Careful readers will note that the error you are correcting is non-existent.
Bruce Middleton
Karma: 28
GDP isn’t just a distribution—it involves a quantity of money, and a velocity: how often the money changes hands. When people are confident that things are stable, they can make plans and do things. When they feel vulnerable, they spend less. Velocity drops. If people can borrow 50% more to spend on housing or business investment, a lot of them will—which keeps the builders and the sawmills humming, paychecks flowing—and so forth. So the distribution framing is incomplete, and the mathematical answer to “where is this greater prosperity?” - meaning “this increase in GDP”—has to lie in velocity.
“Fake” is tinged with suggestions of intent—and the people who charge false interest are hurting themselves and don’t understand what they’re doing, so I say “false”. “Real”—coined by Fisher—has been in use for a century, although its revision in light of Diamond et al is understood by few; anyhow, it gets at the fact that value is what matters, and money is what people think is the proper ruler because of naivety, which is too important to hide; that was Fisher’s life work, and he made a mark and would have succeeded completely but for some crucial mistakes. There’s no hidden assumption of lower taxes. The government will always take what it needs, but piling a hidden (indeed unconscious) tax onto interest rates—where it inhibits long-term investment—is a very destructive thing that shrinks the whole pie. The 2008 story is a great example of a naive government spending far more than it needed to dealing with a crisis caused by a defect whose fix is simple and cost-free.
I agree; I was sorely misguided, naive about the AI world. I’m old; my programmer daughter I’m sure would have rolled her eyes and set me straight.
False interest is not my theory. It consists of clawback, which was recognized by Douglass in 1738, plus a significant amount of tax on false lender income, which was recognized by Peter Diamond in 1973 (then Darby, Feldstein, and others) - and the indexing fix, demonstrated by Massachusetts in 1780, explained by Lowe in 1822, implemented nationally by Chile in 1967. My news is that there has been a failed scientific revolution (i.e., assimilation of the Douglas / Diamond / Lowe facts, and elimination of false interest), and that is so far off anyone’s radar that first impressions are bound to be misleading. I tried a perfectly straightforward presentation here and it was completely ignored; pushing me to other tactics, including this, the ill-fated bounty, and a 400-year timeline. The hope is that someone will eventually look further, be fair, reverse some negative karma, and say “this guy actually knows what he’s talking about (which is false interest and how to eliminate it), and it’s important.”
I’ve taken your advice, and added a preamble; let me know if you think it meets the need.
Well, plausible guess I suppose, but I’m actually an MIT-trained mathematician who’s been involved in this topic for 45 years, so I’m in no danger of being fooled by an AI.
The inflation rate was 3.8% for the year; lenders always have to claw that back to compensate for the shrinkage of their asset. That’s where Fisher’s concept of real interest comes from: subtract the clawback from nominal interest. However, he missed something: the lender also has to hit the borrower for the income tax the government charges lenders on clawback (though it’s not real income). This was so far as I know first pointed out by Peter A. Diamond at MIT in 1973, in MIT working paper 98 (published in the Journal of Public Economics in August 1975). It’s called the Darby-Feldstein effect; Darby published in June 1975, Feldstein in December 1976. The corporate tax rate was 35%, so the Darby-Feldstein effect—which is the sum of a declining geometric sequence (because of compounding) - was 3.8% (1/.65 − 1) = 2.0 %. That means the real earned interest rate was the nominal rate, minus (3.8% +2%). Gemini said borrowers were being ruined by nominal rates jumping from 4% to 8%. If so, the real earned rate after the jump—which is all that is charged on an indexed mortgage—would have been 2.2%. So instead of rates going up, indexing would have brought them down from 4%; hence no crisis.
Brendan—the great thing about AI is that it can answer such questions in seconds—with all the follow-up and elaboration you want, which would take me hours. All you have to do is open Gemini in a sidebar to this page, and say, “what is this guy mean when he says ‘conversion of the sub-prime mortgages in the 2008 crisis to indexed mortgages for their remaining balances’? Explain like I’m 5. Also—would it really have worked?” There you go—off and running.
Why is it a good idea? Well, rescuing what Gemini says were millions of families, keeping them in possession of their homes, without deploying what Gemini says were “trillions of dollars in public capital and guarantees” sounds like a good idea. The silver bullet was there, ready to be fired, because it was just fixing the unsoundness at the root of conventional, currency measure finance: use of a radically shrinking ruler. Gemini can explain that too—and right here my “400 year timeline” post will give you some historical perspective it took me a while to put together, and I think you’d be hard-pressed to find neatly packaged anywhere else.
CoT-forcing promptware
I appreciate your grace and tact, and accept the diagnosis. Deleted the paragraph.
AI will generate language, which may or may not make sense, if you don’t push it. That AI answer does not hold water: you’re telling me I don’t need more borrowing power because TIPS bonds exist? Non-sequitur; next question: presume I want to buy a house. Won’t indexing give me the power to spend more? AI: yes.
No, there’s more to it than that. The point is that culture smuggles lethal nonsense into our skulls. There’s mechanism and history in that view. Hanging children because, hey, it’s the law. Clearly, “insensitivity to inflation” does not encompass that; and it was put in front of you, as part of what this is about. Overwrought, you think? Well, I don’t think so. I think several thousand Canadians were condemned to death when Chrystia Freeland dumped $30 billion dollars—severely needed elsewhere—into mortgage relief—which indexing would have massively bettered, for free—as I explained in an email, to which as expected there was no reply. There’s sound actuarial knowledge behind the estimate; roughly speaking, $5,000,000 government dollars = 1 life.
Would you agree that wisdom is being governed by understanding the systems we are part of, and the systems which are parts of us? Governed by awareness of the real causes of our experience, and the real effects of our actions—and inactions? If you have a better definition, I’m happy to listen.
Can you imagine feeling responsible for thousands of deaths you failed to prevent? Am I overwrought to speak like that? Is it preposterous to suggest that financially illiterate professors and cabinet ministers can cause kilodeaths without ever noticing? Can you contemplate the possibility that culture has narcotized you (and other “normal” people) and made you underwrought? That your image of normalcy (for which you are not to blame; just history happening) is tragically toxic?
Perhaps I should mention that my worldview took a swerve when I was 7, and was swarmed by deliberately maimed beggar children at a tram stop in Calcutta. In your terms, I guess I’ve been overwrought ever since; I certainly stopped trusting adults, which changes the trajectory.
But an appropriate response to someone who relies on it.
We’ll get there. Did you know Francis Amasa Walker was an indexing proponent? President of MIT, 1881-1897. Another was Simon Newcomb—astronomer, economist, so illustrious in his day that he was identified by H.G. Wells as the theorist behind the time machine. Alfred Marshall… I could go on; actually I will—they’ll all be in my 400-year timeline post; I’m in the 1830s at the moment.
All it would take is one good argument at the level of mechanism: what is good—nay, better—about a ruler that shrinks by a factor of 6 in 50 years? Mechanism—not faith that someone else must know about mechanism. An actual grounded reason.
Also—what is better about reducing borrowing power by a third? Check out my 75-year graph. Simple concept: borrowing power with and without indexing. Generate your own graph, if you doubt mine; it’s not very hard. Mechanism, not hearsay. Argument from reputation is the opposite of science.
400-year timeline of chrono-lucropia & attempts to dispel it.
Your primary argument takes me by surprise. The word “common” in that context doesn’t mean universal, and I think it’s fair to say that the inferring would start from the theorem itself, which includes the names. Anyhow—if at the end of the day Less Wrong votes that the theorem is refuted on this technicality, I will pay up.
I liked Morrison; only met him twice. His small television was fringed with orange pop-poms like a Hindu shrine; I wondered it that was a satirical comment.
Is the Bayesian proof dented by the fact that Chile exists? Robert Shiller, in a 2009 advocacy piece aimed at the British public entitled The Case for a Basket, says
The UF is used in Chile for nearly all mortgages, car loans, and long-term government securities. All taxes are expressed in UFs. Pension payments are automatically tied to the UF. Executive stock options sometimes have strike prices denominated in UFs. The UF is widely used for rent payments. Alimony and child support payments are often denominated in UFs. Office properties for sale are usually quoted in UFs. Houses for sale are often quoted in UFs, though pesos are also used
Did you read “Thumbs up from 3 Nobelists” in the mortgage post? That’s a phenomenon that demands an explanation.
I promise to patiently answer every question you have in the end, but I think it may help for orientation to state a big simple fact: faith in the propriety of traditional accounting is something of a type we all know about—it’s a superstition. People brought up in a superstition feel sure that it’s right. Irving Fisher almost said this, not quite clearly enough, calling it “money illusion.” All economists think they understand money illusion, but a blind spot lingers in finance. It’s particularly pernicious because modest inflation of say 4% can easily increase nominal interest rates by 100% - from 4 to 8. I would liken it to say asbestos insulation: inherited practice, damage recognized later.
re 3rd paragraph: yes it’s urgent now: the difference between 6.5% and 1.2% interest And it’s not just housing: utilities, business investment—anything that relies on long-term finance. (More than finance, too: the first indexing ever happened in 1707, because rules at Oxford written in 1440 were still in force & deprived students of fellowships if their income was more than 5 pounds per year; one of them begged for help from Bishop Fleetwood, and he wrote a book tracing value of money & showed that it had gone down by a factor of 6; Oxford changed the rule.) “Tax part” happens because clawback is taxed as lender income. Most economists aren’t aware of that; it was pointed out to me by Prof John Bossons—I worked with him apropos of an indexed mortgage proposal he co-wrote for Canadian Minister of Finance (1982 White Paper)
4th P: as mentioned, finance is particularly vulnerable because small changes in value become large changes in interest rates. No, home loans aren’t special.
Zoologist Desmond Morris, in The Naked Ape, 1967, confidently states that breasts evolved because they look like buttocks, with AI summarizing his argument as “bipedalism obscured the ancestral primate sexual signal of the buttocks, necessitating an anatomical echo on the chest to facilitate frontal copulation.” To which, as I recall, my unimpressed reaction was: chimpanzees (and other quadrupeds) don’t really have buttocks—which actually pop out the way they do because we’re bipedal—and chimps at least have gone whole hog on vulva inflation as the fertility signal. Mentioned for the sake of historical completeness.