06 November 2017

Ponzi Was From Boston

"Parts Unknown" remains the Best Show on the TeeVee, and when I saw the listing for the night's episode yesterday afternoon, Puerto Rico, I instantly wondered whether it would be a bookend to the Emmy Nominated "No Reservations" Beirut one. Not quite, but rather close. The recording was done around Easter, 2017 and begins with a voice-over by Bourdain about Maria and ends with a graphic for relief. The episode does discuss, through the lives of residents, the problem of the territory's debt.

Two kind of by-the-way points stood out to me, which this missive will now discuss.
1 - a teacher wonders whether her pension will exist for her in following years, since the pension system is paid on current account (not that either she nor Bourdain understand that). Bourdain describes it as a "Ponzi scheme".
2 - the flight of manufacturing installations after generous tax giveaways expired.

Let's look at 2 first, if only because John Oliver, coincidence or not, devoted much of his show later in the evening to just such blackmail. Studies have been done for decades, and few if any have found lasting benefit to such schemes. Oliver mentions in the course of his piece that the two Kansas Citys (Kansas and Missouri) have been engaged in stealing installations with ever increasing blackmail. In sum, Kansas netted about 1,000 workers at a total cost to both states of $331 million. Bourdain found just that, and showed the abandoned buildings.

As to 1, well both the teacher and Bourdain are totally wrong. Sort of. Pension programs, whether public or private, are by definition inter-generational Ponzi schemes. They have to be, if you consider what their purpose is for just a minute. Here's the consideration.

Social Security came to be in 1935. Whenever a pension program is created out of whole cloth (and to do otherwise is simply not possible), meaning to cover existing folks of age from the get go, it has to run from current account. There's simply no choice. Now, the next question is how to fund the program going forward. The government (the same applies to a private program as well) can "invest" the contributions in existing private corporations, with all of the risk that entails. And who would decide which corporations get the benefit of all that moolah? Or it can "invest" in public fiduciary instruments. Both have distinct problems. In the case of investing in private corporations, there is the fundamental question of conflict of interest: how can government make and enforce laws, if doing so reduces the value of the pension program's fund? Does government turn a blind eye to such violations? Does government, by definition, morph to Fascism (look it up)? The answer, naturally, is a big Boy Howdy.

So, to avoid that conflict, SS did the right thing by putting the moolah into government instruments. But, naturally, that's just moving the government's money from one pocket to another, both on current account and inter-generationally. The government moves some additional money (the return on Treasuries) to the SS account periodically. There is no real earned interest in this exercise, just some accounting sleight-of-hand. All governments do it, because it's the least bad alternative.

The problem for either approach is that real growth (aka, interest earned) derives from tech progress, not accounting manipulation. Since the Great Recession, and largely because of it, interest rates on government fiduciaries have hovered near 1%. The reason, naturally, is that The Giant Pool of Money continues to grow, and its holders continue to be risk averse; thus The GPoM chases those instruments driving up their price and down their rate of return. The GPoM, after the DotComBomb, sought above risk-free returns at near risk-free risk, and so turned to (mostly) US residential housing. After all, there had never been a sector wide collapse of value in the past, so why would there be one now? Everybody into The Pool!!!

The macro/global reality is that the low growth regime lambasted by Donald J. Quisling is not the fault of Obambi. It's the fault of the Asymptote of Progress. The first Dark Age happened because humans fell into religiosity and stopped thinking. The second Dark Age is happening because humans have figured out everything that matters in the macro world.

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