Quotes Entirely Relevant to Investing 01-18-2009
by Mr JugglesThere is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as final and total catastrophe of the currency system involved.
-Ludwig von Mises, Human Action (1949)
“Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. ”
– John Maynard Keynes, The General Theory of Employment, Interest and Money (1936)
fuck. We’re screwed
VOL IS KING:
Mises was NOT a Keynesian. Do not come here with your typical Keynesian answers, that is what caused this mess in the first place. Might I suggest reading some Hayek, Rothbard, Hazlitt, Mises, or Paul? These authors have a wonderful Austrian cure for what ailes your Keynesian mind.
Cory:
I know von Mises was not a Keynsian, that was a rebuttal.
Hayek is quite good, outside of “the road the serfdom”. Hayek was actually quite influential with respect to Keynes’ work in the General Theory, to which Keynes alludes in that work.
I would say that this current mess was caused my von Mises and Friedman. The market cannot regulate itself as the participants do not have perfect knowledge or information, as Hayek points out.
Might I suggest you read F. H. Knight before stating what the Austrians can and cannot cure.
VOL IS KING:
Comparing von Mises and Friedman, Austrian and Chicago, shows how little you know about all this.
LOLs to Calhoun.
If we decentralized banking, and turned the current system into a whole reserve system rather than a fractional reserve system, then the regulation would take care of itself.
I will definitely check out F.H. Knight, I am interested in what he has to say on the subject.
I’m not sure I did compare, but simply said that they were both culpable. But now that I am comparing, they both advocate laissez-faire policies based on the assumption that market performs better than the government action. Of course, the Austrian School influenced the Chicago so this is not surprising. However, because markets tend to overreact in what Soros calls reflexive processes, there is a role for government to act as a circuit breaker when the feedback loop gets carried away in either the positive or negative direction.
P.S. Really its Harry Markowitz and Eugene Fama’s fault.
seriously, CAPM can suck it
The Germans listened to the advice of a certain Austrian after their economic crisis in the 1920s, and look where that got them.
My main point is: never trust an Austrian.
Ronit: haha nice point.
I hope you know that I mean the Austrian school of economic thought. Hyperinflation that was seen in Germany could possibly hit the US if our leaders keep letting Paul Krugman tea-bag them with his advice.
Cory:
Now you’re just being crazy, we’re in a massive deflationary spiral, inflation would be a freaking wet dream compared to this shit. You can always raise interest rates, you can’t always lower them. We’re through the fucking looking glass, past the zero bound, into the land of nod, negative interest rate country. Only Keynes can save us now.
The cure for deflation is lower prices. Deflation is just the shrinking of the money supply, lowered prices and wages are a RESULT of deflation. Lowered prices is what causes the consumer to keep his standard of living by protecting his purchasing power. Inflation, while unemployment is high, and wages are stagnant is crazy, it will prop up the prices of consumer goods at artificial highs thereby diminishing purchasing power. The only cure for deflation is a drop in prices. Inflation will only perpetuate the problem and decrease the value of each dollar that responsible people have saved.
VOL IS KING, please explain to a C-student, how we are in the deflationary spiral, when there is massive ammounts of money being printed and the money multiplier has not even kicked in yet since the is no lending going on. Doesn’t “lots of money chasing few goods” make money worth less?
All that would be perfectly fine if the consumer wasn’t leveraged and didn’t have to repay debt incurred before deflation set in. Consumers will not purchase more at lower prices because their wages have been reduced and they’re still paying for their earlier consumption.
And so consumption will fall, not rise, due to lower prices as the utility function of the now less secure consumer has changed and so it will go on and on until some exogenous stimulus breaks the cycle.
Alex:
There is a surplus of goods. The money multiplier is not going to kick in because be the banks are insolvent. Consumers are seeing their wages reduced and must use their income to pay down debt from past consumption rather than consuming current goods even though those goods are now cheaper. So the decrease in consumer consumption causes the economy to contract, the contraction puts downward further pressure on wages but consumer debts stay the same in nominal terms and increase in real terms taking up more and more household income and the cycle repeats.
Alex:
VOL IS KING thinks we’re in a deflationary spiral because he is confusing monetary deflation with price deflation. Monetary deflation is a shrinking of the money supply, price deflation is just prices going down. Prices can go down for a number of reasons, including the current lack of demand because people want to forego spending to stabilize their balance sheets. The fact is, prices are going down DESPITE the extreme monetary inflation being printed out at the Treasury. All that means is there’s a lot of inflation happening behind the scenes that will only be revealed when there’s finally an economic recovery and we suddenly notice everything costs twice as much and our parents are eating dog food.
Calhoun: Exactly.
VOL IS KING: The amount of consumption for DISCRETIONARY items may lower, but the demand for everyday items will increase. Just because people are carrying a lot of debt, does not mean that they will stop feeding their children and stop filling their tanks with gasoline. Another reason that we have not seen the effects of our MASSIVE inflationary policies is because we are so reliant on China’s exports. The Chinese Government manipulates their currency as well as the price of their exports in order to keep demand high. We are in for a HUGE surprise when this house of cards comes crashing down. Further inflating the money supply will only exacerbate this, the only viable solution is to return to sound money and get rid of fractional reserve lending. A reserve ratio of 1:1 would be ideal, but anything lower than our current system allows would help.
Calhoun:
I haven’t confused anything. The net effect of the increase in the money supply and the decrease in wages is our case is deflation. The inflation won’t be “revealed” because the economy is contracting faster than the net money supply is expanding. The economy will not recover any time in the next several years as the inflationary policies of the Fed will be insufficient to stimulate demand.
Cory:
Everything is DISCRETIONARY except for food and shelter. Walking is a substitute for gasoline, so is the bus. People most certainly will stop putting gasoline in their car, I haven’t had a car in years and certainly don’t miss it.
Obviously the Chinese are the ones facilitating our massive borrowing in order to make their exports cheaper. As the US consumer continues cut consumption the Chinese will soon find themselves completely fucked. Their entire economy is based selling US consumers shit they don’t need and they have exchanged their reserves for wampum which we can devalue at will.
Nouriel Roubini Says Worst Still Is Ahead of Us: Year in Review
By Nouriel Roubini
The global financial system in 2008 experienced its worst crisis since the Great Depression of the 1930s. Major financial institutions went bust. Others were bought up on the cheap or survived only after major bailouts. Global stock markets fell by more than 50 percent from their 2007 peaks. Interest-rate spreads spiked. A severe liquidity and credit crunch appeared. Many emerging-market economies on the verge of a crisis had to ask for help from the International Monetary Fund……
http://www.rgemonitor.com/roubini-monitor/254973/nouriel_roubini_says_worst_still_is_ahead_of_us_year_in_review
Well, ladies, the Ratings Agencies seem to think that we’ll be relatively ok, so, I mean, what reason do we have to doubt their eternal genius?
If you can’t trust the Ratings, well then shucks, what can ‘ya trust?
Least funniest comment thread ever.
No offense, Anal_yst.
>>>>Hayek is quite good, outside of “the road the serfdomâ€.
Surely, you’re joking. That’s like saying “Jesus is good, outside of that Son of God stuff and the ‘love your neighbor’ bullshit he used to spew.”
The Road to Serfdom is a pamphlet that describes in a nutshell what Hayek wrote at much greater length in Constitution of Liberty. The roots of his work on the economic calculation problem and his theories about spontaneous organization are both evident in Road to Serfdom. You a CUNY grad or something?
Pleb:
Yeah, I don’t have a problem with The Road to Serfdom so much as the Ayn Randers who cling to it. All the underlying theory is great but his followers take it too far. Same with the Keynsians. You need free market capitalism to allocate resources, but you need a government that can save the market from itself from time to time when the inevitable bubble bursts.
As for Jesus, yeah he was was pretty groovy except for all that son of god bullshit. Like Hayek if you read him and don’t take everything to its furthest possible extrapolation then there’s some good stuff in there.
The market cannot regulate itself as the participants do not have perfect knowledge or information, as Hayek points out.
And government can? So, you’re telling us that a handful of guys in government can regulate things better on behalf of hundreds of millions of people than those hundreds of millions of people can regulate for themselves?
I’m an immigrant from the Soviet Union. You’re going to have to prove that one to me. A handful of government wonks don’t even have enough information to make a handful of relatively poor decisions. And please don’t give me this BS about how a good central planning government was hijacked by Stalin. That much centralized power is ALWAYS hijacked.
Mind, a market system doesn’t prevent bad outcomes. It doesn’t promise utopia. It only maximizes individual liberty and doesn’t stomp out human ingenuity and the ability to create wealth – an ultimate benefit for all. In a centrally planned economy you give up all your liberty for the comfort of knowing that no matter what you do, your life will never improve – unless you’re very well politically connected.
And where is all this deregulation that Friedman and Hayek argued for? All the disasters have happened in the most highly regulated portion of the financial sector – banks – where regulation has continued to grow unabated. Carter began deregulation because the 70’s turned out to be pretty shitty and Reagan deregulated further. However, with the ascent of Bush I (seriously, it’s like a faulty gene in that family), regulation and taxes began to grow again and have been growing ever since. We will dispense with the fiction that cutting tax rates without cutting spending is an actual tax cut, right? The net result is more regulation today than we had during Carter’s administration. Where’s all this laissez-faire you keep talking about?
but you need a government that can save the market from itself from time to time when the inevitable bubble bursts.
Really? The tech bubble was not the government’s creation. Government’s “saving us from the market” when that bubble burst lead to an even worse bubble with an even worse burst. Who’s going to save us from government created bubbles?
Not saying we don’t need government, mind. Just saying that economic planning is not its forte. Hasn’t worked anywhere it’s been tried.
As the US consumer continues cut consumption the Chinese will soon find themselves completely fucked. Their entire economy is based selling US consumers shit they don’t need
Right now the Chinese are producing more than they can consume. When their consumption catches up to their production, they won’t be as anxious to lend the U.S. government money. When that happens, we’re going to have the mother of all currency crises here in the USA as each of our creditors will try not to be the last out the door. Who will we borrow from then to create make work projects for all this pump priming that has never ever worked? Keynesian economics is second only to Marxism in creating Banana Republics.
Size:
1)Chinese consumption is never going to catch up to their production, their wages are dropping and going to continue to drop because global consumers are not going to be able to relever and consume unneeded chinese goods the way they have for the past 20 years. The have massive over capacity and galling per capita income. The Chinese will continue to lend to the US indefinitely if they don’t want to have their currency appreciate and US demand for their goods to fall further. Otherwise they will end up back in the stone age from which they only recently escaped. The US is lucky in this regard, as we are the ones with all of the nuclear air craft carriers and therefore the only viable candidates for the world’s reserve currency.
2)The reason the banks are so highly regulated is because they are highly levered and can expand the money supply through their actions. As long as their is a fiat currency (and their always will be gold is just as fiat as the dollar), the banking system must be highly regulated or a country will no longer have control of its money supply. To not regulate banks would the same thing as allowing rampant counterfeiting. Depressions and large recessions were actually much more prevalent before banks were highly regulated and the Fed was established. Famously JP Morgan had to save the financial system and the US government in 1907 because the US government had not the power to do so itself. And, of course is was the unregulated off balance sheet entities that were the main source of the problem this time around. You do not see similar dysfunction in on exchange highly regulated derivatives, such as futures and options market, as you do in CDS and CDO markets.
3) No the government cannot manage to regulate the market either. The government needs the market to allocate resources and the market needs the government to ensure transparency, contract enforceability and orderly functioning in time of market turmoil.
4) I am not a communist or even socialist, central planning is even more inefficient than markets. The issue at hand is that markets cannot possibly be efficient and because of this they at times will need nonparticipant intervention in order to ensure their orderly functioning. All I’m saying is that you need a government to maximize the positive externalities associate with market in which its citizen are not afraid to participate.
5) “Mind, a market system doesn’t prevent bad outcomes. It doesn’t promise utopia. It only maximizes individual liberty and doesn’t stomp out human ingenuity and the ability to create wealth – an ultimate benefit for all.”
There is nothing that says an orderly functioning market will benefit all, most, or anyone. In fact in an efficient market their would be no profit. People love the “creative” part of capitalism, but they forget about the “destruction”.
5)What you call “keysian” economics is in fact not. Keynes did not advocate running deficits while the economy is expanding. The government should be pay down debt while the economy expands so that it can provide stimulus during a crisis not spending like a drunken sailor on foreign adventures. What most people consider to be “Keynesian” is no such thing.
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WHAT!?
VOL IS KING
1.) You’re wrong about Chinese consumption. Every country on earth started in a more impoverished state than it is in now and no country on earth (including the United States) had a United States consumer to rely on to create wealth. Don’t myopically look at China’s current wage rate. No economy is a straight line. As long as the Chinese continue to become productive, they will become wealthier and they will consume more of what they produce. At some point, the U.S. will become less important to them. Neither of us know when that will be.
2.) I know the reasoning behind regulating banks. But the difference between J.P. Morgan saving the banks and the government is that J.P. Morgan was not awash in political power and corruption that comes with it. As for unregulated off-balance sheet items – they will always exist. Banks have captured the regulators and while they get the regulators tow write economic rents into the code for them, they will find ways to create structures which are not regulated to do what they want. This is the regulator/regulatee game and it will always be the game. Regulations usually have exactly the opposite outcomes of the intended ones. They gum up the system, reduce competition, raise prices and stick it to the little guy they’re supposed to protect when everything goes pear shaped. I’m also in a highly regulated industry and I lobby and get economic rents at the expense of my customers all the time. I used to try to fight it, but I see no point in doing that as the customer is too dumb to realize the regulator is protecting them only from lower transactions costs.
3.) I’m not sure you know what Keynesian economic is either. What you describe in most of #3 is Rule of Law. That has nothing to do with economic interference. As for “orderly functioning in time of market turmoil”…you’re going to have to explain to me how the government is expected to do that. The reason there’s turmoil is that there are vast differences in perceptions about what the real price of something or things should be. You’re saying that a handful of guys in government know what the real price is and the millions of market participants are merely idiots? How do a handful of government wonks get so much smarter than everyone else? I’m just curious.
Interventionists like you dream that such things are possible because you want them to be. They’re not. An “orderly market” is one where people are not robbed at gunpoint. Not metaphorical gunpoint but literal gunpoint. As long as the seller sells of his own free will and the buyer buys of his own free will, we have an orderly market. Market volatility and increased velocity is not disorderly. Also, let’s be honest – “disorderly” has come to mean “downward trending”. Nobody was crying about the disorderly upward leaps in the RE market or in Dot Coms.
4.)Let’s be clear: I’m not calling you a communist or a socialist. First of all, both ideologies have recently been renamed by the left because if they called their rehashed socialist ideas “communism” and “socialism”, they would be held responsible for justifying the horrors caused by the imposition of those regimes. Now, socialists and communists call themselves stuff like “environmentalists” (to the chagrin of real environmentalists).
The issue at hand is that markets cannot possibly be efficient and because of this they at times will need nonparticipant intervention in order to ensure their orderly functioning.
Very liquid markets are extremely efficient. Illiquid markets are always inefficient because of the lack of participants. They are always more volatile because there are fewer transactions and less price data. So, in very liquid markets government intervention serves only to prevent the market from clearing and creates massive negative externalities. In very illiquid markets, the government has no more data than other market participants and, thus, cannot make that market function any better than other market participants. So, you’re going to have to explain to me why government is a superior actor in the market and is able to know things that market participants don’t know in order to be able to make the market more efficient.
All I’m saying is that you need a government to maximize the positive externalities associate with market in which its citizen are not afraid to participate.
All I’m saying is that this is fantasy – unless you care to give me a concrete example of how this works. I can’t find one. That’s like me saying “all I need to do is grow 2 more inches and I won’t have to shop in the ‘petite’ section anymore.” There are surgeries for that, but the two inches aren’t worth it.
5.)There is nothing that says an orderly functioning market will benefit all, most, or anyone.
I never said anything about an “orderly market”. That’s your invention and is code for “a market with prices that only go in the direction that I say they should go in and at a pace which is comfortable for me>”
Markets – orderly or otherwise – benefit everyone because they maximize individual liberty. Liberty has value – a lot of value. Living in tyranny is way less valuable – unless you’re the microscopically small percentage of the population close to the tyranny.
People love the “creative†part of capitalism, but they forget about the “destructionâ€.
Yes they do. And destruction of the old is a necessary and natural consequence of progress. But, I hope you’re not talking about the housing market. Government intervention encouraged all and sundry to lend and to buy that single asset to the point that government created this bubble. Now, government is “fixing” it with the exact same things that caused the bubble in the first place. I just don’t see that all knowing, reliable and smart government fixing the ills of the market you keep talking about.
crap, I hit “send”.
What you call “keysian†economics is in fact not. Keynes did not advocate running deficits while the economy is expanding. The government should be pay down debt while the economy expands so that it can provide stimulus during a crisis not spending like a drunken sailor on foreign adventures. What most people consider to be “Keynesian†is no such thing.
Well, that’s how you defined Keynesianism for me. I gave you no such definition. I also resent the government spending like a drunken sailor on domestic misadventures like Social Security and Medicaid, incidentally. The pump priming you describe doesn’t work. The government spending “mulitplier” doesn’t exist. This particular Keynesian gem is flawed to begin with. It assumes that a handful of government actors knows how to deploy capital more efficiently than millions of market participants.
VOL, I don’t think you’re a communist or a socialist. I do think that you’re an interventionist because you’ve so clearly bought into the fantasy that a single actor (government) can know more than any other actor. In the Soviet Union we had a lot of VERY smart people who were our central planners. The political body was mainly comprised of backward, illiterate idiots, but the people in charge of doing the actual planning were geniuses. They failed not because they didn’t try or weren’t smart enough but because one entity cannot know enough to know more than everyone else combined. It’s impossible. The myth you (and so many others) are now buying into again is that government is smarter than you. It’s not.
A word on depressions. Depressions are not deep recessions. Until the Great Depressions everything we now call “recession” was called “depression”. They are synonyms. After the Great Depression, all depressions began to be known as “recessions” to distinguish them from the Great Depression. I’m not aware of any formal distinction in economics between “recession” and “depression”. The distinction became a popularly accepted understanding that anything that wasn’t as bad as a the Great Depression is a recession. But, there is no formal economic distinction between “recession” and “depression”.
Size:
You really don’t understand me at all. There is no direction I want prices to go in. I just want to make sure that a market exists so that we know what the prices are! (As far as I am concerned equities are worthless and should go to zero but I will want there to be a stock market to separate fools from their money. Up down, I don’t care what the prices are, as long as they’re observable. My portfolio is delta neutral, directional moves are irrelevant to me)
I do not think the government will know more than other participants in the market, just that the government’s goal is not the same as the other participants. The government’s goal is to keep the society functioning, the other market participants is to profit. Sometimes the individual profit motive creates negative externalities on the rest of society. This is why we need a government.
Obviously I am a great fan of volatility, I have no problem with markets being volatile, in fact i greatly prefer it. But if you look at some of the fixed income and derivative markets THERE ARE NO WILLING BUYERS AND SELLERS! Why? Lack of transparency and counter party risk. That’s what I’m trying to tell you! You need the government so that participants know that when they buy an asset there WILL BE a market for them to sell that asset in the future. That’s all i’m trying to say here. The government has role as a referee has a role in a soccer game, to be an impartial regulator who prevents the game from descending into chaos. You want an example of where the government intervenes and creates value? Look at the bankruptcy procedure, the government acts as an impartial mediator to aid in a superior recovery of value for a firm’s stake holders.
As for China, like most emerging markets, they will “always” be “emerging” they will never emerge. At least not in my life time, which is all I care about. Maybe in 1,000 years they’ll be a dominant country not depending on the US consumer, but right now with per capita income of what? ~$1,500? China is a laughable paper tiger, period.
As for social security, your perspective is, well, stupid. Social security encourages risk taking because people know they will not starve to death in old age by if their savings get the Madoff treatment or their 401k goes to 1k. For this reason people are willing to invest their savings rather than horde them.
Vol,
You really don’t understand me at all.
The point is not to understand you, Vol. I’m sure you’re an awesome guy. The point is to discuss the ideas you present.
just that the government’s goal is not the same as the other participants. The government’s goal is to keep the society functioning,
“Keep society functioning” is a nebulous phrase. What is society? How do we define it? Define “functioning”. Are we talking Nazi society or John Locke’s society. Anything that vague allows for unlimited government intrusion. For example, government can say “if we have obese people, society is not ‘functioning’ for XYZ reasons and we must force fat people to diet.” or maybe society isn’t functioning if gay people are allowed to be gay (which is what the Soviet government declared).
The other problem with this is that it may be government’s stated goal to “keep society functioning” (however you define it – I define it as simply maintaining rule of law and providing for the common defense, and looking out for the welfare of the indigent, mentally incompetent and minors), the people within government who are charged with these tasks are self interested. Couple unbounded power with self interest and you get the Nomenklatura of the Soviet Union – a collection of very powerful thugs with virtually unlimited power who can and regularly do force people to bend to their whim. The difference between government and the mafia becomes zero.
Sometimes the individual profit motive creates negative externalities on the rest of society.
Again, you are vague. Profit motive may lead to a person murdering another. Obviously, to maintain Rule of Law, murderers must be punished and murder must be deterred (to the extent it can be) by the threat of severe punishment. Pollution too is a negative externality. But, somehow, based on your previous posts, I don’t think you’re discussing these obvious and limited actions of government. Your previous posts have all been about government intervening to keep prices going in the direction it thinks it should in the name of preserving some undefined societal functioning. YOU may not care about the direction of prices, but I think you may not recognize that the government policies you’re advocating do exactly that. You also make the claim that without government intervention, people will just stop trading with each other. That will never be true.
THERE ARE NO WILLING BUYERS AND SELLERS! Why? Lack of transparency and counter party risk.
Vol, I’m a trader (so you know I love Vol too, Vol :). There are willing buyers and sellers. It’s always a question of price. At SOME PRICE, I feel I’m adequately compensated for counterparty risk and lack of transparency. At some price, I’m willing to sell – I’ve puked many a trade at prices I didn’t like because that’s what you have to do when you’re wrong. The reason there are no buyers and sellers is because government has made it patently clear that it is willing to interfere. So, if you’re a seller, you want to see if you can get government to overpay for your asset (you generally can – they’re not the brightest bulbs in the marquis) and if you’re a buyer, you first want to see if you can get a government guarantee for your purchase. So, government interference – even the expectation of it – creates illiquidity in the market as market participants see what kind of rents it can extract from government before acting. Then, government uses that very illiquidity created by its presence to justify it’s actions. There are other complicating factors, of course – the fact that we were too awash in credit and that now that leverage must be cut there are fewer bidders. But that just means the price at which the market clears will be much lower due to the oversupply of assets.
The government has role as a referee has a role in a soccer game, to be an impartial regulator who prevents the game from descending into chaos.
If you read what I’ve previously written about my opinion of the role of government, I think you will see that I find nothing to disagree with in your statement. I think that you mistake government interference with maintaining Rule of Law. The bankruptcy example you proffer is an excellent example of contract law and is part of the maintenance of rule of law. It has little do do with protecting the stakeholders and much more to do with ensuring the maintenance of contracts. But, that’s not the same thing as Fannie Mae explicit or implicit guarantees or buying up “distressed” (read: falling in price) assets or borrowing and spending like a drunken sailor when market participants have all judged that the opposite should occur.
As for China, you’re out of date on your GDP/capita stats. In the very late 90’s the GDP/capita was around $800. In 2007 it was $5400/capita. That’s quite a growth rate. China now has the 3rd largest economy (admittedly far behind the U.S. as the second largest economy – Japan – is half the size of the U.S.). Even if its growth rate is cut in half, it’s still a massive growth rate. I wouldn’t be so quick to laugh.
Plus, if China does present economic competition for the United States, that can only be a good thing. Competition is a good thing – makes things more efficient.
You call my comment that social security is a “misadventure” a stupid perspective. I say it’s stupid of you to make such a statement without making an attempt to understand what I meant. Social security doesn’t ensure that people won’t starve to death in old age because social security is not a savings system. If it were a system of saving, then it wouldn’t be so stupid. But it’s not. It’s interesting that you should mention Madoff because Social Security is a government run Ponzi scheme. It creates obligations during a person’s lifetime but the payments from those obligations actually come from the younger generation paying into it. When social security was proposed, government wonks estimated that it would be bankrupt by 1980 and FDR took exception to saddling the country with what he knew to be a Ponzi scheme. It passed anyway, as you know. It may have worked if the payments were collected first and then paid out to the people who paid in as they retired. Unfortunately, the initial payments were made to people who never paid into the system by workers who were still working. Since we are having fewer children, the pyramid is inverted and we now have fewer people paying into the system than taking money out of it. Already, social security payments aren’t enough to keep you from starving to death without your own retirement savings. If fewer people pay less money into the system, it’ll go bankrupt. Just like a Ponzi scheme. It seems the whole country got “Madoffed” by the government. Please explain to me again why you think that Ponzi schemes are not stupid?
Incidentally, if anyone is stupid enough to put all their retirement savings in the hands of a single individual (as in your example), they deserve to lose it all. Even without scams (which are few and far between actually), your money may be lost by a legitimate fund manager doing his absolute best.
Size:
EXCELLENT replies. I think I love you and your rational perspective of the markets and the role of government.