

Tim O'Reilly: The Biggest Ponzi Scheme of Them All - toffer
http://radar.oreilly.com/2009/01/the-biggest-ponzi-scheme-of-all.html

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swombat
Oh come on now.

It's like they said in an article I read recently... the world has learned
about Ponzi schemes, and now _everything_ is a Ponzi scheme.

At these macro-economic levels, there can be no talk of "Ponzi schemes".

The economy is not an investment vehicle, it's a huge, loose, and fantastic
agreement that enables all of us to get far more (in terms of technology,
resources, comfort, life expectancy, health, happiness, etc) than we would if
we didn't have it. It doesn't exist for its own sake, and it certainly has no
need to be a mathematically correct, long-term sustainable, rigorous system
designed by a computer scientist.

The capitalist system, with all its problems, is the best system that we have.
Who cares that it's not sustainable indefinitely into the future? By the time
we get there, things may well have changed so drastically that it becomes
completely irrelevant.

A human being is not a sustainable thing either. It overspends its resources
instead of maintaining itself in good working condition and eventually dies.
Oh shit. We better cancel humanity. It's a Ponzi scheme!

This Ponzi trend is really, _really_ getting ridiculous. Enough with all that
crap already! This article is a fancy label placed on a collection of dodgy
conclusions drawn from dubious axioms.

~~~
Maascamp
This is a straw man argument. Saying "now everything is a Ponzi scheme"
doesn't address his point that we're going to have to start looking at how a
global steady state economy will work.

He isn't saying Capitalism isn't the best system, he's saying (precisely as
you have said) that it won't last forever in it's current form. That we should
start thinking about the repercussions of our current model so when this model
becomes unsustainable, we'll already be transitioned into the new.

I certainly see no problem in thinking about our future instead of refusing to
look ahead because... well it's going so well right now we shouldn't rock the
boat.

~~~
Retric
Capitalism works just fine in a steady state economy because things break
down. Buildings need to be repaired, styles change etc. Just look look at the
plumbing industry it can grow or shrink but when your sink is broken and you
don't know how to fix it you call someone.

Unless you're suggesting some form of utopia where people don't need to eat
and nothing ever breaks. But even then someone is going to setup an MMO and
the cycle of pretend money can start all over again.

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jerf
You don't have to be a full-blown singulatarian to see that technology still
has a number of game-changing tricks up its sleeve. Robotics is getting to the
point that I think we could see a fully robotic factory of some significance
in the next five to ten years, where "significance" means something like a car
factory or something, not just a demo product.

Computer AI doesn't seem to be on the verge of a breakthrough on the strong-AI
front, but there really seems to have been a qualitative change in the past
few years in computer vision, brought on by having more computer power
available.

Nanotechnology is continuing to advance, primarily in materials science right
now, but it will also continue to make progress in other areas. Even without
full-on molecular nano-constructors (which there is no obvious physical reason
we can't build, but let's leave that to the "full-on singulatarians"), we will
continue to improve our abilities to manipulate matter on a fine scale in a
large way (no contradiction), much like life does. Look for garbage dumps to
go from a blight upon the environment to awesome materials resource sometime
in the next 10 to 15 years. (Future investment opportunity! There will be a
period of time when it becomes obvious that this will be true, but it is not
generally recognized, and an interested individual will be able to pick up old
dumps for a song, relative to what they will be worth.)

(As a side-note, any actually indefinitely-sustainable economy will _require_
this technology, be it biologically derived or otherwise. Any proposal that
involves freezing our current tech level in a mis-guided attempt to be
"sustainable" is simply a death sentence.)

The primary reason we can't go strolling through space isn't material or
technological, it's energy, and if any of the fusion proposals go through
(ITER, Polywell, any of them at all), the energy problem is significantly
mitigated. Especially if it's not ITER; I don't know if we could practically
loft an ITER into space, but a Polywell fusion device certainly could be, and
a fusion-powered space ship would be quite capable, unlike today's models.
Even just growing a pair and getting into fission could significantly mitigate
our energy problems for a very long time. (I wonder when the fear of nuclear
will be exceeded by the fear of not having energy. My guess is one big
blackout in the US and you can kiss anti-power-plant sentiment goodbye.)

And there's more stuff coming up.

Yes. We're in a recession. We may even be in a depression. Fucking stop
_crying_ about it. Sheesh. It is not the end of humanity just because you're
not as rich as you think you should be. (What a selfish model of the future!)

------
1gor
>It is a crisis of overgrowth of financial assets relative to growth of real
wealth /.../paper exchanging for paper is now 20 times greater than exchanges
of paper for real commodities.

Unfortunately, even former World Bank economists could have dismal
understanding of modern finance. But everybody nowadays likes to sing a
populist tune.

A financial transaction is simply passing of legal title of a real asset from
one person to another. Think of a pension fund who wants to makes sure it will
be able to pay future pensions to the widows and orphans and buys a corporate
bond portfolio.

Of course, a pension fund will not want to manage each corporation in its
portfolio. So it will buy securities rather than do direct lending, sit on
company boards etc. The fund will try to diversify its risk among many bonds.
This is the first step of separation of 'real wealth' from 'financial assets'.

When you have many pension funds doing the same thing -- buying corporate
bonds diversified enough and be representative of US economy -- they are
likely to outsource this task to a specialist. An 'index fund' will be
creating a 'collection of corporate bonds' with desired characteristics
(credit quality, size etc.), and all other investors will buy a piece of this
index fund as large as they want.

Now we have removed 'financial assets' two steps from the 'real business'.
Buying a share in an index fund is obviously not the same as making a direct
loan to the corporation and a having dinner with the CEO. It is much cheaper,
so more money is left for widows and orphans.

Here comes the last step. When large players (pension funds) buy or sell these
baskets of securities, they don't want their brokers (investment banks) to get
rich from all those commission on trading individual securities in it. So they
pass the ownership to each other through so called swaps. A swap between two
funds would look like this: 'Fund A to Fund B (current owner of the
portfolio): I will take the risk of owning these bonds for a year. If they
drop in price comparing to today, I'll pay you the difference. If they rise -
you'll pay me. It's as good as if I owned the thing for a year. But you'll
remain the formal owner'.

And these two would record the transaction based on the total value of the
bonds, even though they are only risking the price difference between two set
dates. And then the swap buyer may change his mind in a week's time and enter
in another swap with another fund. So value of the swaps outstanding will grow
larger and larger until it looks really scary to journalists and other
clueless people. There has been $596 trillion of derivatives outstanding (as
of December 2007). So what? It's a backlog of the transactions, more or less.
If you off-set them against each other, you'll arrive back to underlying
securities' value, and eventually trace it all back to the balance sheet of
individual companies.

So there is no such thing as 'financial assets'. Each title associated with a
financial paper can be traced back to a 'real thing', a real asset somewhere.

One should not forget that derivatives (financial assets etc. whatever) have
made capital transaction costs very low. Low costs have led to more efficient
allocation of capital and to great benefits to the society.

That's why a backlash against financial innovation is dangerous. I don't think
we'll be better off by destroying the financial markets and moving back to
barter.

Finally, if you want to find a real Ponzi scheme mastermind, this is Mr
Greenspan and the US government in general. They were trying to prevent a bit
of an economic pain -- a post 2000 dot-com slowdown -- by artificially
lowering interest rates which had led to unrealistic pricing of capital
everywhere, not only in the US. Which has led to property bubble growing and
bursting (soon to be followed by US government debt bubble) and now we all
face much bigger pain. But this should not be blamed on derivatives and
financial markets. The easier it is to pass an ownership title on a real asset
to another person - the better.

------
markessien
He's wrong, there is no Ponzi scheme at all. Let me explain...

First of all, we have limited resources. The resources we absolutely need, for
example, food and water, however, exist in enough quantity for all the people
that currently exist (otherwise they would die).

The second layer of resources, for example, metal to build cars, crude oil for
energy, also exist in enough quantity _for now_.

The exchange between basic needs and not-so-basic needs is irrelevant of the
price that we are actually paying for them, because there is enough for
everyone.

So the economy is built on the most important part of all - human labour. When
I program, I expend labour, and though nothing gets added or removed from the
world, I can still exchange the time I spent for a basic need like food.

This debt he is talking about is debt of human labour, and even if you wipe it
out completely, the worst that has happened is that people wasted their time,
and they will not get paid for it. There is no real destruction of the most
basic needs.

If for example, we were destroying farmland to produce in excess right now,
and we know this will make the farmland completely useless in the future, then
this is a scheme that will collapse. But we're not doing that in any
significant quantity.

Furthemore, we don't need to conserve things that are not finished yet. For
example, let's imagine that we are going to run out of iron in 100 years.
Obviously, this will be problematic, but 10 years before it happens, the price
of iron is going to skyrocket, because we know of the impending scarcity. And
there are lots of materials we can use to replace iron. Same with oil.

There is no ponzi scheme. People are paying for an easier life, and they are
paying other people to make life easier for them.

~~~
bmj
_First of all, we have limited resources. The resources we absolutely need,
for example, food and water, however, exist in enough quantity for all the
people that currently exist (otherwise they would die)_

Err, people _do_ die because they don't have enough food. That's not to say
that we _could_ have enough food to feed the world, but famine is a real issue
in some parts of the world.

 _If for example, we were destroying farmland to produce in excess right now,
and we know this will make the farmland completely useless in the future, then
this is a scheme that will collapse. But we're not doing that in any
significant quantity._

There are many who believe this is the case (see Wendell Berry, for example).

~~~
markessien
People don't die because we don't have enough food. If there were not enough
food, those people would survive a week or so, and would be long dead.

People are dying because they are restricted from moving to areas with enough
food. They are not dying because we lack food in the world.

Be very careful with this line of argumentation, because the surface
scratching articles in papers are different from what the reality of the
situation in the world is.

~~~
bmj
I agree, with one caveat: I'm not sure I see a difference between having
enough food but not having access to it v. not having enough food. People are
still dying, whether quickly or slowly.

An issue is that we live in areas that cannot locally sustain a population,
thus relying on a supply system to survive.

------
shimon
There are some good points here: it certainly seems the growth of derivative
financial products, and the whole financial sector, has outpaced what the
"concrete" economy can support. But the claim that the Earth is full? Absurd.

Clearly, we have some serious environmental limitations. CO2 emissions,
rainforests, overpopulation, etc. But this Earth is wonderfully well-stocked
with potential sources of energy and other resources. We haven't figured out
how to use all of them yet, but over time, new inventions and discoveries tend
to expose them. The same process also helps us improve the value of resources
we already have, like people and (until recently :) capital.

Basically, this is the Peak Oil argument applied to the whole economy. Popular
in doom-n-gloom times, unmentioned in the good times. It's a useful extreme to
consider, but it is an extreme.

~~~
brentr
"We haven't figured out how to use all of them yet.."

I would modify this a little with the following: "We haven't figured out how
to use all of them yet or we don't want to use all of them yet..." Hero of
Alexandria, for all practical purposes, discovered the use of steam power, but
because labor was so cheap, it was never pursued.

~~~
eru
The explanation is actually more complex..

------
timf
Misread the title at first, thinking Tim O'Reilly was the biggest ponzi scheme
of them all.

~~~
davidw
Larry Wall got in early and is now fantastically wealthy! You could too, all
you have to do is write a programming book and sell it to 10 of your friends.

------
undertoad
I liked the one where Ponzi jumped over the shark on his waterskis.

------
jonasvp
Obviously, not everything is a Ponzi scheme but the point the article is
making is totally valid. Any child can understand that you cannot grow
indefinitely in a confined space, even if that space is the Earth and even if
the value measured is quality. The measure of quality is appreciation and we
only have a limited amount of time on our hands.

I wonder why so few people think about the following line of reasoning:

1\. Our current economy is based on money as a medium of exchange to function
(separation of labor -> good)

2\. Therefore, money is a universal medium of exchange and acquires a value
separate from the exchange value: liquidity, the possibility to exchange it
for anything else (see Keynes et.al) -> unintended but ok

3\. As a consequence, our current money relies on a positive rate of interest
to circulate. Whenever the interest rate gets too close to zero, money holders
will not give up their privilege of liquidity and not lend out their money
(bad!)

4\. As a result, the economy collapses - simply because the medium of exchange
stops circulating. In the end, the government has to print new money to
replace the money not being spent/lent, leading to inflation. Alternatively,
the state has to make new debts or fund dying industries only to keep interest
rates positive... (very bad!)

This reasoning does not depend on any technology or production-based argument
because every human undertaking these days is based on beating the rate of
interest. Even if you only invest your own money, you have to factor in the
interest you might have gotten at the bank.

There's a really simple fix to it: motivate money holders to part with their
money even without interest. You would get an economy that _can_ grow when it
needs to but can contract as well without collapsing.

Even though it seems god-given, money itself is actually pretty hackable. If
you're interested, one interesting proposal is here: <http://userpage.fu-
berlin.de/~roehrigw/suhr/nngengl.html>

------
fauigerzigerk
We should keep two things in mind before we go overboard with the ponzi scheme
thing:

1) Exponential GDP growth does not necessarily mean using exponentially more
natural resources. Quite the contrary. A lot of growth could come from work
going into reducing resource consumption. Describing this distinction as
quantitative vs qualitative growth creates the false impression of a need for
some kind of revolution in order to make that switch. It's not a switch. We're
already right in the middle of it and it's a gradual development.

2) Global debt is always zero. Debt is always a claim on other people's
labour. If debtors throw their hands up and say, sorry I can't work enough to
provide that labour, debt is written off and that's it. There's no link to the
use of natural resources at all.

------
mattmaroon
"It may well be that in some possible worlds, that could still be true, but
it's increasingly looking like we're going to be stuck here with only one
world's resources to draw on."

Umm, what? We're finally getting private space exploration.

------
mattmcknight
Just gave the author a point. What's the exchange rate between whuffie and
Hacker News points? How many get you a cup of coffee?

~~~
michael_nielsen
I like it - an OpenKarma standard for karma trading between different sites,
maybe with a central exchange and a floating exchange rate. "I'll trade two HN
points for one point of your reddit karma".

~~~
nuclear_eclipse
I should think that an HN karma point would be worth a _lot more_ than half a
reddit karma point! If anything, I'd say a HN:Reddit ratio of 1:10 or more...

~~~
knome
At rates that good HN will be the first victim of the great karma rushes.
Spectators will establish threads and mine each other for karma until so much
has been generated that even diggs will purchase multiple hackerbucks.

~~~
llimllib
It's OK, I'll start the Karma Currency Market and they'll reach equilibrium
soon enough.

------
known
Isn't PageRank a type of Ponzi scheme?

~~~
jwesley
PageRank is a tool used to rank web pages in search results. But maybe Google
is a Ponzi scheme. Users create all the content, Google sells all the ads!

~~~
llimllib
<Brain Explodes>

Not everything is a dang Ponzi Scheme! Sheesh.

------
Ardit20
I do not understand what makes Tim O' Rilly think that he has any authority to
express an opinion on such an issue.

I belive this is endemic to the internet as a whole. I say why does he not
stick to technology an let scholars who have actually studied the issues he
speak of enlighten us on them.

