Thursday, January 03, 2013

Predictability and economy

One concept that runs throughout Mr. Greve's post is that of predictability. Predictability is the reason why we have written laws, constitutions, contracts, stare decisis, etc. etc. Predictability is essential to the rational expectation that the future can be made better than the present. This same idea forms the basis of credit, and ultimately, of capitalism. It is much easier to have faith in the future if we have some reason, beyond hope, to expect that it will contain something worth striving for.

 Predictability is also central to an unalterable truth. The economy is healthy so long as enough people expect the future to be better than the present. It is an uncomfortable fact, to the point that it can scarcely be spoken, that the value of something is only an opinion. Tulip bulbs, and Facebook stock are ultimately only worth what people think they are worth, and this is largely dependent on what people think they will be worth in the future. Debt is the same way. We can go on borrowing forever if someone will lend us money forever. However, the price of tulips, and corporate stock, and debt and equity markets collapse upon a fairly uniform occurrence. It is not necessarily when debt-to-revenue ratios reach a certain level, or when short term bond yields bear some relation to those of long term instruments. Bubbles burst, systems collapse and economies tank when enough people realize that they are going to get screwed. The predictability that makes economic growth possible is that which makes risk of being screwed something measurable and manageable. Right now our political class is destroying predictability with abandon.

We are all going to get screwed.

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