Irrational Inflation and Destruction
If going the wrong way is good, and the more lost you are the better, eventually you’ll never be able to find your way home.
Things that don’t make sense happen. Since they happened, there are consequences. If whenever you have to take a right turn you instead turn left, the consequence is your route has changed. It would be odd if you took the wrong turn on purpose, and going the wrong way was guaranteed to improve your trip. It would be natural to wonder if going the wrong way is actually the right way since it always improves your voyage. The wrong turn being better than the right turn is irrational, but getting lost is just better.
When will it become worth it to make the correct turn? Why did you decide it was worth it to turn left instead of right? You had a destination and maybe even a deadline. Did anything have to change to make you go the wrong way? The only thing that has to change is the consequence of taking either respective turn. You will start taking the right turn when it is more rewarding than getting lost going left. When going the wrong way is more beneficial than going where you are supposed to, going the wrong way becomes the rational decision. However, it is still irrational that going the wrong way is better. And irrational behavior being superior to being rational has to have repercussions.
Going the wrong way on purpose because it is more rewarding is similar to a bad company being a good investment. But great returns from the bad company makes the irrationality meaningless. This does not change the fact that company is still bad, despite the great returns of its stock. Just like a meme stock when the rising share price and company quality have no relation. As their price rises or other money gets shorter, purchase decisions, irrational or not, become harder to make. Corrections are inevitable.
Luck and mistakes are not irrational, they are random. If you make a mistake and are the only one benefiting from it, that is not special. Behaviors that can be repeated to recreate irrational outcomes are. Behaviors that can easily be repeated like buying and selling subprime mortgages, investing in bad companies, or taking the wrong turns are a problem when they become irrationally good decisions. Money is often the culprit making these conventionally bad things good. But we should ignore the lure of money for a moment, and get back in our car and take some more wrong turns.
News spreads of the great results of taking wrong turns, and the phenomenon grows. As a result, tons of people across the country aren’t going where they need to. A meaningful part of the population is lost and better off because of it. Going the wrong way being better proceeds to become common knowledge. As a result, no one goes where they need to go. This irrational madness becomes the norm, because the consequence of being wrong is better than being right. But with no one being where they need to be, consequences, huge ones, are inevitable at some point.
Again, if the consequence of doing something that doesn’t make sense is superior to the rational alternatives, then it is better to be irrational. Doing something conventionally wrong, like filling your balance sheet with risky credit default swaps, becomes right if the result is always beneficial. Even if it is irrational that you can make money off loanees with no money, the irrationality does not matter if the results are good enough.
No matter how irrational an investment is, if we all keep buying it, we make money. The only risk is a reversion to reason. As long as reason is not part of the purchasing process, sustained irrational gains are like arbitrage. The reason to buy is that it’s going up, not whether it is good or bad. You can not be wrong, when you don’t have to be right. If crypto rises regardless of any negative exterior forces or facts, then reality is not driving its performance; irrationality is. What we are investing in when things become irrational is the fact that everyone wants more money. Which is a safe investment.
Continued irrational behavior is a product of irrational results being good or even superior. When investing is not affected by risk factors, there is no risk. So if an old company with a P/E ratio of 0.00 that hasn’t turned a profit in years is up over 500% last year then what is its performance based on? It is based on people wanting money. This hypothetical company has an archaic business model, is not competitive, and has poor financials, yet its stock gains are awesome and sustained. Since the stock value continues to go up regardless of its market position, the results are irrational. Sustained irrational consequences do not come from facts, they come from human nature. Humans are an intelligent species, but humans are not inherently smart. But we are inherently greedy, hence the regularity of market bubbles. Bubbles form from irrational hope. If they formed from something true and real, they would not be bubbles full of nothing. Since it is a natural condition of ours, the only thing stopping us from inflating bubbles is not having the cash to do so, because we will be irrational if it pays us.
All bubbles are fueled by irrationality and cash. Limit cash and it constrains a bubble’s growth. Doing that also limits disposable income, which seems cruel. But if a portion of it is only inflating bubbles it doesn’t exist anyway. There is no risk that nothing disappears into a greater nothingness. So the decision to limit supply is just as easy of a decision as it was to invest it irrationally. Tightening the amount of money available destroys the illusion before it leads to drastic consequences. Because rationality will arrive at some point. When things get more expensive, and affording more is difficult or impossible, rationale and reason arrive because irrational wins have disappeared. When reason finally confronts a bubble, what was never really there in the first place bursts and disappears. Economic growth that has no denominator (inherent value), is not real. Any amount of money can build in respect to the amount invested, but too much cash destroys.
The inflation of the bubble, is the inflation of the economy. The surplus money needed to be consistently irrational is already there. Irrational market performance is a leading indicator. Too much inflation is bad, and bubbles are bad. Knocking out problematic irrational results before they become recession triggering events is good, and kills two birds with one stone. So how do we identify and destroy bubbles before they become huge problems?
Irrational things don’t have value that justify the returns they are providing. In a very general sense, an algorithm that flags when investments trade and grow mutually exclusive from their book value (tangible value) and/or profit and earnings. Those companies that are flagged would be put up to an unbiased review to see if their market performance is irrational or not. If there are enough irrational growth stories like crypto, on top of NFTs, on top of meme stocks that all have little inherent value yet are creating enormous returns, we know inflation is here already.
If you keep taking wrong turns because they provide you something amazing, that which was dependent on you arriving suffers. And the suffering of those waiting for you gets worse and worse the longer they wait for you to arrive. A recession gets worse the bigger the bubble inflates. If you have taken so many wrong turns that you’re completely lost, or the irrational investment fueled bubble has grown too big to see beyond, you can never make it home. Controlling irrationality helps people stay on course.
The goal going forward has to be zero unemployment combined by zero irrationality. Based on things under our control, it is the only way to avoid future recessions. In short, people need to be told what to do sometimes, so they put others ahead of themselves.
