This is the once-a-week free edition of The Diff. Paying subscribers get at least 3 pieces per week. What you missed this week: why buybacks are a symptom, not a problem (plus two Finance Hipster reasons they are in fact a problem); what we can learn from using agent-based models to simulate infections (“super-spreaders” are surprisingly unimportant, full compliance with social distancing makes a big difference); why banks face Prisoner’s Dilemma, and how the Fed is solving it; and a meditation on legitimacy, in politics and work.
And if you’ve been enjoying The Diff, now’s a great time to share.
First-generation Old Money
I have a few friends who, I assume, come from Old Money. I say I assume, because it’s very hard to tell: the way class works is that you can see it, but you can’t articulate it. If there were a checklist for what makes you part of the upper-crust, you’d be able to follow it. But there’s a term for people who check every legible box: New Money. But some people just have that old-money vibe. One of my finance buddies had an extremely I-do-this-because-it’s-fun-not-that-millions-of-dollars-would-affect-my-lifestyle sort of attitude. He never mentioned coming from money, and I didn’t quite assume, but I read a history book about his home country and kept noticing industrialists and finance ministers with the same last name.
George W. Bush was Old Money. He affected a Texas accent, but he went to Yale; he worked in oil and gas exploration, but maybe in the same sense one might “work” as a yachtsman. Barack Obama also counts. Yes, I know, one of his autobiographies tells a different story, but if you’ve ever tried to read it you know what it really is: a 400-page college admissions essay. Prep school in Hawaii, Harvard Law, then doing public-interest law and teaching classes on the side? Classic Old Money behavior; he’s probably one of a few thousand people with similar biographies, at least up to his Senate election.
Bill Clinton and Donald Trump are both New Money presidents. Accent, personal life, the financial dealings we know about, style. They’re both successful, powerful people, but if either is part of a dynasty it’s as founder, not inheritor.
What sets Old Money and New Money apart is not really those external quirks, but something deeper: New Money has something to prove, and Old Money has nothing to prove. Most of us are somewhere in the middle. There’s not too big a gap between perception and reality for most of us; we might exaggerate our virtues and disguise our vices a little bit, but the majority of people don’t live a lie in any significant way. If you get really rich, really fast, though, you do have to worry that you’re living a lie: are you lucky, or are you good? Old Money doesn’t really have to worry about this, at least an an individual level. I’m sure there have been mediocre batches of Rothschilds and Rockefellers here and there, but overall the family does fine. And even over extraordinarily long periods, through multiple drawdowns-to-zero, family wealth persists.
A legacy like that produces something closer to intrinsic than extrinsic motivation; when Old Money succeeds, it’s not because they’re trying to be something they’re not, just that they’re trying to be the best version of what they are. That’s a very healthy attitude. It’s tolerant of failure (any family that’s been rich for generations probably started with someone who engaged in behavior that was antisocial at the time and is outright felonious today; any museum in New York that was founded before 1934 was funded by things the '34 Act forbade. If you’re old money, you come from a long line of swashbucklers). But it requires effort: over a long timeframe, ennui is fatal to accomplishment, and it seems to be contagious.
You can’t just decide to “be” old money; all of us are born nine months too late to have any impact on that particular outcome. But can you adopt the attitude? More importantly, can you inculcate it?
I think you can. The only evidence of this is anecdotal, but it’s suggestive: John D. Rockefeller, Sr., was a bigamist and con-man. John D. Rockefeller, Jr. can make a plausible claim at being the richest human being ever to live. And every one of his descendants is Old Money.
Is it worth it? Is there any point? The rich aren’t better, but they’re sure better at something. Whether you think that’s creating wealth, preserving it, or stealing it depends on your politics. “Creating wealth” gets more play, but there’s something to be said for preserving it, too; aside from the US and Australia, pretty much every country has experienced at least one event catastrophic enough to wipe out basically all the country’s financial wealth—hyperinflation, revolution, losing a war. And yet, some of the same people bounce back, again and again. That’s an immensely valuable skill to cultivate, since bouncing back fast presupposes some skill in surviving catastrophe and rebuilding afterward. And as Nassim Taleb repeatedly emphasizes, 1) over a long enough time period, the only thing that matters is the risk of going to zero, and 2) “long enough” is always surprisingly short.
So, for partly selfish and partly altruistic reasons, I’m trying to raise the kids as if we’re Old Money (we’re not) and always have been (two generations ago my ancestors specialized in rarefied fields like picking cotton and dismembering hogs). “Old Money” doesn’t really mean rich, although that helps; what it really means is spending money and building a legacy as if both have to last forever.
- Yesterday, I mentioned the idea of “green zones” instead of “red zones.” If we switch to the default assumption that every region in the US has a cluster of Covid-19 patients, then the goal of test-and-trace is to find people, buildings, neighborhoods, and eventually cities that are safe. That’s likely to be official policy soon. Some companies manage earnings through the “kitchen-sink” approach; whenever there’s a bad quarter, they admit to everything they should have written down long before. It works, because if you report enough bad news all at once, statistically all that’s left after is good news. (Related, here’s more on what comes after quarantines.)
- Jordan Schneider interviews Bill Bishop is really all you have to hear: they’re both great on China. Don’t miss their discussion of why the CCP is pushing conspiracy theories (in fairness: American pols are doing this, too), and the deeper meaning of China’s expulsion of US journalists.
- In wonkier China news: China Needs More Progressive Taxes and More Spending on Public Health. Turns out marginal income taxes for earners at the 80th percentile are around 10%; at the 10th percentile it’s 65%. The result is an insanely high savings rate. There was a time when this was exactly what a prudent social engineer would want, and I suspect that in Japan and South Korea technocrats deliberately engineered things so the average worker would have no choice but to save a lot. But as Chinese median income rises and export-driven growth gets riskier, a more consumption-focused model becomes viable right as it becomes necessary.
- A reader submits this great natural experiment in measuring the impact of lockdowns in China. Judging by the box office numbers, government policy affected behavior—but virus rumors had just as big an impact.
The snarky view of Canada is that it’s an emerging market that happens to have a high GDP per capita. This is weird and unfair—they’re about as culturally distant from the US as they are geographically, and they have Constellation and Shopify, every growth-at-a-reasonable-price investor’s most and least favorite tech names. But there’s a grain of truth. Any country that owes a big chunk of its GDP to natural resource extraction and a big chunk of its real estate value to foreign inflows looks suspiciously similar to a bubbly emerging market. Now that’s deflating, with Canadian oil companies cutting capex and Canadian oil hitting absurdly low prices.
Anonymity Socializes Social Capital
Timewasters of the world, unite! You have nothing to lose but your bragging rights. That’s the message of anonymous messaging apps like Yik Yak and Secret. (October is a great newsletter covering the history of social media—subscribe!) I was an avid Secret user for a while, and in the couple weeks that I was on it, I noticed a particular dynamic: the two kinds of content that are more viral on an anonymous site are 1) really vicious gossip, and 2) people trolling for extremely casual hookups. Since both of these are very appealing to a small audience and offputting to a large one, it leads to evaporative cooling, after which the community congeals into gunk.