Capital migration between these three layers.
Layer 1: The Physical Economy
- Energy
- Agriculture
- Water
- Metals
- Infrastructure
- Manufacturing
- Real estate
- Transport
These are tangible assets and productive activities. They satisfy physical human needs.
Layer 2: Financial Claims
- Shares
- Bonds
- ETFs
- Investment funds
- Bank deposits
These are claims on Layer 1 assets and cash flows.
Layer 3: Financial Abstractions
- Futures
- Options
- Swaps
- Structured products
- Leverage
- Synthetic exposures
These are claims on claims.
What makes your recent series interesting is that it can be interpreted as a story of capital moving down the pyramid.
Historically, during periods of stability, capital often moves upward:
Physical assets → Shares → Derivatives
Investors become increasingly comfortable holding paper claims because they trust:
- Governments
- Financial institutions
- Currency systems
- International trade networks
The financial layers expand faster than the underlying physical economy.
However, during periods of uncertainty, the process can reverse:
Derivatives → Financial Assets → Physical Assets
Investors begin asking:
"Who actually owns something real?"
That question has appeared repeatedly throughout history.
Examples include:
- The inflationary 1970s
- Weimar Germany
- Argentina's recurrent crises
- Russia in the 1990s
- Various emerging market currency crises
In each case, confidence in paper claims weakened and ownership of tangible assets became more attractive.
A useful image for readers is this:
The Pyramid of Claims
Layer 3: Claims on claims (Futures, options, swaps)
↓
Layer 2: Claims on assets (Shares, bonds)
↓
Layer 1: Assets themselves (Land, energy, food, metals, factories)
The lower one moves in the pyramid, the closer one gets to physical reality.
The higher one moves, the greater the reliance on trust, law, liquidity and financial stability.
This also ties directly into your recent theme of:
"The Rotation from Financials to Physicals."
The argument is not necessarily that financial assets become worthless.
Rather, it is that after decades in which Layers 2 and 3 expanded much faster than Layer 1, investors may increasingly favour ownership linked to scarce physical resources.
That is essentially the story behind:
- Gold
- Silver
- Copper
- Agriculture
- Energy
- Water infrastructure
- Commodity producers
- Real assets generally
Viewed this way, your three recent posts are really one larger narrative:
For forty years capital climbed the pyramid. Today there are signs that it may be starting to descend again.
Whether that proves correct remains to be seen, but it is a powerful framework because it links financialisation, globalisation, debt expansion and the renewed interest in tangible assets into a single coherent picture.
Glossary
Financialisation - The increasing importance of financial markets, financial institutions and financial instruments relative to the productive economy.
Real Assets - Physical assets with intrinsic utility or scarcity, such as land, energy resources, metals and infrastructure.
Derivative - A contract whose value depends upon another asset rather than direct ownership of that asset.
Liquidity - The ease with which an asset can be bought or sold without significantly affecting its price.
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