Sunday, February 26, 2012

CHS: Mischaracterizing Market Risk as Natural

Charles Hugh Smith' Survival+ is one of the many books I am reading these days.  I have read enough of the book to highly recommend it, as it displays all of the insight and thoughtfulness we've come to expect from CHS, and it does so in a concentrated, cogent manner.  It also suffers from some of his ideological blindspots, which I have noted in the past.  This passage struck me in particular:
A similar mechanism is the exempting of capital and high-caste Elites from risk-- that is, from the risk inherent in free markets.  Just as monopoly capital strives to eliminate "uncertainties" (i.e. losses) by eliminating competition, capital and high-caste Elites (public employees, technocrats, etc.) strive to exempt themselves from risk by constructing fiefdoms protected by the States
Risk is not a characteristic of capitalism or free markets; it is a characteristic of life which markets simply reflect.
While I agree that risk is a natural part of life, market risk is not at all natural and nothing like what we experience in life.  That is because all market risk arises from the demand for compounding interest (i.e., yield), a human invention for making money from money, a distinctly unnatural thing to do with an inanimate, fictive object. I further believe that exempting capital and high-caste Elites from risk is a feature of capitalism, not a bug.  The owners of the money supply WILL be paid for allowing its use.

CHS's mistake was assuming that risk in capitalism and risk in life are one and the same.  Interestingly, CHS less than a page later notes recognizes how words can obscure the truth:
The tool, language, easily becomes a weapon in skilled hands, and the strongest group will do all in its power to protect its own interest.
And later, he says:
Some ideas are easier to express and understand than others.  This stems from language being an ontological force in itself; language carries with it vast powers and equally vast difficulties of interpretation and ambiguity.
So CHS clearly understands the mechanism, language, as well as the cognitive biases that, when applied to the interpretation of language, create blind spots.  But that did not stop CHS from writing an entire book about another language-induced blindspot called An Unconventional Guide to Investing in Troubled Times.  What CHS actually discusses there is speculation, not investment.