Rouletteconomics

“In December of 1639, Pascal's father had moved the family to Rouen where he took a job as tax collector for the region. Pascal's invention of the mechanical calculator in 1641 was borne out of a desire to help his father in collecting taxes. … Pascal worked on many versions of the devices, leading to his attempt to create a perpetual motion machine. He has been credited with introducing the roulette machine, which was a by-product of these experiments.” - Inventor of the Week Archive, Lemelson-MIT Program, May 2003

The simple economics of supply, demand and price are probably the widest known and most used part of economic life for the majority of all participants. We know the basics, too much supply and the market is flooded with a product, the price drops and the producers are encouraged to produce less of that product and look for another opportunity. Simple, or not? On the other side, rules of demand state that a lower price would actually encourage demand to absorb at least some of the over supply. Huge demand and insufficient supply and the opposite happen.

The truth is that there is an endless interaction between price, supply and demand in a dynamic process of price discovery which, like infinity, can be conceptualised in the abstract but one can never quite get your hands on it. Nobody tries to interfere with infinity or to manage infinity but managing price is always fair game.

Now add the tendency of humans to manipulate their environments to their advantage and we see that economics is studied mostly for insights to manipulate for a gain. Nobody pays more for these insights than government for it has unbridled power to manipulate at a macro level. A myriad of other manipulators are much less ambitious and will stick to “niche” markets where they will often attempt to access government power to manipulate their chosen niche market.

Free market economists are seldom as much in demand as economists specialising in market manipulation so why do these unwanted economists refuse to die out and where do they get gainful employment? These economists have learned to look beyond the manipulation and know that, in time, someone will be needed to attend to the repairs to the economic fabric torn by a multitude of manipulations.

Taking our cue from Pascal, where government economic manipulators are looking to maximise taxes in an economic model of perpetually increased tax flows, a peek into market manipulation can be demonstrated by looking at a roulette table. The rules of the table are devised and the roulette table market is set into operation. All participants to the market event (the betting, the spin of the wheel and the roll of the ball) know the rules and the odds.

Two very important preconditions exist. The wheel and the ball must spin and roll without interference and the fall of the ball be left in the unbiased hands of chance. All the punters must be treated equally.

What happens at the table? A redistribution of the pool of bets at the hands of chance and the “House” as operator of the “roulette market” gets a “house percentage”. That is it, and it repeats endlessly for as long as money enters the table. Pool established, turn of the wheel and roll of the ball, the house cut and redistribution according to the placing of the bets and the outcome of the roll. The house cut in roulette is its statistical edge generally calculated to be 5.26%. The House has to manage its income as it would realise the house edge only once it has a statistically large enough number of events.

The game of manipulation immediately gets under way. Certain punters want to find a system to improve their odds. The House wants to find a way to improve its odds and the “marks” just trust in blind luck.

The House has a vested interest in maintaining a status quo and will go as far as prosecuting punters who “game” the system for the roulette market will collapse should the redistribution be taken from the hands of chance. The House will lose its cut or the punter will walk away from a rigged market. Perpetual motion in the roulette market cannot have a single or a few winners and everybody else a loser, or can it?

Say Mr Well Connected arranges with the House special rules that would ensure that he gets a guaranteed winning percentage of the pool. What would happen? Would the punters simply stop punting?

Say Mr Government wants to do the same but it wants an upfront guaranteed cut irrespective of how the redistribution is done thereafter. What needs to be done? Engage the power of governance.

Say Mr Well Connected wants punters to be forced to continue to punt so he can get his slice. What would need to be done? Engage the power of governance.

Governance is a crude intervention and breeds rebellion so alternatives are always sought. The best solution would be to ensure that there is always a lot of money in the pool for punters, the House and Mr Government to take cuts.

The solution is to flood the betting with counterfeit money of such good quality that nobody can see the difference. Who better to do that than the original source of money, the Central Bank? Central Bank money creation will express as debt and too much of it as reckless private or sovereign debt. No matter, Mr Well Connected and Mr Government enters into a Public Private Partnership whereby Mr Well Connected arranges for the orderly distribution of the counterfeit money on behalf of Mr Government in exchange for a percentage of the cash at the table.

Mr Big Spender at the table soon gets into trouble with too much punting while having too little money and far too much debt. He begs Mr Government for a bailout. Mr Government arranges special “F” chips for Mr Big Spender backed by special counterfeit money because Mr Big Spender must be kept at the table else the whole game collapses.

The House has since also made a deal with Miss Lightning Fast Punt who now has a special arrangement, for a fee. She gets to bet first and can withdraw bets one nanosecond before the ball falls. She manages her bets to time the ball and make sure she hardly ever gets a loosing punt. Mr Government does not like the deal very much but Miss Lightning Fast Punt can sure fill a table fast with bets and makes the game look very good so Mr Government just makes unhappy noises but does not interfere with the arrangement.

Round and round the betting would go, the House makes money, Mr Well Connected makes money, Mr Government makes money, Miss Lightning Fast Punt makes money and even lots of lucky punters on the right side of the wheel make money. Mr Big Spender keeps loosing money but with an unlimited credit line to counterfeit money plays like never before. The money pool at the table is saturated with counterfeit money, gambling on debt, a deadly game that always ends in disaster.

The pool money must remain at the table. It can never be withdrawn from the table to enter the economy of goods and services, of real things. It must remain at the table where the game of illusionary wealth is the reward while Mr Well Connected, the House, Miss Lightning Fast Punt and Mr Government spends their cuts in the real economy. The betting pool, however, must remain at the table or else Mr Government will be called upon to pay its debt, a debt that will have to be taken as taxes while using the power of governance. A debt that may be reneged upon in the interest of "the people".

The roulette market is no longer the willing participants market but a market controlled and managed to maintain the money pool at the table at all costs. It now also needs tinkering with the bets and payouts. For instance, the black and red simple bets may now only be played with “I” chips and Mr Government will decide the payout.

What aught to be and what will be are seldom the same so in the end the pool money will escape or a punter will find that the “chips” simply cannot be cashed in and then the game is up. The game is always up when the “mark” is cleaned out. In the game of economics that is when the savers have been cleaned out.

Until then, Mr Government drains the real money form the roulette pool, spends it and runs up a debt that is impossible to repay. Mr Well Connected and Miss Lightning Fast Punt bets at the table and always win, the House is happy with activity, Mr Big Spender can play at will while the punters enjoy their illusion for as long as it lasts.

In time the rouletteconomy becomes unstable and collapse. Then for a short period there will be strong demand for free market economists to repair what is broken before the counterfeiting of money returns as a pacemaker for economic activity. Benign at first, menacing at the end.

The game at rouletteconomy is a dangerous game but fortunately it is just a figment of my imagination, or is it not?

When the chips are down make sure that your payback will not be all illusion for the “real” economic calculator will apply when more Mr Governments are caught at running up bills they cannot hope to ever repay. If you are a saver, know that you are the mark and convert your savings in good time into a reliable store of value far away from the hands of manipulators.

Sarel Oberholster
BCom (Cum Laude), CAIB(SA).
28 May 2010

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .


© Sarel Oberholster