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STOCK MARKET = PYRAMID SCHEME
Originally written for thisisby.us
Sep. 16, 2008 at 01:42pm

"Only when the last tree has died and the last river been poisoned and the last fish been caught will we realize we cannot eat money." - old Cree saying

In a pyramid scheme, those who get in early, get all the money. Those who are late, lose their money. The same was true of the dot-com boom / bust, as well as the housing bubble.

To be fair, a real pyramid scheme has little basis in "true" value, while stock prices reflect a mixture of both a rational assessment of value and just jumping on a bubble-based bandwagon. The question is, what fraction of the stock price is reflected in bubble-based behavior? Anyway, on to the thought exercise:

Imagine if you woke up tomorrow and all the money in the world had disappeared. All stocks, all bonds, all the numbers in a banker's computer. The end of the world? Will you die? Will investors be jumping out of windows? No. Your house is still there (or at least the house you say is yours). Supermarkets still have food. Electric companies can still produce electricity.

The world would only end if people stopped going to work (for example, because of mass layoffs). It would only end if mass destruction follows. If people burned houses and smashed computers. If human lives are wasted in violence. Knowledge is still there, labor is still there. Real products can STILL be produced.

So what does happen if everyone suddenly dumped their stock and all life savings went to zero? Probably not much if people kept their cool - only the accounting has to change. It's time this pyramid scheme was revealed as the get rich quick scam that it is. The emperor has no clothes.


Comments from thisisby.us

by amholloway
on Sep. 16, 2008 at 01:54pm
1 Vote

When an individual engages in multi-level marketing (MLM) ventures, the government wants to get involved to shut it down. When corporations do the same thing (hiring people and taking a percentage of their commision)-- all of a sudden it is smart business. And if they fail, they want the government to bail them out. I wish the government would pay me for the fail business ventures I put money in over the years.


by vetinarii
on Sep. 16, 2008 at 05:28pm
0 Votes

There's an old adage: "If you owe the bank $1,000, they own you. If you owe them $1,000,000,000, you own them." What's true for banks is also true for countries. The government is too scared to let companies of that size just fold, to the point where it's willing to take a hit to its own credit rating to bail them out.

Huge mistake, but try telling that to the politicians.

When people's life savings vanish, it doesn't mean much to young people. But to those of us who've already worked and saved for twenty years, it's a big deal. We get quite upset. And to those who thought they'd retired -- it's quite literally a killer. To most of us it's not a "get-rich-quick" scheme, it's a "save a little all the time and after 40 years of working 40 hours a week, just maybe, we'll be able to stop" scheme.


by seeya
on Sep. 16, 2008 at 05:42pm
1 Vote

I hear ya vetinarii - my dad called yesterday and joked that it was time for suicide. My reply was "deflation" - if everyone has less money, that just means deflation.

Anyway, consider this proposal:

"Everyone in the economy gets paid the same monthly salary - regardless of whether you're a child, an engineer, retired, or whatever"


by vetinarii
on Sep. 16, 2008 at 07:25pm
0 Votes

I remember talking about the "equal pay" idea to my classmates when we studied economics at school... we concluded then that it wasn't practical, and I haven't changed my mind since.

You can do a lot to level pay (like Ben & Jerry's did in their early days), but equalising it completely -- nope. Even in the balmy days immediately after the revolutions in places like Russia and Cuba, that was never seriously attempted, and I think there were good reasons for that.

Deflation sounds okay on paper, but it's an extremely painful experience for some people. And they tend to spread the pain around. "Everything is connected to everything else", said Lenin; you can't isolate part of the economy from the rest. If a bank goes down the crapper, it'll take hundreds of other businesses and households with it, and that's bad news for everyone.

In the short run there are winners as well as losers. Me, I'm currently looking to buy a house. A recession is great news from my point of view. But in the long run, I'd rather be able to switch jobs or even give myself time off more easily, and that requires a thriving economy. So I'm hoping it doesn't last.


by seeya
on Sep. 16, 2008 at 07:44pm
1 Vote

"we concluded then that it wasn't practical"

So what were the reasons for your conclusions? I'd be happy to have a healthy debate on the subject. Times change. Technology advances. Science advances. This includes advances in psychology and the study of human motivation. That means just because primitive people had to resort to one thing to motivate people, it doesn't mean more advanced societies can't figure out better ways.

"Deflation sounds okay on paper"

Deflation is like inflation - you have to view it in the context of the other things happening in your life. Even if inflation were high, if your own income and the value of your investments were increasing at the same rate, then you've neither gained nor lost anything.

"If a bank goes down the crapper, it'll take hundreds of other businesses and households with it"

That's why I wrote this above: "The world would only end if people stopped going to work." If a stock market crash leads to people stopping work, then yes, the world could "end" - but it's just silly and irrational really. Logically, the people could still go to work anyway and keep on producing the same things they produced before, regardless of how much their companies are "worth". It is only a matter of accounting that has to change.


by grantlawnm
on Sep. 16, 2008 at 10:11pm
1 Vote

Good point. The basics of the economy are there. What will be gone is the retirement people thought they had.

So that is why we need to privatize social security so that no one has anything except the crooks that will steal from the people.

Why should the people have anything in their old age?