Thursday, December 11, 2008

Say hello to e^x

I had an interesting conversation today. We were discussing the auto industry mess, and what was the root cause of all of it.

Now, to me, in the end all of this is due to thinking that there will be exponential growth forever. It just doesn't work that way. We love it when we choose to believe it does, because we do well at the expense of somebody else that suffers the consequences. We never see those people, so everything is cool. But when we (meaning the people that happen to live in one of the countries that usually do well) do not do well, chances are nobody is doing well, and therefore we say things like "oh this is global", "everybody is in the same boat" etc. In other words, we have no real incentive to look at our behavior.

But unfortunately I couldn't advance this argument on the guy because I was sure he'd look at me funny if I invoked the presence of one of my dear friends, e^x. So what to do?

I decided to put in these approximate terms. I told him I was the Federal Reserve, and that he represented all the people in this country. Furthermore, I set the rules saying that I was the only entity able to create money. Then I told him that at the beginning of the game, he has no money. So what would he do?

Of course he asked me for money. "Ok", I said, "I am going to give you $1 trillion dollars". And, giving him four packets of sugar, I told him that I would charge him interest and so he would eventually have to pay me back five packets of sugar.

At this point he said "well but if I do not make money, then I do not pay you back and then you lose money". My answer: "and even if you do well, where do you think you're going to get the money from?... remember, I am the only person that can give you money".

In other words, I could not care less if everybody goes bankrupt. They still owe me, and I know because a) I gave them the money in the first place, b) I am the only person that can do that, c) I charged them interest so they owe me more than what they have. Besides, in the real world, he guarantees the money I decide to print, so I know for a fact that this cannot go wrong.

He agreed to these ridiculous terms.

Eventually he realized he'd have to come back to me to get more money so he could pay me back the interest on the $1 trillion. I told him I'd charge him 5%, and so he needs $50 billion. Then I picked up two more packets of sugar and gave those to him. Of course I'd charge him interest on that too, and so I decided that although he had 6 packets of sugar, he owed me more like 8.

At this point he realized the whole exercise was absurd, and gave me back all the sugar saying "here, take your money back, I do not want to play this game". I answered with "sure, but you still owe me, so what I am going to do after you run out of money is to print myself a little more money and buy everything you have for $1". After all, he owes me, he doesn't have the money to pay, and so I can wait any amount of time necessary for him to get so indebted that I can pay him whatever I feel like --- even $1.

He didn't like the consequences. So after a moment of reflection he goes "but well, in the end all this money is worthless... why do you (meaning the Fed) play this game?". So I said "it gives me power to do whatever I want --- for example, since I managed to get you to believe these pieces of paper are worth something, I can give these to you and then I can have whatever I want in exchange". Puzzled face. "In other words, since I own everything, then you are my slave because remember, you still owe me". Silence. "Have you ever seen a bank manager such as myself go to jail, do badly, or suffer any kind of hardship, here or in any country?". More silence. "See?".

Now, back to my tea.

2 comments:

Anonymous said...

What a nice way to put it! Thanks

Friedrich said...

Fine that someone else got simple math straight. I wrote about that
here:
http://fdominicus.blogspot.com/2008/07/einfache-rechnungen.html

Attentions it's German.

But here's another rule for those not beliveing what 10% per year means.

You can divide 72 / 10 and than you got 7.2 years that's the time it needs to double your money.
So you have 1000 today than you'll have 2000 in 7 years. That' s quite a pace.


So let us assume you got 1000 EUR for your birth and interests of 10% each year, then you have

1000 * 1.1**80
=> 2048400.21458548

well over two millions at age 80.

So good luck.

I just have to disagree that having 15 years 10% growth is impossible. That's well within bounds. One just hase to check how fast and long start ups are used to grow.

But in a matured industry there must be something extraordinarily going to to let that happen