Inside Job - the movie and the real world

Today I saw a good film, named Inside Job. It is a documentary film and it describes some evidences about the last economic phenomenons - known like a financial crisis - and there is a large point of view about these phenomenons.

I’m agreed with the facts, i.e. I think these were the events, but I strongly disagree with the author’s view. Let me explain why.

My principles are:

Firstly, in this world any gain has a range of risks. Gain without risks doesn’t exist. Even the state bonds have a risk attached, those of the state bankruptcy. More risks, more gains.

Secondly, if I’m not interested in having a better life, then nobody could oblige me to have a better life.

I already demonstrated why the political decisions are not in favor of the majority of the people and this is the steady state of the current society.

The movie briefly explained how the derivatives work and what is the role of CDO’s, CDS’s, and how the financial crisis began and it spread all over the world.

The main dilemma is: should or not states regulate all financial transactions? Is the deregulation a source of hazard in the free market? Could it generate a lot of corruption? Were states wrong in their actions during the last decade?

I have one answer for all these questions: NO.

For example, if I bought a good/ service and I did not care about the attached risks or I did not care about the quality or another features, then I will have big chances to lose my money. After the risks have materialised and I’ve lost my money, to claim that states were wrong because I was very stupid in my decisions it is a very communist mindset. In fact, all consequences of my decisions belong to me, not to the state. It is very simple, it is like the gravity, if you like.

Was something wrong in selling of all those called derivatives? NO. I think if somebody proposes me to buy a piece of paper for $1,000 because it has a very nice form and my neighbour has already bought one, so there is a market for pieces of paper, it all depends on my decision. Therefore, all consequences belong to me, even if I gain a lot of money or I lose it.

In the current global world, the results of the decisions taken by individuals have given legitimacy for using the public money for saving too-big-to-fail banks.

However, the financial crisis was a very normal consequence of decisions of the majority and, as you see, the majority has taken all the consequences and paid for them.

What will be in the future?

The majority doesn’t have a real view of what was happened, and for the short term socialists will gain more political capital. In the long term, new leaders of the world will become only those smart guys who have a lot of money. And this is very normal and very fair.

Concentrate on being positive at all times

The real winners in life cultivate optimism. They have the ability to manufacture their own happiness and drive. No matter what the situation, the successful diva is the chick who will always find a way to put an optimistic spin on it. She knows failure only as an opportunity to grow and learn a new lesson from life.

People who think optimistically see the world as a place packed with endless opportunities, especially in trying times.

Fiscal policy & free market

The fiscal policy is that component of the political intrusion in the real market that caused and will cause many turmoils. The main reason of a bad fiscal management is a political refusal to undertake only those measures that are beneficial for the economy. Let me explain.

The things are more simpler. The public budget has four sources of finance: taxation, borrowings, selling public assets and printing money. First two are more used. Taxation has an immediate effect and borrowings have a delayed effect.

Also, it has two main categories of expenditures: investments and consumption. Only investment expenditures could create value added. For example, a current investment in infrastructure could be a good basis for future economic developments.

Therefore, if incomes are bigger than outcomes, this is a surplus. In the reverse situation, there is a deficit. The efficiency of the public budget depends on the real rate of return for expenditures. More current expenditures without a good return, less money for tomorrow and more debt.

Well, in nowadays the government didn’t cut sufficiently consumption expenditures and it is struggling with a sharply increase in debts. The focus of politicians is on short term - just only before the next elections. And, of course, a balance between current revenues from taxation and social benefits/ salaries for public sector is political very hard to be attained because that could mean a loss in the electors votes.

An increase in taxation, even temporary, is the worst decision that could be taken ever. Why?

Firstly, because it is a pro-cyclical measure and it will increase the public deficits and the rate of unemployment. Secondly, the debt burden will being more expensive.

The good news is, in the current political conditions, only a big failure could determine a real reform. If this will be the case, the benefits on long term will be greater then costs.

PS: Why political decisions are fair? The answer is in the previous article.

An apparent paradox

The paradox is: as a form of communities leadership there is the decision of majority (the dictatorship of majority), and on the other hand, the average IQ of the majority is usually below to the entire population.

The intelligence is the only one that could creates value added and innovation. It is clear that the majority cannot produce enough resources so that they can maintain their current living standards.

The intelligence is grouped in businesses which create enough value added to give them a big power to negotiate, even with states.

There is an apparent paradox - between the dictatorship of the stupid majority and the smart minority - because few political decisions are really in favor of the majority. So this is the normality, the steady state of the society.

In other words, a large mass with a lower rate of IQ cannot govern a smart minority as long as it is dependent on the value added created by that minority, and politicians can only favor the interests of the minority.

In any society most of the benefits from political decisions are direct related with the average IQ of the majority.

The danger

Nowadays, some economists think that the increase in inflation will be the trend for the next period. Therefore, the monetary mass which is in people’s possession will increase substantially together with interest rates (both for borrowers and lenders) and all prices. The result is a lower standard of living.

The real facts are: all interest rates have fallen to a historic low, the quantity of money which belongs to the population has been decreasing in the last few years and there is a constant pressure on prices to decrease. This pressure is coming from a lower level of demand for all goods and services. The trend is clearing the way for deflation.

Many Central Banks tried to raise the monetary mass by the Q.E., i.e. by buying a lot of bonds before their due dates or by printing money, without any result in the markets. Large quantities of money were transferred from the state to a few persons (individuals or companies), most of the time without anything real in return.

Currently, all this new money is now in the markets and it is feeding ‘bubbles’ on commodities like gold. Asset prices have also been decreasing.

The danger comes from the possibility of transfer of property rights from people to Q.E.’s beneficiaries at a deflated prices.

Every political decision should have a cost-benefit analysis. If this is the case, all costs will have to be met by the general population because all new and existing money is public money. The short term credit for these decisions will go to the current politicians because social benefits will not follow the path of public revenues, which would have been the normal situation, i.e. all public deficits being financed by borrowings. Benefits for the long term will go to those who lent money to the state because they will gain the power to influence political decision making.

I entitled the article “The danger” because I suppose that the main role of public government is to represent the interests of majority. If this is not true, this article could be a true economic forecast for medium and long term period.

A very motivational film

Today I begin a new topic - personal development - because in nowadays a good social education and an efficient personal development are essential for everyone. The economy is strong related with human social behavior and all current trends are based on it. Therefore, a happy life is not possible without a good social education.

This film refer to the life of a triathlete and her motivation to continue a plan for phisical development. The basis here is a strong motivation.

The Greek referendum: would have been right?

In the recent days all leaders of the world gathered at G20 summit in Cannes in order to take only those decisions which are more suitable for the current financial crisis.

The Greek's behavior is the main problem of this summit. I believe that the Greek’s application to the EU was fraudulent. Fraud is not a basis for long term relations. Now the public Greek debt has been increasing without any efficiency, i.e. all expenditure was for social benefits and nothing for investments.

In this world in which the human feelings are the foundation for the value of money, the main principle is that the society is impossible to continue to exist without ethics and morality. Another important thing is relate to the rights. Everywhere rights are followed by obligations. Without obligations, rights never exist.

The Greek Government did not organise a referendum when it used fraud by any means to gain more rights in the EU. Now, they do not want to assume their obligations. There is a misunderstanding of reality and a misuse of rights.

The ethics and morality are not present in the Greek's behavior. The proposal for a referendum in order to decide if they will accept or not the consequences of their actions is not fair.

International political pressure is normal in this conditions and it is just a step for rectify this type of wrong behavior.

The old law of the world: efficiency

All changes that have occurred in human history in the organization of the community (from the smallest up to the greatest empires and nation states) had two main components: the social and the innovation. The two essential and interdependent elements are the main reasons of change in the model of any human organization.

Social organization always has been dependent on the existing level of innovation. Throughout history, civilizations that had a new weapon or a lot of tactical knowledge and social organization skills have always been the leading civilizations. The Romans managed to build a great empire due to a superior social organization and the Vikings maintained their supremacy with those fast water craft. All great civilizations have lost their supremacy only when the advantages of a unique social organization or a better level of innovation disappeared. Where innovation was present in several communities at the same level, the social organization made ​​the difference between dominator and dominated.

I would be able to say that the model of social organization and the innovation have created a social paradigm and define the way of thinking and human action.

The existence and use of the currency, Stock Exchanges, Central Banks, fractional reserves system, financial derivatives are all the results of the innovation process. And we can generalize. Any development - from weapons to the most trivial aspect of life - is based on innovation and social organization. Therefore a better social organization has a potential to generate innovation and the innovation can change the social organization.

For example banks were just simple primitive metal deposits, the printing has made ​​available notes and tickets issued by banks and created conditions for emergence of central banks; the computer has made ​​possible the existence of fractional reserves and electronic transactions. Note that the history of innovation in the currency system is based on a series of social changes, i.e. optimization of social relations. Small errors in social organization were eliminated.

I believe that humanity due to globalization, innovation and social changes is at the moment when the social paradigm is changing.

This requires a notice: the change of the social paradigm occur in many years or decades. Look only how much the innovation has evolved in the last decades, how many types of social organization were cease to exist and how many adaptive changes were took place in the entire world.

The economic system is a part of social system, and the change of the current social paradigm is an adaptation of economics to new realities.

Any social paradigm (exactly as I defined it - an organic combination of social organization and innovation) whose inefficiency has been proven, cannot be experienced again in the same form.

In conclusion, efficiency is the law which govern human activity and it causes the shift of the social paradigm. 'Crisis' is the generic name for the period of time in which this social paradigm is changing.

General Theory of Reflexivity

by George Soros