Why Your World Is Fucked Up

I got a link forwarded to me. It is a load of utter crap. Let me first go over in detail why Umair Haque has dropped a load of utter crap on the world, and then why it shows how your world is fucked up. The reason is that constantly people are told what the problems are, and then told complete bullshit for a solution. The people who sell them the bullshit collect a great deal of money and run, leaving things a mess for the next load of utter bullshit.

The ability to do this is heavily rewarded, and is a pre-requisite skill for being part of the elite. Elites sell bullshit to ordinary people, who then devote themselves to one elite cult or another, hoping to charge rent to the next wave.

Let me hammer this out, because it is a particularly egregious example of how one generation of elite fuck ups lead to the next generation of elite fuck ups.

First he talks about Ponzi schemes, and gets what a Ponzi scheme is wrong. But using the language of Ponzi Scheme is a dog whistle. That dog whistle is anti-central bank gold standard. It’s the “fractional reserve accounting is a giant Ponzi Scheme!” meme. This meme is moronic. A Ponzi scheme does nothing other than give the money of new investors to older ones. Fractional reserve accounting dates back a couple hundred years, and the only way to call economic growth over that time a Ponzi scheme is if you ignore little things like electricity, the steam engine, computers, and the rest of the global economy. Fractional reserve accounting has it’s problems, but we are where we are not because it is a Ponzi scheme but because of the Market/Rent problem outlined by Adam Smith, namely, the winners of the Free Market will want to buy the free market, which they can’t be allowed to do.

Let me go over the whiz bang points he makes one by one, in that background.

1. The first one is a call for some kind of private gold standard. I recognize the lingo. In fact calling currency a store of value is wrong. Currency is the mechanism of exchange. Money is the measure of store of value. And, gold bug ranting aside, there is no such thing as a permanent store of value, because what we value changes. Back in 3000 BC Iron was more valuable than gold, because there was a lot less of it available. In 1700 aluminum cost more than gold, because, again, there was a lot more gold available. Now Iron and Aluminum are cheap.

This problem requires implementation of things we already know. Keynes had the basic idea over 60 years ago. The math isn’t that hard, the ideas are there, what is hard is wading through the bullshit and vested interests. Bullshit such as the sort that this individual is promulgating in his idea free whiz bang piece.

Instead the solution is to have an exchange rate mechanism which penalizes volumes of trade beyond sustainable levels, and includes externalities. The solution here isn’t whiz bang “hedged, insured…” yadda yadda, because the currency regime that blew up just now was hedged and insured. The key problem isn’t that it lacked mechanisms to deal with equilibrium problems, but that it allowed people to push costs to the disequilibrium case. The disequilibrium case, it was correctly assumed, would result in a public bail out. “Well if that happens, we are all eating babies so it doesn’t matter.”

The simplest approach would be a KPT regime where a Keynesian trade exchange mechanism is backed by Pigou taxes on Tobin currency transactions. Currencies would be able to float to a limited extent, and even be revalued, but watch out for the “national currency” dog whistle, what he is really hoping for is a private currency so that everyone has to pay rent to the private currency.

Grade F

2. Institutional share holders are often forbidden from getting involved, and there are often barriers in corporate governance. It isn’t about cost, it is about structural barriers. Mutual funds etc support management, because they bought the company because they liked the management in the first place. It also connects to a problem he lists, but gets wrong, below. Managers and executives are in possession of the company. This was pointed out by Berle and Means over 70 years ago. In economics it is called “the agent problem.” He fails to realize that (2) and (4) on his list are versions of the agent problem. Investors must have agents (4), but those agents have every incentive to insulate themselves from the actions of owners. This is exacerbated by (3) which creates more hot money.

If he were being sensible then, he’d start with problem (3), that is the large flows of hot currency looking for parking returns, which would then actually connect with bringing up Madoff, who supplied the demand for parking returns above the market rate. He would then have a merged (2) and (4) as the agent problem, building on the solution to (3). If there is much less hot money, then corporate democracy will not lead to thrashing instability, and there will be far smaller rewards for agents to betray owners in order to get huge pay outs.

Corporate Democracy isn’t particularly hard either, the innovations have, in fact, been the other way – ways of selling shares without selling real ownership. That’s one of the reasons that the Taxpayer Anal Rape Program is so violently vomatious – money given, and the public gets non-voting shares in return. Nothing but protection for incompetent executives.

Grade F (Wrong cause)

3. This problem was solved it is called “the progressive income tax.”

And ignoring the solution makes hash of (2) and (4). Progressive income taxes mean that there is much less incentive to rapidly shift money around, because it is taxed as a drag on churn.

Grade F (Problem already solved)

4. Zero management confuses management with executive functions.

Managers are often over loaded in companies and cutting management is a good thing. The executive class, however, are the people who rat race, and they don’t spend their time doing budgets, but making
connections. The theory that we can do without management and the executive class is all well and good, until you see it in action. Or rather in action. Failing to connect problem (4) as an outgrowth of
problems (2) and (3) is singularly obtuse. In a world where investment money has a high velocity, and the implications for being on the wrong side of velocity are high, and there is little to no oversight, the executive class becomes all about massaging signals that move liquidity.

D (He’s at least got the right idea here)

Now let me talk about why this means that your world is fucked up, and is going to continue to be fucked up for a while yet. You see, you, and I mean you, support giving power, privilege, and position – the ability to do shit and make enough money to live – to people just like this wunderkind who can act as if four relatively solved problems require “innovation.” In fact, we’ve had two generations of “innovation” to get around the known solutions, because they didn’t have what a business goon really wants: the ability to create a “solution” that becomes so pervasive that everyone else has to pay rent. Consider credit cards. They represent a 3.5% tax on virtually the entire economy. Now that’s innovation a business thug can get behind: resolving a problem that has been solved, and collecting hundreds of billions in rent, because not everyone can set up a credit card.

Wake me when you people are serious about getting serious.

This post was read 325 times.

About author View all posts

Stirling Newberry


26 CommentsLeave a comment

  • In a culture where Alan Greenspan can be an acolyte of Ayn Rand and be taken seriously…what would one expect?
    As you would be shocked how much of Mr. Haque’s ideas are taken as wisdom much lower down the chain of rationality.
    What I like are the names:
    Mr. Haque is a hack writer who wrote a hack economic piece on how to hack the economy.
    Mr. Madoff made off with billions of his client’s money.
    Mr. Kashkari carried billions in cash for his masters who appointed him to TARP.
    What’s with the names?
    Does God have a sense of humor after all?

  • Until you resolve the issue of everyone , smart and stupid, wanting something for nothing, there will always be suckers and con artists.

    Truth is. Answers are what people will pay to hear. Philosophers seek truth. Priests and politicians seek answers. That’s why there are so many priests and politicians, but so few philosophers.

    What is needed is an economic model which requires people to invest in their environment and community, rather than drain value out of both to put in a bank. Embed value, rather than distill it out. Throughout history populations have needed ways to focus their drive and energy. Whether it’s conquering nature, fighting wars, building pyramids, temples, cathedrals, cities, etc. We have entertained ourselves with this consumer culture. Now we have to find a way to direct our energies to restoring the organism in which we exist. We need to go from being the top predator to the central nervous system of this planet. I for one, view the current economic crisis as an opportunity that we can’t afford to pass up. Since I think the banking system should be a function of the various levels of government and feed wealth directly back into the communities which produce it, that the banks are doing everything possible to leech off the larger economy and thus the environment on which it is based, they are painting themselves in a corner and society will find them expendable.

  • What makes gold a good unit of exchange is that it puts the brakes on the monetization of debt. It is a good way to keep central banks honest.

    You correctly state that “Fractional reserve accounting dates back a couple hundred years”. But it was not until Nixon that the last link to the god standard was severed in the US. That is why the German experience of the Great Depression was quite different from the US one. Germany suffered through hyperinflation at the time.

    Don’t you think that a US dollar grounded in gold would have kept a check on the US government’s ability to run up debt?

    I for one would feel much more comfortable with the coming US deficit spending if the account deficit wasn’t already sky high.

  • fucked up. I’m by no means wealthy; but I’m comfortable. I live a very modest life-style. I dumped my credit cards 7 years ago. I drive 1 to 2 days a week; the rest I use my bycycle. What’s missing in the world in general is “common sense”. When my long ago ex-girl friend kept sucking up the “equity” in her home, (she’s a financial adviser), to finance lavish spending sprees and paying down credit card debt; I asked her was this a smart thing to do? She launched into a bunch of financial gobbledygook about why this was a smart financial move (saying basically why too much equity in a home was a bad thing). She being the expert, I didn’t argue; I just walked away shaking my head. Not wishing her ill: I should expect she has lost everything by now. Common sense, there’s never enough out there.

  • Where would all that money have been invested, if the government hadn’t been borrowing it and recycling it back through the public sector?

    The main point Stirling makes is that we have to get over the idea that money is a store of value, but is primarily a publicly funded medium of exchange. Total savings is limited by what can be prudently lent and what has happened is that we have attempted to save far more of these accounting units than the economy can effectively absorb, so the powers that be have obliged us by creating all manner of extraneous savings devices and taking their cut. The bubble was blown up so big that little of it will be ultimately salvageable and value will remain mostly in the tangibles. If we accept that the financial system should be a public utility, with personal wealth in tangibles, it would force us to increase the value of our environment and community, not drain value out.

    The problem with gold as monetary base is that it is easily monopolized. Then the Golden Rule applies. “Those with the gold, rule.” Study the history of monetary systems.

  • I had never heard of this guy, so I went to the HBS faculty page to see what he and his colleagues do. Apparently they are all salesmen/consultants. They don’t seem to teach for a living. If they write anything it is to promulgate business and economic theories that first and foremost must have the sheen of novelty, which is pawned off as brilliance. Their customer base, which is certainly not the students at the Harvard Business School, are corporations and especially CEOs, for whom their ideal role is to serve as a personal mentor, educating them on the newest euphemisms for firing people.

    In desperate times, when CEOs don’t have the money to hire them, these consultants search for the most outlandish theories to promote themselves as clever and insightful. They all want to be the new Keynes without having the intellectual merit or work ethic to produce even a smidgen of what he did.

    It never hurts to call them out on their hackery and vapidity, because the consulting industry has done great damage to the American worker, and it is about time somebody takes them on.

  • could you explain this a little more, please? I don’t understand how “my personal wealth” is induced to improve the community. “My personal wealth” is derived from ripping off the community to the largest extant possible.

  • And it was ended by going to an asset money. One reason for the anti-inflation obsession which led to sticking to the gold standard and the Great Depression was that, after a generation of deflationary economics, there had been two sharp inflation shocks.

    the powers that be fled to gold.

    And the gold standard only lasted as an international standard from 1871 forward.

    Gold’s utility in the first age of globalization was that it created a unilateral lever against central banks – if the interest rate shifted the price of gold above the “gold point” – the point where it was possible to arbitrage gold by moving it between countries, a nation had to adapt, or face gold flight.

    Central banks were, in fact, essential to maintain a gold standard, and grew tremendously in power under it, and intervened constantly with monetary policy to maintain it.

    It also enabled both large financial swindles, such as how the Railroads in the US grew, and the proliferation of a paper money – stock.

    There are huge numbers of myths being thrown around about the classical gold standard, the reality being that the era of the classical gold standard was a great deal like our own, and for the same reason. The creation of a hard standard of value creates a drive for financial rent, and therefore the need for a soft currency to denominate investment. This creates an inevitable pressure to monetize as hard money the soft money. This can’t be done, and leads to a contradictory point, where the present future value of debts is greater than the possible size of the hard money. At this point the pressure creates a series of growing instabilities, as various groups try to get close to the door to jump out.

    Then someone yells “Fire!”

  • are like addicts who blame their drug pusher.

    The root of the power of banks right now is that Americans have, for a generation, deliberately overconsumed. If free money is your drug, then of course, the pusher pwns yo’ ass.

  • I was under the impression that Nixon’s actions to end a putative gold standard and adoption of ‘floating’ currency was really the spark that started the conflagration of debt we have now – both in ‘balance of payments’ or trade deficit and the accompanying sale of US bonds to maintain defict spending for Federal Govt.

    When I hear about mark to market and other currency trading ‘bets’ I always think that it’s somehow ‘obscene’ to “make money” this way rather than to devote the energies and effort into production of – say consumer durables or something.

    And then there is the downside of short selling a currency of the ignorant fools who stupidly chose to be born in a small country. On NPR’s “Marketplace” last night there was a story about hedge funds short selling Hungarian currency – when mega funds short sell, their ‘bet’ soon becomes a self fulfilling prophecy. So everyone who borrowed in Euros (to get a lower interest rate) is now going broke and losing his house.

    So what am I missing? Is there something to do with ‘price discovery’ – what is the ‘public virtue’ of currency speculation?

  • what is the ‘public virtue’ of currency speculation?

    The so-called public virtue of financial speculation as a whole is market liquidity. This is based on false premises and probably false pretenses as well.

    A false assumption of economic neoliberalism is that financial markets are essentially the same a goods markets and should therefore be treated the same way and be on the same footing.

    Goods markets are about exchanging goods that have been produced, thereby supporting both production and consumption through the cycle of exchanging income from production for output of production.

    The financial markets are about supporting ways of extracting rent from income from production. While financial markets are purported to supply the investment needed for production, the fact is that only a very small part of the financial markets are concerned with deploying new investment.

    The principle reason for financial markets from this point of view is to provide liquidity in the exchange of existing investment. However, the actual reason is profit that is not directly related to production. There is only so much wealth in a system and it is derived from production. Wealth not directly related to production is captured from the wealth derived from production, e.g., through financial rents and schemes, government taxation, crime, etc.

    The financial industry is essentially a web of wealth capture schemes based on rent, scheming, and speculative gain owing to price fluctuation of equity, RE, commodities and currency. These highly lucrative activities generally extract wealth from the system or concentrate it within the system, without adding anything substantial to the system. All of the BS about free markets, free trade, and free capital flows are designed to disguise these kinds of rip-offs from actual value-generators.

    Those doing the ripping off do everything in their power to prevent regulation of these activities, as well as any legislation that is not favorable to neoliberalism. Moreover, they promote legislation that gives them an advantage and seek favors for the financial industry in particular. They decry regulation as “socialism,” i.e., governmental intervention in private enterprise and private property. They pretend through the sleight of hand that GDP growth equates with national prosperity, that this will lead to less prosperity, when the opposite is the case, since the result is growing inequality among wealth-holders.

    Arianna Huffington: Will The Madoff Debacle Finally End The “Who Could Have Known?” Era? Interesting read.

  • The problems arise when everyone is ripping off the community to the largest extent possible and the law of diminishing returns sets in with a vengeance. Carried to its extreme and society will look like Somalia. Anyone for a little piracy? After a while society strikes back and carried to its extreme, we have a police state. Gulag anyone?

    The need is to keep it somewhere in the middle, between mob rule and totalitarianism.

    Money is a public utility and treating it as such doesn’t mean socialism, which is the public ownership of all property. If we invest our time and effort into making our property, community, society healthier and richer, it makes the world in which we live a better place. If we shaft it for all it’s worth, we make the world in which we live a more miserable place. Yes some of us live better lives, but as the disparity increases, more of our wealth goes to protection, but the rot seeps through the cracks in our armour anyway. Putting it in the bank mostly benefits the bankers anyway.
    This funneling of value up the economic ladder, without nearly equivalent benefits precipitating down, isn’t anymore sustainable than a real hurricane can soak up energy and water without dropping it all eventually, to devastating consequences. As with politics, power corrupts and absolute power corrupts absolutely. The fact is that progressive taxation powers sustainable economic growth and the monopolization of wealth is extremely economically inefficient. How can you invest all that money, when nobody has the income to pay interest and the economy has seized up from illiquidity? Borrowers are the engine of the economy, while lenders are the fuel tank.

  • Nixon had to go off the gold standard, such as it was, because of Johnson’s loose money policies to pay for the Great Society programs and the Vietnam war. Guns AND butter, as they say.

  • I’ve read the late 19th Century in the US was dominated by huge recession from the 1870’s through to 1900 – and presumably a ‘contraction’ of the money supply through pegging to ‘hard’ gold was the enemy that Progressives wanted to defeat through adoption of a ‘softer’ silver currency?

  • There’s not enough of it.

    If you were to peg existing money to existing gold, the value would be something like $20,000 an ounce (the number is probably wrong, but it’s ball-park).

    Are you going to accept five one-ounce gold coins for your $100,000 home?

    Then there’s the idiocy going back to the gold standard would create. Mining the whole world for specks of yellow metal. I’m with the indians on this one (they thought white man insane over the stuff).

    So we’re stuck with fiat money.


    There must be confidence in money and money is used to store wealth. Recent manipululations have stolen the wealth of people that spent a lifetime working hard and saving in order to protect gamblers and purveyors of economic scams and manipulations.

    They got their money by playing a game and winning; they should have lost it for playing the game and losing.

    Our government is doing everything in its power to protect the wrong people at the expense of honest people.

    I did inhale.

  • and government needs to be able to increase the money supply when appropriate. But it must be tied somehow to real assets.

    Conversely silver would be a better medium as there is more of it to be had.

    Currently oil is the standard.

    I did inhale.

Leave a Reply