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)


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)


The Communist Ideal

I recently completed reading The Communist Manifesto, by Karl Max. At only thirty-two pages long, it was a long and grudgingly boring read. I thought I was reading a book ten times the length, but I do believe I have imparted the general idea of what he espoused. While communism in its many forms that were tried in the 20th century, have failed, often disastrously, with the exception of China (which by opening up ever more aspects of its economy to free-market principles, essentially forestalled the political ramifications a central-command government eventually faces). I don’t believe that communism, as attempted so far, is the communism that Karl Marx proposed. In this post, I am not defending those 20th century communist regimes. In fact, after reading the Communist Manifesto, I do not think they were very communist, and if they were, they may have started out with the best of intentions, but the results, at least in the short-term, were anything but.

The end-result, or logical progression, of Karl Marx’s communism, in essence, was the abolition of government, and by extension, money, and equal status to all people in terms of opportunity (not possessions). What he saw, and wrote, must be understood in context of his time, and realized that the future he envisioned, would not come within his lifetime (though maybe he didn’t know this, I can’t tell). He lived at the beginning of the Industrial Revolution, and saw the rapid industrialization that occurred, and was right to say that capital would flow upwards in the antagonistic struggle between capital and labour, as those lower on the totem pole would eventually be replaced and relegated to a smaller subsection of the populace in an anarchic free-market system, and correctly extrapolated that this trend cannot continue indefinitely. But, he was unable to extrapolate that new jobs would be created to replace old jobs, but the jobs engines that has been continually creating new jobs is finally showing signs of its mortality, and it probably won’t last forever.

In those nations that tried on communism, the age-old dilemma of mistranslation and misappropriation of ideas, coupled with the rarely changing mindsets of people, led to poverty, and sometimes tragedy, where ever communism was exported, as well as in the free-market also (working workers to death, slavery, and unequal pay between the sexes etc.).

But I think that Karl was ahead of his time (perhaps a little too far). Consider where we are now with our current trends racing relentlessly into the future. We are moving towards an increasingly automated future where jobs will become more and more scarce as the law of diminishing returns rears its ugly head (new technologies now are creating fewer jobs than they replace), which will grind away at social stability. Soon, machines and artificial intelligence (AI) will do human jobs better than humans; without lunch breaks, smoke breaks (or any breaks for that matter), insurance, distractions, sick leave, and so many other factors that retard human output as well as increase the cost of labour, and thus goods and services.

We are moving into a future where potentially everyone will have a 3D (additive) printer in their homes, replacing the need for factories and factory workers. You need a new mug, you’ll print it. If you need a new phone, you’ll print it, and if you’ll need a new printer, you’ll print it, and so on. Materials will be assembled into the feed for these printers most likely; inside the countries themselves by automated processes, reducing international shipping and all the jobs it provides. Indoor farms combining aeroponics, aquaponics, and hydroponics will be capable of growing any food from any climate anywhere and everywhere, further reducing trans-city-country-continental transportation. Portable medical devices are on the horizon that will replace your general practitioner (GP) in identifying what type of illness you have, as well as articulate in detail the remedies for the proper healing taken in consideration of your genetic makeup, all analysed in the blink of an eye with 99.99% accuracy (predicted), and the drugs will be printed on an additive printer no lessNanotechnology is on the up and up, and in the coming decades, may release the awesome potential of building everything, anywhere, anytime using any input, at the atomic level with zero-waste. You will literally be able to turn anything into anything else!

How could something as medieval as money survive in a future like this? Money is a physical manifestation of scarcity. Replacing the ancient tradition of trading goods directly and acting as a medium of exchange between all goods, and evolving along with society. In the beginning, predominantly taking the form of gold and silver, as well as dozens of other forms (cheese in some parts of ancient Italy, and tea in Siberia way back when). Then constantly oscillating back and forth between gold standards, silver standards, paper standards, and combinations thereof. Now we find ourselves in the midst of a global paper standard. But because money evolves lineally, and our technology has in the last hundred years, begun evolving exponentially, money will, by necessity, eventually shed the characteristics that necessitated its original conditions because everything else in its environment will evolve beyond a need of it. This is a core concept of evolution, and since technological evolution is an extension of biological evolution: we can think of money in a resource-scarce environment as random mutation in a naturally selecting environment (society). But technological evolution continues, and now, exponentially increases in capacity and capability. Thus the conditions that selected the monetary-mutation are beginning to move beyond scarcity, i.e. money is losing its value (and hopefully will die), and into abundance, soon afterwards, perhaps infinite abundance (nanotechnology, anything becomes everything and trade essentially ceases).

To side-track to biological evolution to try to further the point. We humans evolved with enzymes that could process and digest raw meat, yet we no longer have them because we invented fire and the frying pan; an external stomach that replaced raw-food enzymes (and which by the way, allowed the necessary conditions to grow our brains far in excess to other primates and become the dominant ape by out-eating them). Within just a few tens-of-thousands of years (an evolutionary second), we could no longer eat raw meat (if you ate only raw meat for 90 days, you’d die). Money evolved, i.e., was bought into being as an improvement to the previous paradigm of direct trading, facilitating a division of labour, which amplified co-operation, increased specialization, resulting in technological progression, and societal advancement. Yet in evolution, it is very rare for a trait to outlast for long the conditions that necessitated its creation and subsequent survival, and such will (hopefully) be the case for money soon. Money is subject to the same laws of diminishing returns as everything else. Much as the faltering, or sputtering of the jobs engine of our current economies as they are replaced by technologies that far out-do people in terms of cost, speed, and reliability, in the process, creating fewer jobs than they replace. Yet due to the stigma of 20th century communism, I fear the necessary discourse will never occur, or perhaps occur too late in updating capitalism to keep pace with the continually evolving and accelerating change of this technological century.

Only a simple understanding of ‘Supply and Demand‘ is required to understand this point. If the demand and supply of a product stay constant, then the price remains stable. If demand increases without a comparable increase in supply: that is, demand outstrips supply, then the price rises and vice-versa. If a product has a large unrefined supply, but requires expensive tools of production to bring it to market: then the price is high and vice-versa. So in this future we find ourselves barrelling towards, where both supply is bountiful, or its use so exceedingly efficient as to nullify it, or where any resource can be used to create any other resource as is done with additive manufacturing and nanotechnology, then what possible use will money have? This is not to say it will disappear overnight, more than likely, it will deflate and continue deflating as our technological progress accelerates until we come upon a day where we find it is no longer necessary. Whether that takes 20, 40, or 100 years remains to be seen. That process will create economic pain, even if exponential in nature, because if people still need money to buy food, water, and shelter, and if the majority of the population is out of work; how does taxation, government, redistribution, and public benefits work so as not to antagonize class differences? (The end result of this exponential technological progress is that there are no more class differences or haves / have-nots, but the ramp-up is where the concern lies as the system which will eventually benefit everyone might be dismantled by shortsighted doom-and-gloom thinking)

Providing we can circumnavigate such problems, and arrive to the other side in one piece. In such an economy, where supply and demand become irrelevant, and individual needs and wants take precedence, where government is no longer required as an ‘impartial‘ arbiter, and where people are simply given everything they need to survive and thrive since it costs nothing to produce in terms of human labour, does not the ideal of communism ring true? I don’t mean the central bank that it demands (we still use them anyway), or the agricultural army it stipulated, or any other requirements that served more as a transitory approach, but the overall meaning. That everyone is equal, and we all deserve opportunities, all men and women are given the ability to shine, if they so choose.

I do believe that the essence of the message rings true, despite what other subjects he waxed on about, or didn’t, which seem obvious to us now in hindsight, but which wouldn’t have in his time. A lot of meaning is lost in the translation between German to English, and I imagine even more so, between the 18th century and the 21st. He did live two-hundred-years ago, so the allure of projecting todays moral and ethical framework on to his thinking is tempting, but which, at the end of the day, is only a shortcut to ignorant thinking. To truly understand it, we must flip the polarity of time and study it in that sense, which is what I have attempted to do in this post and distil what he may have meant (of course, I may still wrong).

Looking to history and projecting into the future, we find that most of our descendants views on several issues as immoral. Slavery, segregation, extreme classism, rules of war, as well as acts of war among many others. I see no such difference in today’s morality looking forward and fully expect those in the future to look back upon our own morality as incrementally better than the generations before us. Perhaps they will be as quick to judge us, as we to those that came before us. From our Keynesian fantasies which prolong, expand, and exacerbate the misery of billions (via a central bank and extraction of wealth), along with its isolation, consolidation and subsequent corruption of a few elite bankers who hold monetary power over billions, to those down the lower end of the monetary totem-pole being unable to afford certain necessities; healthy food, healthcare, and shelter, which would otherwise increase quality of life by removing the negative influences that affect mental and physical wellbeing (often diet-related), and which, when removed result in increased cooperation, knowledge-creation, which in our modern society makes it healthier for all involved, rich and poor alike and those who fit snugly in-between.

To use a real example of the potential problems down the road. Studies have shown that it cost society far less money to house chronic homeless people; that is, give them a free home, income benefits, and health insurance, than it is to leave them on the street, or even put them in a shelter. A Boston Health Care study tracked one-hundred-nineteen chronic homeless folk, and found that over five-years, they were admitted to emergency care 18,834 times, and that’s with thirty-three of them dying, and seven placed in a nursing home. A study in San Diego found that putting homeless people in an actual home resulted in a 61% reduction in emergency room benefits, and a 62% reduction in inpatient days over two years, with each visit costing at least $1,000. Putting chronic homeless people in a shelter costs $24,000 per year per person. And during the day, they are roaming the streets and increasingly likely to end up in jail, so that $24,000 does not include the cost of jailing, guarding, and feeding them when they are put in jail, which often occurs as a result of depression, and substance abuse that often accompanies their wandering street-life. What will we do in the future when joblessness is increasingly common, and the tools to create high-quality automated homesautomated medical care, and food are a tiny fraction of todays cost? Will we turn our back on them, because of out-dated free-market-principles? Besides, you can’t have a society that neglects a majority of its citizens without decay and eventually revolution (or in the case of an advanced force against those with nothing, mass-jailing or genocide).

People are created equal, not genetically, nor in their physical or mental ability, but morally in the context of our societies. If we allow any (unfair) inequality to creep in (which for now is inevitable), it slowly but surely grinds away at the fabric of society, only for the potential of violence to rear its ugly head.  In this regard, one of the great moral achievements of humanity is the slowly increasing minimally acceptable status one can have by providing help to those unfortunate enough to be at the lowest of the low (both by free-market economics driving the prices down and public assistance in the form of welfare, which was inspired by communistic thinking). Of course, as many will rightly point out, the latter is easily abused, mostly by political pandering and selfish voting, and we’ve seen the indulgences and problems inherent in an overburdened welfare state, but that in no way undermines its validity in the correct doses.

Nothing is perfect, much as we live today in a bastardized version of the free market, the communism of the USSR in the 20th century turned into a bastardized version of communism (though I’m glad I live in the former). With that being said, what many people overlook, or completely neglect to take into account is both socioeconomic systems are context-specific. In environments of scarcity, the free-market reigns supreme (though without a moral framework, it goes horribly wrong, i.e. slavery). In environments of limitless abundance, money, government, and classes have no place. And in the transition period between the two, ideological and emotionally based, shortsighted thinking tends to outweigh reasoned and objective analysis, potentially turning otherwise fixable periods into disaster due to the nature of democracy and political pandering. In the future when we have the technological marvels that will arise out of today’s inventions, bought into being by the capitalist workings of scarcity, will not the ideal of communism ring true in an age of abundance? (Not its 20th century misappropriations).

The rigidity of our political and economic institutions is what is at issue here; it must evolve and adapt in response to the self-changing environment we created, instead of boxing us into the past. In human history, we have example after example of people and societies holding onto tradition and frameworks for far too long after their usefulness has evaporated, and being unable to let go of the past, they often paid the price, some the ultimate price. Capitalism will be in a similar position soon.