Death’s upside: the diamond skull

This morning is the first day back at work after the Easter break. Having overindulged on chocolate eggs on the weekend, I decide to get some exercise and walk to my Mayfair office from London Bridge station. As a result, I happen to be passing the Tate Modern as they open and pop in to see the Damian Hirst show on impulse. There is a huge queue for tickets but no queue or tickets required to see the ‘diamond skull’. The whole of the huge turbine hall is given over for the display of this one tiny piece.

But what an astonishing piece. Inside a small completely dark room the platinum skull, studded with diamonds, is the only thing visible. It is brilliantly lit and walking around it you see the scintillating, inner fire of all those diamonds shimmering at you. The effect is quite breathtaking. It is much smaller than I imagined and I was surprised by the strength of my emotional response. In the darkness, you feel torn between a push-back of revulsion and the tug of desire. The middle aged matrons next to me are completely hypnotised by it: rabbits in front of a snake. The only time I have felt a similar feeling is when my aunt took me to see Tutankamun’s golden death mask in the exhibition at the British Museum in 1972.

Both objects seem to be saying the same thing. Exquisitely crafted from priceless materials, they are simultaneously a celebration of death and a bid for immortality. In Hirst’s case there is another angle: the obsession of the art world with money.  The value of the diamonds is reputedly £14m and the asking price when it was displayed at the White Cube gallery was £50m. There is still some confusion about whether it was actually “sold” and it is apparently owned today by an anonymous consortium which includes Hirst himself. So there is catataxic debate about whether the whole is worth more than the sum of its parts. How much value has the artist added? If you were to sell it today in the open market would it be worth more than the value of the diamonds that make it up?

I don’t want to go too far down that path because there is a different catataxic angle that I want to explore. In the train this morning, I read two articles in the newspaper, both of which are obliquely connected to the diamond skull. The first was a warning by the Financial Services Authority (FSA) that thousands of Britons face a “mortgage time bomb”. The second was about Shandong Helon, a Chinese chemical company teetering on the edge of bankruptcy.

Let’s look at the mortgage time bomb first. Banks in the UK have been transferring customers over to “interest only” mortgages and these now make up 35% of the market. Many homeowners have been struggling to meet payments on traditional mortgages. Rather than calling in the loans, the banks have rescheduled them and switched their customers over to “interest only” products where the monthly payments are much less. A £200,000 mortgage would typically cost £1,000 a month if it was a traditional product but only £600 a month if it was “interest only”. They are cheaper because, as the name suggests, you are only repaying the interest and not the capital sum. The problem is that your debt is not reducing, so at the end of the mortgage period you are faced with a huge bill: the whole value of the amount you originally borrowed.

Why are the banks being so helpful? It may be that they have such a poor profile in the media right now that they want to avoid headlines about evicting impoverished homeowners, especially since half of them are now government owned. But the other reason is that if they repossessed the houses of the defaulting customers and sold them off they would drive house prices down thereby damaging their own balance sheets. It’s much better for all concerned for the loans to be classified as “in forbearance” rather than “in default”. Homeowners keep their house, the banks’ assets look better than they really are and house prices are kept artificially high.

There is a downside though. All this ‘benevolent’ activity is just storing up problems for the future. When interest rates finally rise, all hell will break loose. If people are struggling when base rates are 0.5%, what will it be like when they go up fourfold and return to a long term norm of 2%? In America, banks have been much more ruthless about mortgage foreclosures. House prices have halved, causing painful adjustments in the economy. But that is all history now, and the banks, having written off all their bad loans, are lending again driving growth in the economy. In contrast, the UK seems to be following the same path as Japan in the 1990s. Japanese banks hid their bad loans and the resulting drag on the economy meant no growth for more than a decade.

The second article about Shandong Helon has a similar theme. This Chinese chemical company has to repay 400m renmenbi  on April 15th. The market has been assuming that it will default; the first ever default in China’s fledgeling domestic corporate bond market. But a brief statement today confirmed that the bond will be repaid in full. No Default. Strangely, this is not good news at all. The problem with China’s bond market is that it has developed under the assumption that companies will always be bailed out by the state in the end (just like the EU Greek crisis). That means that risk has been badly mispriced.  So plenty of people were secretly hoping that Shandong Helon would default, thereby resetting the market’s sense of risk and allowing the market to function properly for the first time.

One of the five maxims of catataxis is  “virtue reverses at a catataxic boundary”. In other words, what is good for the individual is bad for the collective (and vice versa). Death (or default) is a good example of this. Death, from the individual perspective, is pretty much the worst thing that can happen. But from the collective perspective it is vitally important: a positive thing in that it allows the chemical elements of the life form to be broken down (through bacterial decay) and redistributed more profitably to other parts of the ecosystem. Ashes to ashes, dust to dust; it’s all part of the great circle of life. Similarly, in the economy,  the parallel to death is default, which, after the bad debts have been written off, allows capital to be redistributed to those who deserve it more.

So that’s the message that I take from Damian Hirst’s diamond skull. Death should be celebrated and not feared. It’s an important part of the process. Death has an upside.

3 Replies to “Death’s upside: the diamond skull”

  1. Thanks for this John, an interesting read and I enjoyed your analysis of the situation. I also enjoyed the fact that in one article you were able to talk about a piece of art which is basically more valuable than a whole company. Such interesting times we live (and die) in!

  2. Great post. On the skull, I think you are right – I have read that in William Poundstone’s book.
    On mortgages too, what would happen if interest rates were above the level of inflation? I think we know that bank balance sheets would suddenly have a lot more NPLs. Now they have been recapitalised by the Central Banks/tax payer it is not the banks that are insolvent, it is their customers that are insolvent.

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