Crony Capitalism

This is sub-chapter #16, of Chapter #4, Economics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the full PDF of the book, then you can download it by clicking here—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published. If you wish to read the previous chapters in one convenient place online, follow this link.


CRONY CAPITALISM

Getting depressed yet? Hold it in; we are almost at the positive chapter. Let’s talk socioeconomics. The social system that we live in today is not the free market, otherwise referred to by its derogatory term of capitalism, given it by Karl Marx, father of communism.

So what are we living in? To determine that answer, let us go through the options one by one and see if we can find out.

The free-market is an anarchic system where capital is deployed with the intention of producing more capital. Individual liberties regarding to purchasing, selling, and trading are all legal, with individuals taking responsibility for their own actions with their capital, and economic decision-making decentralized with government ensuring rule of law, enforcement of contractual obligations, and foreign policy.

In socialism, there is a belief in equality via redistribution. The people (government) own or heavily influence the means of production, but individuals are allowed to own property.

Then there’s communism, where the people (government) own both the means of production and everything else too.

Finally, we have fascism. An extreme right-wing form of nationalism, predominantly militaristic in nature, and with industry and government in collusion, with preferential treatment given to a military-industry complex at the expense of the citizenry served with a cherry of forced national identity on top.

Now, before some get their knickers in a twist. What I am referencing above are not the textbook description of these ideologies, of which none have ever existed in the entirety of our history. There never has been a government-less communist state, nor a perfect socialist state, and we inch ever further away from the free market day by day (though the fascist governments seem to be the closest). Rather what is referenced is the layman’s viewpoint, the distorted ideals that are alive today in the minds of billions around the world, including myself. I do this because very few people actually know what Communism is, likening it to the USSR, ditto for Socialism, likening it to Europe, and likewise for the Free Market, thinking it is America. Of course, the above descriptions are also drastic oversimplifications, but given one line to describe them, I believe they are apt.

So to bring it full circle, and as is plainly obvious, we live in the stepchild of all four of the above models:

  • Communism for the bankers in the form of the free $7.7 trillion dollars they received
  • Socialism for a few corporations (e.g. auto companies) and the poor via redistribution of wealth
  • Fascism for the military industrial complex using deceit and obfuscation to justify, or prolong ongoing wars
  • Free market for the middle class

Before continuing, I want to say I’m not complaining about the poor’s social net. They need help, most of them are there through no fault of their own, and most of them are kept there by the policies of the political class exacerbating and the extenuating economic hardship bought about resultantly. Society essentially functions as a singular super-organism, with each cell dependent on other cells. That is, there is no such thing as an individual doing everything on their own, so keeping everyone in health is beneficial to the super-organism overall (humanity). Now back to my main point, it’s the rest that is problematic, save for that last one—but first, let us go on a separate but related tangent.

Death is a very crucial part of life, as it is also in the free market. Quite fitting that the best economic model we have created mimics the nature we live in. With death comes the opportunity for change, to evolve, to update, and to attempt to cross the Rubicon that perhaps once was impassable, with the tips, tools, and tricks that we learned from our forefathers trying, and dying.

The role that death plays in evolution and the free market cannot be overemphasized, and this may not do it justice.

Without death, evolution is meaningless, and, therefore, single-celled life would not have evolved into multi-cellular life and everything else here today. So if we have a system that favors a select few, such as the bankers, the military industrial complex, etc., which prevents them from dying or instigates growth beyond what would be naturally possible; it creates rot, distortions, impedes natural progress, and consolidates money where it wouldn’t ordinarily go, thereby preventing access to it via honorable means, exacerbating poverty, joblessness, and wastes resources on problems that don’t exist. As such, lessons aren’t learned that need to be learned, and progress isn’t made that would ordinarily be made.

We are experiential creatures; we learn through the act of experience. This has always been the case, and will be for a very long time; there’s no going around it, and there is very little difference between that fundamental truth on an individual level, or at the level of an economy full of many millions of people.

The invisible hand of the free market is not perfect, but neither are we; and it is damn sure better than the central hand of bureaucrats who think they know better, but invariably don’t.

The status quo that they perpetuate is very dangerous. Keeping the status quo in place is actually, in real terms (since nothing on this planet exists in isolation), a regression. Much in the same manner that a bank’s savings account might pay one-percent interest, but if inflation is three-percent, then your yield in real terms is −2%. You’re going backwards. That’s the status quo!

The rot of stagnation is the downfall of empires. It begins when access to opportunity depends more on existing wealth and connections than hard work and talent, as economist Daniel Altman writes (though I am putting my conclusion on top of his analysis). Think about the Roman Empire, or the Ottoman Empire, or any other past empire. Think about their beginnings: nimble, fast learning, quick to adapt, and above all, persistent and meritocratic. All qualities responsible for their ascent to greatness, or at least, contextualized superiority.

Think about where they were at the end of their reigns: gigantic governments with bloated bureaucracies preying upon the lower classes, viewing them as inferior, and stifling the innovative, free forming of ideas and inventions, and penalizing criticism for fear of losing their momentary hold on power.

Not a single empire in the history of civilization has stood the test of time. What is the single factor present in all of them? People, many of whom relish the status quo—whether the empire is religious, communist, socialist, royal, feudal, or republic in nature, it has been bound for failure as soon as one individual successfully makes the case that static (stagnation) is preferable to dynamism!

It’s this pathological need to control (and corrupt) the normal, changing environment. It’s the existential threat with our constant desire to meddle (meddling involves both stopping change or changing stability, though here I am referring to the former), which carries with it both positive and negative consequences. Positive in that we build civilizations, technology, medicines, and everything else that makes life easier to live now than was the case 100, 1,000, or 10,000 years ago.

Yet be that as it may, we are, and always have been, easily corruptible beasts, and you need only look to our seven-thousand year civilized history to see that every governmental model ever tried has failed with disastrous consequences for all involved, with the brunt of the pain upon the lower classes, due to the self-serving nature of the upper classes, the so-called educated class, due to their futile  efforts to elongate their momentary ascension, and of course, also hurt themselves in the act, yet, our politics has scarcely changed in thousands of years. Does not Einstein’s quip ring true?

“Insanity: doing the same thing over and over again and expecting different results.” ~ Albert Einstein (Physicist)

Quick note: our democracies have evolved, however the role of the politician has not. We like to think that we are smarter than those who came before us, and in some regards we are, but we remain just as greedy, ignorant, and oblivious as our predecessors concerning the singular issue that affects us all the most and by which a society lives or dies; government (more specifically, political control of), its responsibility, and the status quo it futilely holds onto.

This is why we live in this crony capitalist society, moving ever further away from the free market, the one thing responsible for our quality of life, undergoing a slow death as we move ever closer to the distorted reincarnations of socialist/communist models, and why a movement akin to Occupy Wall St is long overdue by several decades, though some of their ideals are a bit distorted. We shouldn’t move to overthrow the free market; we should aim to re-instigate it, with social policies rooted in empirical study and objective analysis, as opposed to bias and pandering (following on from the social sciences and AI component in Fixing Politics).

The more numerous the laws, the more corrupt the government.” ~ Gaius Cornelius Tacitus (Historian)


Europe’s Achilles Heel

europe's achilles heel

This is sub-chapter #15, of Chapter #4, Economics (Three-Quarters of the way there), of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the full PDF of the book, then you can download it by clicking here—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published. If you wish to read the previous chapters in one convenient place online, follow this link.


EUROPE’S ACHILLES HEEL

The Euro, the official currency of the European Monetary Union (EMU) has been in place since 1999, and up until 2008/09 was functioning pretty smoothly. Countries that participated in the EMU (seventeen countries out of twenty-seven countries in the European Union) saw their overall GDP during that decade rise, everybody got along, and politicians were celebrating their grand experiment in unification and big government.

Of course, this wasn’t because bigger government is better, but because economically weaker parts of the EU, like Greece and Portugal were able to borrow more money with the ‘apparent’ credit of Germany, allowing for debt-based growth, which is always short-lived. Another factor was in part the removal of congestion and barriers between the EMU nations that facilitated the exchange of goods. There were no more borders and the free flow of goods and people was accelerated, saving huge amounts of time and money.

That party came to a close during the Global Financial Crisis and a fundamental flaw was exposed. To understand the flaw, first we need to understand the EMU.

As part of the makeup of the EMU, national governments keep their national sovereignty, but allow an open border policy with other EU nations and give up their sovereignty to print new money. That last point is the crux of the flaw. You have seventeen nations that make up the EMU that must all use the centrally issued Euro.

Now, the manner in which a central bank sets the price of money, aka the interest rate, goes much like this: The central bank (CB) takes into account the fiscal habits of the nation’s people, and enacts policies that can have the greatest benefit to the economy for the well-being of all, in relation to those spending habits. They do this by setting the price of money (the interest rate).

For example, a nation of savers would have a low-interest rate, and a nation of spenders would have a high interest rate—a drastic simplification, but for the purposes of this example, fitting and easier to digest.

Digging a little deeper: a nation of savers would create excess capital; which can be used to create new businesses, industries, and jobs. Access to new capital from the CB would not be as necessary, and when it would be, the resulting inflation would be manageable growing with economic expansion in the process creating prosperity by naturally increasing as required by the new jobs and businesses brought into existence with the money multiplier effect—win-win for everybody. Another way to look at it is, the low-interest rate is an indicator that the necessary sacrifice and thrift have been achieved that shows that long-term investments can be funded with minimal risk by borrowing; hence the price of money is cheap (low-interest rates).

On the other hand, a nation of spenders could not have such a low price of money as spenders in such an environment would spend beyond their means and create lots of private debt, and pay off that existing debt with new loans and more debt—which is what our governments are currently doing, ramming it into your skull for the forty-fourth time (it’s simple mathematics that is cannot go on forever). In a low-interest environment, this creates a vicious cycle that creates lots of inflation and economic pain for everyone, without increasing the jobs and business that go with it, as it does in a nation of savers, so inflation spins out of control and everyone who hasn’t diversified into commodities (and even they often get the short-end of the stick due to reactive government policies) are worse off. It is in this scenario where totalitarianism usually arises; such was the case with Hitler in the aftermath of the Weimar Hyperinflation. So a nation of spenders would need a higher central bank interest rate to disincentive new loans and the money creation that goes with it.

Here we come to the crux of the problem. There are seventeen countries together in this economic union; countries like Germany, a nation of productive savers who couldn’t imagine life without work, and whom work until the age of sixty-five before retirement. And at the opposite end of the spectrum is a country like Greece, a nation of spenders, some of who retire at fifty, and the majority at sixty, the lowest rate in Europe. Yet both have access to the same line of credit from the European Central Bank, and nobody saw this disaster coming, why? The subprime mortgage in the US that triggered the Global Financial Crisis was due in part, to giving anyone and everyone interest-free loans without even bothering to do credit checks or even see paperwork. Many argued that it was immoral or unfair to not provide such credit, but is it unfair and immoral now that the entire nation (perhaps even world) is worse off?

This caused huge distortions and misallocations of capital, which can’t now be paved over with the current round of bailout after bailout after European Central Bank bailout (not that it stops them from trying), but a problem can’t begin to be solved without solving the underlying cause that begot it.

This gaping, foundational crack in the base of the EU isn’t even being looked at. Brussels is just throwing money at it, hoping it disappears (which it won’t and cannot), essentially trying to solve the problem by doing the same thing that the problem caused in the first place, a misallocation of capital that is only being magnified by these suit-wearing monkeys, further misallocating current savings, and creating future debt burdens in the name of keeping the status quo.

The solution is, or would have been, to charge a variable interest to the varying countries that make up the monetary union depending on the macro-economic behaviors of their people. That is, what would an individual central bank in each of the countries set its interest rates at, so that, to the best of its ability, prices remain stable and the economy remains strong? Then charge that interest rate to each country. Sure, they will cry foul and whine like babies as politicians have a habit of doing, but so what? Let them bitch and cry until their cheeks turn coarse, and eventually they will swallow it up or they’ll end up in their own currency, which may just happen anyway with the current system.

Is it fairer that the now richer, more prudent countries that produced excess capital now have to essentially give free money to these countries whose politicians and people had the foresight of five-year olds at a candy store? It’s fairer to get what you have shown the world you are responsible with. Anything more puts the wellbeing of other people into irresponsible hands, which potential outcomes worse than people or nations making do with what they have. Anything else simply perverts and distorts incentives without the necessary financial intelligence (learned slowly and surely), which all too often, creates more problems than what one (person, country, or supra-bloc) began with, except now they have less wealth with which to deal with the problem, not to mention that it only renews calls for the cycle to begin anew, which again, all too often, historically at least, ends up in totalitarianism. (With the internet-connected world we live in today, this scenario is extremely unlikely but it is enough that economic well-being is so connected to livelihood, quality of life, and cost of living that to embark on such a path regardless of the social cost is utter folly.)

On an individual level, you have to earn other people’s trust before you can be trusted with their friendship, babysitting their child, or taking a loan. The same should be true on an international level, but politicians are the most self-serving people on this planet and they think they deserve everything because we have put them on a pedestal.

Perhaps the monetary union would never have gotten off the ground in the first place, as such legislation required unanimous support from all countries involved. The poorer countries, always wishing to spend beyond their means, would have struck it down immediately. But that would’ve been the first warning sign.

An equal-across-the-board interest rate might seem fair to the socialist-leaning tendencies of the left-dominated societies of Europe, but remember in the real world, life isn’t fair. A wolf isn’t guaranteed a rabbit to eat, the slowest antelope will be eaten, and injured birds are met with the fatal clasp of a cat’s fang.

The only institution we are equal under (or should be, since in practice its fuzzy) is the law. Whether poor or rich, we are to be treated equally in justice. But try going to a bank for a loan with bad credit. You can’t, and for good reason; the likelihood of you paying it back is slim, and the bank, a vital component in society, loses money that than can’t be loaned to a business to build a bakery, a clinic, or an apartment complex that would otherwise increase economic activity, prosperity, and quality of life.

The advancement of society comes only when capital, created in excess [savings], is used to create new businesses, investments, jobs, and the consumption of more products. It may come for a while under such liberal make-believe equality, but that doesn’t last long, and the economic reality of such decisions eventually rears its ugly head and we, the people, usually suffer.

Everything comes down to economics, one-way or the other, whether you acknowledge, understand it, or don’t. Everybody will one day reap the fruit of their economic decisions and if not, then the burden falls to the next generation, much as it is being done so today.

Governments can only temporarily alter this balance, and only to our detriment (by borrowing from the future). This is a big reason communism doesn’t work, as capital is squandered and we are too shortsighted to work for the common good while subsisting on beets.

It’s a European Union of economic failure, of mass unemployment and of low growth.” ~ Nigel Farage (Politician)


Debt Crisis 101

debt crisis 101

This is sub-chapter #14, of Chapter #4, Economics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the full PDF of the book, then you can download it by clicking here—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published. If you wish to read the previous chapters in one convenient place online, follow this link.

 


DEBT CRISIS 101

Imagine an eighteen-year-old rich college kid named Jack whose parents are rich. He goes to an Ivy League college with a credit card, and spends his college years buying everything he needs and wants: big screen TV’s, nice furniture, etc. He has his share of parties and his generous parents pay for all of it, no questions asked because their emotions get in the way of their rationality.

Four-to-six years later, he graduates college and becomes an apprentice lawyer, not earning much money at the beginning, though now he has his own credit card and is on his own. What do you think his spending habits are going to be like?

We all realize that most young kids would continue their spending habits as before, and rack up a bit of debt. Even adults do it now. “Oh, he’s just trying to keep up with the Jones, lame.” So Jack racks up a bit of debt, but because he wants to seem independent and show his parents he can take care of himself, he makes the minimum payments each month, which is all he can afford.

Now after a payment or two, he might think his debts are under control; he’s confident and proved that he is independent (to himself.) Jack goes on another spending spree to celebrate. Same process—he might make the minimum payments again or get a second credit card and pay off the first credit card. Rinse and repeat.

Eventually, his initial debts, still accruing interest each month, will no longer be affordable, and he won’t be able to make those minimum payments. Or he might not be able to get a third card due to bad credit. He is not yet making enough money and might not for a few years, but he’s confident that one day he will, so there’s no immediate problem, and he maintains the status quo. Imagine that…

Now look at the American and European governments and ask yourself, what’s the difference? You will realize there is very little difference in how fiscal responsibility works in an individual or in a government. In order to lend to governments; investors, other countries, central banks, or big institutions, need some assurance they can get their capital back with a bit of interest above inflation to turn a profit. If there is no assurance, foreign capital will slowly dry up, as is beginning to happen today.

The credit crisis we found ourselves in a few years ago was, of course, the precursor to this debt crisis we find ourselves in now. As during the credit crisis, all that toxic debt carried by private companies was going to sink the ‘too big to fail companies,’ and so governments bought it all up and carried it onto their books, increasing their own debt portfolio dramatically. But these governments were swimming in debt to begin with and were already running deficits every month of every year, and of course, paying the minimum repayments on their interest and paying off existing debt with new debt. At the prior levels, however, it was manageable, and there was no cause for immediate concern.

Then the constant stimulus and bailouts began, and they continued to accrue ever more debt. When they couldn’t sell enough debt, they printed it. Even money printed out of nowhere is loaned at interest—right now from the Federal Reserve at between 0 and 0.25% and in the EU at 1.5%, as of Jan 2013—and that extra money inflates the currency, robbing people who had the prudence of saving of their purchasing power, and worsening income inequality.

So with all this extra debt streaming in, plus the already running deficits that governments were, and still are running, you begin to see how similar they are to our dear and stupid Jack. Eventually, they will not be able to repay even the minimum repayments as interest rates eventually rise. And then what happens?

This moment could be happening soon. Japan is over 225% debt-to-GDP ratio, the USA is above 100% and climbing each month, and some of the European ratios are well over 100%. What’s going to happen when these governments can’t pay back their debts? That will be a major strike in the confidence of the global economic system, where trillions of dollars of government debt are held around the world in pensions and other benefits.

Trillions upon trillions of dollars are invested in these government debt traps, and the global economy is going to sink if anything ever happens to them. That capital needs somewhere to go, and when it doesn’t have any place to go to, bad things are going to happen (and a lot of it will disappear).

I’m sure that politicians know this; they have legions of economists and other smart people working for them. There is no way for them not to know. Yet, because the global financial system is based on confidence, no politician can tackle any of these problems for the following reasons:

1:

An electorate that will immediately vote them out of office. People know cuts have to be made—well some do—but no one can touch their entitlements, so of course nothing is cut.

2:

Their comrades won’t support them for fear of their electorate voting them out of office, too, which again shows the self-serving nature of politicians. Rather than taking one for the team, they pretend they don’t know.

3:

The global economy and all the stock markets in it, are based on confidence. A company can have great financials, profits to earnings (P/E), and other good financial indicators but still have a poor stock price. Or it can be the other way around; Enron, Lehman Brothers, and Facebook (when it first IPO’ed) make fine examples. Stock earnings and prices are based on future expected growth, so today matters less than tomorrow, or in economic parlance, the (theoretical) present value of discounted future cash flow. The same goes on an international basis and for fiat currencies. The value of a dollar today is based on future value it can bring, with next year’s expected tax revenue to repay that borrowed dollar with interest, along with demand for its bonds; and to make matters worse, emotion plays just as large a part, if not larger, than logic, which throws common sense even further into the black hole of financial markets.

This is a fundamental flaw in fiat currencies and the stock market; confidence is essentially a zero-sum game. There are very few things that we can remain confident in over a long-span of time: the moon, the sun, the stars, the comings and goings of the seasons, our need of food and water and sexual urges. What else can you say with absolute confidence will be around for all time?

So when confidence disappears, and the biggest economies are unable to borrow enough money to fund themselves and their entitlement programs, what will happen?

Look what happened in 2008. Lehman Brothers, which insured America’s mortgages, went belly up, and the global economy was brought to its knees because all the fancy derivative packages they sold couldn’t cover the payouts when growth in the housing market stopped, because the price of oil was too high.

Then western governments picked up all that debt, so what will happen when the government stops being able to absorb that toxic debt? Currently the US government pays $220 billion in debt repayments per year (six-percent of the government budget), and this number may rise to $1 trillion by  2020. (Note: the repayments are artificially small because the Federal Reserve has set its interest rate between 0 − 0.25%. If these rates ever rise, and they must once, or perhaps if, the economy starts recovering, the repayments will become even larger. Keeping interest rates at 0% is not possible forever, so sooner or later, those rates must rise.) In such a scenario, that of the government being unable to finance its obligations; stock, bond, and derivatives markets will tank everywhere. Politicians have shown us repeatedly that they will do everything to keep the status quo going. History is replete with such examples. Thus, we can almost be assured that no course of action will be taken to prevent this calamity until it’s too late to do anything, not that they have many options at this point anyway, short of political suicide, and an economic reset.

At the end of the day, it’s not the government’s fault alone. While they hold their fair share of blame in this circle of madness, we are equally to blame for allowing them to do as they please. Politicians are an extension of the society they represent. They are paid too much, get freebies others slave for, are put on a pedestal, are allowed to receive bribes in the form of lobbying, and are rewarded by the masses for saying what they want to hear instead of the hard truth they need to hear (this is really the only problem that needs fixing). So at the end of the day, the types of people who are attracted to these positions tend to be more leeches than public servants, paint rosy pictures where roses don’t exist and aren’t afraid to lie for the perceived “public good.”

All lies and half-truths eventually see the light of day; it is inevitable (especially with the internet). Lying for the sake of short-term stability forsakes the long-term march of human progress. This is what our civilization is seemingly transforming into: a self-serving, shortsighted engine of crony capitalism barely capable of thinking past the next quarter, long-term prosperity be damned. Our economics, so rooted in political dogma and ideology can, and should do better, but only if politics loosens it grip. As in the past, the separation of Church and State heralded a new era in human civilization, so to will (for the second time no less), a separation of Bank and State. (You’ll notice that the conjoining of Bank and State abbreviate neatly and poetically to BS. Indeed, BS is exactly what follows when the orgy of political malfeasance meets the relentless greed of Wall St.)

If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours” ~ John Maynard Keynes (Economist)


Infinite Growth Fantasies

infinite growth fantasies

This is sub-chapter #13, of Chapter #4, Economics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the MOBI, ePub, or PDF, then please let me know in the comments—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published.


INFINITE GROWTH FANTASIES

Keynesian economics, upon which most public economic policy is based upon (despite it being a distortion of what Keynes himself stipulated),  carries with it, in the hearts and minds of our politicians and central bankers, an illusion of continuous economic growth year upon year. These public officials believe that government intervention only results in prosperity, and that without growth or government intervention, big problems will abound—the latter being true, but only within this model they have created for us. This is not the width and breadth of Keynesianism, but it’s all we need to dissect to realize its futility.

We’ll get into the ridiculousness of the infinite growth fantasy in a little while, but first let’s go over a few things; such as where money comes from, fractional reserve banking, why governments are bailing out the big banks, and why growth is so vitally important in today’s economic model.

Money, as I’m sure everyone knows, doesn’t just pop out of nowhere. Before we had the printing press and Wall Street, we used gold, silver, and various other tangible goods such as tea in Siberia or cheese in parts of Italy way back when. Though they differ to todays fiat standard, as they are naturally occurring and unable to be created at will.

Once the printing press arrived and we moved to the modern incarnation of the fiat standard at the beginning of the last century, we had to have a limit on our ability to create this money, otherwise what was to stop the printing rendering the value of its own money worthless (inflation)? The era of debt-based growth was born.

The modern economic debt instrument was born out of a need to put a limit on how much money could be put into circulation. For a government or private bank to borrow credit from the central bank, it had to be borrowed at interest, whether that interest was one-percent or five-percent made no matter.

So what effect does this interest rate have in restricting the money supply? As we all know, a loan has to be repaid eventually, so you don’t keep taking and taking: the principal and the interest. As the more astute among you may have figured out by now—I didn’t until it was shoved in my face—is that the principal plus interest is greater than the original loan amount of just the principal, and since all money can only come from the central bank, the amount to be repaid is always greater than the amount of money in the economy.

Compounding this, private banks that borrow this centrally issued credit can re-loan and multiply that credit via the process of fractional reserve banking to citizens and private businesses at further interest.

Fractional reserve banking works on the premise that not all people need access to their money all the time. So the bank loans out ninety-percent of your money to other people and businesses while you keep it parked in a savings account—this is where your interest comes from, other people’s interest repayments. This theoretically allows the efficient use of money to expand an economy, and is also why a run on a bank ends in bankruptcy of the bank, as there isn’t enough money to cover all the deposits. This is where confusion sets in as the average person sees terms such as M1, M2, and M3 bundled about in reference to this. Let me briefly explain them: M1 is the total amount of cash/coins outside the private banking system (there is also M0 which includes cash/coins inside the banking system), plus travelers cheques and other checkable deposits. Then there is M2, which is M1 plus savings accounts, money-market accounts, and some term deposits. Lastly, there is M3, which is M2, plus all other term deposits, institutional money market mutual funds, though M3 has not been used in economic analysis since 2006.

As they loan out part of your deposit, the new loan holder deposits his or her new money into another bank account, where it is regarded as an increase in the money supply (M2). This is called the money multiplier effect and is used as one of many signals in assessing the health of an economy. It is theoretically possible to turn $10 into $90 (not that the limit is always reached), which is a reflection of added credit into M2 over M1. (Only central banks can add to, or subtract from, M1 as that is minted cash and coins, and not electronic cash which a bank can create.)

When the money supply is being multiplied, the economy is seen to be expanding, and when it is not, it is perceived as contracting. This is why in a lot of recessions, money seems to disappear, it actually is disappearing. This is also why wealth has become extremely consolidated in the 1%. The fiat system is literally, accidentally or not, a way to funnel money upwards. The poor pay off their loans for their entire lives, while the rich park their money into savings accounts, and the interest from the lower and middle classes flows into it. Of course, they are good economic reasons to do this, but it is easily abused.

Generally, this system works well if left to its independent vices and machinations, as even the money multiplier effect only comes into effect when new businesses and consumption is required, but it can’t work forever, especially with the human desire to meddle. Since the dawn of time, people have always tried to bend their surroundings to their own will, and this may help you to understand why politicians and bankers manipulate the system to favor their friends, donors, and families—worse still, this susceptibility is actually magnified in a position of power, where they delude themselves into believing they deserve such power. (This probably explains why there are so few good politicians, and why politicians are caught, figuratively and often literally, with their pants down.)

The number-one abuse (or distortion) is the bailout system, even when given as a loan. Inflation has a twelve-to eighteen-month lag time once new credit is introduced into the system and all other currency units are affected. So the big banks that get bailout money are essentially getting a portion of it for free (if it isn’t free to begin with), and can turn around and use it to pay down debt, buy smaller banks, etc., before the inflationary effects of this new funny money erodes the purchasing power of every other currency unit in circulation. By the time it has circulated its way to the lower classes, it has lost some of its value as prices have risen while wages have not, hitting the poor especially hard.

The monetary system isn’t fair by nature, and that’s normal because life isn’t fair. Not all lions will be the head of a pride, not all trees will receive the same quantity of sunlight, and some Gazelles are unlucky enough to feel a cheetah’s jaw clenched around their necks. Some people are tall, some have brown eyes, others blue, and a few are born in rich countries, while most are born in poor countries. Nature isn’t fair, and since we are a part of nature, neither are we. (Though we are gradually overcoming this bias, but we shouldn’t try to do it via economics, more on this in Technology.)

This cruelty, if you can call it that, is part of the diversity of life, and without this diversity there wouldn’t be any life to begin with, since diverse conditions are what allowed for the formation of life, and its continuance is an underlying driver of evolution, never allowing the rot of stagnation to creep up. Fairness is not an inherent quality of nature. Although this extra kick in the face to the poor and middle class in a fiat currency system is a step beyond Mother Nature’s system of fairness, which begets change and freshness of ideas through diverse and unequal opportunities. It amounts to a cruel joke making the poor poorer and the rich richer in a system rigged beyond necessity to the upper echelon, and as history has shown us, is one of the biggest contributors to social unrest and revolution, and that’s where we are now. A recent study out of Cambridge has correlated the price of food, as the foundational issue (affected by politics, regulations, and inflation) which has instigated riots all over the world, most evidently in the recent Arab Spring, allowing them in a sense, to be predicted. (It was first published four-days before the start of the Arab Spring in Tunisia.) The study stipulated that when the price of food, by the FAO food prince index is above 210, conditions are fertile for social unrest (Of course, there are dozens of other factors that people will point to; such as freedom, censorship, jobs et al, but a hungry public is, in the words of the lead economist Bar-Yam, leads to the “range of conditions in which the tiniest spark can lead to riots.”)

Moving on to necessity of growth, there is a very specific reason that economies must constantly keep growing. Recessions happen when economies stop growing, or contract due to burst bubbles.

Here I must briefly digress. Sometimes central banks try to preemptively boost the economy in anticipation of worsening economic indicators by lowering interest rates and encouraging increased borrowing, but it only delays the recession, as the new funny money creates a further misallocation of capital, which requires a recession to fix (a bigger one now) than would have otherwise happened. The reason why is it gives false signals to businesses, imbuing them with a false outlook on things like consumer confidence and spending. Lower interest rates allow riskier projects, many of which, in the false environment, are more reliant on increased consumer confidence, and when the delayed recession hits, results in more money lost if the new project/s, contingent on a false outlook, breaks down. In this way, government, or central bank intervention, only delays and intensifies the problem. Just as we saw before with drugs, making them illegal only pushed the market underground and squeezed its undesirable effects invisibly onto a smaller subsets of the population, with larger negative ramifications for all.

This is why governmental intervention into an economy is a drag instead of a boost, as Keynesians boast. How could it be anything but? The politically connected rich get free money, while the purchasing power of the poor and middle class erodes. So left-leaning parties try to redistribute tax-money to the poor to compensate for the rising inequality, coupled with the inefficiency of the government wasting a portion of it. Simultaneous to this, increasingly, money is consolidated in the upper classes vis-a-vie interest, thereby restricting honest economic opportunities for the middle-class and poor, making them dependent on the handouts, which elevates the party politics of handouts for votes, and making the situation ever worse—and round and round the Ferris wheel we go.

The reason that an economy needs to grow is so that new credit can be issued and circulated throughout the economy to pay down the debt of the old credit. Every currency unit in every economy is owed to someone by someone else. So if you have no growth, when loans come due, there is not enough money to pay them down. You must always borrow more new to pay down the old. Depressions happen otherwise.

The Great Depression is the only recession in modern history in which the central bank restricted the money supply thereafter (note that they didn’t do nothing as they should have, but restricted), and the American poor welcomed with open arms the thirty-percent unemployment that came with it. This action, coupled with many other government interventionist policies at the time: confiscation of private property such as gold, constriction of money supply, new tax increases, and a plethora of regulations increasing business uncertainty and thus their reluctance to hire and expand workers, coupled with extreme investor uncertainty, exacerbated the situation and turned what would have been a normal recession into the Great Depression. Gross Private Investment during the thirties did not reach pre-depression levels until 1946-1950. In fact, from 1930 to 1940, net private investment was negative $3.1 billion. This is why the money supply must always grow in order to pay down the old debt, whilst still having an increased money supply—and Keynesians today boast the government saved us from the depression! As the economist Benjamin Anderson wrote in 1949, “The impact of these multitudinous measures—industrial, agricultural, financial, monetary, and other—upon a bewildered industrial and financial community was extraordinarily heavy.”

Finally, we arrive at infinite growth. Most economists’ wet dream is continual five-percent year-on-year expansion, and since humans have the funny habit of thinking that they live at the apex of civilization, especially those of us in the West, as a result we tend to project that our institutions and economic models will be around for all time. So let’s play with the numbers of compounded economic growth and see what happens. The results will definitely surprise you.

For the following example I am going to use two-percent year-on-year growth. Just try to imagine five-percent growth. (Hint: it will be an exponentially higher exponential increase.)

If we had an economy of $1,000,000 at the time of the crusades, approximately 1,000 years ago, and it grew at two-percent compounded year-on-year. Today, that economy would have grown ‘5,368,709,120,000’ its original size. Remember, this is an economy  only 0.00000015% of current world GDP (approximately seventy-trillion dollars). I’m afraid to even run the numbers for today. That’s a five-trillion percent expansion. Today, that seventy-trillion dollars of global wealth is supported by just three-percent equity.

Compound Growth Methodology:

To arrive at that number, you take seventy and divide it by the percentage growth per year, in this case two-percent, so seventy divided by two gets us thirty-five; this is logarithmic math and beyond the scope of this chapter to discuss, but it’s can easily be googled. Therefore, at two-percent yearly growth, the economy will double every thirty-five years. One-thousand years divided by thirty-five doublings means that the economy doubles 28.6 times. Then it’s a simple matter of algebra.

Just to further nail the point home, the following is from an essay by Jeremy Grantham, a hedge fund manager with $97 billion in assets. The scenario he describes is a fictional re-telling on what would’ve happened to the ancient Egyptians if they’d had the same economic fantasy as us.

Let’s try 1% compound growth in either their wealth or their population. In 3,000 years the original population of Egypt —let’s say 3 million—would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth.”

Raise your hand if you still think we are at apex of human civilization? The very way our economy is designed to work ensures that it either destroys us, or the planet, or both. Though more likely, and luckily one might say, is that it simply fails before either of those scenarios takes place. This model guarantees eventual failure: that’s how not smart we are.

Both Option Status Quo and Option Yes We Can stand in stark contrast to reality. As it stands today, we are reaching the limits of this economic expansion. That’s why, one way or the other, the current status quo of bailing out the banks with taxpayer money is only going to hurt us in the end, and the banks are still going to collapse eventually. So…what’s the point? Why not just reset the system now and save us all the bother. This Keynesianism of public policy is delusional. When people talk about having—or needing rather—a sustainable economy, how about we listen to them instead of calling them tree huggers. Our future well-being depends on it. Without economic well-being, nothing else matters. (Note, this does not mean big numbers in a bank account, but the real, productive capacity of a society to make food, deliver clean water, build shelters, and everything else that contributes to well-being.)

“Depressions and mass unemployment are not caused by the free market but by government interference in the economy.” ~ Ludwig Von Mises (Economist)


Fixing Politics

fixing politics

This is sub-chapter #12, of Chapter #3, Politics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World. Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the MOBI, ePub, or PDF, then please let me know in the comments—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published.


FIXING POLITICS

Since we are stuck with the obsolescence of politics for the foreseeable future, here are some solutions, though I’m sure they are many more, that aim to make gaming the system more difficult if implemented, and allow a freer society for a longer period of time.

Granted, this will not stop the political subterfuge that seemingly always, undermines the democratic system. (Politicians are a creative bunch.) It merely serves to make the process much more difficult, and thereby allow a greater functioning of democracy on a longer time-scale, which will allow the making and creation of the science and technology that will eventually rid us of this insidious process that is retarding our progress (I’ll elaborate more in the last chapter). Please forgive me any generalizations in this chapter, though it is hard to find an honest politician these days, I’m sure a few exist somewhere.

“Many forms of government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.” ~ Winston Churchill (Former Prime Minister of GB)

Career Politicians

The career politician (CP) is a virus in the democratic system, and his or her major concern is re-election. Thus, their every decision, policy, and recommendation is acted upon in context to their re-election chances and not necessarily to the people’s or nation’s benefit. They may have started out with the best of intentions, and with a big heart, but people are mortal, and the leviathan (the government as named by Thomas Hobbes) is all-powerful in the bewildering eyes of a mere mortal.

The CP rarely, if ever, leaves his or her bubble distorting their view of reality, much as a goldfish living in a curved fishbowl believes that everything travels in an arc instead of a straight line. Politicians are human goldfish, observing things that seem real and committing words to paper that rarely fix them, when often times, the best solution is to let the super-organism that is society self-correct. (This is usually the best course of action for recessions.)

As a result of being in the game for the long term, they are beholden to the people (and to the political game itself), for the choices they make. But the people, like most people everywhere whom are not well versed in all matters of running a society—hence the need for democracy in the first place—end up looking to their own short-term interests. (An evolutionary mechanism where for 99.9% of our hominid history, our only concerns were food, water, shelter, and sex. If only modern society were so simple.) Likewise, since a politician cannot develop, write, read, or legislate on their own, they are dependent on their fellow politician and staff, in a system that favors ideology, and breeds resentment, distrust, subterfuge: which are ideal conditions for short-term decisions that generate political capitol, even, if not especially, to the detriment of long-term planning. All this does is handicap the CP’s toolkit.

As with most things, we earthly beings have a tough time of grasping the bigger picture, and the decisions we make on a day-to-day basis are usually personal in nature. Politics, politicians, and elections generally get thrown into this mix, when they eventually roll around, inconveniencing our day-to-day lives.

Since idle brainpower is usually spent entertaining one’s self outside of work, we often make the quick, easy, and emotional decision when it comes to electing a person for office. Politicians are elected based on how likable they are, how catchy their sound bites are, or how opposed to their opponent’s policies they are and various other trivial, non-important factors that excite us and make us like that person. Politicking is an emotional event, not the logical and rational event the Athenians intended it to be.

This personal decision to elect a politician is usually based on how the politician personally benefits the voter, or how emotionally pleasing they are, instead of to the nation, for it is easy to forget there are others who are also in trouble. How quickly do you forget about starving children in Africa after you watch one of those commercials? How much easier do you think it is when you live in a relatively advanced democratic nation where you don’t see those people starving and entertainment only shows you the high life? It’s so very easy to lose focus today.

It’s hard to blame any one person, as we spend most of our adult lives providing for ourselves. It’s second nature and a paradigm in itself. But therein lays the major problem with politics: we should not look for the person who excites our emotional self, but to someone who strains the limit of our rational self, and who requires us to think and come to a logical rational conclusion of his or her own abilities, as their ability to govern will affect our future wellbeing. The media doesn’t help but they just give us what we want; negative, short-term, often irrelevant, and anecdotal news.

Due to this self-serving, short-sighted nature, CPs, even when genuine, end up having a tough time doing their jobs because they do not have the leeway to make the tough decisions that need to be made to move society forward, neither to say the things that need be said, as an ignorant populace can and will remove them from office if the ramifications of their decision affects them negatively; even if it might be beneficial to the nation in the long-term. The majority of voters rarely take the latter into account. Again, it’s emotional instead of rational. It’s always, me and mine, instead of ours and yours, or here and now, instead of there and then. In most nations, most people are for universal healthcare and looking out for each other, but in order to do that, a government and nation must be fiscally responsible and prudent in order to provide that economic foundation which allows them to spend the money to look after everyone. To not allow politicians to fix broken entitlement systems, or raise or lower taxes (whichever is necessary), then they cannot provide proper services and benefits for those few issues where everyone does agree. It’s akin to driving to another city…without gas. Your car will run on fumes for a while, but it will conk out far too short of your destination. Or Wile Coyote running out over a cliff, unawares he’s running on air, looking down, giving us the viewer, a sad face, and falling to his temporary doom. Wile Coyote is the government hoodwinked by the public, and the Road Runner is where society wants him, but won’t allow him to be. This is the story of todays economic; a debt , governance, and austerity cacophony.

This often has the consequence of politicians catering to the lowest common denominator of the varying social groups, doing the minimum necessary, staying away from controversial issues even if they need to be overhauled or addressed, and rarely, if ever, straying outside of this niche for fear of the ramifications. (Farm subsidies, War on Drugs, the Military Budget and so forth. Though occasionally, ideology or flat-out bribery, I.e., lobbying, will inculcate the public-fearing goldfish against any protests such as the bailouts, the republican war on women, and batting on behalf of the rich and un-needy, though notice none of them ever benefit society at large. How rather pathetic.)

But here’s what people seem to forget. Politicians are there to manage the big picture and they are supposed to be smarter than us, and routinely, when they have to make those hard decisions that require short-term pain but will result in long-term gains, we punish them. Effectively saying we demand the best of now and the best of then—which in all but theory, and probably even in theory, is impossible. So the politicians give you exactly what you want, except by giving you the now that you want, they ignore your future, and you still have to live it.

With this conundrum gaining strength as time progresses in every democracy since the Athenians invented it to the present day, the caliber of politician, in time, is reduced as people who talk a lofty game and who pander to the now crowd are voted in, and the future slips ever further away.

Life isn’t that simple. Politicians are but an extension of society, and they reflect the society from which they came—the needs, wants, and the aspirations of that society. It’s a very sobering thought when put into perspective. We are responsible for our politicians, as thieving, conniving, lying, ignorant, and arrogant as a lot of them may be; they are there because we created the right conditions for their prospering.

“That which starts sweet, ends bitter; and that which starts bitter, ends sweet.” ~ Unknown

The Fix:

Politicians should be limited to one term of five years. (Differing term limits may be justifiable based on continuity purposes and requirements, but I’m an idiot and prefer simple answers like five.) This is enough time to settle into a very difficult job; access, analyze, and study the socio-economic picture; implement programs that benefit the nation or eliminate programs that are a detriment; and then get the hell out of office without need of pandering, lobbyists’ money, or playing Mr. Nice Guy with the media and populace. An individual can only run for office once in his or her life, and upon running, their immediate family is precluded from running. Politics should not be about pandering, but doing what needs to be done, they should absolutely have their feet to the fire, but in overdoing such reactiveness as it is done today, they will merely shy away from fixing issues that do need fixing.

Much like jury duty is a requirement of a just republic, so power cannot be consolidated into too few hands; the political process should almost be mandatory, and taught in schools as our children grow up so they can understand its significance and importance, much as we teach them now of jury duty. and if not mandatory, which would be a tough sell, limited as I have just outlined.

A one-term politician can lend itself to abuse and this will be addressed soon with ‘Social Science.

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” ~ Plato (Philosopher)

Revolving Door

The revolving door between big business, or businesses of any kind to be fair, and government has to be stopped, as it creates biases and prejudices that influence the equal rule of law that should be, though often isn’t, the law of the land.

When I worked in Saudi Arabia, my contract had a government-mandated stipulation, a clause that stated that should the company and I part ways, I could not work for any other company inside Saudi Arabia for a minimum of two years. While in the private sector this is a silly rule and should be left individually between each company and employee (and even then it’s harmful, but hey, free-market), in the revolving door between public and private sector, this is extremely necessary and long overdue.

All too often, you see officials from big companies with huge influence in the halls of power, moving into regulatory positions overseeing the industry, which the corporation they just came from resides in. This puts them in a position of power to provide favorable circumstances for their recently departed company. Oftentimes, they will re-join that company after their stint in the government, provided their time in office proved fruitful for said company. Examples here are too numerous to list, though it is especially prevalent in the biotech and military industrial sectors.

This is unacceptable and creates a clear conflict of interest. Another strategy that lobbying firms apply is to offer government employees high-paying jobs once they finish their time in the government. This effectively puts the government employee in the pocket of the firm, as they will rarely do anything to risk a multi-million-dollar job that is waiting for them on the outside.

This practice simply must stop. A two-year gap between any private sector switches to a government position that oversees regulations of the recently departed corporation will help reduce such circumstances. Obviously, there would need to be qualifying conditions for this, and not an outright ban, and it should be handled by the Justice branch, not by another government office.

The Fix:

Both of the following conditions must be met for a two-year gap to be enforced:

From Private Sector to Government

i) The corporation lobbies the government, or has spent money doing so in the past two years
ii) The government position in question will have some part in regulating or overseeing the industry from the corporation the individual recently departed from

It should still be illegal to provide the government official any type of gift to sway him or her, in any capacity, present or future, and the loopholes that allow some gifts should be removed.

Social Science

Politicians by their very nature are disconnected and cut off from the rest of us. They get free travel, free healthcare and many other perks, and invariably, they are lawyers and business majors instead of scientists and technologists. As a result, they never really feel the effects of recessions and other pains that we normally feel, some of those pains because of their policies. This develops in them, a certain laissez-faire attitude to introducing new regulations and laws to fix perceived ills in an economy, the national budget, or the business world instead of just letting the economic dislocation play out and reset. As they say; to a man with a hammer, everything looks like a nail, even apparently, people.

They always have a need to fix things, even though it may have resulted from their policies to begin with, and by doing more, may only exacerbate the situation further. But they do it anyway for fear of being labeled ‘idle,’ or maybe because they do not understand the notion of ‘cause and effect,’ but I put my money on the former, and that’s usually the fault of the public.

Counter to this, the people they are exposed to tend to be the rich, politically connected folks who lobby for their time. This means that they are really only exposed to new and different ideas by the folks with the means, money, and power to get audiences with them, and who, like us, are self-serving in nature, caring or thinking little of others.

So it is no wonder that most regulations and laws are created at the behest of this politically connected class of people. We tend to act like and become like those who we surround ourselves with, a basic human function that evolved because of social interaction.

A nasty byproduct of this human condition is that a lot of the laws and regulations that are passed are influenced by those who stand to gain from them and who don’t have the greater good at heart. Whether or not they are intended to be destructive to the rest of us, most of the time, is unknown, but a majority of regulations end up doing just that, especially when an industry or country is overloaded with regulations. Eventually, it stifles and suffocates that which it touches. For example, it costs twice as much to install solar power in the US than in Germany, and this price differential is solely government red-tape. Think about how much more solar power would be prevalent if that red tape was reduced, and how much more competitive solar would be against other forms of energy by now?

Politicians have carte blanche to introduce any kind of bill they want, and with political maneuvering it’s possible to get many kinds of bills passed in the ‘I scratch your back, you scratch mine next time’ manner that seems to work so well in politics, and coincidentally, in groups of chimpanzees.

This is arcane, scarcely different from kings and queens of old enacting anything that they wanted. It is only more difficult to do so now, but all too possible and getting increasingly easier as more and more funding comes from big business, and politicians become ever more isolated from us, and the people clamor for more government intervention.

The Fix:

In almost all countries, there are dozens of universities that do hundreds of studies each year on all matter of subjects far and wide to educate their students and make the world a better place, not mentioning the scientific institutions that could use more funding and science at the same time, but I’ll continue using only universities to make my point.

For each program that a politician wants to implement, three randomly assigned universities must carry out the relevant social, economical, engineering, and statistical studies on the impact of the program/s in question to the general population, national budget, and attempt to assign a statistical risk to eventual outcomes so that contingency plans can be drawn up.

At least two of the three conclusions should be in agreement for the bill to be presented to Parliament or Congress, and perhaps even a follow-up study to find out why the outlier did not conform. The universities’ bills should be paid with tax money, and this would have the added bonus of creating a sense of accomplishment and achievement in aspiring young adults to learn more about the functions of their countries in an unbiased way, protecting them for decades to come from unsubstantiated political propaganda (as well as perhaps going some way to reduce tuition costs, though this may be wishful thinking).

For example: if a politician wants to implement a program that at face value wants to impose a tariff on a foreign product to support a local industry that creates a similar product and save jobs in that industry, then three different economic teams from three different universities selected at random will study the proposed plan and all possible outcomes. None of these three teams will be aware of the other two teams, so collusion cannot be possible and will be illegal, much as it is for a jury to discuss a trial outside of the courtroom.

The teams, in this case from what little I know of economics, would more than likely come to the conclusion that the imposition of such a tariff would simply drain consumers’ wallets as a cheaper, equally well-made product is taken off the market and an uncompetitive industry is propped up at the expense of people’s savings, essentially taxing some consumers, and keeping the employees of said industry from being let go and put to greater use in a competitive industry that would need their labor to compete for those extra savings that the consumers would have, without the tariff. Death begets life, in nature and in the free market.

“Death is very likely to be the single best invention of life because death is life’s change agent.” ~ Steve Jobs (Businessman)

Yet bills like these pass all the time, as the members of the senate/parliament/house are economically illiterate (well, at least at this late-stage cycle of democracy, the founding fathers knew all too well the dangers of government involvement in an economy, which is why they went to so much trouble to limit the powers of the federal government in such matters—not that it worked; politicians are a crafty bunch).

We don’t all have the time to study economics in university, but we can easily have universities help us, which they would be happy to do (because they’d get more funding: it’s in their best interest too). This applies to all cross-sections of a nation. No one person is an expert on everything, but everyone is an expert on at least one thing. We can recruit the smartest people from the best colleges to give us the best, most relevant, most up-to-date and need-to-know information so that the nation can move forward.

The names of the universities, and the research teams would be kept secret from all until the conclusion of the study, and the outcomes of all three studies should be published to the public domain, warts and all, to remove doubts of bias and allow rational discourse and further peer-review from others.

Lobbying

With the inclusion of the social sciences into politics, lobbying has no place and would probably disappear all by itself. If a donor was to donate millions to a politician in exchange for, let’s say, deregulation in a certain industry, the politician would not be allowed to simply push it onto the floor for voting; a study would have to be done that actually verifies the potential outcome and whether that outcome is positive or negative. All of a sudden, you would find that nefarious bills pushed by the corporate world would all but disappear. Donations should stay legal, capped to a certain number per individual, and since corporations are ‘people,’ they shouldn’t be able to exceed that limit, though of course they do, because some ‘people’ are more equal than other people.
Artificial Intelligence

We are entering the boom-time of artificial technology (AI). Before I begin to discuss the role that AI may take, let us see in reality just how difficult it is to know everything at one time, especially with the gargantuan set of laws that the US government has implemented. The current code-of-laws of the United States of America, clocks in at two-hundred-thousand pages. The US tax code alone clocks in at 3.8 million words (four-times the length of all of Shakespeare’s plays, and sonnets). How could any one politician, or even 435 representatives, or one-hundred senators with all their support staff ever manage to unwind, let alone understand, such complexity?

So while I routinely disparage politicians in this book, by way of their corruption, shortsightedness, and idiocy. It’s really a byproduct of the real cause; an unyielding and unending complexity of words and actions that no human being could ever fully know. It is all but impossible to not take shortcuts through the endless complexity and nuance of language, and in relation to events. This doesn’t forgive politicians, due to the reason for their existence being to overcome as best as possible this shortcoming, but they, like us, are creatures of habit, and being such creatures, always look for the most bang for their buck (shortcuts) on how to do more with less, and this is what sets them astray. Considering we cannot change human nature, we should do what we’ve always done when faced with a human limitation. That is inventing technology that alters the environment in the process alleviating said limitation. A cavemen once co-opted a stick to reach an unreachable branch. Early civilizations invented the wheel to take heavier or more numerous objects further in less time and effort. We invented agriculture which used less energy than hunting and gathering food every day—which led to the creation of cities and civil society. Today, we are creating AI’s that can remember everything and understand the meaning and nuance of language at the speed of light, but most importantly, objectively.

In 1978, CBS, embroiled in a case with the Justice Department, had to examine six-million documents at a cost of $2.2 million (almost all for the cost for lawyers and paralegals). In January of 2011, Blackstone Discovery, helped analyze 1.5 million documents for $100,000 in a fraction of the time. The latter was done with software parsing through the documents and extracting relevant keywords inserted by a much smaller team of lawyers, perhaps only a handful, in a process known as E-discovery. In 2011, an AI, Watson, beat the best two human players in the world on the game-show Jeopardy, a game based on the nuance of human language, using as his brain, wikipedia and a few encyclopedias. He wasn’t taught what any of the information meant and had to figure it out on his own, which he did by assigning probabilities to outcomes based on his inputs—which is what we do by the way though we are not aware of it. The AI techniques are capable of both linguistic (keyword and phrase analysis) and sociological (deductive) reasoning. Another company, Clearwell, has developed software to search for concepts rather than keywords, so searching for ‘dog’ will also yield results such as ‘man’s best friend’ and ‘walk’. It’s estimated that one lawyer with these powerful softwares can do the work of five-hundred lawyers from decades prior. (Not to mention that the work of hundreds of lawyers barely result in an above-average accuracy of just sixty-percent. All that money for slightly better than a coin toss in the words of Mike Lynch, founder of Autonomy.) Together, with these powers combined, Captain Planet is born! Actually, the field is called ‘legal informatics.

Clearly, the same problems that impacts the world of law, impacts even more so the world of government, where even more considerations have to be taken into account: foreign policy, citizen responses and other nations (what actions they took as a result of this and that), and so forth. I imagine E-discovery, coupled with general AI, like that of Watson, will be used in the political sphere in the coming years (perhaps decade or two). This is not too say that an AI will make decisions, but will provide objective analysis and statistical possibilities infinitely better than even an army of experts could do. And the politician, who, now able to see the myriad possibilities a law, regulation, or action may take, or how similar laws effected change in the past, will be better informed to make the right choice.

Think of the significance of this. All too often, our economic forecasts take into account only first and second order events, which are highly visible and which favor shortsighted policies so that politicians can point to it as proof of their success. But third, fourth, and fifth order effects such as reduced quality-of-living, rising prices, under or unemployment, and dozens of other factors wallow in the background along with all the noise of society, and which usually outweigh the first and second orders, are ignored, though work tirelessly to demoralize and upend society on longer timescales. Let’s use an economic example, namely, the deterioration of per-capita wealth: In 1791 (using the price of gold as a barometer as it’s less susceptible to inflation), per-capita GDP was 2.6 oz. per person per year (PPPY). It doubled by 1811, reached 12 oz. by 1892, climbing to 23.6 in 1916, sailed past 41.1 in 1929, and hit a peak of 139.5 oz. in 1970. Then a disastrous economy policy of fantasy started with Nixon who uncoupled the dollar from gold, then hitting its doltish stride with Reagonomics, culminating in the simple-minded policies of Dubya (George W. Bush), America is now at 28.4 oz. PPPY.

Watson trained as an economist, having total recall, with the deductive powers of a Milton Friedman on steroids (and since it is an Information Technology, doubling in capability every year), and trillions upon trillions of bytes of data points could immediately inform the politician of all the destructive benefits of any such law (or in this case, economic fantasy dressed up as nonsense), perhaps offering up alternatives backed up by empirical research, instead of wishful thinking.

We already use AI’s in airports, planes, finance, fraud detection, security, warfare, and many other areas in which a human being could not adequately manage the multitudes of information and these areas have boomed as a result. I see the same happening for politics, though just as in warfare, the trigger man will always be human. But unlike in warfare, everything a politician does is a matter of record. As more and more of the world is going digital—a trend otherwise known as Big Data—we will gain unprecedented insight into the human condition, and gain the ability to track causes and their effects, backwards with ever-increasing accuracy, and forwards with statistical probabilities. Think of a politician who is warned by their Watson that passing a certain legislation will increase the likelihood of a recession, that will put millions out of work, but ignores his artificial assistants warning and proceeds with his gut instinct. Then the forecasted outcome does indeed happen, and now Mr. Goldfish is on the record for the world to see, and for his citizens to demand his resignation off (or to turn the election to his opponents favor). What will happen on that day? That will be an interesting day…
In conclusion, I’m sure that even if all these were adopted, there would still be some way to game the system. There always is. That’s why after two-thousand years of democracy, it always ends in failure and dictatorship. However, the above conditions are intended to make it more difficult to engage in the necessary connections, power plays, and the scheming that negatively affects a country over all.

Democracy is still the best governmental model we’ve come up with so far, but that is much like saying that riding a three-legged horse is preferable to riding a two-legged horse. Either way, you’re falling over. If we were falling forward, that would be fine, but we’re not, and a recently released study by Cornell University psychologist David Dunning in 2012 has shown just that, that we are too dumb for democracy; namely, because we are inherently inept at assessing other people’s competence and expertise. This results in most political leaders, in terms of competence and intelligence, registering barely above-average from a cross-section of the public. The one redeeming factor of democracy is that it usually limits less-than-average candidates from being elected, though occasionally they slip through the cracks.

In the internet and information age, the role of politics in a society must evolve, there is no way around that. With our global problems today being unmet by our politicians: climate-change, pollution of the air, water, and land, and resource management, the political system has to evolve, and Big Data in an increasingly digital world is making all the difference, illuminating once dark corners of the governmental (though it may be more prudent to label it the human) sphere. We do not live in a static society, but a dynamic knowledge-building society, and our government must reflect this.

Are We Responsible?

are we responsible?

This is sub-chapter #9, of Chapter #3, Politics, of my ongoing rewrite and open editing process Random Rationality: A Rational Guide to an Irrational World.

Would greatly appreciate any feedback, corrections, criticisms, and comments. If you want the MOBI, ePub, or PDF, then please let me know in the comments—if you provide constructive criticisms in return, and live in the US, UK, or EU, then I’ll ship you a paperback copy of the book free of charge when it’s published.


ARE WE RESPONSIBLE?

Now that the ‘facts nonsense’ is over with, I can start with the rhetoric, where any opinion can be made to sound right. But before we begin, I’d like to apologize in advance for the overabundance of negativity in the next 8 sub-chapters. I am only calling it as I see it, but it might be difficult to slog through. If you can make it through the seven hells, plus the free bonus hell, then you will be rewarded with an overabundance of positivity in the last 4 sub-chapters, as I’m saving the best for last. With that out-of-the-way, let’s talk about responsibility, personal as well as social responsibility in the context of the question, are we responsible enough to govern ourselves?

Let’s begin with social responsibility. The majority of us are part of the collective called society. We enter into a social contract with our fellow citizens and our government to give up some of our liberties in exchange for certain conveniences—usually by accident of birth.

For example, we allow the government to tax us in exchange for them to build infrastructure. We expect them to pass laws, regulations and statutes that protect us from those who would do us harm, to enforce the rule of law, and to look out for our best interests on the international stage. So while we lose some freedoms, we gain greater freedoms in the form of convenience; that’s the theory anyway, and generally how governments function at a democracies inception, when everybody is an idealist.

Onto responsibility: there was a study some time ago titled, The Bystander Effect. It aimed to clarify what, if any, difference occurred in the response time of normal people giving aid to complete strangers who were in the process of getting, or were hurt, depending on how many other bystanders were present. The final result was quite interesting: the more people watching, and as long as they could see each other watching, the less likely help would be rendered in any form.

What? Common sense should dictate that help be rendered faster, but as usual, the truth flies in the face of common sense. The theory was that because everybody could see everyone else also watching, subsequently assumed that somebody else would dial the police, ambulance, or render aid. Another study take a different approach to the same problem. They put a lone person in a room, and started pumping smoke into the room. Seventy-percent percent of people reported the smoke within seconds. When other subjects  (actors told to ignore the smoke) were present, the number of people reporting the smoke declined significantly, to ten-percent in one scenario.

So what does this have to do with society?

Think, by and large, of Western governments that a lot of us are in this contract with. By now, most of us know that something is wrong. Spending is too high, government meddling in the economy is distorting the marketplace causing the misallocation of capital, we are being endlessly manipulated, and corporations employ armies of lobbyists so democracy is swayed their way, at times, regardless of the social cost.

At times, greater liberties than are required to be removed are being removed, seemingly with no immediate benefit to us, along with an anthology of other seemingly small inconveniences that, when added up, paint a confusing, perhaps disturbing picture.

No one, however, does much of anything to protest it, if they even know at all. We all assume that someone else will do it, and yes, there are those who stick it to the man, but they are few and far between.

The world sits atop a precipice, most importantly, a financial one. (I will goto in more in the chapter Debt Crisis 101.) The Western world is in so much debt that any day now we could plunge into another depression. And if that was our only problem we might be so lucky:

  • Online privacy is a thing of the past. Governments and corporations are increasingly intruding into our private lives, both offline and online.
  • Inflation is accelerating around the world. That is, your purchasing power is being slowly eroded, and the Consumer Price Index (CPI) which tracks inflation often tracks novel and unimportant price increases to underestimate inflation
  • Too Big To Fail’ banks are getting trillions—not a typo, trillions—of free dollars because, apparently, socialism is now ‘in’ for friends of the government
  • The mainstream media seems to be getting more biased by the day, sometimes outright trying to misinform us. Accidentally or not, who knows. (Cough fox news cough.)
  • US politicians are domestically passing draconian laws that other countries might, and usually do, emulate such as the National Defense Authorization Act (NDAA)

The Bystander Effect is also known by another phrase, the diffusion of responsibility. So it’s quite obvious that when it comes to social responsibility, we’ve dropped the ball there, and in most cases, we demand that governments continue on the path to fiscal disaster, which I’ll explore soon.

Onwards and forwards to personal responsibility. We like to think of ourselves as responsible, more so as we age, yet are we really? Using the populations of Greece, Italy and Spain as examples, are they really acting responsibly by protesting the governments’ austerity measures in 2012 that are removing unsustainable programs that can’t be paid for?

‎”It is not the function of our government to keep the citizen from falling into error; It is the function of the citizen to keep the government from falling into error.” ~ Robert H. Jackson (US Supreme Court Justice)

These programs will only make their own eventual situation worse by accelerating their countries’ economic downfall. Sounds silly protesting to keep entitlements that are damaging to your economy, and by extension, your future personal well-being, does it not? We are predisposed to future short-term thinking, and it seems our educational systems are not preparing us to see past this default mode.

Of course, those protesting don’t know this, but it is part of their responsibility, their social contract, to be informed on what does and does not work economically. It’s not good enough to demand something just because it benefits you. Ignorance will eventually hurt you, your fellow citizens, and in a globalized world, the entire region or planet.

It is often said, “Ignorance is bliss,” though it should be said, “Ignorance is temporary bliss.” Those who live this way are leaving their future well-being to chance, or to other less-than-savory characters—in many cases, the politician.

All three of the just-mentioned countries are in so much debt, they run the risk of outright default. In the case of Greece, they can’t even sell debt on the private bond market, relying solely on bailouts from the IMF and ECB. So why are they, and many others, drowning in debt?

One of the reasons is that the majority vote for politicians who bring the most benefits to them, without asking simple questions such as, “Where is the money going to come from to pay for this program?” Or anything remotely resembling a sensible question. And the recently elected politician can’t just raise taxes as soon as they’re elected to pay for their promises, so what is a politically expedient way of getting the necessary money to keep these promises without attracting the ire of voters? Thanks to Keynesianism, the answer is simple: borrow it. Problem solved! Of course, it’s only solved on a short-term basis, and we will be finding out just how shortsighted it really was in the coming years globally, though locally it is being felt in certain areas, as it is in Spain, where the youth have fifty-three percent unemployment, regardless of educational attainment.

There’s yet another reason government debts have spiraled upwards around the world. It’s not just limited to those three countries mentioned above, they are merely the top 3 examples! It is because previous government programs rarely, if ever, get cut as there are people who rely on those programs who won’t or can’t, give them up, and this affects a politician’s chance of re-election, no matter how small a minority it benefits. Just look at corn subsidies in the USA, corn farmers make up less than two-percent of the voting block, yet they receive billions in subsidies that simply isn’t economically necessary (and actually is economically destructive), while also contributing destructively to the entire planet, essentially raising the cost of corn, tying it to the price of fuel (converting it into biofuels with only a trivial 50% energy gain, compared to oil at 500%, i.e., one barrel of oil gets us 1.5 barrels of corn bio-fuel, while one barrel of oil gets us five barrels of oil out of the ground). This negatively affects food prices around the world, thereby increasing world hunger. But they still get their billions of dollars of subsidies without a care in the world, and no politician can touch that subsidy. Democracy was at first, the tyranny of the majority, though it has seemingly evolved into the tyranny of the minority, thanks to the art of lobbying. I need not even discuss the stranglehold of Wall St. Human intuition and shortsighted thinking is becoming so overwhelmed, that in a data-abundant world, it should no longer be used as the basis for democratic decision-making, an important part of it yes, but not the basis or foundation, as we are inherently bias and shortsighted (more on this in Fixing Politics and Chapter 5: Technology).

Thus, the upward thrust of government programs and the bureaucracies that goes with them, which history has shown happens time and time again, happens yet again in the modern-day where apparently we know better. This leads to ineffectual decision-making and government. Politicians are so concerned with keeping their jobs that they don’t do their jobs to the full potential and benefit of the nation. And people are so concerned with their own benefits or entitlements, or self-absorbed ideas that their socioeconomic system is the right one that they won’t allow politicians to do their jobs to their full potential either, even when a change of direction is required, or demanded to avert disaster! Responsibility? More like populist ignorance, with a serving of political cowardice, and a sprinkling of stupidity on both sides. (By stupidity, I mean the inability to recognize the long-term effects of actions.)

“How fortunate that men do not think.” ~Adolf Hitler (Sociopath)

This lack of personal responsibility lies solely at the feet of the populace. Yes, politicians have run up the debt making things unsustainable. They have spent and spend too much, borrow and borrowed too much, and printed and print too much new money—and we are right to blame them for their part in these problems.

But we blame them for the whole problem when we are part of the problem; we, or at least the majority, voted them in based on what they would provide to us. We are to blame for not asking basic questions on how they will fund these generous entitlement programs, and are at fault for not understanding basic economics. We are to blame for leaving to others the responsibility of keeping their actions in check because we were too busy watching American, British, or French Idol. Being social mammals evidently has its drawbacks. Consider the Asch Conformity experiments conducted in the 1950s, and repeated many times since. Seven-to-nine participants (all but one being actors designed to fool the one real participant), when accessing two pictures on a card; the picture on the left is of a straight line, compared to the picture on the right with three straight lines, one of which matches the length of the left line. Cycling through variations of the cards, the actors were on some occasions told to purposefully give the incorrect answer as to which line from the right-side matches the line on the left. The lonely real participants answer, who was made to judge last, was recorded. In one-third of cases, the real participant overrode his gut intuition (the answer was exceedingly simple) and conformed to the crowd. This experiment was repeated over many years, many universities, and hundreds of people. It also found that the more ambiguous a situation, that is, the more uncertain (as we find in public knowledge of politics, economics etc), the greater the conformity effect. Now all those political pundit TV shows begin to make sense on Fox News and others.

We are the instigating factor in the crux of this huge worldwide issue that will come to bear down on us in the ensuing years. There is currently fifty-trillion dollars in debt worldwide, with a global economy of seventy-trillion dollars. (By the way, this is just government debt, and doesn’t include institutional or household debt.) When you take account just the ten largest mature economies, debt-to-GDP is 350%. I’m not playing tricks on you…cumulatively speaking, for the ten most mature economies (Australia, US, UK, Japan, Germany et al), their debt burden is over three  and a half times larger than the size of their economies, and this spread is growing. (This figures does not take into account the derivatives and Wall St investments which notionally total $668 trillion, though they only carry a market value of $15 trillion.) Think about that for a heartbeat, for every dollar in a Westerner’s hand, there is three-dollars-fifty of debt. In a near future coming to you, many won’t get paid their $2. Will it be you? (The specifics of how there is more debt than money will be explained in the chapter, Infinite Growth.)

The USA, the cornerstone of the world economy, now has, at the time of writing, $16.5 trillion in debt compared to a GDP of $15.81 trillion, and that’s just government debt; it doesn’t include household debt, which raises that ratio many times higher. This doesn’t even begin to even image the entire problem. The unfunded liabilities of the US government: Social Security, Medicare, and federal employees future retirement benefits are on the order of $86.8 trillion, as calculated by Chris Cox and Bill Archer, who both served on President Clinton’s Bipartisan Commission on Entitlement and Tax Reform (drawn up in 1994), which of course was never acted on. (An unfunded liability is the amount by which the liabilities of the plan, in this case benefits, exceeds the plans assets at a given date. The reason why it has grown into such a huge problem, is the federal government does not do the same accounting as is legally required of public and non-profit firms.)

“If the economy isn’t growing, it’s not because the government isn’t spending enough to “stimulate” it. Government spending comes from: taxation, which is a burden on the economy; borrowing, which is a future burden on the economy; or printing money – inflation – which is an especially dishonest, hidden form of taxation makes people think they’re richer while they’re being impoverished. No. If the economy isn’t growing, it’s because the government has burdened it with heavy taxation, smothered it with excessive regulation, distorted it with false information (the Fed’s manipulation of interest rates), and replaced real money—gold—with paper.” ~ Doug Casey (Investor)

So, what is the solution to this debt problem? There are no solutions, that I know of, except for a reset, which will happen all on its own as it stands, and anyone saying bailout knows not of what they speak. Creating more monetary debt to solve a debt problem is akin to giving heroin to a heroin addict and expecting it to solve his addiction problem; despite what politicians (pushers) will tell you. It’s only meant to buy them more time, not you. To show to you that is indeed the case: consider the fiscal cliff fiasco, where in 2011, the US budget passed by congress, factored in automatic budget cuts and tax increases (or expiration of tax decreases rather) to take effect by the end of 2012. This was done to ensure they had time to work out which cuts really to be made, with across the board cuts taking effect if no political compromise was forthcoming. At the time of writing this paragraph (Jan 2, 2013), they’d just passed an extension again for two more months while compromising on the tax increases. By the way, that compromise is projected to increase the national debt by four-trillion dollars over the next decade. (Doing nothing would have kept—theoretically at least—the debt-to-GDP ratio constant, but they managed to screw that up too! As journalist John Cassidy on the New Yorker, in an article concluding the deal wrote, “Congress is only buying time—and precious little of it.

So what are some solutions for these political problems that are so endemic? I will get to them in a later chapter, after asking a simple yet elusive question in the next chapter.

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.” ~ Unknown (Unknown unknown)


Note: the book is fully sourced, but because of the writing program I use, the links don’t transfer over to WordPress. At the conclusion of the twenty chapters, I may throw up a post with all hundred-fifty+ sources, but the final book will have all the relevant sources in the proper locations.

Saving the Planet, One Scientific Steak at a Time

In-vitro meat (IVM) is one of those subjects that could quickly get out of hand in the minds of an uninformed public, and this post is my small part in countering the entropy of reason. Hmm, is it still entropy if the reasoning was never there to begin with?

In my discussions with those unfamiliar with it, the first reaction seems to be one of disgust. Maybe due to the increasing familiarity with Genetically Modified Foods (GMO), especially with the increasing notoriety of Monsanto (as if they were the first and last step in GMO). But, as in any foray into the unknown, as Bertrand Russell puts it: first you must begin with the facts, and move on from there. So let’s get to the facts of meat today, and then with those of IVM. One thing we must get out-of-the-way before we begin: human-beings will not just stop eating meat, so any philosophical or personal objection to the practice of meat-eating is bunk. One person’s (or even a billion persons) objection to the practice of eating meat is irrelevant, it’s simply a part of life and must be dealt with.

Continue reading “Saving the Planet, One Scientific Steak at a Time”