The daisy chain of delusion

Pretending you have created something from nothing has been big the past couple of years.  I can readily think of three instances.

First, and most obviously, there has been the magical issuance of new money to cover trillions of dollars of new federal government spending over the past couple of years.  Printing money for redistributive and non-productive purposes is never a good idea but is always appealing to politicians unwilling to make the hard choices necessary.

Next, there has been the spectacular evaporation of FTX in the past week.  From Is this the end of crypto? in The Economist.  The subheading is The collapse of FTX has dealt a catastrophic blow to crypto’s reputation and aspirations.  There is this key passage.

The more that comes out about the demise of FTX, the more shocking the tale becomes. The exchange’s own terms of service said it would not lend customers’ assets to its trading arm. Yet of $14bn of such assets, it had reportedly lent $8bn-worth to Alameda Research, a trading firm also owned by Mr Bankman-Fried. In turn, it accepted as collateral its own digital tokens, which it had conjured out of thin air. A fatal run on the exchange exposed the gaping hole in its balance-sheet. To cap it all, after FTX declared bankruptcy in America, hundreds of millions of dollars mysteriously flowed out of its accounts.

And within that key passage is the brazen reality "In turn, it accepted as collateral its own digital tokens, which it had conjured out of thin air."

The final example from this week is in Chester, Pennsylvania.  From Lesson from Chester PA: Don't Count Assets You Don't Actually Have, Public Pension Plans by Mary Pat Campbell.  The subheading is It's not a clever move to pretend to have more money than you do in public finance.  

Here is the nutshell:

Since 2013, Chester has not been able to make full contributions to its pension plans

However, the unpaid portion had been booked as an asset to the funds in determining the funded ratio for the pension funds — last measured at 49%

But if you removed the portion that was the receivables, the funded ratio was 3%

[snip]

This town had been getting deeper into a hole, and this “clever trick” of booking the unpaid contributions as an asset for the pension… which not only affected the official funding ratio, but also affected the required contributions….which all of a sudden got bigger because they noticed that hey, they didn’t actually have those assets.

They booked as an asset the amount that they owed their pension but were unable to pay.  Well . . . creative.

The federal government printing money to pay for things it wants but can't afford.

A crypto company assigning its self-created, digital tokens as having inherent value.

A city treating the amount of money it owed its pension as an asset with value despite being unable to pay that obligation.  

A lot of people seem to be hooked on getting something for nothing and conjuring pretend value from the ether.  The daisy chain of self-delusion must, at some point, come undone.