Was whole economy a Ponzi scheme?

http://www.iht.com/articles/2009/01/01/business/col02.php

by noor420 • 18 years ago

28 44 18 years ago

zby• 18 years ago

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

gaius• 18 years ago

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

'Zackly.

noonespecial• 18 years ago

Money and wealth turned out not to be the same thing after all. You can create money by scribbling marks on little pieces of paper. Creating wealth turned out to be much, much harder.

Seems like every time they forget this, we eventually have a "correction".

vaksel• 18 years ago

not exactly, people want to think there is some huge conspiracy run by evil geniuses...the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us.

Most of the decisions made by these financial geniuses, can pretty much be summarized by a series of if then statements, that they learned through out their lives

tokenadult• 18 years ago

"the reality is actually much more horrifying. The people running the show aren't evil geniuses....they are just as stupid as the rest of us."

Yep, that is more horrifying to a lot of people who want experts to do their thinking for them.

ajkirwin• 18 years ago

So most of the population then. You can't avoid stupidity.

LogicHoleFlaw• 18 years ago

What kills me about this sort of thing is how easily a system of (let's give them the benefit of the doubt) individually intelligent actors develops catastrophic emergent behaviors. Even if each person involved makes savvy decisions, if the resultant whole is unstable then everyone is still screwed.

cracki• 18 years ago

...because hardly anyone has the big picture. this works with ant colonies because they had time to evolve their local decision making. it doesn't work with human economy.

taylan• 18 years ago

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

FiReaNG3L• 18 years ago

This one is sadly true

fallentimes5• 18 years ago

I think you can say it for any self-replicating profession.

ph0rque• 18 years ago

As long as there are people paying for the services a given profession provides, it will continue to exist. Now, it might be the case in e.g. academia that the profs will have to do the tedious work that grad students used to do, or come up with other ways of compensation, but the point still stands.

RobertL2• 18 years ago

Anyone with any knowledge of our monetary systems will readily acknowledge that it works like a big ponzi scheme.

This is really the only way to manage a monetary system so it allows for economic growth.

We could say. "Let's go back to the Gold or Silver standard" but they have their own problems. United States was on a gold standard in the 1980s and I don't think we want to go there.

Anyone who has studied the history of Andrew Jackson should recall that the ongoing conflict between himself and Henry Clay during his three terms as president was about "Money Supply".

mudetroit2• 18 years ago

The US actually adopted fiat currency and abandoned the gold standard in 1913.

dgordon2• 18 years ago

Neither Andrew Jackson nor anyone else had more than two terms as president except FDR, who took the US off the gold standard by stealing everyone's gold in 1933. (That's where the gold in Fort Knox came from.)

Besides, the US used a gold (and sometimes silver) standard most of the time before 1913, and in that time grew from thirteen largely agrarian colonies to the largest industrial economy in the world, so I can't understand why you say that "a big Ponzi scheme" is "really the only way to manage a monetary system so it allows for economic growth."

JMiao• 18 years ago

don't forget about amateur athletics -- just look at brandon jennings going to europe. how can society criticize h.s. stars and their families for thinking about making some money (i.e. "recouping") when the coaches and everyone else around them (broadcasters, writers, etc.) are making millions?

kragen2• 18 years ago

No. Ponzi schemes are zero-sum; that's why they're doomed to failure when they promise above-unity average returns. Academia discovers knowledge; once the knowledge is discovered, everyone everywhere benefits from it, but especially in academia. It's as far from zero-sum as you can get!

The "leverage" of N Ph.D. students per [insert desired definition of success] position amplifies the effectiveness of academia considerably, but academia would still work more or less the same way without it.

(I am not now and have never been an academic, although I've spent a fair bit of time with academics. Consequently I am both reasonably-well-informed and minimally biased.)

qqq• 18 years ago

I upvoted you, but one thing: if you wanna be unbiased, show not tell it! Saying you're not biased isn't much good at all. Just say stuff that isn't biased.

andrewljohnson• 18 years ago

This thread seems like a big ponzi scheme.

mdasen• 18 years ago

In the short-term, yes. In the long-term, no.

When dealing with investments, over the long-run their price will match their value. However, in the short-run, the price will be whatever other people are willing to pay for it. So, in boom times that's often higher than value and in recession that's often lower than value. And in the short-run, new buyers of a stock pay back the older buyers just like a Ponzi scheme, but in the long run the company's value is what determines the price.

So, maybe you want to play the system and buy and sell based on these trends, but that's hard. Heck, Harvard's endowment fund couldn't do it, you think you'll be able to? It's a lot easier to focus on the long-run and invest in things that are good values.

The real problem that we're seeing here isn't that there are market fluctuations. It's that people wanted to put things in stocks that they thought they'd be using as cash in 6-18 months - specifically, retirement savings. If you're not one of the rich whose wealth will outlast their life, you need to move money from stocks into less risky investments as your retirement date approaches. If you don't, then you have to be flexible with when you retire and how much you'll have. But everyone wanted that extra hundred-grand or something to retire on - why move into safe investments when stocks have done so well? I don't want to loose out on some additional cash for retirement!

Heck, most investment firms have auto-adjusting funds that become more risk averse as you reach retirement age, but they aren't as popular as they should be because people don't want safe as much as they want more. In some ways it's like an unintentional scam. Investment professionals will caution you against being too risky just like a con-person tries to dissuade their mark, but the mark sees what they want and thinks the con is trying to keep them from money. . .and then it collapses. The difference is that the investment professional is (usually) being sincere about avoiding risk.

Be careful, don't over-extend yourself with visions of gold, and don't count those golden eggs before they hatch.

mudetroit2• 18 years ago

The more fundamental problem was the philosophical shift from holding stock being a means to collect a dividend to expecting the short term ability to purchase stock and sell it for a profit.

If you sit and think about it logically, why does a stock that doesn't pay a dividend have any intrinsic value attached to it? Yet we have built an economic structure that says that it is possible for that piece of paper to gain value.

nostrademons2• 18 years ago

Because the money that would be paid out as dividends is instead reinvested in the company, increasing its ability to produce profits in the future. Assuming that managers can find investment opportunities that exceed the return on capital that a shareholder would otherwise get, this is a good trade.

This is a fairly big assumption. It tends to be true in younger, high growth companies, or companies where management is good at identifying other profitable markets to enter. This is why Google, Berkshire Hathaway, Apple, etc. never pay dividends, and why Microsoft didn't until recently.

Unfortunately, managers tend to be pretty poor at realizing when their market is no longer growing. So they'll think they can buy growth by acquiring companies or hiring more people, but end up destroying shareholder value when the exorbitant purchase prices don't pan out. Good for entrepreneurs, but bad for investors.

It's not as simple as "dividends = good, stock price appreciation = bad". There's been a fair amount of academic mathematical finance devoted to dividends, and it showed that investors should be ambivalent about dividend yields, as long as management was economically rational (i.e. would only undertake investments if the expected return was greater than the cost of capital). A reduced dividend just means that more money stays within the company, which increases its future value.

fizx• 18 years ago

Don't forget that "in the long run, we're all dead." I don't know why I find that quote so ironic. :)

dhughes• 18 years ago

Well yeah, sort of.

If you think about it what is stock, you pay $10 for a share that someone else paid $5 for, pretty much just because of rumours the company may do better in the next month or year, it's like buying air.

At least with commodities it seems like there is something material behind that contract; grain, oil, sugar. It's not like one day people will suddenly decide, or could be capable of deciding, to cut out sugar.

bwd• 18 years ago

"We too thought our retirement funds and houses were growing miraculously, though ours was an illusion fueled by debt rather than fraud"

This is clearly true regarding housing prices and the returns and market prices of financial companies, but it ignores the effects of productivity increases when applied to other types of companies. Increasing productivity should allow equity capital to produce higher returns and it is difficult to separate this effect from the effect of a leveraged balance sheet when pricing equities. The market will certainly overshoot on the downside at some point but it's difficult to determine where that occurs because consumption must be lower in the short and long term due to deleveraging by businesses and consumers.

patrickg-zill3• 18 years ago

If you measure the strength of the USD not in relation to other currencies, but what you can buy, either in gold, silver, or a basket of goods (since after all, money is a means to exchange things); then it is reasonable to point out that over the last 100 years, the purchasing power of $1 USD in 1910 has collapsed to about 4 cents today.

In 1910, $20 would get you 0.96 ounces of gold (the $20 gold coin), or 15.4 ounces of silver (20 of the $1 Morgan Dollar), or about 600 loaves of bread (bread was about 3 cents a loaf), or over 360 bottles of beer (36 bottles was $1.75).

Savers have been punished severely, spenders rewarded as over time, inflation reduced the bite of the debt they took on (they could pay back a mortgage with greatly-inflated dollars).

Capital gains taxes did not allow you to adjust for inflation (e.g. if you were given something worth $20 in 1920 as a baby gift and sold it when you were 80 for $900 you didn't really make anything on it).

... it may be quite painful for those of us in the USA over the next few years.

rms• 18 years ago

Beer used to come in cases of 36?

patrickg-zill3• 18 years ago

I don't know if it came in cases, but the only price reference I was able to find was a price per 36 bottles.

jerf• 18 years ago

That analysis leaves so many things out of the story that I would hardly even know where to begin pointing out the problems, including ignoring or misunderstanding compound interest (your analysis only holds for someone stuffing dollar bills in their mattress, not under any other feasible holding model across 100 years, which in truth is simply not approximatable in any simplistic fashion anyhow) and the fact that a dollar in the past is intrinsically worth more than a dollar in the present, because the dollar in the past can be leveraged to generate more present wealth. (Typically, this is looked at from the point of view that a dollar in the present is worth more than a dollar in the future and future dollars must be discounted in value when compared to present dollars, but the tense-shifted statement is equivalent, barring the fact that you can't actually spend past-dollars in the past. (In which case a past-dollar would be REALLY valuable...))

Finally, you seem to be claiming that the US (either collectively or per-citizen) is no more wealthy today than it was in 1920 (or 19xx), which is one of those results so absurd that it should be prompting you to reconsider your viewpoint, not prompting you to post on the internet.

patrickg-zill3• 18 years ago

You are reading into my post, things I did not say.

In fact I didn't touch at all on the issue of wealth per person or total US wealth.

Was whole economy a Ponzi scheme?

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