enough to own such a work, one might easily imagine feeling rather special. After all, there is a limited supply of them, a broad appreciation for them and they are instantly recognisable. Ownership of such an item imputes qualities of intelligence, taste, wealth and sophistication – attributes likely to be agreed by others.
Moreover, small Henry Moore sculptures are an example of a ‘brand’ with the established characteristics of quality, rarity, liquidity in a number of currencies, as well as easy transportability if one must change location quickly.
The fact that the piece is art made at another point in history hearkens back to the nostalgia of a less hectic and perhaps more intelligible life, whether this view is accurate or not. Its small size also is important, as tactility provides a sense of engagement if one is seeking comfort, and has been shown to reduce anxiety.
Of course, this is just one example, but it is a rather ideal one, as it ticks so many boxes!
In summary, in the increasingly ‘virtual’ world produced by technology, there seems to have been a shift and an acceleration in the perceived rate of the passage of time. In this environment, auction prices have spiralled. Inflation is almost nonexistent, and is certainly not the menacing factor it has been historically. One seeks to understand this new market phenomenon even if we have already unconsciously responded to it.
It would appear that one result has been a renewed interest in the ownership of objects and images, to satisfy a need for the pleasure and comfort that tangibles can provide. There has been a shift away from the limited satisfaction of the impersonal bank balance as a source of security and assurance. A new manner of calculating ROI has developed, which now factors in the ‘truncation’ of time. Rather like financial derivatives products, its application in the marketplace has caused a multiplier effect to occur in terms of pricing. Contributing to this is the revamping of auction house commission schedules, which private dealers have embraced and amalgamated in their own pricing structures for the purposes of revenue enhancement.
These elements, taken together, offer an alternative theorem as to why the art and auction market results are evidencing increasingly high and record-setting prices.