Category Archives: Economy

The relationship between needs, values, emotions and well-being

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To figure out why emotions can be unhelpful at times, I’m currently in the process of building my own model to understand the links between needs, values, emotions, subsequent decision making, and well-being, hoping that understanding these links may help improve my own well-being as well as my interpersonal relationships.

Very briefly put together, my basic assumptions are that I, like everybody else, have a set of idiosyncratic needs (N), which I would classify into three domains–biological, psychological, and cultural or social. Those needs are represented by values (V), and that experiencing these values (including thinking back to or imagining future experiences) or the environment’s response to or challenge of them is one of the main contributors to the experience of emotion (E). Subsequently and mostly unconsciously emotions lead to a change in the trajectory of a person’s interaction with the environment, in short immediately or long-term altered behavior (B), and I would call this effect of emotion motivation (M) towards a goal (G) which is linked to the value. Given the motivational component, a person is then either propelled to unconsciously act according to genetically preprogrammed or habitually learned responses (R), or–if the emotion and motivation become conscious via awareness (A) and particularly if they are represented by language (L)–is able to select and apply a more cognitively appraised, goal-oriented strategy (S) to improve the chance of fulfilling the underlying need. Below, I will give a few more details about some of the highlighted terms, to define them more clearly and set them apart.

In my mind, needs are parameters and conditions that have to be satisfied to maintain proper function of the body, the mind, and social relations. If the needs are satisfied appropriately and in balance with the needs of our environment, including the needs of other people, this will enhance chances of individual as well as species survival and well-being. Importantly, not all needs are equally urgent to be satisfied, and both the passage of time itself as well as interacting with our environment changes the amount to which each need requires satisfying for continued well-being.

To allow behavior to be “in tune” with our needs–that is to say for our brains to figure out what needs we actually have, how urgent each of them is, and what we have to do to satisfy them–those parameters and conditions are represented by values. Unfortunately, these representations are not necessarily always the most helpful ones, but can be biased and distorted or even woefully incorrect. We may for instance greatly value something that actually doesn’t fulfill any need, or we may have no representational value for a critical need, both leading to a potential for long-term dissatisfaction. For example, people may have a high value for recreational drugs and (over-) use them even though the body reacts negatively to their consumption; on the other hand, people may have little value for (or even aversion towards) socializing and human interaction, but if they have this as a psychological need, they will also experience lower well-being. In this context and as far as I understand, I think it’s important to note that economic and neuroeconomic models only represent values, which together build the utility function (U). In other words, economic decision making is not necessarily geared towards need satisfaction, which I would call contentment, but towards increased utility, something I think of more as happiness.

While the value system we have is fairly flexible, I think it’s still worth pointing out values can be either genetically pre-programmed (such as our liking/wanting of sugary foods), learned (such as liking/wanting of receiving money), or inferred, concluded or simply “copied” from people we trust (such as liking/wanting the concept of sexual chastity). Values can be either positive, i.e. sought, desired, and preferentially chosen, or negative, i.e. avoided.

Given that psychological and social needs can be satisfied with a much larger and diverse set of stimuli and contexts, there are probably more possible values than needs. E.g. the need for social approval can be satisfied via others’ liking as well as someone’s submission, respect, etc. And some people seem to prefer being loved, others may prefer being feared or revered. Taken together, one of the most important predictors of well-being would be an accurate, helpful, and environmentally balanced value representation of needs.

At least for some needs we have a direct emotional response in case a lack in its satisfaction is registered, either consciously and/or non-consciously. And certain responses seem to be typically associated with emotional states that are triggered to generate motivation directly towards fulfilling the need or countering a threat for satisfying the need in the future. For some biological needs, emotional responses are fairly clear, such as feeling tired when we need sleep, thirsty when we need water, or hungry when we need nutrition. And a severe lack may result in higher aggression potentials, given the urgency and severity of the condition.

For psychological and social needs and their values, it is in fact much more complicated to understand typical emotional responses, given that the way in which they are elicited and expressed seems to depend on (among other factors) whether

  • a positive value is experienced (e.g. liking and pleasure)
  • a positive value could be experienced in the future (e.g. wanting/craving)
  • a negative value is experienced
  • a negative value could be experienced in the future
  • a (positive) value is threatened by the environment
  • a (positive) value is threatened by an intentional agent (other person)
  • actions of the person him- or herself make it more or less likely to experience a value
  • actions of someone else make it more or less likely to experience a value
  • whether these actions were intentional, out of neglect, or out of ignorance

Obviously, this is merely the beginning of creating a model. Once I get a little further along with it, I would like to be able to make more accurate predictions about which emotions are most likely to be elicited in specific contexts.

For my own long-term well-being it seems critical that I learn a few key things:

  • becoming aware of the emotions that I have
  • correctly identifying the value or values which led to these (complex) emotions
  • to be able do so, having the language necessary to identify the emotions
  • attempting to back-track from the values to the underlying needs they represent
  • if no need seems to exist, the value may have to be altered to improve well-being

And in situations of experience “lack or loss” of well-being (discontentment) without strong emotional responses, it may be necessary to try to identify the need or needs that are not being met and attempting to generate or set up values that represent those needs.

Contracts, relationships, and our society at large

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Yesterday I had a very nice chat with a friend and colleague, and as part of this chat, a theme that I had thought about before came back to my mind: whenever people interact with one another, this usually implies some sort of contract. And I want to start by giving my own, personal definition of what I understand when I use the term contract…

Naturally, there are written contracts, many of them being pre-printed forms where people simply fill in some blanks and, by signing it, indicate they are willing and accept to be bound by the terms stated therein. But I would argue that most contracts that people enter into are unwritten contracts. In that sense, for me a contract is indeed just that, the willingness and acceptance to display a certain type of behavior in the future, sometimes based on conditional contingencies, sometimes regardless of other future events. And quite a few contracts also contain some sort of provision of what will happen if the contract is not fulfilled. In some contracts this part is left out, which then means that the person misbehaving might be dragged in front of a judge, given that there was a contract to begin with, objectively speaking.

Put differently, whenever I have a (hopefully reasonable) expectation about someone else’s behavior–or more precisely for that behavior to be within certain limits–and this person implicitly or explicitly agrees to my expectation–and of course at the same time has expectations about my behavior in the very same situation–there is some kind of contract at work. And whenever such a contract is violated by straying from the agreed-upon path, there is a conflict that needs resolution.

Now, what are unwritten contracts? For one, as far as I can tell, being in any kind of relationship, including an intimate relationship, can be seen as agreeing to a contract, most of which are never written down but actually only inferred by habitual and customary behavior. To give a practical example: whenever I go shopping for groceries and I put my items on the conveyor belt at the register, I enter into a (sort of business) relationship with the person on the other side of the register, and I have a certain expectation of what is going to happen next. Unless there are circumstances at play that I didn’t notice or I have made some kind of error–for instance, I might have put too many items out for the express check-out line–I would assume that the associate of the store will start scanning or manually processing my grocery items and, once done with this task, ask me to pay for my shopping. In turn, the expectation is then that I will pay and take the items with me when I leave. Obviously, nothing of that is written down or agreed upon on an individual basis, but rather the idea of entering a groceries (or other) store, collecting, and finally presenting the merchandise at the register is seen as my entering into this unwritten contract.

When it comes to personal, intimate, relationships, the contract between the two partners might be much, much more complicated: it contains clauses covering behavior in many, many more domains and regarding many, many more possible situations. But, apart from its complexity, the contract is probably equally unwritten, and entered into–at least in the beginning–implicitly. In fact, even a first date, when two people have little to no knowledge about one another, still comes with a contract: for one, you expect the other person to behave with at least a minimal amount of dignity and respect towards you, and if that part is broken, the date usually ends prematurely.

One of the big differences, comparing such a contract to the one at the groceries store, is that people don’t always agree on what exactly that contract says, which leaves (a lot of) room for conflict. In fact, my take on relationship conflicts in general is that, other than bad intentions, ignorance, and negligence, disagreements in relationships are almost exclusively caused by two people applying different versions of the same contract to one and the same relationship.

Imagine going to the bank and signing two copies of a loan agreement, and the two versions differ in, say, the interest rate and the payment terms. I think, unless your copy has the higher rate and more frequent payments, the bank will be quite dissatisfied and upset if you don’t make your interest payments on time, in the expected amount…

The same is true in an intimate relationship, with the difference being that there is no written contract. In that sense, a relationship without a written contract requires that, whenever a conflict occurs, the people in the relationship must be willing to “spell it out” and renegotiate: what are my expectations? Why were they not met? Are my expectations unreasonable or even unrealistic? Can we find a middle ground?

For that to be successful, however, it is important that both parties in the relationship understand that the terms must be negotiable to begin with. As soon or as long as one party insists that their terms are “right” or that their views on things are “the only way to see it”, negotiation becomes impossible–something that reminds me strongly of the current political situation, both here in the U.S., but also abroad. And it is somewhat unfortunate that in quite a few situations, one of the parties in a relationship either subjectively or, even worse, objectively is in a position of power to almost dictate the terms of the contract, which, if abused, in the long run can lead to an undermining of trust, the basis for any future success of the relationship…

And speaking of relationships, here’s another idea (I know, coming back to the economy…): naturally, people who work their entire life have the expectation that their retirement will be a reasonably comfortable one, although they no longer put their work force into the generation of wealth and produce. To a certain extent–wherever financial assets and investments exist–this expectation might even be backed up by a written contract. But this obviously doesn’t change the premise of what is supposed to happen: those people have worked for most of their adult life and simply expect that they don’t have to keep working until they are on their deathbed. Society, on the other hand, makes the promise that the elderly as well as those unable to provide for their livelihood by means of work will be taken care of reasonably well.

This social contract between the older and younger generation as well as between working and non-working members of society is now threatened. Why? Over the past 40 or so years, the percentage of generated wealth, as measured by the gross domestic, attributed to the production factor of labor paid in wages has declined slowly but irresistibly–put differently, prices for every good and service used by an actual end consumer are no longer, in the main, determined by the cost of labor, but by the cost of capital and corporate profit margins. On the other hand, more and more–though still select and elite–people are able to afford living without working at all, throughout their entire life, not just retirement, simply by paying for their consumption out of some capital gains. If this trend continues, those who actually have to generate the wealth through labor will no longer be able to provide for everyone… And as much as I believe in free markets and capitalism, I think it’s high time to start re-distributing wealth to those who actually provide for it: the working class!

Oops, I did it again: An investment experiment

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For those of you who don’t know, I want to start by describing my first ever “investment experience”: around 6 years ago, right after I started working at a small company in the Netherlands, I felt the need to think about my financial future. As part of that process I looked into options for how to invest the small amount of savings I had at the time, as well as the part of my salary I could afford to put out the side. But I also felt much less qualified about economic decision making back then. So I ended up going to my regular bank and bought into a fund product that closely tracked with the popular German stock market index, DAX. After an initial period of a few months, where I would check the fund value relatively often, I just assumed I had made a good decision needing little further thought.

In early 2008 I moved to New York, but kept my fund account in Germany–I yet needed to figure out: would I want to stay in the U.S. for longer, maybe forever? But 2008 turned out to be the year of the financial crisis. Already in 2007 the markets seemed to have hit an invisible ceiling, but that was nothing compared to the market shock of 2008. At the beginning of that year the DAX had already fallen from about 8,000 to under 7,000 points and, with great volatility, remained at that level for a while. What made me “get out” of the market then? Maybe the fact that my “capital” was so far away and I could only watch it decline slowly but steadily from across the Atlantic… Or maybe some “sense” told me that my savings might well be in danger. Anyway, around mid-August of 2008, at a time where the DAX had already lost around 20 per cent of its 2007 peak value, I asked my bank to sell my fund shares for good. One of my best financial decisions ever!

Only a few short months later, after the Lehman Brothers bankruptcy had happened, the DAX crashed and with it the value of the fund I had kept buying over the 2-year period from mid-2006 through mid-2008. In the end I got an averaged annual return of about 1.2 per cent out of that investment, but only because the lump sum had been put into the fund account at the very beginning. Had I sold at the peak period I would have made a nice cut, but had I remained in the market until 2009, I might as well have lost half of my savings! In short, I had been extremely lucky and kind of promised myself never to “play” with financial investments again.

To this day, government officials both in the U.S. and Europe but also the people responsible for our currency at the Federal Reserve as well as the European Central Bank seem to believe that a problem caused, in my opinion, by too much liquidity in the financial sector can be solved by increasing liquidity even further. For instance, if you look at the 10-, 20-, and 30-year gold price chart, you can see that 2001 was a year of “change”. Ever since 2001 the price for an ounce of gold has climbed from around $280, the average price in the years 1999, 2000, and 2001, to an astonishing $1,770 by the end of last week. At the time right before the financial crisis the price was already at $900, three times as much as only 7 years earlier! And after an initial dip down to $700, all that the financial crisis since then has added to the chart is extreme volatility.

Whenever representatives of the government or the Fed talk about the fact that we do not have higher-than-usual inflation rates, yet, the only relevant quantity they refer to is inflation as measured by the consumer price index, short CPI, which indeed has not yet climbed above what people might think of as an acceptable rate. But at the same time, in the years since the Lehman Brothers collapse at least, commodities have increased a little less than 100 per cent–here’s an explanation for a commodity price index. And I think that even people who never look into stock or commodities price charts are beginning to wonder whether and how much more “liquidity”, now again provided with the Fed’s QE3 program, is supposed to help the (job) market.

I’m not trying to paint a picture of either “our financial system is about to crash” or “our currency will fail soon”. What I want to say is that there is some inflation in our currency, but that this inflation has not yet occurred on the consumer price side. So far, the additional liquidity has found its way mostly into financial products, such as derivatives, but to some extent also wandered into the commodity markets. This means that those markets–including the price for gold and silver, for sure–are subject to a “bubble”. The price level seems unrealistically high. But I think it is at least fair to say that the additional money did not go into increased production and hiring of workers…

And now, finally, after this very long preamble, I can come to the experiment I am doing: since I do not trust the stock market any longer–the price of most traded stock seems to be based more on the fantasy of the shareholders and potential buyers than some “real value”–I decided to put a small fraction of my savings, about $6,000, into precious metals, mainly silver. From my own research over the past few days, it seems that most “experts” recommend that 10 to 15 per cent of savings are put into precious metals.

Not that I’m saying that I necessarily trust these expert opinions… Instead I will try to give a few reasons why, for me, owning just a little bit of silver might not be the worst of things. To be clear, I am not expecting any particular outcome of the economic and global financial situation. If anything, I am trying to be ready for all possibilities. What could happen? Well, first of all, nothing could happen, nothing at all. Maybe the banks and governments are right, and after another period of slow growth and getting the more practical problems straightened out the global economy will be “back on track”. Then again, there is also the possibility that, with all this additional liquidity having been created, governments and banks have very few popular options to “take it back”, to effectively remove money from the system again. Still, any bubbles that exist in some of the markets must, eventually, burst or spill over into the real economy: people will want to spend their “capital gains”, consumer prices might finally show substantial inflation. This increase in spending could be triggered by several factors, one of them being a loss in faith in the stability of the currency. I don’t want to guess, but even with an inflation rate of between 5 and 20 per cent per year, prices for food and other items of daily value could easily double in like 10 years, but also in as little as 4 years, a final-term presidency for sure…

The solution I personally prefer for handling this surplus liquidity would be to truly remove the money–and debt, given that our money is nothing but debt, one way or another–from the system. But that would, of course, require that some people, particularly the better-off, those who profited most from the policies of the past 10 years, must be willing to give up a significant part of their wealth, finally re-distributing from rich to poor. And that isn’t something that, in my mind, could currently be “sold” to the American or European public. So, I do not see anything like that coming. As I said above, yes, the prices of gold and silver are, in all likelihood, already above their “true value”, at least when compared to what a dollar can still buy “on the street”, but…

The current estimates of silver mining, reserve availability, and industrial use, such as data presented as part of the U.S. Geological Survey–and for those of you who know German, here’s a table that contains industrial usage data–say for instance that if “things were to stay the same” as today, we might run out of silver being minable at known locations with currently available technology in about 25 years. Naturally, a lot of previously mined silver is still readily accessible, such as in actual silverware or coins. And when the price for silver were to grow due to shortage in production, I am sure that people would start, in masses, to scourge through their possessions, hoping to find a silver fork or spoon which could then, literally, feed them for a day, at least once it’s sold or bartered. And or course new silver reserve deposits might be found or better techniques developed.

Yet another important datapoint is that, even with already inflated prices of about US$35 per troy ounce today, the silver production of one whole year would cost only a little shy of $27 billion dollars. In other words, the amount of money the Fed is prepared to pump into the market on a monthly basis would already suffice to buy the entire silver production of a entire year. Put differently, the worldwide production of a year is just enough so that each and every American could roughly buy two or three one-ounce silver coins, like the American Eagle–luckily not that many coins are minted! Otherwise, the perfect recipe for a perfect bubble…

Finally, silver has become an essential component in many industrial products. Being the metal with the best electrical conductivity properties at room temperature and little corrosion, it is kind of irreplaceable in quite a few contexts. While exact numbers seem hard to come by, the fact that there are many applications and around 38 per cent of the annual production already is put to industrial use, it is safe to say that silver will always find a buyer. So, despite any possibly existing bubbles in the market, the price will never go down to $0.

And while gold seems much more appropriate with a currency crisis in mind, it is unfortunately far less easy to barter with. Even a relatively small gold coin weighing 1/20 ounce costs already around $100 in today’s market. And gold also has a bad reputation for having seen either official or informal prohibitions, up to confiscations, in the past. Silver on the other hand can be traded or bartered in relatively small units. In times of a possible crisis, which would most likely be very temporary in nature, owning a little bit of silver might come in handy if, for instance, I would want to “pay” for some urgently needed good or service, such as some pain killers from a stranger.

Now, do I actually believe the currency will crash? Not anytime soon, no. But it will need serious effort and, possibly, reform to regain the trust and faith of people before we can come back to a fully functioning economy. Unfortunately, current policies are still rooted in the neoclassical and neoliberal theories of monetary markets. The idea that the job market can be “eased” by flooding the economy with money will hopefully die soon, maybe after the next failed experiment or two. But I want to be prepared for each of the following three situations:

First, nothing could happen. In that case, my investment experiment in buying some silver means neither loss nor gain. Second, the currency/financial markets calm down and the silver bubble bursts. My own estimate for a then realistic silver price would be somewhere around $15 per ounce. I would then have lost around 5 per cent of my savings–although, in the future, these coins might very well still become an investment, I just have to hold on! Third, however, the currency might crash for good. In that case, I will have a small amount of “wealth” (i.e. real value!) in form of silver coins, which I can then barter with until a new currency has been established.

And when it comes to a “new currency”… As a thought for another, future blog post maybe: I still think the best way to organize the “creation of money” would be by simply accepting the notion that money is nothing but our way of doing “double book keeping” with each other. In that case, whenever some actual wealth (i.e. value) is produced or a service is rendered, the person generating the value should simply “create” the money for that value with it. That would give the money creation privilege into the hands of those who also create the value: the people! It’s a little bit like time sharing.

Naturally, people would have to trust one another and, for many tasks, some kind of rule-of-thumb would have to be found as to how the “valuation” of doing that task can be done. At the very least, we would unlikely get back to the current system where people earn so disproportionately based on their jobs. Oh, and making money out of money would of course not work. That would be like making money out of thin air–exactly what banks are doing everyday right now! 😉

Change? Yes, we can!

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Over the past week, I’ve spent a considerable amount of time “brooding” over the amount of debt the American people have accrued, both the nationally but also the privately held debt. It is almost as if I can literally feel that debt weighing down on me as well as on many other people. I even began by writing this very blog entry dedicated to putting together a lot of exact numbers–back in high school I was fairly good at math, maybe that’s why I liked the idea–but then I realized: it is actually relatively unimportant how large the debt exactly is. What matters is the effect that “being so deeply in debt” has on people. For the most part, I would say that being in debt comes with a feeling of “not being able to afford something I usually would want to get and could pay for”. And sometimes the things people cannot afford to buy can be very important things… But being as deep in debt as we are at the moment probably comes more with the feeling of being “owned” by whoever I am indebted to.

Naturally, there are still quite a few Americans who do not yet personally suffer from the effects of either the national debt or their personal debt, should they have some. At least the way in which they suffer is probably very subtle, almost invisible even, and has not yet reached levels that affect their day-to-day activities let alone their ability to buy enough food to live off. But there are yet ways in which this kind of indebtedness affects everybody: by reducing our freedom in a considerable way, slowly eroding it. My assumption is that, if the amount of debt keeps increasing, the American People will, in the end, be “enslaved” by policy decisions made solely based on fiscal arguments. Even in the current presidential race, few people seem to ask the question whether or not any of the budget items for which candidates suggest cuts are useful or essential. The fact that “we need to save money” seems like all that matters. And another aspect is that not only those people with little money and potentially monetary debt will be enslaved, but also those with considerable wealth will be enslaved to follow “the rules” the financial markets dictate.

I’m now trying to step back from any concrete problems and instead attempt to describe the intersection of the society and economy I live in as I see it… It seems a fair assessment that, based on the division of labor and the highly specialized processes required to produce many if not most of the goods we have grown used to, we simply need a way of ensuring that the wealth that is being produced by the people through some form of work is, somehow, distributed. And I want to make it clear that I do not refer to wealth only as physically graspable goods, such as food, clothing, or cars, but also other accomplishments that increase our general quality of life and welfare, like education, public safety, and the rule of law! On the other hand, I sometimes have very strong doubts that some of the services provided by parts of the financial industry can ever be described as “generating wealth” of any kind, at least not when it comes to “commonwealth”, which is just a translation of the word republic!

Over time, the pre-dominant way that developed to determine the distribution of goods and services, in general, is based on a token-based, free-market economy. In such an economy, goods and services are “swapped” for currency based on a price that is, at least in theory, determined by supply and demand, which then automatically provides each individual participant of the economy with the greatest value, hence maximizing the overall wealth. For one, it ensures that goods of “lesser value” with the same requirements for resource use are, over time, removed from the market place. Importantly, the reason this system is chosen by the government, the democratically elected representatives of a republic, is not to benefit the few and allow individuals to get rich, but rather so as to generate the greatest benefit for society as a whole! It is also important to take into account that if the profit margin of anyone providing services, such as in case of education, or producing goods, such as in assembling cars, becomes too great, the price should be considered too high, such that the general population certainly does not get the “greatest value” in return…

As far as I can see, this description does not contain any information on how the required currency is provided, nor does it give any detailed rules as to how some of the less individual but rather society-based desires can be satisfied. And at this point I would like to describe my most recent thoughts based on a few observations:

In almost all market-based economies, the idea of having a central bank, which is as far as possible from government influence, that provides the currency seems being considered as without alternative. To the extent to which I understand economics, this is however by far not a proven fact, but rather it is the currently favored, and thus accepted, hypothesis or model. While some past occurrences have indeed shown that by simply giving the right to create money to the executive branch of government can lead to disaster, I don’t think that any proof has been presented that would allow to draw the conclusion of the opposite, namely that putting money creation into the hands of privately run banks is necessarily “in the interest of the people or society”. And given that this privilege of creating money seems to come with at least “some power”, I must admit I am quite surprised that the Supreme Court of the United States hasn’t yet found that allowing private banks to “create money” is unconstitutional.

In addition to the idea that a central bank is organizing the monetary supply, the idea that interest has to be paid for a loan seems equally without alternative. And what’s more, in the current flavor of monetary lending practices, the interest is not only paid on the original loan, the principal, but on all subsequently accrued interest-based debt, that is to say compound interest, in other words a possibly exponential growth of debt. Funny enough, I would at least see several ways in which the currently existing system could be “extended”. I’m not necessarily saying that each of my thoughts would be an improvement, but to say that “things have to be the way they are” simply seems to easy. For one, Congress could set rules prohibiting extremely high interest rates beyond, say, 10 per cent. And in cases were such interest rates yet seem reasonable, such as where the risk for the borrower is indeed very great, legal provisions could enforce that interest rates have to decline over time automatically and that compound interest is only legal for very low interest rates. In other words: if my history demonstrates a high risk of me being a potentially defaulting loan recipient, I might initially have to pay a high interest rate, say 25%, but once I have made regular interest payments over a certain period of time, the interest rate either would have to be lowered substantially or, alternatively, any interest that was not paid will not be added to the amount on which I have to pay that interest rate, as this amount was not part of the initial risk of the borrower anyway. And finally, if someone giving out a loan makes some profit with receiving interest, I find it not only fair but essential that this person than also truly carries the risk in the case of a default on the loan.

Why do I see those issues as problematic to begin with? Well, starting with the second area that is not covered by the description of a free-market society, I would argue that there are many desires which a society might express as a whole rather than individually. For instance, in the United States some of these desires are put expressly into the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

I would argue that, naturally, the pursuit of happiness is certainly something every individual has, but on the other hand it might not be necessarily true that each individual wants to guarantee this for every other individual equally, which is why it was made something government shall try to achieve. In a way, this principle is somewhat contrary to the idea of some of the elements in our very economy insofar as competition, in the sense in which it is used in sports like the Olympics, requires equal chances and footing. Obviously if someone owns a lot of capital, mostly in form of currency liquidity, that person does not have to “struggle” as hard as someone else if they wish to pursue their happiness–or pursue anything else for that matter, so how can that be considered fair competition. Furthermore, it seems to me that while none of the people heading the “too big to fail banks” has been elected by “The People”, banks and other financial firms are beginning to exercise a great amount of influence over political decisions, to the point where I would question to what extent the actual government is still “in power”–and if that were not the case it would almost seem like a constitutional duty to attempt to abolish any form of government that has not been given the consent of the governed.

Now, please, don’t get me wrong. I’m not a fan of socialism or another kind of systems that wishes to simply “equalize” monetary means among participants of a given economy. But the idea that some participants of our economic system can consume goods and services in pursuit of their happiness simply by owning “excess capital” and living off interest payments made by others who require some of this excess capital to be able to participate in the economy at all seems not only strange but outright dangerously close to violating some of the principles the Founding Fathers wanted to see granted for every person living in the United States. The King of England was considered overbearing at the time, and in my mind at least the financial industry is playing an every more important role in how our daily lives are shaped.

As part of living in a society that, I would hope, is a civil society with a basis in the ideas of some of the greatest philosophers, my vision is that each and every member of society should participate on both sides: giving and taking. And the giving should not be limited to having one’s money “do the work”–which is a true misnomer in my opinion: money cannot work, it can simply be used to suck up someone else’s contribution to society in form of interest payments…

Do I see any hope? Well, yes, of course! But the vision I have would require people to give up quite a bit on the idea of “owning” an entitlement that is counted in forms of a dollar amount, at least when it comes to amounts that, by far, exceed what they could ever spend on regular consumption goods in the foreseeable future. So long as someone has the ability to “conserve” effort that was put into the economic system for very long periods, and pile up this conserved effort to ever higher mountains, the system will always carry an incalculable risk of failure. In that sense, I actually believe that re-designing some of the government-run programs, like Medicaid and Medicare, into a system that, within reasonable contraints, promises to pay for people’s basic needs and medical expenses when their insurance doesn’t cover for it or they simply don’t have an insurance, but that doesn’t do so in form of expressly stating dollar amounts is a necessary step to fix things. More generally, holders of U.S. Treasury Bonds would have to give up at least part of their entitlement, which next to Medicare and Medicaid also includes debt held by retirement funds, private investors, and investment firms.

But another big contribution that has to be made is that banks need to return to an actually useful business model: that of providing required services to society, not a way of providing the people working at banks with the means to get rich for their own sake, which then is rather a disservice to society. Financial capital is meant to serve the people, not the other way around…

Do I blame anyone involved? Not at all. If anything, I would say that the mantra of “if I just had a little more money, I’d be so much happier” works a bit like a virus. Once it infects our minds it almost is like taking over control of our lives. Involuntarily I am reminded of a movie from the 80s: They Live. A zombie-like world where many people have been brain-washed and are no longer seeking true happiness in their lives. And just as in the movie, at the very end, no-one in our society, not even someone who seemingly benefits from this way of organizing our economy, truly wins. Maybe we should step back a little from the numbers and think about what we, as a society, want our lives to look like, and what our government’s functions are supposed to be and then find ways for us to strive towards that goal and our government to fulfill those functions.

What does a guarantor have to guarantee?

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I will not reveal any names, but in the past 24 hours I have repeatedly asked myself this question: what is a guarantor, in a case of a rental lease agreement, supposed to guarantee? And I would be interested in hearing from those of you who either have been guarantor in the past of have had to present one upon signing a lease… Why am I asking?

A good and indeed very much trusted friend of mine asked me to be a guarantor for him to be able to sign a lease for a shared-with-a-friend apartment in Manhattan, which naturally is somewhat pricey and given the rule of thumb that one needs to make at least 40 times the monthly rent in annual gross income, he needed someone to underwrite as guarantor. Now, while it certainly might already seem risky enough to vouch for that amount of money, I was willing to do so, but was then faced with legal language on a form–clearly not written by my friend–that simply seemed to ask for just too much. Here is an online form with almost identical language to the one I was given, and, after trying to give my opinion on what I was thinking a guarantor’s role is, I will try to point out what made me feel most uncomfortable about the language in this particular form.

So, what is the role of a guarantor? Well, in principle I would assume that it works a bit like an insurance. The landlord has invested some money into a property that he or she is renting out. As part of the renting agreement a regular, usually monthly payment is made, the rent, which can be considered as the return dividend or interest on the investment. Naturally, just as with every investment, there is an associated risk, and the landlord wants to minimize the risk by ensuring that the tenant is likely to be able to pay the rent, all of it, and on time. He thus places certain rules upon the tenant, such as that the gross annual income exceeds 40 times the monthly rent. And that’s where the insurance comes in, at least in my understanding of how it’s supposed to work. Should the tenant become insolvent, the landlord wants someone to be held liable to pay the remaining rent, right? In that case the insurance should, at most, be reasonably limited to the amount the landlord would obtain if the insurance were not being used. But what does the agreement form I received say…

First of all, from the language in the first clause it would seem that the owner or landlord does not see the sole risk of insolvency of the tenant in not being able to collect the rent, for otherwise the part “without being limited to the payment of rent” seems odd. Unfortunately, the language does not give any clear indication as to what other claims the landlord might have or come up with. And while it might seem standard legalese, I find it always very dangerous to agree to paying for something if I don’t even know what that something is or how much it might cost.

Next, clauses six and seven (6, 7) seems to suggest that the landlord might, without “making demand”–which could mean giving notice although I’m not sure, I didn’t find a definition of this term–decide to send further requests for payment to the guarantor. At least the part “without first making demand against Tenant and without first bringing any action or proceeding against Tenant” seems to suggest to me that once I were to sign this agreement, the landlord can simply choose who to “make demands against”. And the guarantor, that is I, would have to agree to not requiring any proof to be presented by the landlord that payments were, indeed, not made.

And finally, clauses eleven and twelve (11, 12) read like an invitation for the landlord to try and conjure up some interesting “expenses” which the guarantor would have to cover without been given the opportunity of a trial–instead I assume simply a summary judgment would be made–while all legal fees, if the case were won by the landlord, would have to be paid by the guarantor on top of losing. Well, naturally the landlord would find a suitable attorney for such a venture!

In short, while this instrument of a guarantor agreement is certainly a wise precaution on the side of the landlord against tenants who, despite their best efforts, might simply be unable to (fully) pay the rent for the agreed term of the lease, this language seems to remove any risk, at least in terms of financial risks associated with not being paid in form of rent, from the landlord while at the same time adding substantial risk to the guarantor, namely that of scrupulous landlords trying to pull a fast one in reverse.

And as any good insurance agreement most certainly has a clause limiting the overall amount of liability, I find it only fair that if a natural person plays the role of guarantor, there equally should be measures in place to prevent fraudulent action on the part of the landlord. Which brought me to a final, interesting idea:

Wouldn’t it be an extremely interesting business model to actually offer professional guarantor services? Just like a regular insurance company, you would perform a background check and then ask your clients, i.e. wanna-be tenants, to pay a premium, say somewhere between 2 and 5 per cent of the monthly rent depending on the result of the background check, and in return underwrite and ensure that should the client become insolvent you, the insurer, will continue any outstanding rent payments as specified by the lease. Naturally, the liability would then, indeed, be limited to the rent and for any other eventuality, such as damage to the property based on negligence or criminal intent, the landlord would not be able to make any claims, but my assumption is still that the true intent of a guarantor agreement is to ensure the rent, not any much less likely cases, especially since a typical background check by a landlord can hardly reveal potential for future cases of negligence or accidents.

Additionally, such a business, the professional guarantor, could offer subsidized legal advice for its clients, the tenants, in case landlords were to be slow to react to reasonable demands or create otherwise unacceptable conditions… And I am sure that there are quite a few tenants out there who wouldn’t mind having a company having their back when it comes to landlords and building managers who aren’t always “up to speed” with fixing reported problems or ensuring their tenants well-being.

For my friend, I truly hope he and his friend find a new apartment; it turns out the broker seemingly didn’t like all the fuss I made about this form and the apartment went to someone else…

Oh, and by the way, there are guarantor agreement forms out there with much less legalese!

Is Obama good for the American Economy?

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So far I have avoided blogging about a topic in the overlap region between politics and and economics. But after watching a couple of YouTube videos I found on the website of Prof. Franz Hörmann, I have repeatedly asked myself the following question: if I were an American Citizen already and had the option to participate in the Presidential Elections come November, would I vote for Barack Obama? Do I truly believe that Obama is good for the American Economy? And if not, would Mitt Romney be better?

Well, I honestly cannot answer the question about who I’d vote for with certainty. I mean, really, who knows with absolute certainty who they will vote for anyway, if there are still weeks ahead with the potential to reveal important information pertaining both candidates… Yet, I have at least found my disappointment with the current President grow into a sense of disillusionment over the past few months. Here are my thoughts on why I would at least feel much less inclined to be voting for Obama, and why I think that, ultimately, Obama isn’t the President to spearhead the changes necessary to find a way to make a free-market economy work for the benefit of all Americans. What America needs is a President who is not afraid to stand up to the forces that have invaded, pervaded, and perverted the political process, transforming it into something similar to a anchor-hosted regular television show where two supposedly opposing teams vie for “who’s the fairest of them all”.

As far as I can see, the problem is systemic in nature. And my guess is that many people “in power”, both in politics as well as in financial institutions, are at least subconsciously aware of the fact that there is a problem waiting to blow up. Maybe some even have a good idea what the problem is, but it seems that, so far, playing by the established rules seems the preferable choice, and I can see several very good reasons why it seems that way… So, what is the problem?

In short: We, The People, have over time gotten accustomed to how the monetary system is organized to a degree that even just thinking about possible alternatives comes across as “communist”–which is maybe just a different way of saying something like “crazy”, “impossible”, or “un-American”. Furthermore, some of the collectively held beliefs about money are simply false but, given that they support the current system to a degree that were they to be questioned the economy might collapse, no-one dares to bring this up. Let’s start maybe with some of the reasons why we (think we) need money:

Exchanging goods in a free-market economy is simply impractical without a form of currency, some representational good that can be converted into any other good or service we require. In addition, based on the fact that the “good or service” we contribute to society, usually in form of performing well at a job, leads to the acquisition of only relatively small amounts of currency units at a time, an economy with a monetary exchange function gives the opportunity to “save” some units of currency for future transactions, in other words to delay consumption in favor of “investment”. Naturally, for this to work reasonably well, people must have faith and be willing to trust that the value of their savings will not decline too much, and this trust has to be earned, to some degree, by the experience of stable prices.

If those were the only functions of money, we probably wouldn’t be anywhere near this economic mess we are faced with at the moment though. So, what are the problems in the current system? Well, I can see a few of them, and some are probably mixed up, but I will try to single out the root as far as I understand the matter:

But first it is important to know that the control over the monetary system does not lie directly with the people or their representatives, but instead, at least in the U.S. economy, with the Federal Reserve, a public entity which all the same states on its website that, quote, “its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government”. While that in itself may not necessarily be a problem, so long as this entity is given a clear set of instructions and its performance is more or less closely monitored by the sovereign’s representatives, it means that the control over monetary policy is, for some reason, not considered something worth putting into the hand of the elected representatives. One of the typical arguments given is that if the government were allowed to print money, it could increase spending without limits. The misconception in this statement lies in the understanding of where inflation, the loss of value per unit of currency, comes from.

The real problem, I think, lies with the fact that while the central bank, the Federal Reserve, provides the economy with “physical” currency, every regular bank and every mortgage lender creates money out of nothing every time a loan is made. You don’t believe it? Well, here is how it works: if I go to my bank tomorrow and request a loan over $100,000 and the loan is granted, all the bank needs to do is add $100,000 to the number on file in a computer, my account, and that’s it. Well, not quite. In return for this generous act of creating $100,000, I must promise to pay back the money, which the bank generated out of nothing, and pay it back with interest. This promise is a debt the bank puts into their books as well. But from the day the number is added to my account, I have to pay interest, whether or not I convert this number into physical currency or not. And the true problem with this system lies in the fact that to pay back the money with interest, the total amount of money has to increase. And the amount by which it has to increase in any given amount of time, the interest rate, is not controlled by anyone, not even the central bank! It is “set” by the “market”, but in a free-market economy you have supply and demand, but since the money I took out on the loan didn’t even exist before I took it, the supply is endless, and the price should be much lower.

Also, the total amount of money in all regular banks must grow, regardless of whether and how it is spent, simply by the fact that it exists (in the banks’ computers). And given that banks have very little motivation in having people pay back their loans early, as that would lower their profits, both the interest rate as well as the suggested payments are in favor of prolonging the loan term and bank profits.

Now, it is often argued that the interest rate is the price for the risk of the bank, but what exactly is that risk? Given that the money was generated out of thin air only at the time the loan was made, the risk only materializes in the case of a default of the lender, in which case the promise the bank has put into their books has to be written off. But the people running the bank are unlikely to be personally liable should the case occur that a huge number of people default all at once. This has led, in the past, to the incentive of giving out more and more loans even to people who the banks sort of had to know would not be able to keep their promise of paying back the loan, because the risk is deferred to the future, and only threatens the bank, but not the people making the bad decisions. And to top it all off, those “bad loans” were then bundled together into “good packages” and re-sold to investors who wanted to put their profits, in part coming from interest payments of people already in debt of course, to “good use”.

Given that it is not the interest rate the Federal Reserve charges for central bank money but rather the average interest rate of lenders that determines the amount of additional money required in the system, any inflation that occurs–that is to say the ratio between money in existence and all available goods produced by an economy in a given time–remains largely invisible to the people, until the point comes when those who have profited from the system were to try and “cash out”. And until that point comes, those who “have” will always become those who “have more” and vice versa… In other words, while the current system lasts, all but those “invested” in financial market products will become disenfranchised over time. Even big industry players are suffering from this, which might be one of the reasons for the Koch brothers to support the Tea Party rather than the GOP establishment.

Finally, the belief that our economy is a free market driven by supply and demand is incorrect in at least two regards: First, money cannot be scarce, given that it is created by banks whenever a loan is taken out. And to pretend otherwise so as to keep people in the mood of paying a high price for it is, in my eyes, simply unethical. Second, if people truly had a choice about what “work” they could “offer” on the market, my guess is that certain jobs would pay much better than they do. And the reason that they don’t pay better doesn’t lie in the supply of those services or, put more accurately, in the willingness to do so, but rather in the fact that they seemingly do not require highly specialized training.

Given that our current economy requires people to sell their “workforce” to either acquire currency (cash) or the “right” to obtain money from a bank by having someone “deposit” money into their account, this in the end leads to the potential for a modern-day slavery system, where those people without preexisting means, such as owning monetary wealth or other ways to generate income, or specialized knowledge are essentially forced to sell their workforce at “market value”, which in a industrialized economy drops to ever lower amounts if those who can offer unprivileged services increase in number.

But contrary to talent-searching shows on TV, people who really matter in our daily lives, such as policemen, teachers, security guards, or simply the person who always holds the door open when someone doesn’t have a free hand to do it themselves, will never appear during prime-time, and yet it is those people who truly make our lives better. If our economy were to go through another recession, which it very well might if the burden of debt isn’t brought down to bearable levels, who is going to have a greater impact on my life with their talents? Some “talented” rich kid with the added bonus of being able to impeccably smile in front of the cameras, or yet the hard-working, honest average American who does not expect the system to provide luxury but a simply a decent way of living? I put my bet on the latter “talent” any old time!

And as long as the political debate solely focuses on how to improve the economy for those who are already in power and well off, the general population will hardly ever see any real improvement. So, who would I vote for? At the moment I would say: I wouldn’t vote at all. Maybe if enough people send the message that neither candidate is worthy to lead America out of this mess, the required momentum to rebuild the political process and debate from the bottom up will finally come together. But it seems that we rather prefer to support a broken system based on partially false beliefs, because that way we can at least dream of being rich, instead of being free and happy. What did the Declaration of Independence say again…? I think I have to do some reading!