Tim O'Reilly: The Biggest Ponzi Scheme of Them All

It's like they said in an article I read recently... the world has learned about Ponzi schemes, and now everything is a Ponzi scheme.

At these macro-economic levels, there can be no talk of "Ponzi schemes".

The economy is not an investment vehicle, it's a huge, loose, and fantastic agreement that enables all of us to get far more (in terms of technology, resources, comfort, life expectancy, health, happiness, etc) than we would if we didn't have it. It doesn't exist for its own sake, and it certainly has no need to be a mathematically correct, long-term sustainable, rigorous system designed by a computer scientist.

The capitalist system, with all its problems, is the best system that we have. Who cares that it's not sustainable indefinitely into the future? By the time we get there, things may well have changed so drastically that it becomes completely irrelevant.

A human being is not a sustainable thing either. It overspends its resources instead of maintaining itself in good working condition and eventually dies. Oh shit. We better cancel humanity. It's a Ponzi scheme!

This Ponzi trend is really, really getting ridiculous. Enough with all that crap already! This article is a fancy label placed on a collection of dodgy conclusions drawn from dubious axioms.

First of all, we have limited resources. The resources we absolutely need, for example, food and water, however, exist in enough quantity for all the people that currently exist (otherwise they would die).

The second layer of resources, for example, metal to build cars, crude oil for energy, also exist in enough quantity for now.

The exchange between basic needs and not-so-basic needs is irrelevant of the price that we are actually paying for them, because there is enough for everyone.

So the economy is built on the most important part of all - human labour. When I program, I expend labour, and though nothing gets added or removed from the world, I can still exchange the time I spent for a basic need like food.

This debt he is talking about is debt of human labour, and even if you wipe it out completely, the worst that has happened is that people wasted their time, and they will not get paid for it. There is no real destruction of the most basic needs.

If for example, we were destroying farmland to produce in excess right now, and we know this will make the farmland completely useless in the future, then this is a scheme that will collapse. But we're not doing that in any significant quantity.

Furthemore, we don't need to conserve things that are not finished yet. For example, let's imagine that we are going to run out of iron in 100 years. Obviously, this will be problematic, but 10 years before it happens, the price of iron is going to skyrocket, because we know of the impending scarcity. And there are lots of materials we can use to replace iron. Same with oil.

There is no ponzi scheme. People are paying for an easier life, and they are paying other people to make life easier for them.

Clearly, we have some serious environmental limitations. CO2 emissions, rainforests, overpopulation, etc. But this Earth is wonderfully well-stocked with potential sources of energy and other resources. We haven't figured out how to use all of them yet, but over time, new inventions and discoveries tend to expose them. The same process also helps us improve the value of resources we already have, like people and (until recently :) capital.

Basically, this is the Peak Oil argument applied to the whole economy. Popular in doom-n-gloom times, unmentioned in the good times. It's a useful extreme to consider, but it is an extreme.

Computer AI doesn't seem to be on the verge of a breakthrough on the strong-AI front, but there really seems to have been a qualitative change in the past few years in computer vision, brought on by having more computer power available.

Nanotechnology is continuing to advance, primarily in materials science right now, but it will also continue to make progress in other areas. Even without full-on molecular nano-constructors (which there is no obvious physical reason we can't build, but let's leave that to the "full-on singulatarians"), we will continue to improve our abilities to manipulate matter on a fine scale in a large way (no contradiction), much like life does. Look for garbage dumps to go from a blight upon the environment to awesome materials resource sometime in the next 10 to 15 years. (Future investment opportunity! There will be a period of time when it becomes obvious that this will be true, but it is not generally recognized, and an interested individual will be able to pick up old dumps for a song, relative to what they will be worth.)

(As a side-note, any actually indefinitely-sustainable economy will require this technology, be it biologically derived or otherwise. Any proposal that involves freezing our current tech level in a mis-guided attempt to be "sustainable" is simply a death sentence.)

The primary reason we can't go strolling through space isn't material or technological, it's energy, and if any of the fusion proposals go through (ITER, Polywell, any of them at all), the energy problem is significantly mitigated. Especially if it's not ITER; I don't know if we could practically loft an ITER into space, but a Polywell fusion device certainly could be, and a fusion-powered space ship would be quite capable, unlike today's models. Even just growing a pair and getting into fission could significantly mitigate our energy problems for a very long time. (I wonder when the fear of nuclear will be exceeded by the fear of not having energy. My guess is one big blackout in the US and you can kiss anti-power-plant sentiment goodbye.)

And there's more stuff coming up.

Yes. We're in a recession. We may even be in a depression. Fucking stop crying about it. Sheesh. It is not the end of humanity just because you're not as rich as you think you should be. (What a selfish model of the future!)

I wonder why so few people think about the following line of reasoning:

1. Our current economy is based on money as a medium of exchange to function (separation of labor -> good)

2. Therefore, money is a universal medium of exchange and acquires a value separate from the exchange value: liquidity, the possibility to exchange it for anything else (see Keynes et.al) -> unintended but ok

3. As a consequence, our current money relies on a positive rate of interest to circulate. Whenever the interest rate gets too close to zero, money holders will not give up their privilege of liquidity and not lend out their money (bad!)

4. As a result, the economy collapses - simply because the medium of exchange stops circulating. In the end, the government has to print new money to replace the money not being spent/lent, leading to inflation. Alternatively, the state has to make new debts or fund dying industries only to keep interest rates positive... (very bad!)

This reasoning does not depend on any technology or production-based argument because every human undertaking these days is based on beating the rate of interest. Even if you only invest your own money, you have to factor in the interest you might have gotten at the bank.

There's a really simple fix to it: motivate money holders to part with their money even without interest. You would get an economy that can grow when it needs to but can contract as well without collapsing.

Even though it seems god-given, money itself is actually pretty hackable. If you're interested, one interesting proposal is here: http://userpage.fu-berlin.de/~roehrigw/suhr/nngengl.html

1) Exponential GDP growth does not necessarily mean using exponentially more natural resources. Quite the contrary. A lot of growth could come from work going into reducing resource consumption. Describing this distinction as quantitative vs qualitative growth creates the false impression of a need for some kind of revolution in order to make that switch. It's not a switch. We're already right in the middle of it and it's a gradual development.

2) Global debt is always zero. Debt is always a claim on other people's labour. If debtors throw their hands up and say, sorry I can't work enough to provide that labour, debt is written off and that's it. There's no link to the use of natural resources at all.

Umm, what? We're finally getting private space exploration.

Unfortunately, even former World Bank economists could have dismal understanding of modern finance. But everybody nowadays likes to sing a populist tune.

A financial transaction is simply passing of legal title of a real asset from one person to another. Think of a pension fund who wants to makes sure it will be able to pay future pensions to the widows and orphans and buys a corporate bond portfolio.

Of course, a pension fund will not want to manage each corporation in its portfolio. So it will buy securities rather than do direct lending, sit on company boards etc. The fund will try to diversify its risk among many bonds. This is the first step of separation of 'real wealth' from 'financial assets'.

When you have many pension funds doing the same thing -- buying corporate bonds diversified enough and be representative of US economy -- they are likely to outsource this task to a specialist. An 'index fund' will be creating a 'collection of corporate bonds' with desired characteristics (credit quality, size etc.), and all other investors will buy a piece of this index fund as large as they want.

Now we have removed 'financial assets' two steps from the 'real business'. Buying a share in an index fund is obviously not the same as making a direct loan to the corporation and a having dinner with the CEO. It is much cheaper, so more money is left for widows and orphans.

Here comes the last step. When large players (pension funds) buy or sell these baskets of securities, they don't want their brokers (investment banks) to get rich from all those commission on trading individual securities in it. So they pass the ownership to each other through so called swaps. A swap between two funds would look like this: 'Fund A to Fund B (current owner of the portfolio): I will take the risk of owning these bonds for a year. If they drop in price comparing to today, I'll pay you the difference. If they rise - you'll pay me. It's as good as if I owned the thing for a year. But you'll remain the formal owner'.

And these two would record the transaction based on the total value of the bonds, even though they are only risking the price difference between two set dates. And then the swap buyer may change his mind in a week's time and enter in another swap with another fund. So value of the swaps outstanding will grow larger and larger until it looks really scary to journalists and other clueless people. There has been $596 trillion of derivatives outstanding (as of December 2007). So what? It's a backlog of the transactions, more or less. If you off-set them against each other, you'll arrive back to underlying securities' value, and eventually trace it all back to the balance sheet of individual companies.

So there is no such thing as 'financial assets'. Each title associated with a financial paper can be traced back to a 'real thing', a real asset somewhere.

One should not forget that derivatives (financial assets etc. whatever) have made capital transaction costs very low. Low costs have led to more efficient allocation of capital and to great benefits to the society.

That's why a backlash against financial innovation is dangerous. I don't think we'll be better off by destroying the financial markets and moving back to barter.

Finally, if you want to find a real Ponzi scheme mastermind, this is Mr Greenspan and the US government in general. They were trying to prevent a bit of an economic pain -- a post 2000 dot-com slowdown -- by artificially lowering interest rates which had led to unrealistic pricing of capital everywhere, not only in the US. Which has led to property bubble growing and bursting (soon to be followed by US government debt bubble) and now we all face much bigger pain. But this should not be blamed on derivatives and financial markets. The easier it is to pass an ownership title on a real asset to another person - the better.

I belive this is endemic to the internet as a whole. I say why does he not stick to technology an let scholars who have actually studied the issues he speak of enlighten us on them.