Malinvestments

Foseti:

If I’m reading Charles Murray’s thesis [in Coming Apart] correctly (and it’s certainly possible that I’m not, since I haven’t read the book), I think there’s an argument within his thesis that the education bubble is not in fact a bubble.

There are two points to Murray’s argument that I’m concerned with here.

1) Murray argues that America is increasingly efficient at sorting people by cognitive ability. As such, you can live basically your entire life among people within a narrow range of cognitive ability similar to your own.

2) The closer you are to the top end of this intellectually sorted landscape, the better your life will be, by virtually every measure of success.

Let me draw some conclusions and add some premises.

I would suggest that colleges are the mechanism by which the sorting described in 1) is accomplished. The main function of colleges is not education or signalling, or whatever your favorite theory is. Their main function is to sort people into groups based on cognitive ability. (Note that this theory explains why people would be willing to pay $40,000 to attend certain schools that are not necessarily top-tier – it’s worth it, as long as it gets you in a different cognitive ability grouping than the state school alternative).

I would also suggest that this sorting service is a very valuable service – and it is getting exponentially more valuable over time, as society becomes more efficiently sorted and the benefits of being in a high-ability group become more pronounced.

Therefore, the increases in college tuition that we continue to see are justified by the increasingly valuable service that colleges are providing. Unfortunately, it’s a service that: nobody wants to discuss; and that colleges will adamantly deny they provide. Perhaps everyone will continue to moan about an education bubble while shelling out $50,000/year for their kid to attend a college, much like they currently moan about lack of diversity in the public schools in their hometown which they moved to because it has good schools.

Gary North: 

Where religion is involved, people rarely change. College education is part of a religion: salvation (healing) by formal education.

The voters believe in tax-funded K-12 education. It gets worse. The budgets increase. The test scores fall. Yet voters just refuse to give up. They think one more reform will do the trick. It won't.

This same faith is transferred to college. Nothing changes for the better. Year after year, decade after decade, student performance falls and costs rise. This is what state funding always does. There is no negative feedback system that says: "Stop!"

To speak of college as a bubble is silly. A bubble does not pop until months or years after the funding ceases. There is no indication that the funding for college education will cease.

Until there is a rebellion against tax-funding of all education, beginning with kindergarten, college costs will rise and performance will fall. The horror stories will continue.

We get what we pay for. We especially get what we pay for with our tax money. What you see is what you get: a self-policed monopoly, a self-serving bureaucracy, and entrenched resistance to change imposed by representatives of the people who are funding the system. "Academic freedom" has always meant the same thing, from Prussian universities in 1820 until today: tax-subsidized intellectual kidnapping of children.

We do not get bubbles. We get quagmires.

I don't recomend you turn to Cracked.com for investment adivce. Nonetheless, the site has offered a useful and entertaining introduction to "Socionomics," which is worth a read:  

You could say that "Freakonomics" (numbers 7, 6, 4) is the use of micro-economic reasoning to offer nifty explanations for a social trends in a way that makes you seem smart.

"Socionomics" (numbers 5, 3, 2, 1), on the other hand, is something quite different. The discipline was developed by Robert Prechter, the legendary financial analyst and, currently, an über-bear on every asset but cash. In Prechter’s mind, your average trader and CNBC analyst makes his decisions and opinions based on “news”; Prechter flips this on its head, claiming that “news”—along with fractal moves in market indices—is an effect, not a cause, of deeper waves of social mood and outlooks toward the future. Such waves are repetitive and cyclical—and thus predictable; in themselves, they are inexplicable...

The sagacious New York Times columnist Paul Krugman has quipped that conservatives should reject the Thanksgiving holiday as "un-American," since its mythical first occurrence involved Pilgrims and Indians generously sharing seasonal food and goods—or in other words, Socialism.

Here’s how it went down: a bunch of people got together, with each group bringing what it could — the Wampanoag brought deer, the Pilgrims apparently shot some birds, etc.. Then everyone shared equally in the feast — regardless of how much they brought to the table. Socialism!

Worse yet, many of the lucky duckies benefiting from the largesse of this 17th-century welfare state were illegal immigrants. (That would be the Pilgrims).

What Krugman truly reveals is that the founding myths modern Americans like to recount to themselves—and instill in students in public and private education—are, at their core, egalitarian. The genuinely heroic myth of close-nit communities' surviving in a rugged wilderness and reaping their first harvest is eclipsed by the vision of interracial harmony.

The good thing is that the reality of the First Thanksgiving barely resembles the contemporary myth. Indeed, the truth is something out of The Conquest of the Continent.

Tyler Durden: 

Everywhere you look these days, it seems that ZIRP, or the Fed's Zero Interest Rate Policy, is the panacea to all the world's problems. In fact, ask any tenured economy Ph.D. what inflation is and you will get a stare down, be told you are a moron, that banks need to print more, more, more and that we are really roiling indeflation, with some latent mumblings about buying their economics textbook for the inflationary price of $124.95. Everywhere, that is except the Fed itself. Because in an extremely ironic twist, it is none other than the San Francisco Fed, which operates the "Be Fed chairman for a day" simulation, where you try to keep both unemployment and inflation within the "price stabeeleetee" barriers, that reveals the reality of ZIRP. The laughter really begins when one recreates precisely what the Fed is doing: namely the policy of Zero Interest Rates, now well in its third year, that things take a turn for the surreal. We challenge any reader to play the Fed simulation game, and to do what Bernanke has done: namely lock the Fed Funds rate at the legal minimum: between 0.00% and 0.25%. In our personal experience, we were dismissed as Fed Chairman after annual inflation literally went off the charts and hit 38.36% following 4 years of ZIRP. And according tothe Fed, inflation would now, 2.5 years into ZIRP, realistically be running at about 17%. Which incidentally isexactly where it is, at least for those who have not mutated sufficiently to be able to metabolize iPads and fly to and from work using their own pair of wings. Of course, every hyperinflation has a silver lining: US unemployment will be just 1.5%. Granted everyone will be making pitchforks and rope, but they would be employed.

Morning shows seem to be a lot more interesting in Ireland! 

There are two things to consider. 

First, in the concentric circles that make up the international, dollar-based monetary system, a crash of the Euro would in all likelihood benefit the dollar, which is still the “safe haven,” until it isn’t.

Second, the European Monetary Union is kept together through a tug-of-war between “Core Europe” (which essentially means Germany) and “Periphery Europe” (that is, the rest).

The Euro makes sense for Germany to the extent that it can take advantage of a single market for its goods; for this, the Euro should be not too hard...not too soft...just right. (In other words, the Euro should be cheap enough to keep German exports attractive, but then dear enough not to raise the specter of Weimar.)

The Euro stops making sense for Germany when the above advantages are overwhelmed by the need to bailout the Periphery’s creditors and prop up its welfare bureaucracies.

The Euro is advantageous for Periphery countries like Greece and Italy in that they can borrow in Euros (that is, at low rates). It’s disadvantageous in that they must pay it back. The majority of Greek and Italian debt could be re-nominated into Drachma and Lira, allowing the countries to pay it off with their printing presses (an option not open to them while on the Euro). 

What is clear is that the arrangement described above is highly unstable, as both Core and Periphery have very good reasons for wanting to get out. 

I’m terrible with predictions, especially about the future, but my view is that the Euro won’t last another two years. And it’s demise will benefit Washington...for a while.

Beginning with the Council of Nicaea, the Catholic Church has forbidden usury, in some way or form, for most of its history. (And usury was most often strictly defined as charging any kind of interest on a loan (“making money from money”), and not simply charging excessive interest, as the term is used today.)

For centuries, the money-lender was forbidden a Christian burial. One of the most consequential effects of this was that Europe’s Jews filled this tabooed market niche, resulting in intense resentment on the part many Christians...and unfathomable power for certain Jewish families, Frankfurt’s House of Rothschild being the most (in)famous.

The Church, of course, eventually came to terms with finance in its own way, as evidenced by the Papal Coronation of Leo X—formerly Giovanni di Lorenzo de' Medici.

Whatever the twists and turns of this history might be, it remains deeply ironic that in 2011, the Vatican has explicitly called for the creation of a massive new usurious bank with “universal jurisdiction.”

Not every Occupy Wall Street protester is trying to relive the 1960s. At least some want to return to the 1360s, or some other lost decade from the Middle Ages, when public consciousness of ethnic patterns in the world of credit and finance was not so repressed.

Unlike middle-class White protesters, who know better than to make such appalling faux pas, this slightly over-articulate Catholic mulatto gentleman has no reservations about joining the dots in this very public fashion.

Note how the reporter, who is apparently from Glenn Beck TV, tries to lure him into saying something we can all safely abhor. At 3:09 he asks, "So would you advocate something special, attacks or something, on just Jewish billionaires?"

I instinctively dislike "Occupy Wall Street," and its primitive, let's hold-hands-with-the-99%" egalitarianism. That said, it's hard not to conclude that the OWSs have a more penetrating critique of the American elite than the Tea Party.

I first heard about “Operation Twist”—the Fed's latest knob-twisting and deck-chair-on-the-Titanic-rearranging effort—from James Rickards back in August. Still, I never thought “the Bernanke” would actually call the initiative by this name, a Chubby Checker reference from when this kind of thing was last tried.

“Quantitative Easing 3” had apparently become a non-starter: “money-printing” (even though the Fed wasn't doing exactly that...) is now a Republican talking-point and political liability—and it has also clearly failed. Unlike QE, “Twist” doesn't involve an increase in purchases, but a selling off short-term debt and buying up long-term debt. The ostensible purpose is to lower long-term interest rates, which would allow middle-class voters to refinance their 30-year mortgages—and thus be happy and pacified for the 2012 election. (Perhaps the Bernanke even thinks he can re-inflate the housing market...)

One could, of course, look at this from another perspective, and see that the Bernanke is not so much leading interest rates as following them. The Fed is, in a sense, riding the 30-year tail wind of the bond market towards zero.

But I usually look at things from a different perspective altogether—namely, how the Central Bank will manage Washington's unfathomable debt mountain. Actually paying off some 100 trillion in Treasuries and entitlement liabilities—and I think these debts will be paid, at least nominally—entails massive inflation. As I discussed in depth a year ago, the Fed can get away with this by locking the world into long-term debt—the kind of debt that's difficult to get out of and which the Fed can more easily inflate into oblivion. In this way, the Bernanke is leading the charge into low-interest, long-term paper. Indeed, the Fed is set up as the biggest sucker.