Tuesday, March 10, 2009

Stoner Econ 101

Belmont Club » Eve of Destruction 2
The financial systems reached the limits of its information span last year by walking off a cliff they didn’t see. And the trick is to see the next cliff. What steps will create more information out of the data instead of more walls, more partitions, more black boxes?
Applying the basic tenets of Stoner Economics might help us understand the financial crisis, and our response to it.

a) In stoner economics, lenders owe borrowers.

For instance, you are in a bar and a friend borrows twenty dollars. No sooner does he borrow the bucks than he acts like you owed him the money. Let's say you put in the effort to get the twenty back. Now he’s shown he’s “good for it,” so you owe him forty — the twenty you always owed him and the twenty he just gave you. So later on you “lend” him the forty. Only now you are short on cash, so naturally you borrow twenty from another friend so you can have someone who owes you. But he was a little short so he borrowed twenty from the guy you just lent the forty to. Meanwhile, you’ve opened up a tab at the bar and bought everyone drinks. In the end, only the bar actually gets paid. By you, of course.

In the case of money market funds, you should add seven or eight zeros to the above amounts.

When you are asked to pay your neighbor's mortgage or to help finance the next bailout, remember: Lenders owe borrowers.

b) In stoner economics the sum of all transactions is always less than zero.

Say you have some dope, and you have some money, and you want to get high. So you smoke the dope and you get high. Later, you want to get high, you don’t have any dope but you do have some money. So you buy some dope and you get high. Later, you want to get high but you don’t have any dope and you don’t have any money. So you borrow some money, you buy some dope, and you get high. Later, you want to get high, but you don’t have dope, you don’t have money and you are in debt. So you don’t pay your rent and you buy some dope and you get high. Later, you want to get high. But you don’t have dope, you don’t have money, you owe money, and you haven’t paid your rent. So you hit up your grandmother, who is a little forgetful but can still sign a check.

We have now reached the final stage, but we cannot hit up our grandma for her past thrift (we kinda maybe already spent that) but we can hit up our grandkids — trade on their future labor, you might say.

But why were the sums in the example less than zero? After all, the dope was always bought. But the stoner is not doing what the squares used to call “useful work.” He is hustling to get high. And the money goes into the drug market, where maybe it hires mules and stuff but is generally not productive for the entire economy. So it all adds up to less than Zero. Not only is the money misspent, but so is a lot of the time and effort connected to it.

An economic bubble also encourages a lot of wasted time and effort. When the bubble deflates, it all goes up in smoke.

Basically, an investment should produce a return and in a bubble the returns are imaginary.

c) One of my pet peeves about President Obama is his use of the word “investing” to replace “spending.” So we invest in giving his voters raises and whatnot.

But I now realize he is using basic Stoner Economics. In Stoner Economics:

-Spending that makes you feel good is an investment.
-That in which you invest, you quickly consume.
-The bigger the investment, the quicker the consumption.
-The “Investors” who provide the “Capital to feel good” were often unwilling providers of funds (they was robbed).
-Those involved in the investment can take a hit (share the joy).
-Everyone is responsible for their own bad trip (so don't worry about unintended consequences).

I’m looking for the mathematical model I developed for Stoner Economics. I got it around here somewhere. I hope I find it. I couldn't repeat the intellectual exercise (hell, I might not even survive it).

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