Held in the Strictest Confidence

[jeffxandra]

My brother-in-law was referring specifically to the Stock Market, but the entire economy is essentially a confidence game. It's built upon a foundation of faith with, hopefully, a smattering of reason to keep the entire thing from collapsing upon itself.


The faith is in the belief that things will continually improve, income/profits will grow, expenses/needs will be overcome, and so on and so forth. It's the faith that if you buy a house it will appreciate in value, that you'll continue to keep your job, indeed that you'll get paid more and advance.

The reason is the side that's supposed to keep everyone from making it a true confidence game, i.e. allowing someone to exploit that faith for more profit than is reasonable. Someone should be able to make money off of the car they sell you, but that doesn't mean they should be able to gouge you. It's what makes people and corporations say, "Yeah, but...". The thing that reminds people they might not keep their job, that they can't just keep borrowing on their credit cards. That the mortgage lender should do their job and complete a full background check on that guy before he borrows $400,000.

Both are necessary for a healthy economy. If people don't have faith that the economy will improve, then, no matter how much reason they use in their activities, the economy will eventually slide.

And if people have faith without reason, they put themselves, and eventually the whole economy, in jeopardy. Faith without reason is what happens when people treat their homes like an ATM machine. Faith without reason is what happens when banks, thinking their biggest trouble is people not paying their credit cards, get a law passed that makes credit card debt the first priority when it comes to paying off personal debt. Now that people are being forced to face that debt, they're walking away from mortgages and the banks are left holding the bag anyway. In the end, both people & businesses turn to the government for help. And it will, because the alternative is the potential for economic chaos (and eventual election loss by the office holders).

The stimulus package, passed in different versions by the House & Senate, attempts to address the faith side of the equation. But that's not the problem, it wasn't really the problem in 2001 either. But faith can go a long way when it comes to convincing people things are better than they really are. Each time that faith gets an injection, it pushes off reason a little bit longer, and when reason (and reality) finally do step in, it'll be even worse because we've waited so long to face it.

The citizens of Xandrapolis need to turn to their government too. They need help with infrastructure. Would you be willing to pay some taxes (i.e. click the link) to improve the transportation network?

Comments

[pneumatik.livejournal.com]

Confidence game? I dunno. I provide a service for my employer, and they pay me money for it. I give other people money in exchange for other services or goods. The economy grows for multiple reasons - low but positive inflation, people starting new companies that provide goods and servers not previously available (or better, or cheaper, etc.), new technology greats new goods that people want, and people investing some of their money in new ventures.

Even if the economy stops growing, low but positive inflation guarantees that my house will become less expensive to me as long as the real value of my salary doesn't change.

I don't have faith that the US economy will continue to improve. I think it will based on what's happened in the past, say, 400+ years.

[jeffxandra.livejournal.com]

Forgive me for sounding derisive, but your comment betrays the typical conservative supply side thinking that has caused a lot of trouble over the years.

People consume because they think they'll get paid again, because they believe they'll not lose their job, regardless of their performance. If people don't think they'll have a job in six months, that discretionary spending contracts, if not flat-out stops. And discretionary spending is where the economy grows. Because there is demand out there to create the supply.

[pneumatik.livejournal.com]

I'm looking long-term, like from now until I retire. If I get fired, I'll get another job. People will always want other people to do stuff for them, so I'll take their money and do some of that stuff. It's conceivable that people will stop spending as much money, but they'll always want food and clothes and roof over their head. There'll be less work, but there'll still be work.

What I'm interested in is how you think things should work. Clearly you don't like the current one.

[jeffxandra.livejournal.com]

Fundamentally the biggest fix needs to come in the financial sector. Given the straits we're currently in, there's probably going to need to be a two pronged approach. Just to note, despite my earlier admonition of your supply-side thinking, these both could arguably be considered supply-side solutions.

1)Restore the risk balance: The combination of bankruptcy legislation placing the onus squarely upon the borrower and the ability to hide the risk inherent in lending vehicles when reselling has left the banks (and other lending institutions) willing to lend money without applying reason as I mentioned in my initial post. The pro-lending policy from the Fed (lower interest rates) with the absence of risk for lenders has, for lack of a better metaphor, created a jenga tower, becoming more precarious with each block being pulled from the foundation.

2)Greater oversight and disclosure requirements for these institutions and investment vehicles: I know this won't be a big hit with you, Mr. Small Government Man, but it's become clear that, similar to Enron, the values of many of these entities became significantly divorced from reality because they were given the opportunity to do so. Stronger disclosure requirements and oversight will further encourage them to choose more wisely in their lending practices.

Now that said, I should probably address a few other things

1) The Fed has been obsessed with the Core Inflation (http://en.wikipedia.org/wiki/Core_inflation) rate for years (since 2000). Given the 20 years of post stagflation era (overall) growth, it was (at the time) a reasonable decision given the overall volatility of the food and fuel markets. However, these two markets are where the inflationary pressures have been the strongest over the past 8 years. Milk, for example, has more than doubled in price. Gasoline has arguably tripled. So, while it appears that we've had reasonably low inflation over the recent period, we really haven't.

2) That has led, I would note, to a decline in Real Income (your real value of salary) since 2000.

3) Much of what I'm trying to argue is that a long term approach has to be brought to treating the economy anyway. Part of what a long term approach includes is accepting that a short duration mild recession is good for the economy as a whole. It reduces the aforementioned inflationary pressures and encourages savings by individuals. Instead, we've continually tried to forestall a recession through tax cuts when we're up, tax cuts when we're down, and tax rebates when we don't think the tax cuts will work fast enough. All of these combined with unchecked spending, while not quite as bad as your typical Cold War era Communist power or Banana Republic since we'll allegedly pay it back, are essentially the same thing, printing money you don't really have. As a short term practice, spending more than the government takes in, though it applies to individuals as well, can be a positive thing, but it's not a proper long term policy. And it shouldn't be a tool for staving off a recession because it doesn't actually cure the structural issues that cause the recession in the first place.

[pneumatik.livejournal.com]

Re: 1) I don't have a lot of sympathy for banks who loan out risky money. And if investors don't do their homework before investing a lot of money, they deserve whatever they get. Which brings me to 2:
Re: 2) Actually, I'm 100% behind better and fuller disclosure. I don't believe that the ability to lie to the customer is an inherent right of any company or person. Financial businesses will always game the financial game, so if the rules say they doing certain things will increase the paper value of a company, they'll do it.

Re: 1) The Wikipedia article you link to says PCE and CPI are pretty much the same since 2000. It's a small sample size, but for now I'll say they're the same. Gas is arguably going up because it's becoming scarcer (peak oil, yadda yadda). I haven't been tracking the price of milk, but I wouldn't be surprised if the food->ethanol movement has been driving up the price of many different foods.
Re: 2) The real value of my salary only goes down if it increases slower than the inflation rate. Now, my real salary wrt milk and gas may have gone down, but I would argue it has gone up wrt computers and other electronics.
Re: 3) The government has been spending more than it takes in for many, many years. You're not the first person to suggest that at some point, it's best to let the crash happen. The problem with that is it goes against Keynes - "In the long run, we're all dead." Also, the money that the government borrows comes from people and institutions, not from the mint. As long as the money the government borrows and spends grows their tax base faster than they're borrowing money, it may not be a bad thing.

Really, though, there isn't much to do about the government borrowing money. We spend about a third of the budget on servicing the debt and another third on entitlements (health care, mainly). Even if discretionary spending drops to zero (a terrible idea), the budget only gets so much smaller.

[black-op.livejournal.com]

I think you've captured a lot here that people tend to ignore.
Be careful. Not all tales are for all audiences.