Five Year Forecast

Looking ahead five years, John Petersen of the Arlington Institute says:

Many sources, both conventional and unconventional, suggest that we are living in a special time -- that between now and 2012 the world will undergo an epochal shift to a new era. This rapid evolution will produce a world that operates in fundamentally different ways than it has in the past.

Petersen cites data concerning Demographics, Peak Oil, Species Extinction, Climate Change, and Economic Disruption. Based on all this, he forecasts a paradigm shift:

The new world, as in all paradigm shifts, would not make much sense from our present perspective. Never having seen group larger than a clan, a hunter-gatherer contemplating the future would have been hard-pressed to envision a world that included people living in towns and villages. Similarly, the future that may arrive with 2012 would necessarily seem strange in the context of most of our upbringing.

But as we get closer to the time of this epic shift the early outlines of a new future appear to be emerging. First of all, the new world is a highly interdependent and connected one. The complexity of our present communications systems link individual humans in ways that would have seemed impossible just two decades ago (the World Wide Web had not yet been invented only fifteen years ago!) As the ability to interact in increasingly more sophisticated ways develops, a point will be passed when humanity begins to act like an organism, rather than unrelated individuals and small groups. Ideas will transit the world like rumors in a small town. Concepts and perspectives will infect the global brain and produce behavior never before seen. We will see our future tied to others many thousands of miles away from us in ways that would have made no sense five years ago. We will rapidly become planetary citizens.

Then he suggests that we are approaching a "punctuation" point in human evolution:

Although no one now alive has ever lived through a similar shift, the history of the planet, as we know it, suggests that these kinds of major upheavals have happened many times in the past -- in fact, they are the fundamental evolutionary mechanism for the planet. Biological life moved abruptly from single-cellular life to multiple-cellular life after a very long period of equilibrium. Then multiple-cellular life was punctuated by a radical transformation that yielded vertebrates . . . which were followed by rapid shifts to mammals, early humans, and then homo sapiens.

Social evolutionary punctuations continued moving hunter-gathers into villages and towns, finally resulting in the printing press which enabled the industrial age. Perhaps the Internet represents the new communications infrastructure upon which the radically new paradigm will be built.

Perhaps we are about to experience another punctuation in the equilibrium of human evolution. Patterns from the past suggest that the time is right for another one. The question is, are we ready? If the change that seems to be forming on the horizon is anything like it appears it might be, then all humans will need to move into a new mode of living and thinking in order to survive the transition.

This seems a little far out to me -- and I am hardly conservative when it comes to predicting a radically different human future -- but for that much change to occur by 2012 is further than I would go. If he was talking about 2050, or even 2025, I might buy it.

We'll find out, I suppose. Maybe we should mark our calendars for five years from now, and then look back at Petersen's forecasted paradigm shift and see how close he was.

(Hat tip: FutureWire)

Mike Treder

Tags: nanotechnology nanotech nano science technology ethics weblog blog

Comments

[Tom Mazanec]

What if we have molecular manufacturing in 2012? That is still (barely) plausible.

[Chris Phoenix, CRN]

I have to wonder what the "patterns from the past" are. He also mentions "many sources, both conventional and unconventional." There's a body of study that looks at ancient prophecies--the Mayan calendar (which ends a cycle in December 2012) and the "Earth changes" prophecies from various North American native sources.

Chris

[Tom Craver]

I read the original article. It starts out ok, presenting several major issues that could well come to a head in the next few years (though missing a couple of others). But then it seems to put on rose colored glasses, assuming that we'll magically transition to a world where we're all "interconnected" and "sensitive" and "open", and seems to assume that this will save us.

I don't think so. We might arrive at such an enlightened state ultimately - but not without first suffering a truly massive shock - likely better described as "utter collapse".

[stefan baltov]

I suggest we move in a new relations- beyond the capitalism, which might be the only way to survive. The net now gives the possibility of creating a new system of social relations, where the man by man exploitation wouldn't be posssible.For example - imagine you have a bracelet on your hand- where you store the credits of your work. And no one could take these credits from you by no means - let say - you buy something and the credit for it is ERASED of your bracelet. In other words - the more you work- the more credit you have, or, in other words - you alone'd be the "renaissance man"- or the measure of all things- and thus unable to destroy as much as we could together. It might sound utopic and naive, but tnink a bit and you might find it's something new ?

[Chris Phoenix, CRN]

Stefan, it sounds like you're proposing that money should be held *only* by individuals, not by non-human legal entities. (The bracelet is effectively money.)

It's an intriguing idea--corporations have certainly gained a lot more legal powers than they used to have, and they may have gone too far in that direction. In the US at least, corporations are allowed to contribute money to politics--under the theory that as legal persons, they have freedom of speech, and spending money is a form of speech. Hm...

It's hard to imagine a system in which people couldn't enter enforceable contracts to spend money (which you call credit). For example, several friends might get together and buy a house, with some of the credit being erased from each bracelet at the time of the transaction. Or if I buy something on Ebay, I pay for it, and then the seller has to pay the post office to ship it.

As soon as you have contracts to spend credit, you have a way of creating pools of credit outside the bracelet. You could "sell shares" by getting a lot of people to agree to pay some of their credit for a big-ticket shared item like a factory. But a contract representing control of a certain amount of credit for a specific purpose is not the same as money.

For several reasons, you'd want there to be at least limited ability for people to make transfers on other people's behalf. Suppose I get Alzheimer's--someone else has to be able to administer my credit, or else I'll either waste it or lose access to it.

Another reason to do indirect transfers is for convenience--for example, direct billing. Now, it may be that convenience in paying is overrated. It may be that a system which requires people to make more explicit decisions about when they pay, and what they pay for, would have some benefits in making people more responsible about how they pay.

For example, if a corporation did not have its own bank account, but had to get approval from all its employees whenever it wanted to spend collective money on something, corporations would probably be smaller. Of course some corps might ask employees to sign contracts to contribute credit up to a certain amount automatically for day-to-day expenses. But that would, in effect, convert the workers from employees to investors--a much more responsible status.

I don't have a business degree, so I'm probably missing some problems with this approach. But it sounds interesting to me.

Insurance might be implemented by means of a contract among a group that all expenses of a certain kind would be shared among them. This would put the insurance industry out of business--insurance could be set up simply by drafting a good contract, and would not require money to be held in a large common pool.

Taxes could be dealt with by means of a limited-withdrawal contract with the government, similar to the one corporations would use to buy office supplies.

One of the most intriguing things about this scheme is that, since every transaction has to come directly out of someone's bracelet, transparency and accountability could be very high. The government or a corporation couldn't take your money and put it in an account and spend it later on something you couldn't check on. They could pre-negotiate the right to spend your money, but the actual expenditure would be visible to you at the time it happened.

Investing could still happen. "Here, Acme Corp--don't trouble your employees with your office-supplies contract. Take it all out of my bracelet, and in return, give me 1% of revenues from every sale."

What happens when someone wants to import goods from Europe? There are several possible ways to buy Euros, but they all boil down to putting together a set of stuff that that will have tangible and lasting value to Europeans.

Foreign exchange could be based on an exportable mineral or other resource. Preferably, a basket of resources, so that fluctuation in the value of one resource won't drive the foreign-exchange rate wild. This is effectively barter on a large scale.

Foreign exchange could be based on an internal theoretical goods-and-services basket that could in theory be traded for whatever else was wanted. But this is close to creating money--if promissory notes based on that basket are tradeable, then they can be used to keep stocks of money independent of people. And since the basket isn't real but is more of like a stock market index, it seems likely that the "currency" could inflate or otherwise be unstable.

Foreign exchanage could be based on a collective decision of the people to create a pool of their wealth for the purpose of foreign exchange--the office-supplies pool writ large. In effect, someone buying goods from Europe would be trading a tiny piece of the nation's soul for the goods. And because this would be backed by real credits, the account couldn't be overdrawn. The value of a foreign-exchange credit would closely track the economic health of the country, which is as it should be. Since foreign trade is a relatively small part of a healthy nation's economy, enough credit backing could be allocated for foreign trade while still leaving citizens enough credit unallocated to spend domestically.

One potential problem with this whole scheme is that people might over-subscribe themselves through a complicated web of conditional or future-valued contracts such as insurance contracts and investments. There would have to be a mechanism for tracking a person's subscriptions and ensuring that people didn't over-extend themselves enough to destabilize the system. Sounds simple--don't borrow what you can't pay--but it's not, for several reasons I don't have time to think through fully.

One thing I'm not sure of is how to handle bankruptcy. The system would be more solid if bankruptcy were impossible (though near-zero credit balance would still be possible). I don't know if it's possible to track all contracts to ensure that no one ever overextends themselves to the point of risking bankruptcy. Even if it were possible, it might constrain resources too much, reducing the flow of the economy. Of course, people might convince others with extra unallocated credits to underwrite investments they wanted to make. And I think part of your goal was to reduce the flow of the economy.

OK, Stefan, that's what I see as the logical consequences of your idea. Intriguing, and different, and not obviously unworkable. Now let's see what the other readers have to say about it...

Chris

[Greg]

>>I don't have a business degree, so I'm probably missing some problems with this approach. But it sounds interesting to me.<<

I do happen to have a business degree and I would characterize the approach as highly non-optimal, out of deference to the fact that this blog is supposed to be readable by the entire family. The drawbacks are many and varied. What happens if you lose your bracelet? What happens if your bracelet malfunctions, if your bracelet is destroyed? What happens if someone sticks a gun in your face and tells you to empty all the value in your bracelet?

In addition to these pragmatic difficulties there are a huge range of other difficulties. If I must transfer the value to the personal bracelet of someone selling me an item, say an iPod, then if that person is selling me this on behalf of anything other than a sole proprietorship, it immediately brings a raft of what are known as "agency problems". How do you keep the seller from cheating the firm, co-mingling funds makes this much harder to prevent than would otherwise be the case. Also, how do I pay iTunes for my downloads in this scheme.

More fundamentally, I get the idea that making investment impossible was rather the idea of the whole concept, a way to get rid of capital by fiat and embodying something like a labor theory of value. The problem is that whether investing is seen as a bug or a feature, this scheme will not prevent it (people will hack the scheme to create what amounts to capital, want them to or not) but will do so in a way that is *far* more haphazard and inefficient than our capital markets are today.

It has seriously been suggested that the reason Western Europe and its progeny came to dominate the World was the development of the joint-stock company. Even if this is only part of the reason (and I believe that it is at least that) the productive power of such an engine of progress is not to be discarded casually particularly when, as with this plan, I don't see any real upside benefits to balance out the loss.

[Brian Wang]

>Move beyond capitalism

You can see various attempts currently and in the past. They were and are inefficient.

I can buy things now (a critical level of energy production, land for growing food etc...) to get off-grid. Disconnect from the current system for power and for goods. Have enough to be self-sufficient. Anyone with over say 5 million in capital could do this now. There are almost 1 million people worldwide with this kind of resource. But people do not. Getting to that level of independence is not efficient. It is investing in a project whose returns are some level of self sufficient subsistency.

Countries can also accumulate things to become independent and not have to trade.

Trade is at least useful for obtaining and adopting new ideas and products made by others. If you try to drop out of the system and not adopt fast enough, the extreme case looks something like the Amish.

Any new system needs to encourage faster productivity growth and be more motivating of increased activity than the current dominant system. The dominant system is the faster growing one. Faster growing passes slower growing.

[Brian Wang]

btw: the 5 million figure was assuming owning the land and power generation systems free and clear. Independence would mean not have debt to finance. Or at least offsetting income to cover debt. I am sure that this figure could be brought down. I just hit at a higher number to be sure it was comfortably above.

Independence is not an efficient investment.

[Chris Phoenix, CRN]

Brian, Greg--Stefan was the one who wanted to move beyond capitalism, not me. I agree about the hacks--in fact I tried to invent some uncomplicated ones, and the fact that I was able to is what made me think this could be interesting.

Since money could only be transferred to another person's personal account, I'd be able to find whoever stuck the gun in my face. If it was still a problem, transfers could be limited as with ATM cards.

If a sales clerk sold me an iPod, they'd have a sales contract that would distribute the sale price among all the company's investors. Direct to all their accounts. This would of course require micropayment, or possibly nanopayment. It couldn't be done without computers.

What is a joint stock company other than a basket of contracts? What functions of it could not be implemented in this system?

Brian, why did you think I was arguing for off-grid or isolation? I talked about how to do foreign trade.

Part of what intrigued me about this system is that it seemed to lend itself better to investment than to leverage. But now I'm thinking that leverage could be implemented in this credits system (just write a contract funded by your hypothetical future earnings), and could be greatly reduced in a money system like ours if that was desired.

I'm also wondering whether leverage will be seen as shaping the 20th century Western money system, as joint stock companies shaped the 19th. As far as I know, the jury is still out on whether a leverage system can be sufficiently stable over the long run. We did have a Great Depression. (I'm pretty sure Stefan would think leverage was bad.)

Chris

[Brian Wang]

where did you get the independent part:

I was extrapolating the independent part from Stefan's: you alone'd be the "renaissance man"- or the measure of all things.

The move beyond capitalism was again a Stefan thing. So I was addressing his comment rather than yours.

The only part of my thing which might relate to yours is my comment that any new system has to be encouraging faster growth and productivity than the current system.

A system that soften the hard edges of failure can be OK. I do not think failure like bankruptcy needs to be crushing and actually making those who fail starve is not necessarily more motivating. In fact the current systems have reasonable safety nets and letting and encouraging people/entrepreneurs who take chances be able to try again is I believe a strength of the American system. Enable faster and more frequent trial and failure. Feedback from knowledgable mentors to test out ideas early and often.

I would think that trying to expand and improve the Silicon Valley model would speed innovation and productivity growth. Make systems where competitors with better ideas have fewer barriers if their system is better. This would mean adjusting the relationship of government, government budgets, large utility players. Some of the Google ideas could be adopted. 20% of funded time for each person to innovate. But we probably can't get it right all at once and even here we should constantly have policy experiments and competitions. A constant array of prizes and challenges for people who can find better policies, systems, technologies etc...

[Phillip Huggan]

"I'm also wondering whether leverage will be seen as shaping the 20th century Western money system, as joint stock companies shaped the 19th. As far as I know, the jury is still out on whether a leverage system can be sufficiently stable over the long run. We did have a Great Depression. (I'm pretty sure Stefan would think leverage was bad.)"

Leverage is good if productivity gains increase stably over the long-term. It magnifies output shortfalls. Whether leverage is a good thing lies outside the systems of finance (in a seasonal sector like farming leverage is essential, when it comes to purchasing luxury goods cash should be king).
I see a few net-worth maximizing strategies where the goal is to annex tax-payer dollars making stupid derivative plays. I'd say the present system of leverage works mainly because natural resources are so plentiful, parasitic hedge-funds and dumb/corrupt central bankers can be accomodated. Leverage would be pointless in a post-MNT consumer economy, though there may be some massive engineering feats that could still utilize it.

[Greg]

>>Since money could only be transferred to another person's personal account, I'd be able to find whoever stuck the gun in my face. If it was still a problem, transfers could be limited as with ATM cards.<<

Where do the records reside? If they are local, what prevents the guy with the gun from just taking the bracelet. If the records are not local, why are we bothering with bracelets anyway?

>>If a sales clerk sold me an iPod, they'd have a sales contract that would distribute the sale price among all the company's investors. Direct to all their accounts. This would of course require micropayment, or possibly nanopayment. It couldn't be done without computers.<<

Maybe even a femto- or atto- payment. Even with computers, have you considered the kind of bandwidth necessary, the amount of computation, plus little questions like: I am one of the investors, I happen to be in a tunnel, underwater, or somewhere else un-reachably offline when the purchase is made, what happens to the transaction?

>>What is a joint stock company other than a basket of contracts? What functions of it could not be implemented in this system?<<

Among the important benefits provided by a joint-stock company that this system doesn't address are:

1) Limited liability, currently if I buy Best Buy stock, not using margin, the worst that can happen to me is that I lose my investment, I am not on the hook for more than I paid for the stock, regardless of how deep in the hole Best Buy might get. Without this feature the cost of capital would be significantly higher than it is today and you would have _lots_ more horror stories of investors made destitute by their investments.

2) Liquidity. The ease that investors have getting into or out of the investments they make. Again, less liquidity means the cost of capital rises means less investment than would otherwise be the case.

3) Elimination of the need for investors to become involved with the day-to-day operations of the businesses in which they invest. I will agree that with this there is the possibility of agency problems, but without it there is no way that an individual investor could invest in a diversified portfolio and have time to lead a normal life.

>>Part of what intrigued me about this system is that it seemed to lend itself better to investment than to leverage. But now I'm thinking that leverage could be implemented in this credits system (just write a contract funded by your hypothetical future earnings), and could be greatly reduced in a money system like ours if that was desired.<<

Your use of terms such as leverage seems to me to be idiosyncratic, at least in so far as the terms are used in finance and business, I sent an email describing what these terms mean to business types. Could you take another crack at this in light of what I was talking about, I am having trouble understanding what you are trying to get at.

>>We did have a Great Depression. (I'm pretty sure Stefan would think leverage was bad.)<<

The Great Depression is another opportunity for me to use the "Perfect Storm" metaphor. You had a confluence of bad events and worse responses to those events: A bottoming of the business cycle, a stock market bubble that was even more of a bubble than the 90's market in tech stocks suddenly popped (as bubbles are want to do eventually), the dust bowl, and a set of government policies that were, in an economic sense, deranged. These include what we would today regard as a perverse concern for keeping the Federal Budget in balance in the midst of a crisis, the protectionist Smoot-Hawley tariffs (which, combined with the utterly predictable foreign retaliation, caused world trade to crash), and the crowning mistake, the Fed jacking interest rates UP as the US slid into the worst Depression it has ever had. And when FDR came on the scene some of the things he did helped (the bank holiday and FDIC helped to quell a nasty run on the banks) but other parts of the New Deal actively hurt things (the National Recovery Act, for example).

All in all, we know a lot better now. Am I saying that we won't make mistakes, certainly not, but the mistakes we make will be different ones. In all of this mess, leverage in the sense that business types think of it only really plays a part in the stock market crash and the run on the banks. In the case of the stock market, margin requirements were tightened so that margin could account for no more than 50% of a stock purchase (instead of 90%) and I have already mentioned how the run on the banks was addressed.

[Tom Craver]

The "bracelet" scheme seems a bit vague. So long as contracts can be enforced, one can easily rebuild systems of money, credit and investment. Can we come up with something more concrete, and based on possible effects of MNT?

One thing that Capitalism and Communism have in common is the idea of ownership of property - individual or communal - and defense of that by the government. Sometimes that means using force and harming people in defense of private or communal property.

Suppose we contemplate switching to a system that always values human life over property. I.e. the government will never use force to protect property or enforce a contract, etc - only to protect people from harm, including prohibiting people from using force themselves to take things away from others, or acting to endanger others.

There would still be social pressure to respect others, including not un-duly interfering with material things they have created or have been using.

Note: I'm *not* saying I've got this all thought out and it's the way to go - I'd be very cautious about abandoning existing methods of organizing society.

[Phillip Huggan]

"Note: I'm *not* saying I've got this all thought out and it's the way to go - I'd be very cautious about abandoning existing methods of organizing society."

I haven't got it all figured out either. One idea may be to tentatively test mildly different social organization models on willing communities and wait for the real time genetic algorithm feedback to progress over generations.

Hey Tom, what happens in your model if someone tries to sabotage a valuable piece of public health property like an MRI machine or a sewage treatment plant? My instincts say to shoot the saboteur, but you seem to be saying to shoot the MRI machine instead.

[Tom Craver]

I actually was thinking along the lines of MNT so advanced that everyone could provide any material goods they need.

If there's such a thing as a public health MRI, they'd just make a new one. If keeping a public sewerage system operating despite pranksters is too difficult, it would simply be privatized - everyone must take care of their own waste.

Though if either of were sabotaged in a manner that created a high risk of harm to others, that would be regulated/enforced under the system.

[Brian Wang]

Sabotaging a sewer treatment plant would be endangering people, so even under the proposed only protect people the government could use force to rectify.
Although I fail to see the advantage to getting rid of all property damage laws. What could make sense is as it becomes easier to make things then things become cheaper so that the cutoff point for what is considered minor offenses could be moved. Vandalism and minor property damage would encompass more as what is easy to fix becomes greater. Still why should there be a free pass for bad behavior.

I think that current laws can be adapted to the new situation.

Behavior should be regulated. Capital punishment would not be for property damage. But damage that results in death should still be a serious crime. Murder 2, manslaughter, depraved indifference etc...

[Greg]

>>Behavior should be regulated. Capital punishment would not be for property damage. But damage that results in death should still be a serious crime. Murder 2, manslaughter, depraved indifference etc...<<

I am unaware of any provision in any state of the Union or Federal Government wherein the death penalty can be meted out for crimes against property alone without violence entering the picture somewhere. I am not a lawyer, so if you know of such a statute, I would be very much interested. If you actually had meant capital punishment in the sense that the police are, in certain circumstances allowed to shoot you should they find you committing a a crime against property (which was my original interpretation of your point), I have a response to that too.

The only set of circumstances where I have heard of where officials acting in an official capacity are allowed to shoot someone merely for the act of theft is in a disaster where looting has broken out and civil order has broken down. Even in that circumstance I would argue that "shoot looters on sight" policies are more about the restoration of civil order than about crimes against property per se. Under more normal conditions, most police departments I have heard of are quite stringent concerning use of deadly force- in stark contrast to the "movie cops" you see who casually off a half dozen felons before lunch and then go back for a second helping (of felons, that is, as opposed to lunch). A far more realistic scenario can happen this way, the police catch someone stealing a car, for example, and attempt to arrest the suspect, the suspect resists arrest (or, at least, the police on the scene believe this to be the case), things escalate until one or more of the officers involved end up shooting (usually because they are being shot at or stabbed at, or because they believe this is just about to happen). This may have started out with an auto theft, but I think it inaccurate to say that the shooting is about the auto theft.

[Chris Phoenix, CRN]

On leverage, I am not sure I was using the term right. What I intended to talk about was the practice of deriving present value from hypothetical future resources. This is of course destabilizing if done to excess. I don't know whether there is a valid argument that systems might be better off in the long run without any leverage.

On the idea of defending people but not property: I am not at all sure that the two can be separated. If someone attacks my property--things I care about--they are attacking me in a very real way. To say that contracts shouldn't be enforced is to say that the things referenced in the contract are not really my property. That strikes me as the kind of mistake the Communists made. An attempt to legislate property out of existence would deserve E.O. Wilson's comment: Great theory - wrong species.

Chris

[Phillip Huggan]

I agree with Tom's comment that property crimes against MNT resources capable of being restored with negligible quality-of-living losses to someone, should be treated with a fine or scolding, the way grafitti on a dumpster presently is (which is very different than grafitti on the Mona Lisa or on an emergency fire-extinguisher instruction sticker; how these behaviours should be punished).

Chris, leverage is usually meant as using assets (industrial machinery, land, cash, goodwill) to "rent to own" other assets. Like, demonstrating a record of stable employment and 5% down payment to get a mortgage from a bank. Or issuing stock-options/ownership-grants to hire a needed employee.
Technically, just paying someone in cash on the spot for immediate work is leverage in that you hope your physical bills don't loose value before you utilize them. But usually more abstract Money Supply (M1, M2, etc) definitions are meant by "leverage".

Chris, the term I think you meant is Expected Value (EV) or more commonly, "discounting". I had $16 worth of sports parlays that needed the Bears to win outright, or lose by less than 4 pts. After my successful hockey game picks, my EV was around $65 before the Super Bowl kickoff. It fluctuated wildly during the game and dropped to less than a few dollars after Grossman threw a brick late in the game that was returned for a TD.

Discounting can be making predictions about anything. Leverage is a process to convince someone to lend you their property, based on your ability to pay him back in the future. Leverage would be ideal if it somehow measured how well the loan would increase one's future productivity (rather than pay-back probability), but in practise it rewards capital holders who already have the means to pay for the highest leverage ROI assets such as bread, fresh water, shelter, basic health care, utilities, public transportation, education, training, air (post-MNT?) etc., and other corrective means such as graduated income tax rates and outlawing tax-shelters and (some) public utilities and public education must be undertaken to address leverage free-rider effects.

[Phillip Huggan]

I'm not too concerned about consumer MNT economies (beyond ensuring universal access to essential consumables). For me the question is about how to best utilize MNT for industrial capital projects and scietific R + D, in a way that isn't "risky".

For example, suppose I want to build a MNTed observatory in space for the purpose of observing the geography/topography of some Oort cloud planetoid. You could discount the odds of my successful telescope deployment (given limited MNT factory "run-time" for the project) as being, say, 99%. You could discount the successful observation of an desired Xena feature as being 20%. You can use these EV estimates when planning your project, but to actually *build* the telescope requires leverage, unless you happen to own/control the MNT infrastructure. If you intend to search for microbe life on Xena, you probably have to convince tax-payers to take on debt; convincing them to make your telescope is the act of utilizing leverage. If you intend to scout Xena for a site to use as a hotel for tourists or a space golf course, you probably go the private route and see if your business plan qualifies as measured by a variety a business metrics (sweet, a 100000000 yard drive!!).

[Chris Phoenix]

Phillip, you seem to be wanting to treat property crime as "victimless" unless substantial damage is done. But property crime is fundamentally not victimless. If someone dropped a piece of litter on my property unthinkingly, I wouldn't mind too much. If someone threw a bag of litter onto my lawn from a passing car, for their trivial convenience, I would be pretty upset. Not from the harm done, but from the incivility and invasion and deliberate criminality. And if someone entered my yard and spray-painted something, even a dumpster, I would suspect them of being a basically bad person who should be locked up. I wouldn't automatically lock them up--I'd try to learn enough to make a productive decision. But that would be one of my options.

I was not talking about expected value. Assessing expected value seems necessary for leverage, but they are not the same thing. If I sell a piece of property, the sale price is closely related to that property's expected value. If I borrow money using the property as collateral, and then use the borrowed money to buy another piece of property, that is leverage--right? First the loan officer computes the expected value. Second I obtain two properties for the price of one. The second step is what I meant by leverage.

Chris

[Greg]

Regarding questions of crimes against property, another consideration to take note of is the "broken window" theory, which argues that if even minor crimes against property are not responded to in adequate fashion, this establishes a climate where would-be criminals feel free to commit far more serious crimes, perhaps against people.

>>I was not talking about expected value. Assessing expected value seems necessary for leverage, but they are not the same thing. If I sell a piece of property, the sale price is closely related to that property's expected value. If I borrow money using the property as collateral, and then use the borrowed money to buy another piece of property, that is leverage--right? First the loan officer computes the expected value. Second I obtain two properties for the price of one. The second step is what I meant by leverage.<<

In terms of present and future values, one way of evaluating a rental property could be to project a future set of net cash flows (i.e. cash flows once maintenance, taxes, and the like are excluded) and then applying a discount rate to the cash flows and summing the discounted values and comparing to the price the property is selling for. One of the big drawbacks to doing this is the number of assumptions one needs to make in the process of generating this value and the sensitivity of the value produced to these assumptions (what interest rate to use, for example).

In your example, in order to use property number 1 as collateral for a loan to buy property number 2, you would first have to have some equity built up in property number 1. You could, of course, use a good portion of the value of property number 2 as collateral for your second loan. This will only be allowed if the degree of debt on both properties and consequent ease of servicing both loans is within limits the bank considers acceptable. The leverage comes into in in the fact that you don't have to everything pay up-front for either property. The degree of this leverage is something the bank has great incentive to watch like a hawk.

Where future value calculations and the concept of leverage meet is in the interest rate. If interest rates go up, a given amount of debt will be more expensive than under a lower interest rate regime. At the same time, a higher interest rate makes prospective future cash flows less valuable. The more money I can get by simply parking my money in a savings account, the less attractive alternative investments will seem in contrast.