Empire of Debt
They went to the polling stations in November 2004 and believed they were selecting the government they wanted, when the choice had already been reduced to two men of the same class, same age, same schooling, same wealth, same secret club, same society, with more or less the same ideas about things should be run. (p. 25)
since most innovations are failures, people should view any proposed change to the traditional order with skepticism. That doesn¡¯t mean you can¡¯t innovate in a society, but the burden of proof should always be on the world improvers to show that their proposed change will make things better --- something they can almost never do. (p. 195)
Comment: This can be derived from
the second law of thermodynamics.
John Maynard Keynes ¡ showed that nations could be winched out of recession by easy credit and government spending. When private spenders eased off, he noted, government could take up the slack --- by running deficits. Where would the money come from? He expected governments to run surpluses in good times so they would have money to spend in bad ones. Had government actually done so, the Keynesian system would have at least been honest. But this was the part the politicians never particularly liked, and the part of his plan they never could quite follow. ¡ Politicians had no trouble giving the economy the boost that Keynes had suggested. But when it came to saving money to have something to give a boost with, the time never seemed quite right. ¡ Like fat men at a wedding feast, policymakers told themselves they would eat less after the party is over, to make up for their gluttony now. But in public finance, there is never a good time for fasting. (p. 201)
In 1995, Department of labor officials began to crunch the numbers into such odd and awful shapes, even their own mothers would no longer recognize them. The practice known as hedonic price indexing based on ¡°chained dollars¡± was put into place. Computers came to be valued for their potential to increase productivity rather than their actual cost, dramatically inflating GDP so as to make the number useless.
Nearly half the items in
Between 2000 and the end of 2004, for example, spending on computers rose 9.3 percent. Since computers became more powerful, however, the number was enhanced to 113.4 percent. Other numbers in the consumer price inflation calculation were adjusted by the substitution effect. If steak rose in price, the statisticians assumed people switched to mutton, thereby reducing their cost of living.
So did they adjust the price of housing. It cost a lot more to own a house in 2005 than it did in the year 2000, but the boys went to work on the numbers with pliers and a torch. Soon they had twisted the cost of actually owning a house into the cost of renting the same house; ¡°owners¡¯ equivalent rent¡± they called it. ¡ The CPI, of which more than a quarter is the cost of housing, was held down. ¡ While everyone knows it has become much more expensive to make ends meet, these distortions keep the official CPI low and the gross domestic product (GDP) figures high. (Nominal output is reduced by the official CPI number to give the real GDP figure. The lower the CPI, the higher the resulting GDP figure.) The productivity figures are also beaten senseless. Output per hour is distorted by the measure of output itself, which includes both hedonic quality enhancement and inflation adjustment. (p. 208)
The shareholders themselves --- the millions of lumpen pseudo-investors who own mutual funds --- couldn¡¯t tell the difference. They had neither the time, the money, nor the training to be real capitalists; they were merely chumps for Wall Street. (p. 214)
Suppose it is credit card debt. Say the man used the money to take a trip around the world. But the trip wore him out; no sooner does he return home than the collapse of a heart attack. Are the children under any obligation to pay the credit card bills? Not at all.
But comes now, ¡°public¡± debt. What kind of strange beast is this? One generation consumes. It then hands the next generation the bill. The younger generation never agreed to the terms of indebtedness. They are party to a contract --- and on the wrong end of it, we might add --- that they never made. Indentured servants only had to work seven years to pay off their indenture. This new generation, on the other hand, will have to work their entire lives.
Such arrangements are often excused as part of the ¡°social contract¡±. But what kind of contract allows one person to take the benefits while sticking the costs to someone else?
But dead men don¡¯t talk, and the unborn don¡¯t vote. Politicians ¡ gradually came to see that they could get the benefits of spending money in the present, while passing on the debts to the next administration and the next generation. (p. 227)
Markets work best without the heavy hand of regulation, Greenspan acknowledged. But he seemed to exempt, conveniently, the credit markets. ¡ Instead of letting lenders of credit and demanders of it be guided by an ¡°invisible hand¡±, for years the Fed chief¡¯s boney paws have drawn them together. Mr Greenspan¡¯s ¡°Open Market Committee¡±, not the open market, has largely determined the rate at which lenders will lend, short term, and at which borrowers will borrow.
Why is it that what is good for the goose of lumber markets, stock markets, grain markets, laptop computer markets, and almost every other market under Heaven is not good enough for the gander of the credit market? The answer is not one of logic, but of convenience. Most of the time, political leaders prefer easier credit terms than buyers and sellers would determine on their own. In setting its key rate, the Open Market Committee is likely to set a rate that is to the politicians¡¯ liking. ¡
This artificially low rate gives us the illusion that there is more money available than there really is. Hardly anyone complains. Consumers feel they have more money to spend than they really have. Producers sense a demand that really isn¡¯t there. Undeserving politicians get reelected. And conniving central bankers are reappointed.
The ¡°information content¡± of the Fed¡¯s low rate misleads everyone. They proceed happily on the long, slow process of ruining themselves, unaware that they are responding to an imposter. (p. 235)
Comments: Relate it to my papers.
Stocks are buoyed up or thrown down as the market¡¯s view of the firm¡¯s value changes. Profit-making enterprises¡¯ value depends on how much profit they make, a figure subject to both change and speculation. But the value of a house changes little over time. Year after year, it is the same roof, the same walls, the same cozy warmth and convenience. The value that owner-occupied house gives cannot be amended, jiggled, bent, written down, cooked up, or restated. ¡ No profits are earned.
And yet, the homeowner also believed that he can go to friendly lenders from time to time and ¡°take out¡± cash --- as if the place had been accumulating earnings. What he is taking out, he believes, is merely surplus equity. He figures that if last year he had, say, $200,000 worth of house, this year he must have $250,000 worth of house. He can ¡°take out¡± the $50,000 in profit --- and still have his $200,000 worth of house.
He does not ask himself where that $50,000 came from. He does not find it at all extraordinary that an item he knows to be a cost center could also produce more in ¡°profits¡± each year than he earns in income. (p. 240)
At the foundation of essentialism is ignorance, not knowledge. Ignorance rules the world of finance. It also rules the rest of the world. ¡ What do you do when you know so little? You become very modest. You turn to essentials. You focus on what you can control. You follow the rules. ¡ In business and investment, essentialists operate on the basis of private knowledge, not public knowledge. (p. 319)