Tuesday, December 14, 2021

Smart Enough to Get Rich, Not Smart Enough to Keep It

Are we smart enough to keep our oh-so-easily conjured riches? If we continue to believe that doing more of what's failed spectacularly will deliver permanently expanding riches, then the answer is no.

Near the end of his monumental 400+-page analysis of the notion that alternative energy sources can replace hydrocarbon fuels, (Energy and Human Ambitions on a Finite Planet), Thomas Murphy discusses the really big picture: mass extinction events and species' role in mass extinctions.

So here's the thing. The first species smart enough to exploit fossil fuels will do so with reckless abandon. Evolution did not skip steps and create a wise being -- despite the fact that the sapiens in our species means wise. (Self-assigned flattery) A wise being would recognize early on the damage inherent in profligate use of fossil fuels and would have refrained from unfettered exploitation.

Not only is climate change a problem, but building an entire civilization dependent on a finite energy resource and also enabling a widespread degradation of natural ecosystems seems like an amateur blunder.


In other words, humanity was smart enough to exploit the natural riches of hydrocarbons but not smart enough to figure out what to do after we've consumed all the easy-to-extract wealth or how to deal with the consequences of the profligate use of all the riches.

I think the same can be said of the immense financial (i.e. phantom) wealth that's been generated in the past 20 years: we were smart enough to generate all these hundreds of trillions of dollars of "wealth" but we aren't smart enough to keep it or manage the consequences of our profligate use of the magic of money-creation.

This dynamic is scale-invariant, meaning it applies to individual investors, organizations and nations / empires: each is smart enough to get rich but not smart enough to keep it.

There are many reasons for this inability to convert intelligence into wisdom, but chief among them is the conviction that doing more of what worked in the past will eventually produce the desired results. I call this doing more of what's failed spectacularly, and we're remarkably adept at doing so. (I know I am, and I observe this on a systems-wide level.)

So the investor who minted riches flipping houses will keep flipping houses even after the cycle has turned, eventually losing the fortune. The investor who minted riches buying call options on meme stocks will keep buying call options on meme stocks until the fortune has been lost. The investor who minted riches by maintaining a balanced portfolio will keep maintaining a balanced portfolio until most of the riches have dissipated. And so on.

On a larger scale, central banks that managed a spot of bother by printing trillions of dollars and buying bonds will keep doing so until the system unravels. Central banks are blind to the consequences of their "success" and confident that doing more of what worked in the past is the key to permanent success. It looks like it is until it isn't.

This confidence that doing more of what worked in the past will work once again slips very easily into magical thinking. Here's an analogy: the water well has run dry, and so the central bank prints money and gives it to the thirsty people standing around the empty bore hole and drilling rig in the belief that demand creates supply: if you give people money to buy water, the water will magically appear because somebody somewhere will figure out a way to supply water at a profit.

This is a nice idea but the water has to be available at a sustainable cost. Dropping water bottles from helicopters can be done for a time, but eventually the $1,000 cost for each liter of water has consequences, and printing trillions of units of currency to pay for this profligacy has its own consequences.

Recall that actions have consequences (first-order effects) and consequences have their own consequences (second-order effects.) We're smart enough to exploit first-order effects (drill an oil well and get rich, print money and get rich without even bothering to drill the well) but not smart enough to anticipate all the second-order effects or change course before our heavily loaded galleon of riches has crashed onto the razor-sharp rocks and been smashed to bits.

It turns out there wasn't much selective advantage 200,000 years ago to converting intelligence into wisdom. The key advantage was cooperating with other humans to strip all the low-hanging fruit from the tree and then move on to the next exploitable resource.

In the modern analogy, we stripped all the low-hanging hydrocarbon energy and exploited the magic of money-printing and its sibling, debt, and now we're ready to print another couple hundred trillion magical dollars and buy a replacement global energy system.

All these newly conjured trillions have boosted the market value of assets. This first-order effect is simply marvelous: just buy the asset with borrowed money and sit back and get rich by doing absolutely nothing and creating zero value. (If necessary, borrow more money to buy back your company's shares, reducing the float--this drives up share prices like magic. Hey, magic! Why not use this magic to get richer?)

But this conjuring trick has consequences which then generate their own consequences, one of which is all the phantom wealth suddenly evaporates. It can evaporate in various ways, but the result is the same, and doing more of what worked so wonderfully in the past (creating trillions out of thin air and speculating on asset bubbles) stops working, to general astonishment and anguish.

One consequence is extreme wealth inequality as this money-conjuring / asset bubble trick works extremely well for those at the top, who end up owning most of the wealth and virtually all the income derived from that wealth. But it works very poorly for the bottom 90% who don't own enough wealth to benefit and are too far from the central bank money spigot to get much of the free money. (Here's a $250 per child tax credit--enjoy your riches!)

As I describe in my new book, inequality and scarcity bring down nations and empires. The past 50 years of cheap, abundant goodies (now mostly made overseas) and money-conjuring have generated a compelling illusion that conjuring more money via printing and debt solves all supply issues and keeps asset bubbles expanding forever.

Those who believe that doing more of what worked in the past will always be successful are not looking beyond the first-order effects they desire. Anticipating simple cause and effect--get richer by printing more money and speculating more wildly--may appear intelligent while it works, but it isn't wisdom.

Wisdom, if it is ever gained at all, is only attainable after the second-order effects collapse all the conjuring.

Are we smart enough to keep our oh-so-easily conjured riches? If we continue to believe that doing more of what's failed spectacularly will deliver permanently expanding riches, then the answer is no.




My new book is now available at a 20% discount this month: Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $8.95, print $20)

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.



Recent Videos/Podcasts:

A Grand Strategy to Address the Global Crisis (54 min., with Richard Bonugli)

XI's GAMBIT: A Bridge Too Far? (41 min, with Gordon Long)


My recent books:

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $25) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 Kindle, $10 print, ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print)
Read the first section for free



Become a $1/month patron of my work via patreon.com.




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Guy T. ($50), for your monstrously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

 

Thank you, Amy C. ($52), for your magnificently generous contribution to this site -- I am greatly honored by your steadfast support and readership.


Thank you, Allan H. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

 

Thank you, Ben S. ($5/month), for your exceptionally generous pledge to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act


This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Do Not Sell My Personal Information


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP