A General Theory of Stupidity

The Daily Reckoning PRESENTS: Us here at the Daily Reckoning is not stupid, but we do have an idea of what makes people ignorant to the major problems we face on a daily basis. As Bill Bonner explains, it has nothing to do with brain size, and everything to do with a lack of evolution. Read on…

A GENERAL THEORY OF STUPIDITY

“Two things are infinite: The universe and human stupidity; and I’m not sure about the universe.”

– Albert Einstein

The big news this week…at least before the premature exit of Anna Nicole Smith…was the new U.S. budget proposal. The Bush Administration revealed itself – once again – to be the most spend-thrift regime of all time. No publicly elected government has ever spent so much of its citizens’ money, or so much money that its citizens didn’t have. Nor did any government ever redistribute so much wealth – from the taxpayers to the defense contractors…from the middle classes to the financial classes…and (most importantly) from future generations to the folks living right here and right now.

The whole spectacle is breathtaking…and like all public spectacles…absurd.

Nearly half a trillion dollars in debt will be added over the next two years, according to the Bush plan. But then, in the year 2012, the feds promised to deliver a modest surplus – of just over $60 billion. Of course, that will only happen if nothing goes wrong in Iraq or Afghanistan (how could it?) and you are willing to employ accountants who are inveterate liars.

Even in the best case, there is no plausible way in which Americans can repay their debts – public or private. The public debt alone equals more than $100,000 for every family of four. The interest would be about $5,000. How many families could add that to their budgets? What sort of a politician would ask them to? Currently, the feds can’t even keep up with the interest payments. So, the debt feeds on itself…and the whole shebang just keeps getting bigger and bigger. More money. More credit. More debt.

We thought about it all last night…this time pausing neither for prayer nor alcohol. What we were looking for was an answer to two related questions: How big can this credit bubble get? And, more profoundly, how stupid can people be? The questions keep coming up, intertwined like a pole dancer and a bare leg – when we watch TV or hear the news, when we listen to financial reports, when we read about the new U.S. budget. The views…the prices…the numbers – they are enough to make an imbecile take to thought…and a sober man to drink.

And yet, the people we meet all seem responsible…even intelligent. They drive cars…they have jobs…they manage their own checkbooks. How is it possible that they can read about the U.S. budget without shock and alarm…hold their life savings in dollar-based assets…or lend more money to the world’s biggest debtor for less than 5% yield?

Suddenly this morning, we found an answer…or at least a theory. And what a marvelous theory it is! You, dear reader, are the first to have it.

Every great thinker stands on the shoulders of the giants who have preceded him. We don’t claim to stand on Darwin’s shoulders, or on Newton’s, but at least we think we have stepped on their toes.

Newton’s “Inverse Square Law” holds that gravity – and many other things – decreases by the square of the distance from the source. In a flash, we realized that this applied to useful investment intelligence too. The further you get from the facts, the less you know what is really going on.

We described this phenomenon earlier in the week:

If a person issues too many I.O.U.s, lenders catch on quickly and cut him off. When a bank issues too many notes, word gets around. Depositors get jumpy. Then, they take out their money…and the bank fails. This used to happen all the time, before central banks cornered the banking business.

Likewise, when a country spends more than it can afford, people holding the nation’s currency begin to have bad nights. Then, they sell the currency for other devices, or for gold. Interest rates rise…the currency falls. Gracefully or calamitously, the problem corrects itself.

But now we live in a world of globalized, faith-based, denatured currencies. The United States emits dollars, which are a form of I.O.U. No one knows exactly what a dollar is worth…but that doesn’t stop other central banks from trying to keep up with it. They issue more currency too. And then, the financial whizzes in London and New York issue their own credits – I.O.U.s on the I.O.U.s – which are backed by debt, backed by debt, backed by more debt. And now, the poor investor – professional or amateur – is light-years from the facts; he doesn’t know what to make of it. Can the United States go broke, he wonders? If it could, how come it hasn’t already? None of us has any idea. We don’t know how many dollars walk the earth…when they will depart it…or how much each one should be worth.

Entire fortunes are put at risk. Billion-dollar bets are placed. Trillions of dollars float on a sea of liquidity. And nobody really knows what anything is worth…or when it might stop being worth anything at all.

How could this be?

Here, we turn to Darwin and the dinner table for a lift.

“It just makes sense that some groups of people would be smarter than others,” our wife argued. “Different environments challenge people in different ways. Harsh environments may require greater intelligence to survive. Over time, the dumber members of the group are weeded out. The result should be a higher intelligence for the whole group.”

We have not noticed that people from places where the climate is especially miserable are especially bright. Neither Eskimos, Indians from Tierra del Fuego, nor Scottish highlanders regularly win chess championships or Nobel prizes. But the idea was intriguing. Greater intelligence would seem to be a benefit. So, you’d think that all animals, everywhere, would have gotten smarter over time. But where is the pig with an I.Q. over 140? Where is the parrot that can decline a Latin verb? Or the whale that can write sonnets?

They don’t exist. Perhaps they lack the gray matter. But killer whales have

brains seven times human size. Sperm whales, though not the largest animals, have the world’s largest brains. Obviously, we have to conclude that bigger brains alone do not account for higher intelligence. They have the intelligence they need for the circumstances in which they evolved…any more would be not only wasted, it would be counter-productive, leading the poor pig to wallow in existential angst when he should be enjoying the mud.

Likewise, we can guess that human intelligence, too, is well sized for the life humans lived when mankind did most of its evolving – that is, hundreds of thousands of years ago. Then, people lived in small groups in the forest, scratching larvae out of dead tree trunks, rather than living in air-conditioned buildings in Manhattan and earning a living by selling swaps to hedge funds. That is, we are perfectly evolved for a different style of life…before the invention of celebrity TV or central banking.

In those days before time, things made sense in a different way. A man could see his enemies, and he knew what would happen if he didn’t fight them. He would stand with his comrades…and fight to the death if necessary…to defend his tribe, his family, and his little clan. Now, when he is sent to bring democracy to the heathen, he takes up the challenge with hardly a complaint. But he still fights as if his little band were under attack from wolves or sub-humans. He fights to protect his comrades…and his buddies…not ‘democracy’ or the ‘divine right of kings.’ Every study of soldiers tells us so, and he still comes home a hero, even if he had only been keeping the cola machines full at the base camp or dropping bombs on people with no anti-air defenses.

Humans evolved in small groups, where they could know the particulars of things. They understood the threats they faced…and knew what was valuable. But when the scale and sophistication of human civilization increased, man found himself in a situation for which his brain was not prepared. He no longer had the precise, specific, direct information he needed. Instead, he needed to rely on a new kind of knowledge made up of abstractions, generalities and slogans. This new knowledge, which Nietzsche called “wissen” to distinguish it from the more ancient form of experience-based knowledge called “erfahrung,” trips him up, because it is too far removed from the facts. The Inverse Square Law and Darwin’s law both work against him.

Our hairy ancestors didn’t have to figure out the questions that bedevil us now: How much is a dollar worth? Or how much credit can the world stomach before it gets sick? Or will a troop ‘surge’ in on the other side of the globe do any good? So, even today, our brains are just not suited to it. They’re not big enough.

Today, the average man can barely tell the difference between a fact and a campaign slogan. And so the new ersatz knowledge leads him into error. Modern politics turns the voter into an enabling dupe…makes the amateur investor a chump for Wall Street…and sends the poor, hapless foot-soldier off on a fool’s errand where he can only get himself killed.

Civilization, central banking and politics make monkeys of us all; we’re not equipped to deal with them. Like a hairdresser who shows up to work with a wrench in his hand and liquor on his breath, we are bound to make a mess of things.

Regards,

Bill Bonner
The Daily Reckoning
February 9, 2007

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

It’s the bleak mid-winter here in Paris. Snow lies all around.

From the news, the markets are jelled with cold too. The Dow has barely moved. Not a dollar…or a bond…is stirring.

But what still won’t keep quiet is the creaking, crunching sound of the housing market. It is sliding – like a glacier – down.

Yesterday came word that New Century Financial Corp. – the nation’s second largest provider of sub-prime mortgages – is having a rough time of it. When its mortgages go bad, it has to buy them back. Predictably, it now discovers that it did not set aside enough money to do that. So, when investors got wind of this situation yesterday, they took down the stock by more than one-third.

Which must have been a bad day for the insiders and large shareholders. They should have unloaded that stock on the unsuspecting public long ago. Perhaps they did.

“Refinancing gets tougher,” says the Wall Street Journal.

“Lenders battered by late payers,” adds the Associated Press.

Dear, dear reader…who would have thought that lending money to people who could not afford to pay it back would lead to problems? Life is just full of surprises, isn’t it?

According to the Mortgage Lender Implode-O-Meter, 20 lenders have gone kaput since December 2006.

Meanwhile, the Toll Bros stepped up to the microphone, too. They said their orders for the first quarter of this year have plunged 33%. Revenue is off 19%.

And now we have Desert Storm Three. Phoenix, as hot as it is, seems hard hit by the icy winds from residential neighborhoods caving in. Pulte lost money in the last quarter of ’06, largely because of weakness in the desert. Sales in 2006 in the Phoenix area fell 26% over the year before. Locally based builder, Fulton Homes, said its closings were cut in half last year.

And behind it all trot the real estate agents, brokers, and granite counter-top installers. They, too, are astonished by this sudden turnabout. Realtors are said to be giving up after the average agent earned 20% less in ’06 than in ’05. Prices weren’t much lower in most cases, but there were fewer sales…and less commission.

And what’s this? One of the biggest financial firms – Merrill Lynch, a company that has boomed with the global liquidity boom – is now warning its customers to watch out. A global liquidity inflation is inevitably followed by a global liquidity deflation, says Merrill, warning its customers to take cover.

Merrill sees higher interest rates, possibly sooner than most expect.

“Fed official…rates may rise,” says a headline from the Philadelphia Enquirer.

We don’t put much stake in such headlines. But there must come a time when lenders get nervous and yields rise. That is when you will have wished you had cocked your head up and seen our Crash Alert flag flying over the Daily Reckoning headquarters…or paid attention when Merrill Lynch told you to head for high ground.

More news…

————–

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:

“We started off the day with both the European Central Bank (ECB) and Bank of England (BOE) both passing on rate hikes. I didn’t really think they would move this month…and the markets did not penalize the currencies for this non-move…”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

————–

And more thoughts, opinions and whatever…

*** Short Fuse, reporting from Charm City…

“The ECB opted to leave interest rates as is yesterday, and the Bank of England followed suit, triggering a major sell-off in the British pound against the U.S. dollar, euro and Japanese yen.

“This sell-off against the dollar was intensified by a WSJ report, released yesterday, saying that the U.K’s #1 bank, HSBC is being forced to set aside 20 percent more capital to cover delinquencies in the U.S. subprime mortgage market.

“Interesting…as we delve a bit deeper into this story, we ran across this headline from Sydney Morning Herald: ‘How the HSBC Bet the Household and Lost”.

“Well, well…look what we have here. Seems that HSBC’s subprime lender, the aptly named ‘Household,’ isn’t doing too hot. In fact, the lender, which they bought in 2003 for $27.7 billion is ‘experiencing mortgage portfolio problems that are threatening the group as a whole.'”

*** Anna Nicole Smith, we hardly knew ye…

In fact, we didn’t know ye at all. And when the story made the front page of today’s IHT, we had to read more to find out who you were.

But what a story! Sex. Money. Fame. Weight problems. A walking, talking, breathing public spectacle.

How the public media will miss her. RIP.

*** Yesterday, we had a flashback. We were walking along the Boulevard Raspail when we saw a huge crowd…with flags flying…flares burning…drums pounding…and someone on a microphone threatening revolution. How it brought back memories!

We remember, as a student in the late ’60s…we had gone along with a similar crowd. Well, similar in some respects. The demonstrators of the ’60s were mostly students; young people with aspirations of becoming a Parisian Che or a disciple of Sartre. They wanted revolution, no doubt about it, and their idea of revolution came from the Bolsheviks. It was all absurd…but good fun for a young man.

Then, as now, your editor merely went along to see what would happen. Excitement and tear gas were in the air. Heck, he might even get lucky and meet a young woman with blond hair and communist sympathies. Even then he thought the commies were numbskulls, but he knew that leftist girls could be fun – even more fun that their bourgeoise cousines.

As we remember it, the ’60s crowd marched right up to where the police had formed a barricade. The ‘flics’ had clear plastic shields – as they do now. But back then, the student radicals went on the attack. They picked up bottles and stones and threw them at the police, who fell into a classic ‘turtle’ formation to protect themselves. A one-sided battle raged for a few minutes. The students grew bolder…getting close enough to put well-aimed missiles between the shields and cause a few injuries to the police. And then, the real radicals – those who had their own organization and agenda – came out and threw Molotov cocktails at the police, torching a park bench and a car in the process. Now it was getting serious. And now the police counter-attacked.

All of a sudden, the gendarmes rushed towards the students with clubs swinging. They had had enough of being used for target practice. When they got a student on the ground, several of them swarmed over him, laying on a good round of whacks…giving him a few kicks…and then grabbing him by the collar and hauling him off to the mobile prison vans they had parked around the corner.

At first, we were a bit taken aback. This was more serious than we were prepared for. Besides, we had no stake in this fight at all. We were studying philosophy at the University of Paris, not trying to improve the world. But by now, the whole picture had changed. The provocateurs had gotten away, naturally, and the police were going to work on anyone they could get their hands on. That, alas, included your editor.

Seeing himself cut off from his line of retreat, he was about to explain that he was just a spectator when one of the policemen tried out his club across our jaw. Down we went and were soon the subject of the same sort of treatment we had just seen delivered to other students. Whack…whack…kick…kick.

But when the cops had finished their workout…we were not hauled away. We were just left there, bleeding slightly, but otherwise unhurt. Unlike American police, the French use rubber truncheons that allow them to hammer away without doing much permanent damage.

The whole experience was salutary and illuminating. We would recommend it to everyone.

Still, when we saw the mob coming down the Boulevard Raspail yesterday, a sense of déjà vu came over us. Here were many of the same student revolutionaries, just 40 years older! Yes, dear reader, the people marching down the street were members of France’s CGT…a union with strong communist connections. Now, these people work for the government – holding various cushy jobs in academia, public transportation and other sinecures.

But the fire and foolishness had gone out of them. They marched slowly, and stopped often to catch their wind. Many were gray haired. Many were paunchy and out of shape. We saw no young women among the marchers…and no pretty ones. Meanwhile, the police had a holiday. They sat around…eating pastries…as the crowd marched by. And the old revolutionaries wanted no more revolution. Instead, they wanted bigger pensions!