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In a developed economy isn’t most everything in a bubble?

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The thermodynamic equilibrium limit of the human economy is the point at which the smallest amount of energy is expended on things other than sustenance. There are places in the world which are very close to sustenance where basically all economic activity is involved in the very basics of life, water, food, shelter, and clothing (e.g. of places I have been Western Nepal comes pretty close).

In a developed economy almost all effort goes into things we don’t need. Thus we exist in an unstable, far from equilibrium position. We saw elements of this in the recent downturn. More people and more generations can live in a single dwelling. Eating out is not necessary. Buying a new car when the old one still works is not necessary. …..

Thus most of a developed economy is devoted to economic activity focussed on wants and not needs. The valuations of most assets are therefore based on an anticipated level of want.

The value of assets is therefore far from a closed system. It is based on the anticipated level of future wants and corresponding economic activity.

This failure of the economics profession (with it’s use of equilibrium models to make the math work) is huge. The zero-order physicists model of the recent Great Recession is just that the equilibrium level of wants shifted lower. That’s it. The rest (especially finance) is just a higher order dependent term based on the change in the equilibrium level of wants.

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Posted by (Questions: 18, Responses: 29)
Posted on 08/01/2017 5:39 PM
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Is this really true:

“In a developed economy almost all effort goes into things we don’t need. “

I am not sure I would agree. You might not think people need a phone, a computer or TV. And yeah, we don’t need them to survive. These are not items like food that literally help us survive. But the social norms of modern society dictate that these items are necessities. If you want to interact and be informed about modern life you need to have many of these things that past generations didn’t need. And yes, you might not need to update your phone every year or buy the hot new car, but technology changes so fast these days that you’re at a social disadvantage if you can’t adapt.

So, I don’t know if your core assumption there is correct….

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Cullen Roche Posted by (Questions: 10, Responses: 1797)
Answered on 08/01/2017 5:54 PM
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But the core difference is between what you are referencing as a social disadvantage and a true physical disadvantage. An open question is what is the inherent demand for social need. Clearly in places like refugee camps or cities like Alepo life goes on at a greatly reduced level of total output but it is also externally limited. But I think there is data supporting that the inherent social economic drive varies across cultures around the world even after accounting for external limits. What many people like about the more relaxed cultural norms in many favored tropical vacation spots is in part a reflection of lower overall economic pressure. “Relax, we’ll get to that later, no hurry”.

I look at just the difference between me and my boys in demand. What if their generation only felt they needed a new iPhone every 4 or 5 years instead of 2 years, or were happy to wear good clothing that was over 10 years old. I just bought a new to me (2015) car, the first car I have bought for me in 14 years (and I kept the one before that for 20 years). What if everyone thought like this? (It would of course drive up demand for financial assets, …, which it seems like we have been witnessing).

How small would the aggregate shift in social driven demand have to be to lower the GDP growth rate from 3% to 2% (all other things being equal)? I don’t know, nor do I think anyone does. But I suspect that only small shifts across an entire developed society may result in measurable changes in output. And ultimately the value of financial assets depends on future real output and future demand.

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Posted by (Questions: 18, Responses: 29)
Answered on 08/01/2017 6:15 PM
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Who cares about the puerile social implications aka keeping up with the Joneses? What are we, still in middle or high school or still watching Keeping up with the Kardashians? That hedonistic treadmill right there is the source of people’s unhappiness and our shitty, disposal crap from China that doesn’t last.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/02/2017 8:03 PM
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That’s just a silly luddite position. Technology isn’t entirely “shitty disposal crap from China”. Much of the stuff we import is important and useful. 10 years ago the older generations didn’t think iPhones were important. My parents used to think my iPhone 1 was the stupidest most inane think in the world. Now they both own one.

This idea that everything was better when you were a young man during “simpler times” is just BS. It wasn’t better. And so people changed and stopped living that way because it was boring and unproductive.

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Cullen Roche Posted by (Questions: 10, Responses: 1797)
Answered on 08/02/2017 8:33 PM
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I’m not going to agree that having a 24/7 dopamine addiction to electronic gadgets (PC’s, consoles, smartphones) is “important and useful”. Are people really getting smarter or are they just getting dumber as a result of being hooked in all the time? Heck, the amount of work I have to do as an unpaid customer-volunteer in pointing out annoying, stupid bugs or mistakes to businesses increases every damn year. So things are not getting universally better in my view. We’re collectively getting stupider, fatter and lazier with a shorter attention span and memory recall…. which is just perfect for adding fuel to the fire by using AI and automation to make up for it!

The thing about the hedonism treadmill is it’s like Pandora’s box. It wasn’t boring and unproductive “back then” — it just seems that way now in hindsight because you can’t go back to the way things were and now can’t imagine it. I know I wasn’t bored 20-years ago, but for the life of me I cannot figure out why because I was doing 1/10th of the amount of work I do now every day.

An even better question is not whether it is “better” now, but is it healthier???

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Posted by (Questions: 35, Responses: 592)
Answered on 08/02/2017 9:12 PM
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Sorry, but this is a disingenuous view of the world. If the world is so terrible then you would throw your computer in the garbage, toss your phone, go live in a 500 sq foot home with no heating or AC, live totally off the grid, drink dirty water, etc.

But no, you won’t do that because you really enjoy your internet connection and fancy computer where you leave comments on websites like this. I agree. It’s great and I would never, not in a million years, go live off the grid like someone had to in the 1800s.

Are there still big problems in the world? Yeah, but it is undeniable that the world is better today than it has ever been:

Check out some of these stats:

Household net worth at record highs.¹
US households spend less on necessities than ever. This “problem” is so bad that the loudest complaints are now about the cost of luxuries like a college education or healthcare.
The misery index is plumbing 60 year lows.
Real GDP is at all-time highs.
The rate of change in inflation is close to all-time lows.
Growth is low, but more stable than ever.
Global life expectancy is improving dramatically.
Child mortality has collapsed.
The world has so much food that we are suffering from an obesity epidemic.
The cost of that food has collapsed.
We are experiencing exponential growth in technological advancements.
The share of the world living in extreme poverty has collapsed.
Global deaths due to mass conflicts are sharply declining.
Violent crimes in the USA are near 30 year lows.
Homicide rates around the world are collapsing.

https://www.pragcap.com/the-era-of-irrational-apathy/

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Cullen Roche Posted by (Questions: 10, Responses: 1797)
Answered on 08/02/2017 10:03 PM
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The idea that everything is always in a bubble is laughably false. Bubbles happen when you have asset valuations far out of line from where they “should” be. Where “should” asset valuations be? The valuation of any asset is the discounted PV of all future cash flow. If home prices rise 70% while rents grow 10% after 80 years of basically having the same ratio and it’s accompanied by higher debt, you’ve got a bubble.

If you get absurd discount factors or revenue growth expectations of 40% increases for a company annually over a decade to have it’s valuation make sense and you have this across broad asset classes, you’ve got a bubble. Bubbles are when prices get far out of line with valuations and are driven by psychology of actors instead of “fundamentals” (which can include arbitrage, shifts in liquidity, etc). To say otherwise is to be numerically false.

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Posted by (Questions: 2, Responses: 74)
Answered on 08/03/2017 7:08 PM
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Cullen, You yourself made the point that things that were once wants rather than needs have become necessary to modern life. Maybe not I-phones (I don’t have one), but certainly your point is well taken. Your list of modern conditions is superficially correct, but equitable distribution is still a problem, especially in an environment of relentless redistribution of wealth upwards.

I would quibble about calling a college education a luxury. Maybe if people could still get decent jobs without college, sure, but today college has basically replaced high school as a minimum qualification. A rich country like the US should also be able to do something about created a world-class healthcare systems in terms of both costs and outcomes.

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Posted by (Questions: 5, Responses: 102)
Answered on 08/11/2017 6:51 PM
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So with all our needs and wants satisfied, the $64K is why is everyone so unhappy? Why is tens of millions on anti-depressants and who knows how many more or less on addictive opiods? Wealth inequality can’t explain that alone or we’ve gut a much, much, much bigger problem than anyone realizes. I remember reading years ago that the suicide rates in Scandinavia with cradle-to-grave socialism is significantly higher than in the West. If humans are really that freakin’ sensitive to not having initiatives and struggle, we’ve got huge problems in store after post-capitalism.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/11/2017 7:24 PM
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@Lucas That chart is kind of misleading. We didn’t have technological breakthroughs from from 1946 to 1980 on the scale or frequency that we have today. The majority of the world was also awash in socialism and poverty. Venture capitalists in Silicon Valley didn’t even exist until the late 60’s. So I don’t think worrying about the .001% in 2014 only getting a measly 6% is worth hand wringing about. You don’t get to the 99.999th percentile in this world unless you first provide the things that other people want to enrichen their lives. That’s how capitalism works. If you want to make a case that we’ve been suffering under the yoke of crony capitalism for the last 34 years and that is the singular reason why there is disparity in average annual income growth, then I’m all eyes.

Besides, average annual income growth isn’t everything. It’s purchasing power. Our dollar buys a heck of lot more now than it did 34 years ago and the wealth effect of 6% average annual income to already uber-rich people is completely marginal at best.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/11/2017 7:38 PM
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BTW, the pink elephant that is in the room is the corruption of etucasion by government. If the workforce is not trained for the jobs demanded by the economy and they’re all depressed addicts as a result, we better blame the proper venue and not the capitalists. But that is liberal zeitgeist heresy, so I’m not holding my breath. So long as gender, race and identity politics is primary ideology, outcomes do not matter.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/11/2017 7:44 PM
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MG,much of what you wrote sounds like ideology, not logic. The question is what make the chart happen. First, what does your $64K represent? If it is average household income, surely you realize that few on the high extremes pull up that average beyond what represents most people. If it is US median income, surely you realize that half of Americans make less. It is not about keeping up with the Joneses. Many people are far from having their wants (okay,maybe never mind wants–that a never ending continuum) and needs satisfied. As one example, very few people can afford unsubsidized health care. Many cannot afford the deductibles of even subsidized health care. Many of the 3% of Americans who do not qualify for subsidies are screaming they cannot afford the unsubsidized premiums. In my town, people make the US median wage, but the median house costs 16 x the median wage, so over 70% of residents rent. Lucky is the tenant who has a good landlord. People need houses and cannot get them. There are more examples of unmet needs.

The chart is a summary of the result of many factors, and you left most of those factors out. No one is complaining about inequality per se. However, the highest paid CEOs tend to deliver the worst performance. There is a lot of wage theft where the rich keep the wages they should be paying to their workers while the US taxpayer makes up the slack because the workers qualify for government benefits. (Why is the right not screaming about that? Because too many on the right are the very employers who are stealing wages while disdaining the people getting government benefits because these employers do not pay enough. The lowest paid workers suffer all kinds of dignities. Their hours are kept just below the minimum to qualify for benefits. Shift scheduling is a nightmare. They are all basically on call every day. If they go out of town on what should be their day off, they might get called to work. If they can’t get back in time, they lose their job. Those are just a couple of the many factors that have contributed to the massive income inequality today.

Education–It used to be the mission of the schools to provide a broad liberal arts education to fit people to be informed thinking citizens. The mission of the schools is not supposed to be job training. Used to be the employers trained their workers. I remember when I worked as an insurance claims examiner during college. The employer hired me off the street, so to speak,and trained me on mock claims for weeks before I was let loose among real claims. Now these same employers expect job applicant to show up with a certificate in claims examining,acquired and paid for by the applicant on the applicant’s time. I would not say that is government’s fault except to the extent that schools do not receive the funding they need to maintain a wide range of programs including the vocational classes that used to be available. We are on the cusp of a shortage of skilled tradesmen,and master tradesmen are not taking on apprentices like they used to. When these master tradesmen retire, then what? It is already getting harder and harder to find a contractor with both the time and the skill.

So many people who throw out dismissive terms like “liberal zeitgeist heresy” seem to live in a different reality than most people.

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Posted by (Questions: 5, Responses: 102)
Answered on 08/12/2017 11:18 AM
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@Lucas Likewise, much of what you write sounds ideological from the left side of the spectrum. It always seems to be about overtly or covertly blaming the big bad evil capitalist businessman for all ills of society and never the “well intentioned” coercive heavy hand of government interfering in the economy for “good cause”, always causing supply shortages and driving up prices that the poor people you lament about then cannot afford. So why not attack the real root cause? Unless you can point towards clear examples of crony capitalism where the big bad evil capitalist businessmen are benefiting from economic protectionism, there is no case to be made that they are systematically raping and suppressing the poor little man — because otherwise, capitalism would not have lifted billions out of poverty over the past 50 years and we wouldn’t be having all this fantastic technological innovation at our disposal. Doh! What is this, the mid to late 1800’s all over again with Marx’s bullshit anti-capitalist arguments?!! Make a clear case that the big bad evil capitalist businessmen are systemically suppressing the little man with technological unemployment and then I’ll believe it is the cause of the average annual income disparity for the last 34 years — that in case you haven’t noticed — was systemic across all socio-economic levels except for that inconsequential top pipsqueak .0001%. Are you gonna throw me a conspiracy theory now? Seriously, I can’t understand how you can have real-world business experience yet believe that millions of good-meaning, capitalists like me are systematically ripping off poor people, as if there didn’t ever exist a free market, the invisible hand, conscience, altruism or the power of the consumer in a gigantic collective feedback mechanism that makes doing so incredibly difficult and never for long. Just ask the Pharma Bro. No, I suspect you consistently conflate cronyism with capitalism as far, far too many with left-winging ideology do because they don’t dare attack the foundational cornerstone of their ideology.

All that being said, it does irk the hell out of me that I sound like a Republican at times. But they tend to be on the side of freedom rather than control like Democrats, so I can’t help it. Money buys you freedom, but so does getting government out of the business of being a class elitist, a racist and an economic protectionist.

Etucasion has failed because government is running it and managing it; outcomes are no longer accountable to parents, employers or the community — unless you’re rich already because then the super-high property taxes being paid talks very, very loudly (well, don’t ask the rich living in SF, but no one rich sends their children to public schools anymore — guess why!). It doesn’t matter what etucasion was supposed to do; government screws up everything given enough time. Because there’s far too many busybodies who want to control and shape the world as their see fit in the halls of power. Do you think those people are economics majors? LOL! No, they’re like journalists… liberal and all they’re good at is writing, not running businesses in the real world as big bad evil capitalists where you have to satisfy the demands for what people want (or need), not what you personally feel is best for them. This is why journalists and politicians have zero credibility in the real world unless you’re on the crony take in some way.

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Posted by (Questions: 35, Responses: 592)
Answered on 08/12/2017 8:37 PM
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MG, None of that response actually addresses any of the points I made and makes a number of unfounded and unwarranted generalizations. It is possible you do not know what the term “liberal education” means. It has nothing to do with left-right political polarization. The term dates back to a time before the current “liberal zeitgeist heresy” usage of the term. It dates back to a time just a few decades a go when both Dems and Republicans lauded the benefits of a liberal education.

The Education system is not bad simply because the “government” is running it. In fact, the school system with the most direct government management is the Department of Defense Dependent Schools located on militarily bases all over the world but staffed by civilians, has been one of the best school systems. It has slipped over the last decade or so when they started relying on colleges of education to recruit their new hires instead of doing it themselves.

Public schools have been public schools for a long time. It is only in the last several decades that quality problems have emerged and most of those are attributable to at 2 factors: 1) the same growing income inequality has also widened the gap between the tax bases of various school systems. Rich districts are even richer, and poorer districts grow even poorer still. 2) The whole tax base model is wrong. The taxes should be equitably distributed over all the schools in the state, and perhaps in the nation. Whenever the proposal is made, the rich parents start screaming that they do not want THEIR tax dollars paying for other people’s children, that education is an inexpensive preventative compared to the expense of government welfare programs or incarceration. One way or another, we all pay for everybody’s children.

I have posted the inequality data before, and I am sure you have seen it and dismissed it, not because there was anything false about it, but because it is uncomfortable for you. Adam Smith himself said that for capitalism to work, it would need to be “highly regulated.” He knew that without tight regulations, workers would get abused, and that price collusion, monopolistic tendencies, environmental abuses of the commons would all game the system over toward those with the capital. Cullen has made a similar point himself several times.

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Posted by (Questions: 5, Responses: 102)
Answered on 08/13/2017 11:15 AM