Life on the Sine Curve, Part 2

Perpetual Motion Machine. Almost. Not to be confused with a perpetual emotion machine, like my daughter.

So what if all the neo-classical economics people have it wrong?

Well let's shortcut the what ifs and just say outright they are utterly and completely wrong. Because their basic premises are such a joke that any field that has done work with equilibrium systems wonders how they were ever taken seriously. This saves time in wading through argument and counter-argument within economics itself, which is a discipline absolutely proud of its disconnect from other fields and from reality itself. So it's not worth bothering with economists on economics, or at least most of them.

There isn't another field of study in the world working with equilibrium systems which would ever start from the assumption that equilibrium is the norm. That's just the old dream of perpetual motion, pure and simple. A complete, laughable joke. Neo-classical economics is based on an idea so fundamentally stupid, and contradicted by serious, centuries-old work in much more rigorous fields, such as engineering, biology and physics, that it really is a wonder that the people who believe in it aren't a public laughing stock.

In terms of what's really going on economically, it's actually not that difficult to understand. It's mostly a common sense thing about debt. Given that the lunatic morons who shovel neo-classical fairy tales down our throats like to always use simple, individual or household-level analogies and examples, I'll do the same. Say your neighbour over a period of time builds a bigger house, puts in a pool, gets two new cars, the kids swap to expensive private schools etc. But they still do the same job, earning the same money. What could be going on? Leaving aside a possible pot crop in their roof cavity or a magical wife, it's pretty bloody obvious that they're using credit. So they're hocked to the eyeballs with debt.

Now strangely enough if you extrapolate this up to the level of the 'economy', and it's booming along, growing at a magnificent rate, the same alarm bells don't go off. Like Australia for the past decade or so, with money pouring out of every orifice. That's basically because we're pretty fucking stupid (that's the technical jargon). But to be fair our economy and many others in the West have been growing for about 50 years, since the Second World War, with only temporary down-blip recessions every now and then. Humble as we are we've attributed this to our vast intellect and cleverness, to our technology and science. Which those silly Africans and Indians and other less 'developed' areas of the globe would emulate, if they could just find a way to extricate themselves from the post-colonial quagmires we threw them into.

So the much-loved economic cycle of the neo-classical crowd has represented nothing more than a nice, easily drawn picture of a half-century long addiction to debt. Every boom has been followed immediately by a bust, because the boom was complete speculation and gambling funded by debt, and when they ran out of suckers to fund the next bit of speculation, the whole thing collapsed. But then hey presto 'economic recovery' happens, which the neo-classicals think is the cycle returning to equilibrium, but in fact is just the finding of some new sucker to lend to under some new speculative scheme, and off we go again. This can go on for quite a while (50-odd years, in fact), with the 'cycle' bopping up and down like horny picknickers in some long grass, so long as there's always a new source of cashed-up suckers willing to invest in some new scheme (usually real estate, in the West, but also stocks and other financial instruments). So this is why serious financial planners and real estate agents and generations of parents will look at you with grave seriousness and say "you should invest, preferably in a house, beause rent will never let you get ahead, and don't worry about the odd loss and recession, because that will average out over the longer economic cycle, and over time good investments always go up in value."

I had a financial advisor for a couple of years. A lovely lady, honest and well trained. When she gave me the advice above, I fired her. Now I think they're all a waste of time, because they've all been trained in the same orthodoxy of the fairy tale economic cycle. Yes houses, for example, have shown this trend, but only in the past 50 years. If you bother to look any further back than that, they don't show this trend at all. They don't go reliably upwards or downwards, they go all over the place. Sometimes they go down very spectacularly, as we're seeing now around the world.

Over time if you keep this sort of lunacy going long enough, you run out of suckers to lend to. That's when you get a Depression. A Depression is very simple, it just means the huge mountain of debt that has been fuelling the apparent endless growth is completely unsustainable, because there's nobody stupid enough left to pass the debt onto in the next speculative scheme. At that point you don't just get a down blip on the economic cycle, you get a nosedive that smashes the entire cycle off the charts.

There are much bigger, anthropological spin-offs to this much simpler idea of recent events in the world economy. Most of our supposed superiority over the 'developing' world is little more than a power imbalance, with us loading ourselves firstly with all of their resources pretty much for free, and latterly with debt to the eyeballs to bring about what looks on the outside like a rapidly expanding 'progress', and sending in the debt-financed military force we have when others refuse to play ball. But those days may be drawing to a close. It's these parts of the world who have actually loaned us the wealth we've used to make ourselves look so marvellous. So we now owe them, big time. They have us by the balls, or at least those we haven't either starved to death or slaughtered along the way. Of course we might just do our usual blow 'em up and ask questions later thing to avoid judgement day. But that can only last so long, all civilisations who pretend they've taken off into the rarified air of exponential progress have been laid to waste. The Romans, anyone? The Egyptians? The Ottoman lot?

Anyway, all the public bleating about government debt here and elswhere is just that - bleating. Government debt is completely dwarfed by private debt, most of us have been at it, living unrealistic lifestyles funded by credit. Governments have been trying to take some of that debt burden off the private sector to get things going again, but it's nowhere near enough (the scale of private debt is ENORMOUS). And revenues for government are falling at the same time, usually because the neo-classical ideologues spent the past decade cutting taxes with the fruits of the debt-fuelled boom, which has now disappeared. So governments will be in debt whether they like it or not, if you hear somebody blaming a government for being in debt right now, fart in their face. The only thing that saved us from the last Depression was the war - it was the only 'stimulus' big enough to wipe out the debt we'd accumulated up until then. Let's hope there's something just as big but less about blowing people up this time.

In time common sense might prevail, one of the central bankers here said last year that people should have been scratching their heads when a country's economy grows by 4 or 5% per year, but individuals are 'investing' and getting returns of 15% plus. How does the individual make relative returns more than 3 times that of the country itsef? Well, they don't, unless it's just a speculative, debt-fuelled scheme of some sort. Like housing. The oldies (usually people who lived through the last Depression) were quite content with simple savings accounts making just enough interest to maybe keep ahead of inflation. They were much smarter than all of the financial clever dicks since. In fact much of the entire finance industry should really disappear, if there is any common sense left, it's been nothing but a glorified casino. I keep my money in a savings account, never will I be even tempted by any scheme that promises returns that are above what the country itself is able to manage. Unfortunately superannuation is largely out of peoples' control, so the best you can do is screw the risk option choice down to cash and pray. Privatising the entire retirement income of countries, another splendid neo-classical idea.

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