Book review: “The Trading Game” by Gary Stevenson (2024)

Does the logic for a wealth tax stack up?

Plus: “The Impact of Inequality on Asset Prices When Households Care About Wealth” by Gary Stevenson (2019)

I was expecting The Trading Game to be a politico-economic manifesto sprinkled with a few autobiographical anecdotes, but it is almost exactly the other way around. The book is more than 90% autobiography, with only a sprinkle of political economy.

We don’t usually review autobiographies on this blog, but I’ll make an exception for this one, because Gary Stevenson has built an entire public persona on his origin story as the man who beat capitalism at its own game. This book tells that origin story: “Gary Begins”. To add some more meat, I will review the book jointly with his Oxford University dissertation “The Impact of Inequality on Asset Prices When Households Care About Wealth”.

Stevenson grew up in relative poverty in Ilford, East London. A maths whiz from an early age, he enrols at the London School of Economics in 2005 to study a combination of economics and mathematics. He likes the material, but he doesn’t feel accepted by his fellow students, who he describes as posh, pretentious, and very career-oriented. He still remembers how some of them appear surprised by the fact that he gets good grades, clearly underestimating him: “[A] lot of rich people expect poor people to be stupid”.

Stevenson then learns about a student contest organised by Citibank, where they offer the winner an internship. The contestants play a card game, “the trading game”, which simulates aspects of financial markets. The other participants play in egghead mode: they treat it purely as a maths game, and go by the textbook. Stevenson, in contrast, plays in streetwise mode. “[T]he kind of person who studies Economics at LSE and attend Finance Society events is not smart”, he explains. “Or rather, they’re a different kind of smart. They are smart with a calculator, and they are good with a spreadsheet.” He recognises that the game is more about bluffing, distracting, and getting others to reveal information. His unconventional strategy works. A few years later, he would employ a similar strategy again – except next time, it would not be for a game of cards. It would be the global economy.

Having won the trading game, Stevenson gets the internship at Citibank, which later leads to a job as a short-term interest rates trader. This is his entry into the mad, frenzied world of high-stakes city trading. At the bank, we meet a colourful cast of characters, some likeable in their own way, some not. Stevenson learns the ropes, and works his way up. He makes money. But his gains are volatile. In 2010, acting upon bad advice, he makes a huge loss when the Swiss Central Bank (SNB) unexpectedly sets a super-low base rate. He wants to know how he could get this so wrong, and realises that in order to get to the bottom of it, he needs a better grasp of economics. So he returns to his old textbooks.

When Stevenson’s colleague “Bill” – a slightly mysterious figure who is always several steps ahead of everyone else – sees him reading an Econ textbook, he explodes with rage, grabs the book, and throws it into the bin. In swearword-laden prose that I cannot quote here, Bill explains that economics is a useless profession. If you want to know what is going on in the real world, you need to talk to real people. Stevenson is impressed: “And that was it. The most important thing I ever heard.”

Photo by Miquel Parera on Unsplash

What does this “Lived Experience” approach to economics tell him?

Going into 2011, the world is still reeling from the Great Financial Crisis, and Europe, in particular, is entering the most acute stage of the Eurozone crisis. Nonetheless, most observers expect that recovery is just around the corner. Consequently, they expect interest rates to go back up to normal levels again, and invest accordingly.

On the basis of his conversations with the people he knows, Stevenson bets in the opposite direction. There is not going to be a recovery. People have no money, so they are not spending anything. The economy is trapped.

In prolonged discussions with a colleague, Stevenson develops this into a fully-fledged economic theory. (The colleague represents orthodox mainstream economics: I am not sure whether he is based on a real person, or whether he is supposed to be an anthropomorphised Econ textbook.)

“We’re in a monetary system. The whole thing always has to be in balance. For everyone who’s in debt, there’s someone who’s in credit. For everybody losing money, there’s somebody who’s gaining. The whole system is designed to be in balance. […]

[A]ssets weren’t disappearing. But if […] the people didn’t own them, and the government didn’t own them… Then who did?”

And then the realisation hits him.

“It was us. It was us, wasn’t it? We were the balance. […]

It was inequality. Inequality that would grow and grow, and get worse and get worse, until it […] killed the economy that contained it. It wasn’t temporary, it was terminal. It was the end of the economy.”

That is Garynomics, in a nutshell. Wealth inequality is self-perpetuating, and it leads to an economic death spiral. The wealthy have a lower marginal propensity to consume. As they get wealthier, they do not buy more consumer goods and services. They buy more assets, pushing up asset prices, and putting them out of ordinary people’s reach. With not enough consumer spending in the economy, ordinary people see their incomes fall. They have to run down their savings, and sell their assets. To whom? To the wealthy, of course, who get even wealthier in the process. And then everyone else has to rent/lease/borrow some of those assets back from the wealthy, paying various forms of rents to them, making them even richer, and enabling them to buy even more assets. And so on.

Or in Stevenson’s own words:

“We had been diagnosing a terminal cancer as a series of seasonal colds. […] [W]hat was really happening was that the wealth of the middle class […] was being sucked away from them and into the hands of the rich. Ordinary families were losing their assets and going into debt. So were governments. As ordinary families and governments got poorer, and the rich got richer, that would increase flow of interest, rent and profit from the middle class to the rich, compounding the problem. The problem would not solve itself. In fact, it would accelerate, it would get worse.”

This apocalyptic vision informs his investment strategy. In 2011, he makes huge amounts of money. But he cannot enjoy it. He experiences great luxury, but derives no pleasure from it. For me as a low-tier amateur foodie and wannabe wine buff, it is almost painful to read about how Stevenson visits the most exquisite restaurants, samples the most exquisite wines, and describes it all with perfect indifference, like somebody who has lost his sense of taste and smell due to Covid.

From 2012 on, Stevenson’s relationship with his colleagues deteriorates. Even though he is the one telling the story from his own perspective, it does not quite become quite clear why. Is it because he now sees them as part of the problem? Is it because he had his “Are we the baddies?” moment, and holds it against those around him?

Whatever the exact reason, his behaviour seems increasingly erratic. He is transferred to Japan, but that does not solve anything. What follows is a long-drawn-out, painful process of extricating himself from the bank. He cannot just leave, or rather, he could, but it would mean losing a large part of his bonus, which is held in the form of deferred stock. The book ends on a happy-ish note, though: he gets out with his full bonus in the end, and moves back to Britain.

Stevenson’s tales of the madness of high-stakes finance are all entertaining in their own way, but that is, of course, not the reason why this book was the No. 1 Sunday Times bestseller for weeks in a row. The reason is that Stevenson has since become a prominent activist and economics commentator, who has, among other things, almost single-handedly placed the idea of a wealth tax on the national agenda. So do his economic ideas – or rather, does his One Big Idea – stack up?

Several of Stevenson’s former colleagues have disputed several major aspects of his story, especially his claim that he was the best trader in the world, or that he went completely against the grain in his investment strategy. Some of Stevenson’s critics have used that as a reason to dismiss him as a fraud, and a conman. But I would argue that these critics are missing the point somewhat. Stevenson’s more extravagant claims are ultimately not that important. It doesn’t really matter whether he was literally “the best in the world”, or whether he was just one of many people who made a good call. The point is this: if you are prepared to bet good money on some economic prediction you make, I am more likely to listen to you – especially if you then go on to win that bet. You don’t need to be the “best in the world” for that, and you don’t need to be only person in the world making such a prediction. Those are differences in degree. As far as I have seen, nobody disputes that Stevenson made a decent chunk of money in 2011, and nobody disputes that his trading activities had at least something to do with interest rate forecasts. That’s good enough. That, and the fact that he has clearly been giving these issues a lot of thought for quite some time, qualifies him to comment on those matters, even if you think he has massively embellished his story in a self-aggrandising way.

So I’m less interested in whether his former colleagues confirm or contradict this part or that part of his story. My issue with Garynomics is that I don’t believe that his success as a city trader confirms his own theory. In a scenario where interest rates cannot realistically go any lower, predicting where they will go next is a binary choice. They can go up, or they can stay the same. You can pick the right option, but that doesn’t mean that you have picked it for the right reason.

Suppose somebody made money in 2016 by betting on a Leave victory in the EU Referendum – perhaps on the basis that they deliberately ignored the opinion polls, and chose to listen to people in their local pub instead. Does this mean that this person is now the ultimate authority on all things Brexit? Does it mean that they can brush off any criticism of their analysis by saying “I made money from this, so I’m right”? Of course not. Maybe the people in that pub voted Leave for some reason that is highly specific to the area, but played no role elsewhere. Or maybe that pub was representative of public opinion then, but no longer is now. Either way – your successful bet certainly wouldn’t mean that your opinion on the Youth Mobility Scheme, or dynamic alignment with Single Market rules, is more valid than anyone else’s.

One obvious problem with Stevenson’s theory is that wealth inequality today is not especially high by historical standards. From the late 18^th to the early 20^th century, the wealthiest 10% of the population held around 90% of the total wealth. If an economy with high levels of wealth inequality cannot grow because the rich just hoard more and more assets – how on earth could the Industrial Revolution ever happen?

Wealth inequality then decreased slowly but steadily for most of the 20^th century until the late 1980s, when the wealth share held by the top decile dropped to just under 50%. Then in the 1990s and early 2000s, it edged up a bit again, but not to anything like the levels of earlier decades. It remains below 60% today, lower than it used to be for most of the postwar period, which Stevenson considers a relative golden age.

Nor is Britain exceptionally unequal, wealth-wise, by international standards, and there is no discernible relationship between wealth inequality and growth. The US has a much more unequal wealth distribution than Britain, and whatever problems they may have, sluggish growth is not generally one of them. After the Great Financial Crisis, it took them just two years to revert to their pre-crisis growth path. How is this possible in Stevenson’s world, where economies with an unequal wealth distribution cannot grow?

In his paper/dissertation The Impact of Inequality on Asset Prices When Households Care About Wealth, Stevenson translates his Big Idea into a theoretical economic model, in which there are two groups of people: the rich and the poor. Their economic wellbeing depends on both their consumption and their wealth, that is, they value asset ownership in its own right, not just as a means to enable future consumption. There are various specifications of his model. He starts with a version in which wealth is fixed. Unsurprisingly, in this model, increasing inequality leads to higher asset prices: the rich demand more assets, and they can outbid the poor.

He then relaxes the fixed-pie assumption by splitting wealth into a fixed and a reproducible component. The relationship between inequality and asset prices then becomes weaker, and requires additional assumptions: the rich need to specifically value the non-reproducible asset. He concedes:

“In the instance of the model where both fixed and accumulable capital were allowed for, the results only held when agents targeted specifically fixed capital holdings, […] which […] some readers may find unrealistic.”

Stevenson’s conclusion, unsurprisingly, is that wealth inequality is bad, and should be reduced. Even his own theoretical model, though, could allow for a very different conclusion, which he does not explore. In his model, the non-reproducible assets are non-reproducible, because he declares them to be so. Fair enough: it’s his model; he can assume whatever he wants to assume. But the real-world equivalent of his non-reproducible asset (he calls it “land”, but he really means housing) is only non-reproducible, because we have made it so. As Paul Cheshire from Stevenson’s Alma Mater, the LSE, explains:

“[W]hat policy is doing is turning houses and housing land into something like gold or artworks – into an asset […] which is in more or less fixed supply. So the price increasingly reflects its expected value relative to other investment assets.”

So even within Stevenson’s own model, there could be a better alternative to wealth taxes: make the non-reproducible wealth reproducible. Once we have done that, inequality no longer matters.

I couldn’t name a single good example of a wealth tax, and when I asked Stevenson about it (≈40 minutes in), he couldn’t either. But I could quite easily name examples of housing markets where housing is very much not a non-reproducible asset. I can’t see why we should tax and redistribute wealth when we could so easily just create a lot more of it.

Suggestions for further reading/watching/listening:

• The Trading Game │Gary Stevenson (2024)

• The Impact of Inequality on Asset Prices When Households Care About Wealth │ Gary Stevenson (2019)

• Are our millionaires taxed enough? │ Gary Stevenson & Institute of Economic Affairs (2022)

• Economic study on wealth taxes │ Darwin Friend (2024)