"... who grew up in the aftermath of the Great Recession — and American capitalism, more broadly. For these purposes, magical thinking is the assumption that favored conditions will continue on forever without regard for history. It is the minimizing of constraints and trade-offs in favor of techno-utopianism and the exclusive emphasis on positive outcomes and novelty. It is the conflation of virtue with commerce.... The fundamentals of business have not changed merely because of new technologies or low interest rates. The way to prosper is still by solving problems in new ways that sustainably deliver value to employees, capital providers and customers.... All those new investors and crypto owners may nurse a grudge against capitalism, rather than understand the perverse world they were born into.... Speculative assets without any economic function should be worth nothing...."
Writes Harvard law and business professor Mihir A. Desai, in "The Crypto Collapse and the End of the Magical Thinking That Infected Capitalism" (NYT).
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59 comments:
Not spot on but a good take. To place the magical thinking at the feet of the youngsters is inaccurate. There’s been plenty of magical thinking at The Fed, Congress, amongst Harvard economists. Most of those people are geezers..
Got a friend who was a kid in Holland during the Hunger Winter. You could eat tulip bulbs.
I am not sure that the author understands that "traditional currencies" are currently based on magical thinking as well. Nothing backs up the dollar any more, and if investors start thinking that the USA is insolvent (and they will), its value can also collapse. Or, if you have US dollars in a bank, they are dwindling through inflation as we speak because the USA just keeps printing (or publishing) pretend dollars.
Cryptocurrency was an attempt to move money away from the sovereign states that can do stupid or authoritarian things that destroy the value of their money. It too has problems, but I think it's a valuable contribution to the story.
Save this article for a few years.
Crypto is here to stay. Not sure what final form, or what the main players will be yet, though Bitcoin is not going anywhere. But it'll be adopted by more and more institutions. There is still a lot of cleaning up to do, still a lot of ups and downs in front of it. But it's not going away. I would say...it's just still in it's development stages.
Remember- our dollar exists only on our confidence in it as a currency. It is not backed by anything other than debt at this point. Not gold, not anything substantial. If the day comes when the US dollar is no longer the go-to global currency, things will change here rapidly. And...as I write this, Saudi Arabia is working on selling oil to China. China wants the dealings done in yuans, not US Dollars, which has been the base currency used in all energy transactions. This is how it begins.
A shockingly adult opinion in the NYT. Now do Trump.
Hear, hear!
“Speculative assets without any economic function should be worth nothing...."
Amen
His assertions are sound.
One of the things that has intrigued me for years about Bitcoin is that very smart, well educated, and impeccably credentialed people will be completely Wrong. We just don't know which side will turn out to be right.
The good news is that you don't have to engage with it at all if you don't want to. I'm saving this essay, as I think it will be entertaining to watch it age.
“ ‘Speculative assets without any economic function should be worth nothing.’ “
Amen.
Now do climate change and the immanentization of the eschaton, complete with unicorn farts.
Crypto is nothing more nor nothing different than a "Trammel of Archimedes" aka the "Do Nothing" machine:
https://www.myphysicslab.com/engine2D/do-nothing-en.html
https://www.youtube.com/watch?v=dpt6GucTn58
You work hard to prove you worked hard, but achieve nothing other than proof of working hard. Crypto reflects a complete misunderstanding and perversion of (1) investing, (2) work ethics, (3) the inherent value of commodities such as gold.
I personally feel that crypto was the natural outgrowth of the smoke-and-mirrors fantasy economies of video games combined with an effort to create an underground financial system (or virtual black market). But, it's ultimately unstable (see the FTX collapse), traceable / not actually underground, and it fails to have any value beyond current paper money. And far fewer people accept crypto than paper money.
Many video games are grinders where you work hard to earn coins/tokens to advance in the game or increase in-world status. The genre of Role-Playing Games (RPGs) is notorious for the 'leveling grind' -- players must gain experience to advance and then gain experience to advance and then gain experience to advance. No end goal, no purpose, no value.
https://brinkofgaming.wordpress.com/2018/11/09/level-grinding-in-rpgs/
The children who played RPGs grew up and looked to investing. They were fooled into thinking virtual grinds have value...'cause they did have value in World of Warcraft. But, they don't. One Amazon delivery driver has more actual economic value than the fantasy crypto earnings of 1,000 chubby e-shut-ins using computers to mine Bitcoin. The real economy involves real things because you live in a real body that needs real food, real oxygen, real water, and real shelter.
Crypto was made for drug dealers, kidnappers and hackers for ransom.
I don't have any money invested in cryptocurrencies. I don't understand them. That's not to say that I understand my other investments. I have a suspicion that they're all Ponzi schemes. Coca Cola has been a mainstay of Warren Buffet's portfolio for years. What is the basic value of a company that delivers tooth decay and diabetes to its customers? No one ever got bad teeth from a cryptocurrency.
Since I graduated from college I've spent my life as a button-pusher, removed at least one level from the actual work of producing things. Crypto strikes me as another level of removal, a phony currency that can exist only because the primary currency (dollars) exists first. It is no exaggeration to say that the Lords of Crypto produce nothing of value and contribute nothing to the human economy. They are parasites on the actual productive economy - not much different from politicians.
It's no more magical than the US dollar, which has its only solid economic foundation in being accepted for the payment of mandatory taxes by the government. They could accept bitcoin and see what happens to bitcoin.
The actual rule is it's good money if you'd accept it back (i.e., in another transaction) as good money. That's why counterfeit money is no good once you know it's counterfeit.
The magic is social convention, which does a lot more magical things. You can see this in the left running government where old conventions are overturned regularly, leading to outrage and collapse mostly. Who knew that the ordinary was so important compared to theory.
Magical thinking is cool what with monetary unicorns and all. But have a parachute to bail at the first whiff of reality. One of my elderly guitar students bailed out at the first sign of crypto engine misfire a few years back. He had soft landing and made bank. Depends on how clued in you are to the monte game and if you have the intestinal fortitude...
I'm not an expert in crypto, far far from it, but I'm a fairly focused personal investor as I hope to reach financial independence by about the age of 45-47, about 5+ years from now. Which means that I've been investing since about 2008 in a meaningful way, during which time it's been the rise of Crypto. As a result, it's been a frequent and hot topic among my reading and discussions with friends and financial advisers.
I got an MBA 2009-2011. I don't remember a lot from it, but I remember the discussions on valuations of assets and in particular equities and bonds. Value of an asset predicted to grow over time is tied to discounted future value - which could be expected cash flow (i.e. profit, dividends, bond payments, etc.) or similar hard return back to the owner. It's also discounted for risk. Super basic fundamentals that stuck with me.
Whenever I had a serious convo about Cyrpto, I would raise simple questions:
1. What is its intrinsic value? The answer is basically emotion - which is true of all currencies, but nonetheless not a positive way to make a long term bet.
2. What prevents it from being supplanted by a subsequent and better cryptocurrency at any time? For example, Bitcoin is insanely energy intense. At some point, that's a mega-downside risk. The answer is nothing but market enthusiasm.
3. Since Crypto is inherently counter to sovereign currencies and taxation, what is to prevent Sovereign nations from banning it within their country? The answer again is, nothing, even if it may be technically difficult to outright ban CC.
So if you take just those 3 observations into account, Cryptocurrency has been nothing more than a bubble asset similar to Tulip bulbs as currency. And once you see that, you can't unsee it.
What amazes me is how many super smart finance and economics "experts" started to promote Crypto in the last 5 years. In particular, my favorite was major firms like Merrill Lynch starting to say that CC as a 5% hedge in a portfolio was becoming mainstream....within 12 months of the absolute desolation of the CC market.
For these purposes, magical thinking is the assumption that favored conditions will continue on forever without regard for history.
It would be interesting to read Harvard law and business professor Mihir A. Desai's prescient warning that I'm sure was published in the NYT several years ago.
Delusional leftism. "Magical thinking" is generous.
---magical thinking is the assumption that favored conditions will continue on forever without regard for history
A/K/A "It's different this time."
Last I looked, the S&P 500 index was still more than 100% above its historical mean. The stock market valuations at the peaks of this cycle, just over a year ago, were the highest in our recorded financial history, the period for which we have solid quantitative data, which is more than 120 years.
That means the S&P index could drop by 50% from here and still be just average, on its historic record. What's more, a mean value cannot be the mean without values lower than that, obviously. An additional fact to consider.
Much of our social craziness starts to make a little more sense when seen through this filter. The filter of a financial peak, whose prosperity -- even though not uniformly shared -- makes it seem like anything is possible. Such as the government writing checks to millions for free money. The history books are going to zoom in on that fact, one day -- how can they not?
But I was convinced that the blockchain does have significant value and potential for improved uses. That doesn't mean every crypto is a worthwhile asset; think of all the now-forgotten car companies that came and went in the first part of the 20th century. But I can't get to the full text of the column so I don't know what else Professor Desai may offer as examples of financial excess and "magical thinking." In critical ways, the Federal Reserve was the most extreme of the magical thinkers. Now they are stuck in a trap of their own making. And the rest of us must follow along.
The so-called "Great Recession" was a credit bubble, but it was not as extreme a bubble in the stock market as 1929, or the tech bubble of 2000, or the 2020-21 frenzy. So, with one down year under our belts, we may still be in only the first act of whatever this downturn eventually comprises.
That's racist.
"What is the basic value of a company that delivers tooth decay and diabetes to its customers?"
Coca-Cola exists for the same reason tobacco companies and your corner drug dealer exist - the customers want the product, regardless how much the product harms them. How the customer got hooked on the product doesn't matter; the Invisible Hand will ensure that the supply will come to meet the demand.
Most young people I know who get involved with cryptocurrencies aren't concerned about the fundamentals and suspect it's a bubble. They vaguely assume that they are more in tune with the popular trends and can ride the bubble up and profit before the bubble bursts. Some will profit and others will lose money while being young enough to recover.
It’s wrong-headed to compare crypto to currency. Let’s say you borrowed 10 bitcoin at $3,682 per bitcoin in January 2018 to buy a new car and now had to pay back the 10 bitcoin at $21,195 per bitcoin. Your $36,820 car would have ended up costing you $211,950.
"What is the basic value of a company that delivers tooth decay and diabetes to its customers?"
Whatever they are willing to pay.
"Where ever there is a desire there is a market to be filled."
The magical thinking he describes is called Modern Monetary Theory and has zero to do with capitalism, as it is another stupid progressive “new idea” Obama’s Treasury secretary embraced. So did the Fed, eagerly printing money and buying up Treasury securities and calling it Quantitative Easing. It ALL has been continually criticized by sane economists (not Paul what’s-his-ass at NYT of course) for more than a decade now. It seemed a little tinfoil hattish at the time when some claimed the excess debt created by Obama’s scheme was part of the Cloward-Piven/WEF plan but damned if it doesn’t fit right in with the Evil Bastards’ evil schemes being discussed this week in Davos. Like Elon said, everything that the Big Media called conspiracy theories really were spoiler alerts.
Backed by the full faith and credit... and perfect tracking.
We'll see where we're at in 10 years.
The primary point regarding Bitcoin vs [most? all?] other cryptocurrencies is that the agreement regarding the number of coins to be produced, the method of valuation and the "proof of work" backing the coin cannot be changed or manipulated by the "founders" of the currency (it can be changed by agreement of something like 80% of the holders, which means that it has to be something fundamental and universally agreed to).
In the absence of such protections, the "currency" is essentially a Ponzi scheme, under which the controllers of the currency profit by taking value from the later participants.
Which is essentially the problem with our current monetary system. They keep changing the rules.
"All those new investors and crypto owners may nurse a grudge against capitalism, rather than understand the perverse world they were born into."
How does one "nurse a grudge" against capitalism? Are they going to get revenge on "Capitalism" by giving it a wedgie? Or stealing its girlfriend? I hope Capitalism has someone watching its back.
Anyway, I have no idea what the correct label is for our current economic system. Its a crazy hodge-podge of socialism, globalism, capitalism, and plutocracy.
I haven't gotten into Cryto because I don't understand it. And don't feel to the need to do the required reading. However, it seems to filling a market demand. So that makes it very much "Capitalism".
BTW, is this another article that's supposed to direct us away from Bankman-Fried and all his fraud into wondering about "The Big Picture" and "Gosh darn it, maybe this whole Crypto-currency thing just needs to go away"?
Had you bought 100 bitcoin for around $300 each in 2015 it would be worth 2 million today. Would have been worth a lot more before the correction but then so would a lot of equities. But wait, you can’t buy anything with it! Take a bar of gold to the car dealer. Take shares of Apple or Disney and see if they will take them for a car. Nope. Sell them then bring the cash. Ditto bitcoin although many dealers will take that “currency”.
Then no one should play poker.
Mike (MJB Wolf) said...
The magical thinking he describes is called Modern Monetary Theory and has zero to do with capitalism, as it is another stupid progressive “new idea” Obama’s Treasury secretary embraced...
Yes, MMT is basically the fundamentals of Keynesian economics rebranded with new labels.
... So did the Fed, eagerly printing money and buying up Treasury securities and calling it Quantitative Easing...
Back when it started, the Feds' attitude basically was "Ha, ha! Look at those stupid Zimbabweans printing those worthless million dollar bank notes. Now let's solve our fiscal problems with this new tool called Quantitative Easing."
Without magical thinking the Democrat party would have no economic plans or any plan for the climate.
Some of the best investments I've made in my life have been in Ponzi schemes.
Any investment that promises over about 5% is a Ponzi scheme of one sort or another. Many of them explode, usually from size, or occasionally black swan events (such as the 2008 housing crisis or the Tulip frenzy).
Many of them do not explode. There is currently at least one $65 billion Ponzi scheme out there right now being run in exactly the same way that Bernie Madoff's scheme ran in frightening ways. It's been reported to the SEC. But so was Madoff. Multiple times. The SEC is protecting it; just as it protected Madoff until he blew up.
If you can identify one to invest in, you should. You'll get outsized returns unavailable to just about everyone else. Just don't think you can hold that investment in the same way you'll own a stock or legitimate investment.
I recently avoided an argument with someone on Reddit about government and capitalism. Person seemed intelligent and educated, but...
Their basic stance was that most governments, and the U.S. Federal government in particular, are capitalist. Because they invest (by agreement of the citizens) money in enterprises which are intended to return a benefit to the citizenry.
I had the benefit of https://xkcd.com/386/ so I went to bed, instead.
Bill Zhang. Until they claw back your “profits” once the scheme unravels. Lots took profits from Madoff which they had to return at great pain. Didn’t know it was a ponzi? Tough shit, give it back.
I have been railing against the encroachment of a related form of magical thinking, now for a decade. It was best exemplified by an ad for a car, where the car is shown to create itself from thin air according to the wishes of the buyer. I contrasted this with the previous dominant ad theme of that manufacturer, based on engineering skill and effort. Another great example was an ad for iPhone, where the voiceover poetically extolled the superiority of art over science and especially engineering, without a trace of awareness.
It's another version of the thinking that knows that electric power comes from wall sockets, that clean water comes from a tap, that sewage disappears when one flushes the loo, that government-provided things are free, that belief is reality.
I've taken to recommending Kipling's "Copybook Headings" to folks.
Rocco, just yesterday , on npr, I heard the "trillion dollar coin" debt reduction idea mentioned again, semi-seriously.
The dollar is ultimately a claim on the productive capacity of the U.S.
Cryptocurrencies are ultimately a claim on … what?
No more magical thatn belief in the US dollar which has been debased for political aims.
Crypto is already banned or its use is restricted in much of the world. It's very much a Western thing, restricted in China and India, restricted or banned in many countries in South America and the Arab world, and not familiar in many African countries.
It looks like another libertarian pipe dream, like declaring deserted islands and offshore platforms to be independent micronations. It may be that currency, like information, investment, and trade, really doesn't "want to be free" as much as libertarians thought.
Temujin:
I think you're right about crypto surviving. But I think the form it survives in will be Central Bank Digital Currencies. The state will have the luxury of being able to force a monopoly, and CBDC will have (for them) the desirable quality of full controllability. The selling point to the populace will be that transactions can be secure and traceable. The IRS will do your taxes for you. And thus another tranche of human liberty will disappear.
Crypto is everything you don't understand about computers and finance.
Charlie Munger on crypto, "It is rat poison squared."
"Some will profit and others will lose money while being young enough to recover."
And the total profit will be equal to the total loss. Minus a certain amount of overhead.
BitCon: Don't
Let's first define what an ideal currency would be. Currency serves two purposes; it allows me to express a preference for one good or service over another, and it allows me to express time preference (that is, when I acquire or consume a good or service.)
All currencies must satisfy at least one of these purposes, and an ideal currency must satisfy both.
...
But before I get to that, I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.
This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.
All currencies require some means of validation. That is, when you and I wish to transact using a currency I have to be able to know that you're not presenting a counterfeit token to me.
...
Second, due to the indelible nature of the records you're exposed for much longer that with traditional currencies to the risk of a bust and in many cases you might be exposed for the rest of your life. In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States, along with many other jurisdictions,
...
Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue.
...
Bitcoins are basically cryptographic "solutions." The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin. As each coin is "mined" the next solution becomes more difficult.
...
The other problem that a cryptocurrency has is that it possesses entropy.
Entropy is simply the tendency toward disorder (that is, loss of value.) A car, left out in the open, exhibits this as it rusts away. Gold has very low entropy, in that it is almost-impossible to actually destroy it. It does not oxidize or react with most other elements and as such virtually all of the gold ever dug out of the ground still exists as actual gold.
Fiat currencies, of course, have entropy in both directions because they can be emitted and withdrawn at will.
...
I mentioned above about fiat currencies being able to be issued and withdrawn. There is often much hay made about the principle of seigniorage, which is the term for the "from thin air" creation of value that a state actor obtains in creating tokens of money. Seigniorage is simply the difference in represented value between the cost of emitting the token (in the case of paper money, the paper, security features and ink) and the "value" represented in the market. There is much outrage directed at the premise of fiat currency in this regard but nearly all of it is misplaced because people do not understand that in a just and proper currency system the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.
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I prefer instead to effort toward political recognition of the duties that come with the privilege that is bestowed on a sovereign currency issuer in the hope of solving the underlying problem rather than sniveling in the corner trying to evade it.
0% interest rates from the Fed made borrowing free, and the free money looks for a return. Instead of real estate, the speculation went to crypto.
When the rates went up and borrowed money had to be paid back at a higher interest rate, the bubble burst.
Totally predictable, and anyone who got conned into buying fake money with real money got an education.
Turns out that everything is only worth what someone else will pay for it. That's it.
Cryptocurrency is the opposite of money.
Money depends on the creation of wealth wheth it be mining coal or gold, cooking hamburgers or writing books or running a blog.
Crypto depends on the destruction of wealth. Crypto like bitcoin takes useful resources like energy and consumes out, creating nothing more than an illusion.
If I ask meade to come to my house and dig a hole in my front yard so I can plant a tree,he has created wealth. (or value if you prefer)
If he shows up unbidden and digs that same hole in my driveway he has destroyed wealth.
The mere act of exerting effort does not create wealth no matter what Karl marx said. Not for a hole in my driveway, not for cryptocurrency
John Henry
Whoever sold Tom Brady on this thing must be in big doo doo.
What if it was his ex to be?
I remember when Milwaukee got Crypto back in 1993. Same year as the thousand-year flood event shut down the Upper Mississippi and the Missouri turned into a thousand-mile long lake. Not too long after that Dahmer fella got convicted.
I guess crypto (of any sort) is a sign of something going awry in the space-time continuum.
Bitcoin is still a good way of sending a billion dollars across the globe without involving a bank or government.
Certainly that is worth something.
Speculative assets without any economic function should be worth nothing...
That's a religious view, not an economic one. A more agnostic economist would note that supply and demand is a law, no "oughts" about it. Gold has very little intrinsic value as a metal -- in fact it's one of the more useless metals out there. But it's been considered valuable for centuries because of its scarcity.
Art is another asset category that holds no economic function outside the laws of supply and demand.
The blockchain has many economic functions. It's ultimately going to be faster and cheaper than current network solutions. And it's going to be more secure and decentralized.
I think a lot of observers are caught up in the "currency" aspects of crypto and are missing the technology revolution in the blockchain. One of the fascinating dichotomies in our age is how almost all the tech guys see the possibilities in the blockchain, and so few of the money guys do.
Play Splinterlands for an afternoon and tell me if you see any possibilities in a fun game where you make money every time you play.
I think he has mixed up some ideas here and it comes across as an old curmudgeon complaint about the yung'uns.
Is thecl drive to improve the world somehow bad? Given level of depression in today's young people and their lament about student debt and housing prices, I don't think unbridled optimism is something we see in the millennial generation.
Decades ago on my university campus, students indulged in an activity known as "Airplane". You could buy a seat for (say) $20; and then if you recruited (say) 5 others to buy seats, they would pay you $100, and you could become a "flight attendant", and share in the money paid by new recruits; and if your first round recruits were successful (to some specified degree) in recruiting others, you could become a co-captain, etc, A couple things are obvious from this: (1) the whole activity created exactly nothing of real value; (2) nevertheless some people (the first people in) could make a lot of money; (3) the fact that some people made a lot of money persuaded others to participate; (4) ultimately the whole thing collapses as we reach the end of a population who are persuadable.
This is basic nature of financial bubbles. I think crypto currencies are exactly like this.
Red Pilled America has an interesting series on Bitcoin:
https://blog.iheart.com/post/our-new-eye-opening-iheartradio-original-podcast-red-pilled-america-launches-today
As long as Crypto is useful for money laundering and other nefarious purposes, including speculation and tulip trading, it will always have value. How much value is up for debate.
OMG. There is a Harvard Professor saying something intelligent.
The End Times are surely upon us.
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