I have just discovered a way for everybody to get rich.
First, a quick review of how to make money from securities. The key is to sell at a higher price than at what you buy. Buy low sell high. If you buy a security and it rises in price, you can profit when you sell. If you think the security will fall, you just reverse the order of your trades, selling first and then buying. You can do this by borrowing the security, selling it, then buying it back and returning the borrowed security, in what the financial industry calls selling short.
This gives us our first clue to limitless wealth. All you need is to design and issue a security that only goes down.
Then you get everybody to borrow the security, have it go down, and everybody gets rich. Nobody needs to work. No need to till the soil, grow food, build homes and cars, provide medical care, or educate the young. As long as you have a security that always goes down, endless prosperity is guaranteed. The holy grail of the free lunch.
What could go wrong?
If it sounds too good to be true … hmmm … maybe it is? Something must be wrong, because if nobody grows the food, we all starve. If no one builds the homes, we have no shelter. This isn’t exactly our idea of prosperity is it? Rich on paper but homeless and starving? Pretend prosperity that could only work for a time … before too many people went too short, generating a monster short squeeze in which the security ingeniously managed to always lose value instead did the opposite and soared, leaving everyone desperate to cover.
There would be a crash.
So it must be flawed. The system would careen from boom to bust. The energy and ingenuity absorbed by financial gaming would sap the productive vitality of the economy more with each cycle. An insider elite would grow ever richer while the living standards of the many decay. Alas, I must withdraw my suggestion.
The trouble is, this isn’t just some crackpot fantasy. This is how the United States of America actually tries to run its economy.
The Federal Reserve says it wants to make the security it issues – the US dollar – go down at a nice, orderly 2% per year, and that if it does, our economy will grow. Everybody will borrow it – homeowners, students, corporations, governments – and all will prosper. When it all doesn’t go according to plan, it’s only because not enough people borrowed and went short enough, and the cure is to double down and get more people to borrow even more dollars.
Folks, if this is the kind of thinking that having a PhD in Economics gets you, let’s please try and get less educated people on the Fed.
Monetary policy is straightforward if you don’t try to encroach into other turf. Buy and sell Treasuries and gold as needed to manage the money supply to keep the value of the dollar roughly constant over time. Remember that nothing can deflate without having first been inflated. Don’t engage in price fixing in the credit markets; don’t target interest rates. Don’t try to target arbitrary inflation levels or inflate the volume of credit and debt. Don’t mess with mortgage securities, corporate bonds, try to kite stock prices or “stimulate” the economy. Above all, don’t try any crackpot make everybody rich schemes.