Thursday, January 3, 2008

The Unbelievable Lightness of Snake Oil

Dear George,

The most destructive force in the universe is neither a nuclear bomb, nor a tsunami, nor an earthquake, nor a Katrina-size hurricane. It is the snake oil pedaled by an unregulated financier. This snake oil is touted as the ultimate palliative guaranteed to take the risk out of investing through the use of Structured Investment Vehicles (SIVs) that spread risks so thin, nobody can get hurt as long as everyone buys into the bullshit that investment risk is a thing of the past.

I don’t know why people are making such a fuss about them. There are simply another manifestation of a comprehensive policy of make believe that has kept our economy alive on its deathbed. Hell, this sort of stuff has been going on for over twenty years.

For example, in 1996 the Bureau of Labor Statistics introduced the concept of “hedonic pricing” which cooked the books to make things look better than they were. Say a computer manufacturer put out a machine with “x” computing power and sold it for a thousand dollars. A year later, they put out the same machine, but with 2x computing power they were able to sell at the same price. The bureau decided that since the machine had twice the computing power, they would enter its value as $2,000.

Note, if you would, that the extra thousand was pure fantasy. The money didn’t exist. However it gave the impression that both our GDP and our productivity were higher than they actually were. So, everyone bowed before the numbers and treated them as if they were a reality, just as they do with their gods.

It really doesn’t matter. In economics, reality is simply blind faith. This is seen in the treatment of the U.S. dollar. The only way you can have a reserve currency not pegged to gold or another precious metal is if everyone is deluded into thinking that it actually stands for something, just as people once believed that Ralph Lauren clothed their naked emperor.

It was a nice con while it lasted, but now it is starting to unravel as the emperor’s body is slowly revealed with all of its boils and carbuncles on full display. The problem is capital’s addiction to hydrophobic growth. In the pursuit of greater profits, the financial sector dumped the “real” economy and started chasing after profit for profit’s sake rather than producing profit that would benefit the growth of the real economy. As investor Julian Delasantellis explains it, “The financial sector and the “real” economic sector are suppose to work in close tandem with the financial system providing finance for investment and then having the real economy place the profits from that investment back into the financial sector to be turned into more productive new income.”

Thus far, the squeaks and snaps of an economy beginning its collapse have left American consumers untouched as they continue their headlong plunge into debt. Delasantellis believes that the reason Americans ignore economic news is that “Americans just hate economic news.” They still think the fool is fully clothed.

Hope they don’t wake up before you leave office.

Your admirer,
Belacqua Jones

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