Tuesday, April 12, 2016

How Charity Destroys Price Discovery...and Thus Society

The economic concepts of "markets" and "price discovery" are boring to your average American.  Too obsessed about what Kim Kardashian is doing with her ass or the pre-post-post-pre game show of Sportzball, your average American lacks the intelligence and thus interest to appreciate the ramification of things such as "markets" and "price discovery."

But thankfully my readership is not your average American, so we'll actually learn something today.

First, while markets are considered places of exchange where buyers and sellers meet to conduct commerce, and are ultimately where economic production comes to fruition, they also have a very important "fringe benefit."  They provide pricing.

While buyers and sellers haggle, not to mention streamline their operations to cut costs so as to maximize their profits, the entirety of their efforts and the accounting information collected along the way results in a "price."  This price is very important because it measures, precisely, what the real value (and cost) of a product or service is.  Of course, prices are in a constant state of flux because on the supplier's side the inputs are constantly changing (price of raw materials, labor, managerial efficiency, etc.) and on the demander's side their tastes and preferences are also constantly changing (lost jobs, fads, economic conditions, family budget, etc.).  But in the end, the totality of EVERYTHING that goes into producing and buying that product is played out in the market, ultimately resulting in that price.

This price is incredibly precious because it tells everybody what it's value is and allows people (either investors, consumers, or businessmen) to calculate and determine whether it is worth buying that particular product or service.  It also enables investors and businessmen to plan, allowing them to determine whether they should build a new plant, purchase new equipment, or start another business, ultimately affecting economic growth.  Therefore, it is vital that markets produce prices that reflect as accurately as possible their true value, for if they don't, and prices are either overstated or understated, consumers can waste their money and investors malinvest, resulting in lower economic growth.

Again, at first this may seem boring because this is just theoretical talk.  But there are two VERY relevant and recent instances of mispricing and failed markets that has struck every American close to home and should be of much more interest than Kim Kardashian's ass and the opening game of Swingystick:

The housing bubble and the education bubble.

In both instances we have the classic example of where the market failed and there was massive mispricing in both the value of a house and a college education. And like most mispricings, both were caused by an inordinate amount of debt (or "credit") that flooded the market, driving prices way above their real values.

In the case of the housing bubble trillions of dollars in debt were introduced to the market by ARM's, variable mortgages, and other forms of short term lending.  Additionally, lending standards of traditional 30 year mortgages were reduced eliminated completely lending money to any dipshit who could sign loan documents.  This fabricated demand caused developers to overproduce housing, so much so it outstripped even the debt-inflated demand, resulting in the housing crash of 2007.

This "boring" economic phenomena of mispricing directly affected the GLOBE as so large was the malinvestment, it threw us all, smart and stupid, into the worst recession since the Great Depression.  And those times were so bad even they were seared into the memories of the dumbest Americans.

The exact same thing is playing itself out now in the education industry.  Millions of stupid children, propagandized to believe "follow your heart and the money will follow," willing sign their futures away by taking on inordinate amounts of student debt to pay for a piece of paper that has even less utilitarian value than toilet paper.  Here, however, it is not so much greedy bankers willingly financing the dreams of stupid people, but the federal government lending over $1 trillion to this industry.  Consequently, just like housing prices, tuition prices are skyrocketing...and oh...these precious students (of the OWS variety no less) will be bailed out in the EXACT same manner as the banker scum they so loathe.

Now we already know how mispricing has dramatically affected Americans, all for the worse, between these two bubbles. But there's an even bigger bubble growing, and instead of a trillion here or a trillion there, it's roughly a $4.2 trillion PER YEAR bubble.  And that bubble is charity.

At first you may find this distasteful.  "Come on Cappy, how can you go after something like charity."  But remember, for anybody who dared to criticize housing or education, they were equally lambasted because "housing should be a right" and "you can't put a price on education."  But need I remind you of the Great Recession and the problems the millennial generation is facing with their un-repayable student loans?  And if you think these are/were problems, just wait till the charity bubble bursts.  Regardless, the key point to be made about the "charity bubble" is that its origins hail from the exact same origins as the housing and education bubbles.  Mispricing.

But the question is "the mispricing of what?"

And the answer is "the mispricing of stupid decisions." 

Understand that bar charities for cancer, disease, etc., the vast majority of charity is simply bailing out stupid, irresponsible people from their stupid, irresponsible decisions.

If I took my life savings and invested it in Beanie Babies, I made a stupid decision and deserve to lose my entire investment.

If you were a young man who graduated from high school and bought a brand new car to "impress the chicks," you made a stupid decision and deserve to live in poverty as you try to make the car payment. 

And if you were one of those idiot investment bankers who threw money into a "Dotcom" technology you didn't completely understand, only to find out it was IT geek fraudsters talking over your head so they could score the funding to pay themselves bloated executive salaries, you (and your clients) deserve to lose all of your original investment.

But what if you make the most stupid decision of them all?
What if you make the most damaging decision a human being can make?
What if you bring a child into this world you can't afford?

Well then the government, society, non-profit, for-profit, and practically the whole world bends over backward to give you money and reward you for your mistake.  And it is this reward for stupidity that causes the cost of stupid decisions to be mispriced.

To boil it down very simply, we spend between state, federal and local governments about $4.2 trillion on welfare, social security, medicare, medicaid, TANF, EBT, WIC, section 8, and a whole host of other programs that go to one purpose and one purpose only:

To bail stupid people out from their stupid decisions.

Historically people who made stupid decisions either died or at least didn't breed more stupid people because, simply, they couldn't afford it.  There was no taxpayer-financed "forgiveness," no taxpayer financed "second chances," and there sure as hell was none of this "hurray for single moms heroism" going on in the past.  If you made a stupid mistake, you suffered the consequences and, quite literally, were financially prevented from making much others.

But today people are shielded from the true costs of their stupid mistakes.

Had a kid you can't afford?  Here's some money!  Hurray for you!  Vote for me!
Paid $250,000 for an English degree?  Never fear!  We'll bail you out!
Didn't save up enough for retirement?  Vote for me and I'll tax your grandchildren to pay for you!
Bought a house you couldn't afford?  That's alright, we'll put together TARP!

And so, like housing, like education, stupidity is not only mispriced, but encouraged and subsidized, resulting in a population where roughly half of us are parasitic.

But the true cost of this "stupidity bubble" is not that the stupid are rewarded by being able to live off of the productive and smart (though that is a cost).  It's a dual cost in terms of lives wasted and the inevitable economic crash that always follows bubbles.

First, understand how important it is to suffer the consequences of stupid decisions.  Everybody, smart or dumb, makes stupid decisions.  And as long as you learn from them you will advance.  Matter of fact, that is how most advancement in humanity was made - learning from failures.  But if for political purposes and votes, you shield people from the costs of their mistakes, they will never learn and are thus condemned to be fractions of what they could have become.

The single mom of one would have learned from her mistake quickly and maybe salvaged her family by marrying a very charitable man.  But with a government-check -get-out-of-jail-free-card she spits out 4 more, all equally condemned to repeat her miserable lives.

The troublesome kid in school who was coddled through special-ed classes and "guidance counselors" will never learn his lesson and forever become a criminal.  But perhaps a discreet bathroom beating by the larger bully might have set him straight.

Or the immigrant who comes here from some god-forsaken third world shit hole.  Instead of being held to the rigors of traditional America, sink or swim, become an engineer, and live the American dream, he is now trampled by the number of socialist politicians desperately willing to bribe him from his harsh reality all in exchange for a vote...and a sacrificing of his future.

It is the impossible promise of eliminating negative conditioning from people's lives through a government-check-for-your-vote bribe that has turned now nearly 3 generations of Americans into pariahs, denying them a greatness they could have become.

Second, Idiocracy.  Like all bubbles this one will crash.  May not happen today, may not happen tomorrow, but having a society that is constantly bailed out from their stupid decisions will never learn, never advance, and certainly not produce the economic production necessary to make good on all those gubmint promises.  And when those government checks bounce (or more likely, due to inflation, they won't buy anything), the stupid people will revolt, killing whatever few remaining smart/productive ones exist, and then it's all over.  Matter of fact, you should pray for Idiocracy as it at least wasn't violent.  It will be more like Mad Max.

Regardless, you can only expect something egregious or life-ending to happen to society when you prevent people from learning from, paying for, and living with their mistakes.  And since you've underpriced the cost of stupidity, even rewarding it,you have signed the death certificate of western civilization, perhaps accelerating it to the point we may see its end in our lifetimes.

Enjoy the decline!

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tm colon said...

"The ultimate result of shielding men from the effects of folly is to fill the world with fools."

--Herbert Spencer

Doug said...

Most of us, living in an, "Après moi le déluge," world. Even the Mig tows.

Have you seen The Revenment? There's a time when life had real consequences.

Anonymous said...

You hit this one out of the park, Cappy. You're in depth analytical skills have continued to improve over the past few years. You now put most of the "professional" paid main stream commentators to shame. Well done, sir.

Stephan Urkel said...

"The ultimate result of shielding men from the effects of folly, is to fill the world with fools." Herbert Spencer

Anonymous said...


Agree with the theory; disagree with the terminology.

It ain't charity when failing to give results in someone putting a gun to your head.

It is wickedly unfair to the truly charitable organizations out there to lump them in with the Tax Mafia and their minions.

Anonymous said...

That's one half of the problem.
The other half is that people who make smart decisions are punished for it by having to bail out the idiots through taxes.

Socialism: punish success and reward failure.

Anonymous said...

Cappy, do you have priests in your family or something?

Because if you'd add some christian rhetoric and continue on this line of though, you'd make an excellent preacher.

The church grows when it preaches about doom and destruction and repentance.

Anonymous said...

Anonymous at 1:55 PM---His father was a preacher man.

I think there's a big difference between true charity done out of love and generosity and government charity which is involuntary and unjust and created by selfish politicians who are voted in by a selfish population. People will sometimes respond to love but they will always take advantage of a government program.