Has the Art Markets Morphed into a Pyramid Scheme?

I recently wrote 

there hardly has been a natural or market based “price discovery” because market signals have been severely distorted.

This is very important because this also shows that aside from financial markets, a vast segment of economic activities have also been influenced or affected by the monetary policy induced manipulation of price signals.

It appears that we are seeing the same dynamic unfold even in the art markets. 

Godfrey Barker, a British journalist and author specializing in arts seems bewildered by the ongoing developments in the art markets.

At the Financial Times Mr. Barker writes:  (bold mine)

According to Art Market Research, prices are up by 121 per cent in four years and by 634 per cent since 2000. This market shows enduring powers; it has survived plunges such as a 49 per cent crash in the year from May 2009, and leaps such as its 94 per cent recovery in 2010-12.

Mr. Barker doesn't realize that the so-called "enduring powers" by the global art markets has been due to the intensifying interventions of central banks in the economy and financial markets.

And the reason art markets are being chased at by the elite…

The art market has long served the private purposes of the wealthy, from helping them park large sums of money to achieving quick resales of leading pictures, often at twice the original price. Art also offers secrecy and tax rebates when it is displayed to the public. It can be carried in yachts and private jets from one jurisdiction to another. And it is an alternative to cash when settling debts. Interest is strongest in China, Japan, Russia and the Middle East.

One may add status symbol to that

Yet massive price distortions which Mr. Barker says looks like “pyramid schemes”

But funny numbers imply, at some level, false prices. If Alice in Wonderland were involved she might say: “When I go down to the car saleroom I hope my BMW will be as cheap as possible. When I buy a Warhol, I hope it will be as dear as possible.”

Contemporary art is, beyond doubt, an irrational market and its prices, both top and middle, are not always the result of unfettered competition.

The game played by sellers, buyers, auctioneers, dealers and, increasingly, artists is to start with sky-high values and lift them gradually until “the greater fool” joins in, upon which everyone collects their profits. To attract new buyers, publicity is essential, so Christie’s and Sotheby’s bombard the world with news of the record prices their auctions set, and details of private sales also leak out – $137.5m for Willem de Kooning’s “Woman V”, $140m for Jackson Pollock’s “No. 5, 1948”. All sides aspire to lift prices – most notably, auction houses that consult with sellers and guarantee them a tempting outcome.

This financial sport purports to have no victims; even today’s fool, it is supposed, will be tomorrow’s winner.

Yet we should be uneasy. Something about contemporary art echoes pyramid schemes – clubs that make money by recruiting evermore members. The members believe that the artwork they buy is a solid investment, but it is essentially worthless; art is an empty vessel, its value, like that of a $70m shark, solely the confidence that buyers repose in it.

Profits flow, however, so long as new buyers arrive. If one day they do not, and existing buyers take fright and leave, all remaining players will become losers.

Even a casual 'art' (non economic non bubble) observer can notice of deepening accounts of price anomalies and intensifying irrational behavior developing in specific markets

Again from my last Sunday’s outlook

If the cost of unscrupulous behavior have been substantially lowered (which means such actions have even been rewarded), then the natural consequence would be to see these activities multiply.

And they like Gremlins, have been multiplying fast.