"To redeem the demand tickets they have written, the balancers must in turn sell dragonslayer tickets."

January 17, 2008 12:30 AM

Nitroeconomics (if you want to sound more scientific you can call it synthetic economics) is different. It is set in the virtual world of Nitropia, which doesn't exist but easily could.... We can use nitroeconomics to understand real situations in the real world, such as the subprime crisis, with a simple three-step process.... The first cool thing about Nitropia is that it has no financial system at all. Unlike other, inferior virtual economies, it does not distinguish between "money" and other virtual objects. A monetary token in Nitropia is an object like any other - a magic sword, an inflatable penis, or whatever. A player in Nitropia who has a lot of money just owns a lot of these tokens. There is no special, separate "bank balance."

A[n Austrian-school] straightforward explanation of the present financial crisis (part 1)

(Posting a link does not necessarily endorsement or derision of the content of that link.)

posted by orthogonality (28 comments total)

It's a sign of how execrably bad Austrian School economics is when a fantasy world is necessary to make it sound reasonable. Of course, it's little more than an extension of von Mises' thoroughgoing contempt for reality.
posted by Pope Guilty at 12:42 AM on January 17, 2008 [1 favorite]

I bogged down at the marginal utility of dragon-slaying vs. ogre-slaying and skipped to the end: "Clearly, what we have here is a case of regulatory failure." Oh. Well, okay then, let's channel Franklin Roosevelt and... What? You think FDR is what? Schumpeter says what? Jeez, with economists like this, it's no wonder the Hapsburgs are extinct.
posted by CCBC at 12:55 AM on January 17, 2008

That is a really serious case of blahgorrhea he's got there. I hope he's been taking enough fluids.
posted by [expletive deleted] at 1:17 AM on January 17, 2008 [1 favorite]

I think this youtube depiction is a lot more useful conceptualization.
posted by panamax at 1:40 AM on January 17, 2008

I hear Cramer is a huge World of Warcraft fan.
posted by Blazecock Pileon at 2:09 AM on January 17, 2008

I can't believe I've never heard of this before. The principles behind Nitoreconomics are - are just fucking explosive.
posted by From Bklyn at 2:26 AM on January 17, 2008 [1 favorite]

Maybe I'm just not into WoW enough, but ... that was a lot harder to follow than other explanations which didn't involve fantasy worlds.
posted by Comrade_robot at 4:56 AM on January 17, 2008

Because I have never understood anything about money, I found it refreshing, informative and entertaining. But yeah, the conclusion was a little tenuous.

Isn't there like a book that explains the entire canon of economics in fantasy world terms? I'd buy it.
posted by goodnewsfortheinsane at 6:03 AM on January 17, 2008

ah, so this is what economists do to test their theories before imposing them on us.
posted by eustatic at 6:19 AM on January 17, 2008

This is the flaw of the Austrian school's method of praxeology. The corrolaries you derive from an initial set of a priori premises may be derived with a correct logical process of reasoning, but if the initial premises are false, that does not make the logically derived corollaries any more true. Correctness in the process of your logical reasoning does not make your conclusions true, if your initial premises are false.

As far as I can tell, this is the standard Austrian argument that easy credit lent below the "natural rate of interest" leads to a misallocation of consumption goods vs. the capital goods used to make the consumption goods, which in turn leads to downturns in the business cycle. The only problem is that, in recessions, spending tends to go down for both consumption goods and capital goods (i.e., spending goes down in all sectors of the economy at once), instead of oscillating between consumption goods and capital goods, as the Austrians would have you believe. Piero Sraffa's 1932 article on the own rate of interest demolished the Austrian school's insistence on a "natural rate of interest" anyway.
posted by jonp72 at 6:31 AM on January 17, 2008 [1 favorite]

i learned something from this - i learned that orcs have inflatable penises
posted by pyramid termite at 7:18 AM on January 17, 2008 [1 favorite]

LOL ORCS
posted by Mister_A at 8:13 AM on January 17, 2008

money is only money, but if i had a magic sword and an inflatable penis, i could conquer the world.
posted by bruce at 8:23 AM on January 17, 2008

The argument described in the article advances the theory that "borrowing short to lend long" can lead to a misallocation of assets (thanks to the effect on the market prices offered for bonds of various terms) which feeds on itself until systemic failure occurs.

"The natural rate of interest" is a different kettle of bananas.

(I'm no-where near macro-economically competant enough to adjudicate on whether the argument as advanced suffers any oviously fatal flaws: any practicing economists care to comment?)
posted by pharm at 8:37 AM on January 17, 2008

(That comment was meant as a reply to jonp72 btw.)
posted by pharm at 8:38 AM on January 17, 2008

jonp72, I'm not clear on how Sraffa's article demolished the concept of the natural rate of interest. Will you please explain?
posted by rush at 10:16 AM on January 17, 2008

Practicing economists may not know either. No mainstream economist I'm aware of has been talking about the coming financial apocalypse in derivatives... only the Austrians have. And they've been talking about it for close to ten years now. The bubbles caused by the Fed and derivatives started to become really apparent in about 1998, and that's when the first of their analysis started to show up.

No matter how much learning and accreditation they may have, if mainstream economists are using the wrong models, they'll give the wrong results. They may shout down the Austrians as 'bullshit', as I'm seeing here in this thread, but from what I've seen, only the Austrians got the derivative mess correct. Mainstream economics is a towering, dizzy array of equations and models, and the more I dig, the more I think it's an ivory tower built on a foundation of sand. The assumptions just aren't strong enough to support the conclusions, particularly not with the projected aura of invincible fact they always assume.

The gigantic financial pain we're about to go through over the next decade could have been mostly averted if we'd been listening to the right people. We should have been deflating for the last fifteen years, struggling and sweating and in real financial pain; we should have been mad as hell as we adjusted to the reality of cheap Chinese and Indian labor. Instead, we've been anesthetized by constant liquidity injections and bubbles in the stock market, debt, and real estate, while the real economy rotted out from underneath.

Listening to mainstream economists is a very bad idea, with a few notable exceptions. Stephen Roach is one of the only ones that twigged to this problem, but he forecast doom too soon (as did many of us), not realizing the incredible and utterly irresponsible lengths to which the Fed would go to prevent the first bubble from popping. The new games they're playing, as derivatives are starting to implode, would have economists of thirty or forty years ago absolutely aghast, but competence and expertise are in short supply in the modern world. Few people realize just how destructive and stupid the Fed has become.

As to whether or not this person's explanation is good, hmm, I don't know. It's worded well, and covers a lot of the bases, but I lose him when he gets into derivatives. I think I actually need to sit down with a pencil and paper (how low-tech!) and go back through those few paragraphs really carefully, because the transition to zero-day coupons replacing cash just didn't quite catch for me. I know that in the real world, derivatives have indeed increased the apparent supply of money by an enormous factor (thus causing bubbles in various markets as all the ersatz cash chased scarce goods), so he may very well be right, but I didn't quite follow his chain of reasoning.

If there's a problem in his argument, I think it's probably there; it's definitely the crux of the whole thing.
posted by Malor at 10:22 AM on January 17, 2008 [3 favorites]

(oh and originally, ten years ago, they were simply pointing out the stock market bubble and that it would have dire consequences; the transition to understanding and criticism of derivatives has taken longer. Present arguments didn't spring fully formed from the womb in 1998. :) )
posted by Malor at 10:24 AM on January 17, 2008

Christ, what an asshattery ! I liky myself schweet analogies , but that suxor

So , have we basic financial math reasoning ?

Let's do without unit of measure for simplicity shake,

Let X (..a zcb) be a function of time t , respecting the following axioms
-----------------

Ax1. 0 <> X(t1) will be an accepted reward, no matter how small the value of their difference.

Ax2. Let 0 X(t1) , because if I pay an amount of money x(t1) and receive ER(x(t1) in the future
I will have a profit. So I can buy some of these in advance , slice them in parts and sell them according to how much money you
have to spend, and I will keep some of the good to reward me for offering you this deal.

What do I do with all the money you gave me when I sold you ER(x(t1)) ? I will go buy an instrument that expires later , gives better
returns and is, maybe, even less likely to default. Everybody wins, unless P goes into the loo.

Uhhmm.....P of being able to pay what....mmhh....OH !
posted by elpapacito at 11:10 AM on January 17, 2008

elpapacito, most of that was about as straighforward an explanation of money lending that I've seen. There's no reason to lend money away now if you're not going to have more money later for doing so, and he's using very, very simple equations to show you how that works.

Basically, if I give you $100 now, I'll expect $101 back tomorrow... if I don't get that $1 profit, why would I lend you the money to begin with? It'd be safer to just stick it in a mattress. That's what he's trying to show with those very straightforward and easy descriptions.

Yes, it does get complex in the derivatives section, and no I haven't quite gotten it yet either. But insulting him because we're too stupid to follow the argument completely is about as arrogant and unpleasant as it gets. Scorning him for using a tool you don't understand says a lot more about you than it does about him.

Oh, one more comment to the people casting aspersions on 'toy economies'.... that's the way mainstream economics modeling works, too.
posted by Malor at 12:34 PM on January 17, 2008

Malor writes "Scorning him for using a tool you don't understand says a lot more about you than it does about him."

Uhm, not really and indeed I didn't ad hominem. At best it tells I am mighty pissed with his enormously long analogies, whereas very very simple maths can better present, at least part of what he said. Unfortunately I the equations I wrote really don't turn up right, my fault for not considering HTML would see greater than as part of a tag


0 <>t1

and

Er(x(t1)) > x(t1)


Where X is the value of the ZCB at any given t time. The fact that lending/borrowing money requires a difference between the value of the ZCB at two given different times is expressed by the first disequation. If I lend you X(t1) , Joe , $1 , youname ....I expect you to pay me some X(t2) , Joe+X, $1+x, younameit+x ..why ? Because nobody lends money for free, because there is a risk of not being paid back plus a compensation for cost opportunity.

That's quite simply expressed by imposing x(t1) <> with is math symbol for the phrase " x(t1) is always less than x(t2). Some friend advanced this is way too scrict, and suggested x(t1)<> because there is always the possibility of apparently irrational behavior of lending money for free ; yet my professor just dismissed both of us with the impossibilty of x(t1) being equal to x(t2) because of the passing of time...to which I couldn't really reply without risking losing my ass.
posted by elpapacito at 5:12 PM on January 17, 2008

Damn even the code tag isn't kosher ? I shall investigate why it is good on preview, but not after hitting preview button.
posted by elpapacito at 5:14 PM on January 17, 2008

Apparently I entirely misunderstood you; I thought you were deliberately yelling gibberish because you were upset at the guy for using equations. My apologies.

If you get it worked out so that it displays correctly, I'd like to see whatever it is you're trying to say. :)
posted by Malor at 6:10 PM on January 17, 2008

jonp72, I'm not clear on how Sraffa's article demolished the concept of the natural rate of interest. Will you please explain?

The Austrian thought experiments assume that the misallocation of investment with respect to consumer goods vs. capital goods wouldn't have occurred in a system without money. In other words, the "Austrians" believe that there wouldn't be business cycles of boom and bust, if the monetary system didn't distort the economy by allowing banks to offer credit below "the natural rate of interest." Sraffa came up with another thought experiment, which showed that you could create an economy based on barter with no monetary system whatsoever, but the economy would have multiple rates of interest for different commodities, not just one "natural rate of interest." Here's the quote I could find from Sraffa:

If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any moment as many "natural" rates of interest as there are commodities, though they would not be "equilibrium" rates. The "arbitrary" action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) "arbitrarily changed" the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate (p. 49).
posted by jonp72 at 6:10 PM on January 17, 2008

One moment amusing, then seven moments cloying. Ultimately, just another example of triple ironic complacency. Mr. Market will find a way to take your cute blog away from you, chump.
posted by wallstreet1929 at 8:54 PM on January 17, 2008

I previously made a post about this guy's blog

The thread quickly became LOLTIMECUBE…
posted by blasdelf at 10:09 PM on January 17, 2008

I think this was a brilliant explanation for people. I hope more people enjoy it.

Also, I have no clue what you're saying, elpapacito.

this is the standard Austrian argument that easy credit lent below the "natural rate of interest" leads to a misallocation

He doesn't say there's a "natural rate of interest", he's saying that the lack of certainty of the true maturity of his "demand tickets" fucks up the market because it erases any useful information about the real term of the tickets and makes the entire system very brittle and prone to collapse on bad days.

He also points out that no matter what your real motives are, if you can sign up to buy a very long-term (but on-demand) ticket, you will, because the yield will necessarily be higher the longer a term is.

So if everyone buys long-term tickets and cashes them in whenever you want, suddenly ticket terms are meaningless. But! Everyone's buying long-term tickets suddenly because they can get out whenever they want. So there's a huge long-term ticket market now (read: 30 year mortgages) and they get bought and repackaged by ticket balancers (CDOs) but suddenly because the market was so huge, and balancing tickets was so profitable, statistical methods to determine the likelihood of a ticket going bad (foreclosure) suddenly don't work because everyone and their dog is killing dragons.

There's nothing in here about natural rates or bank interest or even specifically currency (cowries are a consumption good, really), just the fact that yield must necessarily go up with term, and the depicted situation creates such a hash of the market that once everyone figures it out, repackaged tickets are worth ... nothing? something?

And then no one wants to touch your tickets because you don't know how many good dragon-killers you've got.
posted by blacklite at 11:10 PM on January 17, 2008

There's a ton more here, where the author and another blogger argue at (long, long) length. ADD interwebs addicts beware.
posted by blacklite at 11:32 PM on January 17, 2008