Why Care Who Misgoverns the Steppes?

 

What Ezra Pound exposed in The Cantos is the monstrous aberration of a world in which reality is distorted, down to a degree never so comprehensively indicated before, by the pull of a fictitious money. It is a noble subject and may be the only possible one for a long poem in our age.

  • C.H. Sisson”

 

r > g – We’ll come back to that provocative notation in a moment …

US stocks sold off on Friday. Gold rose. Tensions in Ukraine were said to be driving both markets. Maybe so. But why would the politics of Ukraine make Procter & Gamble or Nestlé or Boeing less valuable? Why would the shareholders of RJ Reynolds care who misgoverns the Steppes?

But a lot of investors are just gamblers … betting on whether the price of the stock will go up or down, based on the news. And the big financial firms have their own gamblers – many of them very clever. Some of them get the news … then have high-speed computer programs anticipate how the other gamblers will react … and send their trades a fraction of a second faster than everyone else.

Dear readers are advised to stay away – from the news and the gambling. Except for their entertainment value, both are a waste of time.

 

R > G

Now, let us turn back to r > g.

Thomas Piketty is the sort of man history might otherwise forget. And the economics profession might be better off if they’d never met him. He is a French academic … and perhaps the luckiest economist in the world. He has written a book that is probably not worth reading – a book that is apparently wrongheaded and shortsighted … a book with no reported original insights other than the obvious: that accumulating capital is a sensible way to grow wealth.

All of this is, admittedly, hearsay. We are still out in the boondocks. There are no bookstores within hundreds of miles. But we are eager to get a copy of Piketty’s tome just to see if it is as lunkheaded as we suspect. In the meantime, we turn to our expert on French economists, Simone Wapler in Paris, for an insider’s view:

 

“Piketty sticks with the old Marxist clichés. And the success of his book rests on a stupid little equation: r > g. This makes you sound like you know what you’re talking about at dinner parties. It tells us that when the returns to rentiers [the return on capital investments] is greater than economic growth it’s a bad thing, and we have to take money away from the rentiers in order to make the world a more beautiful and happy place. Of course, g is not clearly defined… and neither is “capital,” which is today mostly debt anyway.

 But I only say that because I’m jealous. I’d like to come up with an idiotic equation and get rich, too!”

 

marx

His ideas just won't die…total practical failure and incontrovertible theoretical refutation notwithstanding

(Photo via thenorthstar.info / Author unknown)

 

Looks like there’s nothing too surprising about Piketty’s book. Au contraire, it’s just what you’d expect: a 21st century look at the imaginary struggle between rich capitalists and the working stiffs. What’s astonishing is that it is No. 1 on the Amazon.com bestseller list. The LA Times reports:

 

“Move over, Fifty Shades of Grey. Instead of romance, a book by French economist Thomas Piketty on income inequality and capitalism is the No. 1 best-selling book on Amazon.com.

Piketty’s Capitalism in the Twenty-First Century is generating so much interest among economists and policymakers that it’s temporarily out of stock on Amazon.

At nearly 700 pages, it’s not a book for beach reading by casual readers – unless a mix of dense economic data and history is your thing.

Piketty examined decades of historical data from 20 countries to compare income inequality over time and concluded that the US economy has seen the wealth of the 1% grow to dizzying new heights.

Wealth isn’t trickling down as some argue, Piketty said. Moreover, he warns that rising inequality will undermine democracy and generate discontent.”

 

Which makes us wonder. What is wrong with the pornographers … the romancers … the fat-fighters … and the political liars? How could they let a scarcely-readable economist, whose mother tongue isn’t even English, get ahead of them?

 

How the Rich Got Richer

Yes, dear reader, we are jealous, too. Piketty’s book offers little new. From what we can tell, he misunderstands the most important lessons of economics. Yet his book gets widely reviewed, widely purchased, and widely praised. Our books rarely get noticed (that will change with the publication of our next book – out next month! Watch this space).

The gist of Piketty’s tome is that capitalists have made a lot of money lately … and that something needs to be done about it. Surprise, surprise – he believes wealth “inequality” is a problem … and that market economies need the wise hands of professional economists, policymakers and central bankers to help even things out.

We only have press reports to go on. But none mention any serious effort on the part of Piketty to explain just how the rich got so rich in the first place. Mightn’t those same economists and policymakers have had a hand in it? We’ll come back to that tomorrow …

On the surface of it, his concern that r > g seems absurd. When r is high it means that investments are good ones. That is they produce more wealth than they cost. The higher r goes, the more wealth is created. If you invest in a new technology, for example, the investment only produces positive r if the technology proves successful. The more r you get, the more successful it is … and, theoretically, the richer our species becomes.

Also, when r is high, people are encouraged to save more money and invest it in newer technology and more productive output. The amount of stuff increases … people are, generally, wealthier.

The other thing that happens is that when more people save and invest (motivated by the high r) more and more investments necessarily lower r. The first investments produce high rates of return. This draws more marginal investors into more marginal investments … and the rate of return goes down.

Piketty’s problem solves itself. If it is allowed to …

 

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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3 Responses to “A Monstrous Aberration”

  • JE Stater:

    By the way, the world bank has changed its PPP methodology and the results suddenly show China’s economy is already larger that the the US today.

    from ft.com:

    When looking at the actual consumption per head, the report found the new methodology as well as faster growth in poor countries have “greatly reduced” the gap between rich and poor, “suggesting that the world has become more equal”.

    According to ft this data is “the best that money can buy”. What a laugh.

  • JE Stater:

    Just did the math, inflating anything by 4,5% over 2000 years is increasing the initial capital by 10 to the power of 38! Thats a good way to total amount of atoms estimated in the galaxy (10^85). Can someone check the math, did I mess up?

  • JE Stater:

    How can r > g be sustainable? An investment’s yield is the additional income it generates in future periods. Return on total capital will always be equal to the income it generates. You can use leverage to increase returns on one component of your capital only if the other components r is smaller than the yield of your investment. If you pay higher returns on your capital than you generate income you will be broke quickly.

    Shouldn’t the same principle apply to the whole economy?

    Or, in other words, isn’t r > g the same unsustaible debt inflation / fiat money / minsky process that this blog has pointed out for a long time, just in different words?

    That r > g can be true for 2000 years is something that someone please has to explain to me.

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