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 spendthrift 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 USD $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 USD $100,000 for every family of four. The interest would be about USD $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 and pole dancer's 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 finances. 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 marvellous 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 realised 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 globalised, 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 grey 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' 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 Australia

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