

Was whole economy a Ponzi scheme? - noor420
http://www.iht.com/articles/2009/01/01/business/col02.php

======
mdasen
In the short-term, yes. In the long-term, no.

When dealing with investments, over the long-run their price will match their
value. However, in the short-run, the price will be whatever other people are
willing to pay for it. So, in boom times that's often higher than value and in
recession that's often lower than value. And in the short-run, new buyers of a
stock pay back the older buyers just like a Ponzi scheme, but in the long run
the company's value is what determines the price.

So, maybe you want to play the system and buy and sell based on these trends,
but that's hard. Heck, Harvard's endowment fund couldn't do it, you think
you'll be able to? It's a lot easier to focus on the long-run and invest in
things that are good values.

The real problem that we're seeing here isn't that there are market
fluctuations. It's that people wanted to put things in stocks that they
thought they'd be using as cash in 6-18 months - specifically, retirement
savings. If you're not one of the rich whose wealth will outlast their life,
you need to move money from stocks into less risky investments as your
retirement date approaches. If you don't, then you have to be flexible with
when you retire and how much you'll have. But everyone wanted that extra
hundred-grand or something to retire on - why move into safe investments when
stocks have done so well? I don't want to loose out on some additional cash
for retirement!

Heck, most investment firms have auto-adjusting funds that become more risk
averse as you reach retirement age, but they aren't as popular as they should
be because people don't want safe as much as they want more. In some ways it's
like an unintentional scam. Investment professionals will caution you against
being too risky just like a con-person tries to dissuade their mark, but the
mark sees what they want and thinks the con is trying to keep them from money.
. .and then it collapses. The difference is that the investment professional
is (usually) being sincere about avoiding risk.

Be careful, don't over-extend yourself with visions of gold, and don't count
those golden eggs before they hatch.

~~~
mudetroit
The more fundamental problem was the philosophical shift from holding stock
being a means to collect a dividend to expecting the short term ability to
purchase stock and sell it for a profit.

If you sit and think about it logically, why does a stock that doesn't pay a
dividend have any intrinsic value attached to it? Yet we have built an
economic structure that says that it is possible for that piece of paper to
gain value.

~~~
nostrademons
Because the money that would be paid out as dividends is instead reinvested in
the company, increasing its ability to produce profits in the future.
_Assuming_ that managers can find investment opportunities that exceed the
return on capital that a shareholder would otherwise get, this is a good
trade.

This is a fairly big assumption. It tends to be true in younger, high growth
companies, or companies where management is good at identifying other
profitable markets to enter. This is why Google, Berkshire Hathaway, Apple,
etc. never pay dividends, and why Microsoft didn't until recently.

Unfortunately, managers tend to be pretty poor at realizing when their market
is no longer growing. So they'll _think_ they can buy growth by acquiring
companies or hiring more people, but end up destroying shareholder value when
the exorbitant purchase prices don't pan out. Good for entrepreneurs, but bad
for investors.

It's not as simple as "dividends = good, stock price appreciation = bad".
There's been a fair amount of academic mathematical finance devoted to
dividends, and it showed that investors should be ambivalent about dividend
yields, _as long as management was economically rational_ (i.e. would only
undertake investments if the expected return was greater than the cost of
capital). A reduced dividend just means that more money stays within the
company, which increases its future value.

~~~
netcan
You're still talking about a world where dividends still exist. They're being
generated & reinvested. This is in order to create more dividends in the
future. Once reinvesting becomes expected, it just means that dividends aren't
getting paid. We blur that issued then reinvested concept & just readjust our
expectation for companies to grow.

The issue is that a situation where dividends are the norm, this keeps the
system honest. Cash is harder to fake. If people own stock for dividends it's
harder to get carried away.

The reality is that many companies will probably never pay dividends
justifying their current valuations.

You can't just say that you've abstracted away the middle part & look at
indicators of indicators of indicators forever. This isn't engineering. There
is an enormous psychological element involved. You wouldn't get Uncle Khaled
to invest in your shop if he visited & saw that no one walked through the
door.

~~~
nostrademons
If you're arguing that most companies are not generating anywhere near the
cash flows needed to justify their valuations, you'll find no argument from
me. Even after falling 45%, S&P500 P/Es are still around 12, which implies an
earnings yield of around 8% assuming earnings stayed constant. Given the
historically record earnings of recent years, that seems to be on the high
side of reasonable.

But if there were a company that traded at a P/E of 7-10, had no red flags
like excessive debt or discrepancies between cash flow and earnings, yet paid
no dividends, I'd have no qualms about investing. That actually describes
Berkshire Hathaway pretty well, if its stock price were to drop a bit.

~~~
netcan
Sure, but I'm arguing a bit more then that.

I'm arguing that it's fine to have some companies that don't pay dividends.
Fine in a world where the standard is dividend paying companies. Once they
become the exception, once you stop even speculating about what they would be
paying if they where paying, once you start talking about, game's up. Stock
becomes trading cards.

BTW, it's not just not paying. Paying 1-3% is the same sort of issue just that
then it's the investors rather then the companies _fault._

But then, all that says. It still works. Sort of. Baffles me.

------
taylan
I'm curious if we can generalize even more. For example, can we call Academia
a giant Ponzi Scheme that will collapse when run out of naive new recruits
laboring their years away hoping to reach top of the pyramid one day?

~~~
RobertL
Anyone with any knowledge of our monetary systems will readily acknowledge
that it works like a big ponzi scheme.

This is really the only way to manage a monetary system so it allows for
economic growth.

We could say. "Let's go back to the Gold or Silver standard" but they have
their own problems. United States was on a gold standard in the 1980s and I
don't think we want to go there.

Anyone who has studied the history of Andrew Jackson should recall that the
ongoing conflict between himself and Henry Clay during his three terms as
president was about "Money Supply".

~~~
dgordon
Neither Andrew Jackson nor anyone else had more than two terms as president
except FDR, who took the US off the gold standard by stealing everyone's gold
in 1933. (That's where the gold in Fort Knox came from.)

Besides, the US used a gold (and sometimes silver) standard most of the time
before 1913, and in that time grew from thirteen largely agrarian colonies to
the largest industrial economy in the world, so I can't understand why you say
that "a big Ponzi scheme" is "really the only way to manage a monetary system
so it allows for economic growth."

~~~
RobertL
dgordon. When you grow from nothing to something 13 times doesn't mean too
much. That argument is totally irrelevant.

There is no way we could have had the kind of growth we experienced post WWII
if we had stayed on the gold or silver standard. The monetary system we use
now is not perfect, it's just the best we have available.

But it's definitely broken. We need to fire some of the people who should have
warned us about the crisis we are now in but didn't and then move on.

I feel very badly for those who have suffered unfairly, and this includes
millions of innocents, but these things happen.

~~~
dgordon
Growing all the way to the largest economy in the world is irrelevant? I don't
follow. Nor did I say anything grew "thirteen times."

"There is no way we could have had the kind of growth we experienced post WWII
if we had stayed on the gold or silver standard."

What's your evidence?

"The monetary system we use now is not perfect, it's just the best we have
available."

Again, what's your evidence? Why is this system better than systems based on
precious metals (the choice of most civilizations to use money) or systems
that, while they use fiat currency, do not allow (in theory...) arbitrary
creation of such currency?

"I feel very badly for those who have suffered unfairly, and this includes
millions of innocents, but these things happen."

These things happen because the economic decisions of those who govern
guarantee they will happen.

------
vaksel
not exactly, people want to think there is some huge conspiracy run by evil
geniuses...the reality is actually much more horrifying. The people running
the show aren't evil geniuses....they are just as stupid as the rest of us.

Most of the decisions made by these financial geniuses, can pretty much be
summarized by a series of if then statements, that they learned through out
their lives

~~~
tokenadult
"the reality is actually much more horrifying. The people running the show
aren't evil geniuses....they are just as stupid as the rest of us."

Yep, that is more horrifying to a lot of people who want experts to do their
thinking for them.

~~~
ajkirwin
So most of the population then. You can't avoid stupidity.

------
gaius
_That $50 billion is likely to turn out to be not the amount lost but the
amount people wrongly thought they had._

'Zackly.

~~~
noonespecial
Money and wealth turned out not to be the same thing after all. You can create
money by scribbling marks on little pieces of paper. Creating wealth turned
out to be much, much harder.

Seems like every time they forget this, we eventually have a "correction".

------
zby
It seems that the behaviour fuelling those "Ponzi bubles" is <a
href="[http://www.theatlantic.com/doc/print/200812/financial-
bubble...](http://www.theatlantic.com/doc/print/200812/financial-bubbles) in
our basic psychology</a>.

------
patrickg-zill
If you measure the strength of the USD not in relation to other currencies,
but what you can buy, either in gold, silver, or a basket of goods (since
after all, money is a means to exchange things); then it is reasonable to
point out that over the last 100 years, the purchasing power of $1 USD in 1910
has collapsed to about 4 cents today.

In 1910, $20 would get you 0.96 ounces of gold (the $20 gold coin), or 15.4
ounces of silver (20 of the $1 Morgan Dollar), or about 600 loaves of bread
(bread was about 3 cents a loaf), or over 360 bottles of beer (36 bottles was
$1.75).

Savers have been punished severely, spenders rewarded as over time, inflation
reduced the bite of the debt they took on (they could pay back a mortgage with
greatly-inflated dollars).

Capital gains taxes did not allow you to adjust for inflation (e.g. if you
were given something worth $20 in 1920 as a baby gift and sold it when you
were 80 for $900 you didn't really make anything on it).

... it may be quite painful for those of us in the USA over the next few
years.

~~~
jerf
That analysis leaves so many things out of the story that I would hardly even
know where to begin pointing out the problems, including ignoring or
misunderstanding compound interest (your analysis only holds for someone
stuffing dollar bills in their mattress, not under any other feasible holding
model across 100 years, which in truth is simply not approximatable in any
simplistic fashion anyhow) and the fact that a dollar in the past _is_
intrinsically worth more than a dollar in the present, because the dollar in
the past can be leveraged to generate more present wealth. (Typically, this is
looked at from the point of view that a dollar in the present is worth more
than a dollar in the future and future dollars must be discounted in value
when compared to present dollars, but the tense-shifted statement is
equivalent, barring the fact that you can't actually spend past-dollars in the
past. (In which case a past-dollar would be REALLY valuable...))

Finally, you seem to be claiming that the US (either collectively or per-
citizen) is no more wealthy today than it was in 1920 (or 19xx), which is one
of those results so absurd that it should be prompting you to reconsider your
viewpoint, not prompting you to post on the internet.

~~~
patrickg-zill
You are reading into my post, things I did not say.

In fact I didn't touch at all on the issue of wealth per person or total US
wealth.

------
bwd
"We too thought our retirement funds and houses were growing miraculously,
though ours was an illusion fueled by debt rather than fraud"

This is clearly true regarding housing prices and the returns and market
prices of financial companies, but it ignores the effects of productivity
increases when applied to other types of companies. Increasing productivity
should allow equity capital to produce higher returns and it is difficult to
separate this effect from the effect of a leveraged balance sheet when pricing
equities. The market will certainly overshoot on the downside at some point
but it's difficult to determine where that occurs because consumption must be
lower in the short and long term due to deleveraging by businesses and
consumers.

------
dhughes
Well yeah, sort of.

If you think about it what is stock, you pay $10 for a share that someone else
paid $5 for, pretty much just because of rumours the company may do better in
the next month or year, it's like buying air.

At least with commodities it seems like there is something material behind
that contract; grain, oil, sugar. It's not like one day people will suddenly
decide, or could be capable of deciding, to cut out sugar.

