No mortal is a prophet who can predict the future. However, people's intertemporal decision-making must be an estimation and prediction of the future. Once errors accumulate to a certain extent, it will cause instability.
We look back at history, starting with the famous Mississippi bubble.
Louis XIV, the French sun king, was extravagant. After his death, he left a lot of debts, but a government with an annual tax of only 654.38+45 billion was in debt of 2 billion. After the national finance pays the interest on the debt every year, there is little left. The king who succeeded to the throne was only seven years old, and French state affairs were in the charge of Regent Grand Duke Orleans. Faced with such an unsolvable financial dilemma, the Grand Duke of Orleans boldly used his friend john law to solve the financial problems when the traditional methods failed.
John law has an idea that the country's economy is better and it is necessary to use paper money. After he came to power, he set up a bank called Lloyd's Company, and announced that all taxes should be paid by bank notes of Lloyd's Bank, thus the French ushered in the era of paper money.
John law has formulated the following rules:
1. Lloyds bank notes are "payable at sight", that is, as long as you are willing to come to Lloyds Bank, you can exchange enough coins (precious metals, the currency in circulation at that time).
2. stipulate that bank notes can be exchanged for old silver coins. If the government adopts shrinking silver coins (when collecting silver coins, it is often the government that reduces the proportion of silver), then John's bank will pay the original silver coins.
In short, he tried to make banknotes and precious metals equivalent and keep them redeemable. Paper money itself, as a better trading medium, has rapidly promoted the development of trade. On the premise that paper money can be trusted, the Grand Duke of Orleans is very satisfied with the proposal of paper money. Since paper money can be used as money and has produced good results, why haven't we got more paper money?
With this simple and beautiful idea, the Grand Duke of Orleans ordered Lloyd's Bank to print another 654.38 billion banknotes, 654.38+06 times more than all the banknotes printed before. However, years later, it was not until Princes Of Conti took a large amount of paper money and asked to change it into silver coins that he was suspected and eventually went bankrupt.
In the whole process, the Grand Duke of Orleans made an empirical mistake, because he saw that paper money was effective for a long time and came to the conclusion that paper money was always effective. Because there is no problem in printing more banknotes temporarily without precious metal reserves, it is considered that there is no problem in printing more banknotes.
Why do people still use paper money when there is no corresponding precious metal reserve? In fact, they don't know whether there are enough precious metals in one-on-one relationship. Since they don't know the real reserves of banks, why should they believe in the promise of paying at sight?
Or is it because of experience, which is like why the victims of Ponzi scheme believe that players can continue to pay high interest rates? Because they tried several times and succeeded. Players really pay a lot of interest, making them believe that players themselves have super profitability and can continue to pay high interest rates.
The French people are unable to liquidate all the paper money and precious metals stored in Lloyds Bank. Why do they believe that paper money is valuable for so many years? Empirically, it is suggested that if the bank can redeem the corresponding precious metals once someone calls for redemption in the initial issuance time, people will not try to redeem them often.
The Grand Duke of Orleans and the people who used paper money in France made a linear extrapolation of their limited past experience to predict future decisions. Because paper money was useful in the past and will always be useful in the future.
Why did Princes Of Conti suddenly ask to change paper money into silver coins? Not because he has strong doubts about the credit of paper money, but because when he asked to buy shares in the newly listed Mississippi Company (also managed by john law), he was rejected, thus deliberately making things difficult for him to get back at john law.
For john law, he certainly won't offend a powerful aristocrat for no reason. For the whole paper money system, Princes Of Conti's large-scale redemption request was an accident. It was caused by events outside the paper money system, the Mississippi stock bubble, which was completely external. This is a factor that cannot be calculated when designing a paper money system.
In other words, the troubled Mississippi stock bubble, from its appearance and development to its climax and burst, is full of the advantages of empiricism and the problems caused by its defects.
John law established the Mississippi Company. The company obtained the exclusive right of tobacco on 17 18. 1718165438+10, the Senegalese company was established, responsible for trade with Africa. 17 19, john law merged the East India Company and China Company and renamed it Compagnie des Indes, which monopolized all French trade outside Europe. And the company has nine years of royal coinage rights, tax collection rights and tobacco monopoly rights. Fundamentally, it cannot be surpassed.
There is no doubt that such a company will generate high profits. John law also thought of a very interesting way. When buying shares in Mississippi companies, you can buy them with administrative bonds. Because of Louis XIV's profligacy and debt. Previously, the bonds issued by the government were generally questioned and the discount rate was very high. For bonds with a face value of 654.38+00,000, the purchase price is only 200,000. This bond can be used to buy shares of Mississippi company, which makes the actual yield of shares of Mississippi company as high as 40% reach 200%!
In an instant, investors flocked to buy stocks, and the whole of France was crazy about it. Everyone rushed to buy this magical rich stock, and the stock price suddenly rose by 10 times.
However, the company's business, the business of going to the New World (North America) for gold, does not quite meet the description. The new world is not a beautiful paradise, but full of terrible things. Three quarters of the dispatched personnel died of disease or Indian attacks.
Just as people can't know the total amount of paper money issued and the total amount of precious metals stored by Lloyd's Bank, people who buy shares of Mississippi companies can't know the actual situation of their business in America. People believe in paper money because the successful experience of paper money payment has been repeated many times, while investors buy stocks because they have witnessed the rapid rise of stock prices and some people around them have made a lot of profits.
The reason for buying stocks is that the stock price continues to rise, and buying stocks itself pushes up the stock price. The colonial gold rush thousands of miles away is not something people care about. People are now concerned about soaring stock prices. Because the stock price has been rising in the past, isn't it an empirical linear extrapolation to judge that the stock will rise in the future?
There is no real profit of listed companies, but castles in the air (refer to the simplest logic of my book). When Princes Of Conti retaliated against john law for not buying stocks, the money supply decreased, and the stock price without profit support quickly avalanche.
During the avalanche, people sold stocks in panic, not because they saw clues in the company's performance report that the terrible unknown bacterial virus in the United States and the local natives killed the gold diggers, but because the stock price fell rapidly. An interesting phenomenon I have observed is that when people speculate in a stock, sometimes they don't completely understand the company's business, but they choose to follow up because of the good rise in the past.
In the process of rise and collapse, people always adhere to simple empiricism, and it is precisely the events outside the empirical sample that cause dramatic reversal. External hard constraints are the only thing that can calm people down.
Not only in the field of speculation, empiricism plays almost the same role in the production and sales of real industries.
As we know, in ancient times, Guan Zhong implemented a "continuous liquidation system" in order to combat the harm caused by cheap grain injuries to farmers. This system has been adopted by governments all over the world. The more production, the better. If there are too many homogenized goods and there are not enough buyers, unsalable goods will not only be difficult to become profits, but will become a heavy burden.
Farmers will consider planting cost and final selling price when making planting decisions. This means that farmers are forced to guess which agricultural products will have higher prices in the future.
Can farmers predict the future? Obviously not. If you can, speculating in futures can become the richest man in the world. Farmers can only rely on empiricism when making planting decisions, that is, in the past few years, whenever the price of any crop rises, they will follow suit.
Linear extrapolation of past experience can sell well in the future, and the future that has risen well in the past can also rise well. But what about the facts? The future is unpredictable, maybe the price will be as gratifying as expected, maybe there will be an oversupply in the future, and the backlog will be unsalable.
The cycle of economic crisis is not a feature of capitalism. As early as the Spring and Autumn Period, there was an economic crisis caused by oversupply in ancient China.
We must face the reality that people must make decisions about the future, but the future is unpredictable. People naturally rely on empiricism and think that future events will be the repetition of past phenomena, so making decisions will inevitably lead to decision-making mistakes. Once the mistakes in production and investment decisions are concentrated, the economic crisis is inevitable.
Back in Europe, a few decades after the end of the Mississippi bubble in France, there was a young Englishman named Thornton. He is called the father of the central bank. He worked in the accounting room with his father when he was 18 years old, and later went to work in the bank. Because of his excellent work, he was invited to become a partner in this bank.
Thornton found that the economic crisis occurred not only in France, but also in Britain. 1702, 1705,171712, 1729, etc., there will be an economic crisis almost every few years. The economic crisis not only persists, but also shows a certain periodicity.
In the 18 economic crises he observed, the economy repaired itself every time. However, every recovery lasts only a few years, and then a new crisis will occur and destroy the economy again.
Between heaven and earth, is it still ambiguous? Empty and unyielding, move out.
The cyclical outbreak and recovery of economic and financial crises are cyclical. If we accept that the way of linearly extrapolating the future based on past experience cannot predict the future, it will inevitably lead to a concentrated outbreak of decision-making mistakes. Why is it periodic?
We try to explain it in the next article.