5 ms·

Was whole economy a Ponzi scheme?

28 points by noor420 18y ago

zby 18y ago
It seems that the behaviour fuelling those "Ponzi bubles" is <a href="http://www.theatlantic.com/doc/print/200812/financial-bubbles http://www.theatlantic.com/doc/print/200812/financial-bubble... in our basic psychology</a>.
gaius 18y ago
That $50 billion is likely to turn out to be not the amount lost but the amount people wrongly thought they had. 'Zackly.
- noonespecial 18y ago
  Money and wealth turned out not to be the same thing after all. You can create money by scribbling marks on little pieces of paper. Creating wealth turned out to be much, much harder. Seems like every time they forget this, we eventually have a "correction".
vaksel 18y ago
not exactly, people want to think there is some huge conspiracy run by evil geniuses...the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us. Most of the decisions made by these financial geniuses, can pretty much be summarized by a series of if then statements, that they learned through out their lives
- tokenadult 18y ago
  "the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us." Yep, that is more horrifying to a lot of people who want experts to do their thinking for them.
  - ajkirwin 18y ago
    So most of the population then. You can't avoid stupidity.
- LogicHoleFlaw 18y ago
  What kills me about this sort of thing is how easily a system of (let's give them the benefit of the doubt) individually intelligent actors develops catastrophic emergent behaviors. Even if each person involved makes savvy decisions, if the resultant whole is unstable then everyone is still screwed.
  - cracki 18y ago
    ...because hardly anyone has the big picture. this works with ant colonies because they had time to evolve their local decision making. it doesn't work with human economy.
- deleted 18y ago
  [deleted]
taylan 18y ago
I'm curious if we can generalize even more. For example, can we call Academia a giant Ponzi Scheme that will collapse when run out of naive new recruits laboring their years away hoping to reach top of the pyramid one day?
- FiReaNG3L 18y ago
  This one is sadly true
- fallentimes 18y ago
  I think you can say it for any self-replicating profession.
  - ph0rque 18y ago
    As long as there are people paying for the services a given profession provides, it will continue to exist. Now, it might be the case in e.g. academia that the profs will have to do the tedious work that grad students used to do, or come up with other ways of compensation, but the point still stands.
    - fallentimes 18y ago
      It gets murky when the positions are subsidized by the government or otherwise.
      - jorgeortiz85 18y ago
        Scientific knowledge is a public good. That's exactly the kind of thing government should be subsidizing.
        fallentimes 18y ago
        That's a strawman argument. Not all the subsidized positions have to do with science anyways.
mdasen 18y ago
In the short-term, yes. In the long-term, no. When dealing with investments, over the long-run their price will match their value. However, in the short-run, the price will be whatever other people are willing to pay for it. So, in boom times that's often higher than value and in recession that's often lower than value. And in the short-run, new buyers of a stock pay back the older buyers just like a Ponzi scheme, but in the long run the company's value is what determines the price. So, maybe you want to play the system and buy and sell based on these trends, but that's hard. Heck, Harvard's endowment fund couldn't do it, you think you'll be able to? It's a lot easier to focus on the long-run and invest in things that are good values. The real problem that we're seeing here isn't that there are market fluctuations. It's that people wanted to put things in stocks that they thought they'd be using as cash in 6-18 months - specifically, retirement savings. If you're not one of the rich whose wealth will outlast their life, you need to move money from stocks into less risky investments as your retirement date approaches. If you don't, then you have to be flexible with when you retire and how much you'll have. But everyone wanted that extra hundred-grand or something to retire on - why move into safe investments when stocks have done so well? I don't want to loose out on some additional cash for retirement! Heck, most investment firms have auto-adjusting funds that become more risk averse as you reach retirement age, but they aren't as popular as they should be because people don't want safe as much as they want more. In some ways it's like an unintentional scam. Investment professionals will caution you against being too risky just like a con-person tries to dissuade their mark, but the mark sees what they want and thinks the con is trying to keep them from money. . .and then it collapses. The difference is that the investment professional is (usually) being sincere about avoiding risk. Be careful, don't over-extend yourself with visions of gold, and don't count those golden eggs before they hatch.
- mudetroit 18y ago
  The more fundamental problem was the philosophical shift from holding stock being a means to collect a dividend to expecting the short term ability to purchase stock and sell it for a profit. If you sit and think about it logically, why does a stock that doesn't pay a dividend have any intrinsic value attached to it? Yet we have built an economic structure that says that it is possible for that piece of paper to gain value.
dhughes 18y ago
Well yeah, sort of. If you think about it what is stock, you pay $10 for a share that someone else paid $5 for, pretty much just because of rumours the company may do better in the next month or year, it's like buying air. At least with commodities it seems like there is something material behind that contract; grain, oil, sugar. It's not like one day people will suddenly decide, or could be capable of deciding, to cut out sugar.
bwd 18y ago
"We too thought our retirement funds and houses were growing miraculously, though ours was an illusion fueled by debt rather than fraud" This is clearly true regarding housing prices and the returns and market prices of financial companies, but it ignores the effects of productivity increases when applied to other types of companies. Increasing productivity should allow equity capital to produce higher returns and it is difficult to separate this effect from the effect of a leveraged balance sheet when pricing equities. The market will certainly overshoot on the downside at some point but it's difficult to determine where that occurs because consumption must be lower in the short and long term due to deleveraging by businesses and consumers.
patrickg-zill 18y ago
If you measure the strength of the USD not in relation to other currencies, but what you can buy, either in gold, silver, or a basket of goods (since after all, money is a means to exchange things); then it is reasonable to point out that over the last 100 years, the purchasing power of $1 USD in 1910 has collapsed to about 4 cents today. In 1910, $20 would get you 0.96 ounces of gold (the $20 gold coin), or 15.4 ounces of silver (20 of the $1 Morgan Dollar), or about 600 loaves of bread (bread was about 3 cents a loaf), or over 360 bottles of beer (36 bottles was $1.75). Savers have been punished severely, spenders rewarded as over time, inflation reduced the bite of the debt they took on (they could pay back a mortgage with greatly-inflated dollars). Capital gains taxes did not allow you to adjust for inflation (e.g. if you were given something worth $20 in 1920 as a baby gift and sold it when you were 80 for $900 you didn't really make anything on it). ... it may be quite painful for those of us in the USA over the next few years.
- rms 18y ago
  Beer used to come in cases of 36?
  - patrickg-zill 18y ago
    I don't know if it came in cases, but the only price reference I was able to find was a price per 36 bottles.
- jerf 18y ago
  That analysis leaves so many things out of the story that I would hardly even know where to begin pointing out the problems, including ignoring or misunderstanding compound interest (your analysis only holds for someone stuffing dollar bills in their mattress, not under any other feasible holding model across 100 years, which in truth is simply not approximatable in any simplistic fashion anyhow) and the fact that a dollar in the past is intrinsically worth more than a dollar in the present, because the dollar in the past can be leveraged to generate more present wealth. (Typically, this is looked at from the point of view that a dollar in the present is worth more than a dollar in the future and future dollars must be discounted in value when compared to present dollars, but the tense-shifted statement is equivalent, barring the fact that you can't actually spend past-dollars in the past. (In which case a past-dollar would be REALLY valuable...)) Finally, you seem to be claiming that the US (either collectively or per-citizen) is no more wealthy today than it was in 1920 (or 19xx), which is one of those results so absurd that it should be prompting you to reconsider your viewpoint, not prompting you to post on the internet.

28 points by noor420 18y ago

zby 18y ago

It seems that the behaviour fuelling those "Ponzi bubles" is <a href="http://www.theatlantic.com/doc/print/200812/financial-bubbles http://www.theatlantic.com/doc/print/200812/financial-bubble... in our basic psychology</a>.

gaius 18y ago

That $50 billion is likely to turn out to be not the amount lost but the amount people wrongly thought they had. 'Zackly.

noonespecial 18y ago
Money and wealth turned out not to be the same thing after all. You can create money by scribbling marks on little pieces of paper. Creating wealth turned out to be much, much harder. Seems like every time they forget this, we eventually have a "correction".

vaksel 18y ago

not exactly, people want to think there is some huge conspiracy run by evil geniuses...the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us. Most of the decisions made by these financial geniuses, can pretty much be summarized by a series of if then statements, that they learned through out their lives

tokenadult 18y ago
"the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us." Yep, that is more horrifying to a lot of people who want experts to do their thinking for them.
- ajkirwin 18y ago
  So most of the population then. You can't avoid stupidity.
LogicHoleFlaw 18y ago
What kills me about this sort of thing is how easily a system of (let's give them the benefit of the doubt) individually intelligent actors develops catastrophic emergent behaviors. Even if each person involved makes savvy decisions, if the resultant whole is unstable then everyone is still screwed.
- cracki 18y ago
  ...because hardly anyone has the big picture. this works with ant colonies because they had time to evolve their local decision making. it doesn't work with human economy.
deleted 18y ago
[deleted]

taylan 18y ago

I'm curious if we can generalize even more. For example, can we call Academia a giant Ponzi Scheme that will collapse when run out of naive new recruits laboring their years away hoping to reach top of the pyramid one day?

FiReaNG3L 18y ago
This one is sadly true
fallentimes 18y ago
I think you can say it for any self-replicating profession.
- ph0rque 18y ago
  As long as there are people paying for the services a given profession provides, it will continue to exist. Now, it might be the case in e.g. academia that the profs will have to do the tedious work that grad students used to do, or come up with other ways of compensation, but the point still stands.
  - fallentimes 18y ago
    It gets murky when the positions are subsidized by the government or otherwise.
    - jorgeortiz85 18y ago
      Scientific knowledge is a public good. That's exactly the kind of thing government should be subsidizing.
      - fallentimes 18y ago
        That's a strawman argument. Not all the subsidized positions have to do with science anyways.

mdasen 18y ago

In the short-term, yes. In the long-term, no. When dealing with investments, over the long-run their price will match their value. However, in the short-run, the price will be whatever other people are willing to pay for it. So, in boom times that's often higher than value and in recession that's often lower than value. And in the short-run, new buyers of a stock pay back the older buyers just like a Ponzi scheme, but in the long run the company's value is what determines the price. So, maybe you want to play the system and buy and sell based on these trends, but that's hard. Heck, Harvard's endowment fund couldn't do it, you think you'll be able to? It's a lot easier to focus on the long-run and invest in things that are good values. The real problem that we're seeing here isn't that there are market fluctuations. It's that people wanted to put things in stocks that they thought they'd be using as cash in 6-18 months - specifically, retirement savings. If you're not one of the rich whose wealth will outlast their life, you need to move money from stocks into less risky investments as your retirement date approaches. If you don't, then you have to be flexible with when you retire and how much you'll have. But everyone wanted that extra hundred-grand or something to retire on - why move into safe investments when stocks have done so well? I don't want to loose out on some additional cash for retirement! Heck, most investment firms have auto-adjusting funds that become more risk averse as you reach retirement age, but they aren't as popular as they should be because people don't want safe as much as they want more. In some ways it's like an unintentional scam. Investment professionals will caution you against being too risky just like a con-person tries to dissuade their mark, but the mark sees what they want and thinks the con is trying to keep them from money. . .and then it collapses. The difference is that the investment professional is (usually) being sincere about avoiding risk. Be careful, don't over-extend yourself with visions of gold, and don't count those golden eggs before they hatch.

mudetroit 18y ago
The more fundamental problem was the philosophical shift from holding stock being a means to collect a dividend to expecting the short term ability to purchase stock and sell it for a profit. If you sit and think about it logically, why does a stock that doesn't pay a dividend have any intrinsic value attached to it? Yet we have built an economic structure that says that it is possible for that piece of paper to gain value.

dhughes 18y ago

Well yeah, sort of. If you think about it what is stock, you pay $10 for a share that someone else paid $5 for, pretty much just because of rumours the company may do better in the next month or year, it's like buying air. At least with commodities it seems like there is something material behind that contract; grain, oil, sugar. It's not like one day people will suddenly decide, or could be capable of deciding, to cut out sugar.

bwd 18y ago

"We too thought our retirement funds and houses were growing miraculously, though ours was an illusion fueled by debt rather than fraud" This is clearly true regarding housing prices and the returns and market prices of financial companies, but it ignores the effects of productivity increases when applied to other types of companies. Increasing productivity should allow equity capital to produce higher returns and it is difficult to separate this effect from the effect of a leveraged balance sheet when pricing equities. The market will certainly overshoot on the downside at some point but it's difficult to determine where that occurs because consumption must be lower in the short and long term due to deleveraging by businesses and consumers.

patrickg-zill 18y ago

If you measure the strength of the USD not in relation to other currencies, but what you can buy, either in gold, silver, or a basket of goods (since after all, money is a means to exchange things); then it is reasonable to point out that over the last 100 years, the purchasing power of $1 USD in 1910 has collapsed to about 4 cents today. In 1910, $20 would get you 0.96 ounces of gold (the $20 gold coin), or 15.4 ounces of silver (20 of the $1 Morgan Dollar), or about 600 loaves of bread (bread was about 3 cents a loaf), or over 360 bottles of beer (36 bottles was $1.75). Savers have been punished severely, spenders rewarded as over time, inflation reduced the bite of the debt they took on (they could pay back a mortgage with greatly-inflated dollars). Capital gains taxes did not allow you to adjust for inflation (e.g. if you were given something worth $20 in 1920 as a baby gift and sold it when you were 80 for $900 you didn't really make anything on it). ... it may be quite painful for those of us in the USA over the next few years.

rms 18y ago
Beer used to come in cases of 36?
- patrickg-zill 18y ago
  I don't know if it came in cases, but the only price reference I was able to find was a price per 36 bottles.
jerf 18y ago
That analysis leaves so many things out of the story that I would hardly even know where to begin pointing out the problems, including ignoring or misunderstanding compound interest (your analysis only holds for someone stuffing dollar bills in their mattress, not under any other feasible holding model across 100 years, which in truth is simply not approximatable in any simplistic fashion anyhow) and the fact that a dollar in the past is intrinsically worth more than a dollar in the present, because the dollar in the past can be leveraged to generate more present wealth. (Typically, this is looked at from the point of view that a dollar in the present is worth more than a dollar in the future and future dollars must be discounted in value when compared to present dollars, but the tense-shifted statement is equivalent, barring the fact that you can't actually spend past-dollars in the past. (In which case a past-dollar would be REALLY valuable...)) Finally, you seem to be claiming that the US (either collectively or per-citizen) is no more wealthy today than it was in 1920 (or 19xx), which is one of those results so absurd that it should be prompting you to reconsider your viewpoint, not prompting you to post on the internet.