Cognitive Dissonance in Modern Finance

- By The Notorious CFP®

Introduction

It's a common theme throughout humanity that one must believe they are in control in order to navigate this world without going mad. So when that illusion of control is shattered- be it a health emergency, personal loss, social disruption or stock market decline... i.e. when something bad happens to good people, an event that we suddenly realize we cannot control- the human brain struggles with a concept called cognitive dissonance.

Most people are at least somewhat familiar with the concept of cognitive dissonance. When the stock market goes down, for instance- but we really really want it to go up... or we believe we deserve to be enriched by it at all times.... or we were led to believe but then later discover that our trading strategy or preferred investment class does not work the way that online investing guru promised it would... that's a form of cognitive dissonance as well.

Sometimes, we perceive our political leaders to be competent and virtuous guardians of the republic because well, we voted for them and the economy should be reflecting their virtue, which is our virtue, but in reality it's just the opposite and suddenly over the span of two years we all become stuck inside a giant dumpster fire being towed down an urban street in a major coastal warzone by a clown car driven by children in adult bodies (holding worthless diplomas they "earned" from adult daycare facilities and framed in mahogany on the wall) that we thought were our political messiahs but in actuality brought all of this drama and chaos upon the people all by themselves and now they can't blame anyone else but still try to blame others anyways, until it just gets so absurd that even their equally-corrupt media sycophants hold them to account....

... Well, then that's what modern cognitive dissonance might look like in 2022. (Uh, did that rant just happen?!?!)

Yeah, I just took modern finance to another level. You're gonna want to go back and read that again.

When confronted with cognitive dissonance, the inconsistency we cling to within our own minds requires us to do one of three things:

Ignore it (the lazy approach)
Maintain the conflicting beliefs, invent new ones and perpetuate one's prior mental disorder (the dysfunctional approach)
Change one’s beliefs or behavior to eliminate the conflict - accurate or otherwise (the painful approach)

It's not too difficult to guess which options most Americans typically select. They usually vacillate between sloth and dysfunction. That sounds a tad derogatory, but I'm willing to have my mind changed. Very few are willing or able to evaluate and change our beliefs because that would violate our internal beliefs about ourselves. And that's very uncomfortable, especially when external forces seek to discourage that level of enlightenment.

As a result, we as a culture and society still have yet to truly confront reality. Until we do, the economy- and the markets that reflect them- will continue to struggle and experience occasional disconnection from truth. This post is all about shattering comfortable little lies we all maintain about how we think the market should work.

Some investors will understand and adapt to the playing field of disorder we all participate on and be wildly successful at taking maximum advantage. They will see the code in the matrix and exploit those who cannot or will not. Others will be crippled by paralysis or misstep into disaster. Our response to this current economic crisis (of our own making, might I remind you..) will determine the severity of the downturn and the division of wealth over the next decade. The stark truth is that there is currently an incomprehensible quantity of monetary wealth sitting in cash "on the sidelines" all over the world. And "where it goes, nobody knows.." Like water, it will flow to around those who refuse to yield like stone, and towards those who can adapt and embrace the new rules of finance.

Fortunately, we live in America, which is currently "the cleanest shirt in the hamper" of countries and economies, and eventually our wacky version of capitalism will reassert herself (either the easy way or the hard way) when massive transfers of said wealth occurs. But first we have to get to the roots of the problem before we can solve it. And since I don't need your money or vote, who better than me to present this situation and the solution in a hundred pages or less...

Control

"Choice. The problem is choice" – Neo (The Matrix Reloaded)

When our leaders and the Federal Reserve want to control our financial behavior, like participation in certain sectors of the economy like the equity or property markets, they engage in clever strategies like financial repression, which is a combination of a.) forcing interest rates artificially low - which prevents savers from earning interest in bank deposits, and b.) printing money - quantitative easing (QE), which debases the currency. I know, I know, you've never physically witnessed such manipulation. But trust me, it exists.

Financial repression forces savers out of cash and into alternatives, while it slowly erodes the value of money for everyone. But mostly the poor, who are most vulnerable because they have little in the way of assets and plenty of liabilities and expenses. Said differently, your elected leaders- and the unelected bureaucrats that control them - employ techniques like financial repression to devalue the stored labor (in the form of financial assets) that workers previously or currently engaged in to earn the money in the first place. They steal your labor without you even knowing it. Admittedly, this is a complicated concept and process so let me talk slower and use smaller words for those gearing up a defense to this argument. I know you are out there...and I see you!

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities..."
- Adam Smith, The Wealth Of Nations

I can explain this better in a different way...

Let's say that you worked eight hours today. At the end of a gun, the federal government will take 2-3 hours of that labor in the form of taxes, thank you very much. Yours is probably less, but that represents my tax bracket and 'contribution' to the greater good of society. They will then distribute the fruits of your labor to other people who did not participate in, nor supported your work. Those who run the system will always assert that your contribution goes to operating the various aspects of society that allowed you to perform the work (i.e. former President Obama's infamous "you didn't build that...") but I don't know anyone competent who fundamentally believes that in their heart.

Unless your city or town completed some grand and impressive federal works project this year that you want to brag about, in which case I would love to be enlightened. Please send me pictures that demonstrate what public works your federal tax dollars directly funded in your actual community and let's all marvel at Washington D.C.'s remarkable benevolence and ability to ~~mal~~ invest OPM (other people's money).

And no, direct payments to Pfizer that represented 90% of their Q2 2022 profit is not my definition of public works. I sent the IRS over six figures in 2021 and I know the vast majority of that- like all 'non-profits'- went to salaries and pensions, neither of which do much to improve society nor advance human progress (excluding the ability for those humans to continue consuming, which is admittedly not insignificant.)

We can quibble on the details, but I'm going to proceed under the presumption everyone here is smarter than that and we can continue on with the lesson. The truth is that the vast majority of the money taken through taxes went to support people that are not employable in the private sector, largely engaged in work that has little or no value or could be done by machines. Like BLM, our taxes primarily go to human welfare programs masquerading as civil service.

If their skills were valued and they could support themselves based on their own labor, then there would be sufficient demand, they could charge for their products (streets) and services (education) and we would not need to steal it from the productive class. Federal taxes exist for the same reason as all bureaucracy - to grow large enough that no one can possibly be accountable for anything, much less their end results. Suffice to say, our labor (in the form of money) is transferred from us to someone else through the politicians by threat of incarceration.

Various levels of federal, state and local government will usually extract another 2-3 hours of your daily labor in other, less transparent ways because federal politicians can only steal and redistribute so much of our physical labor through taxes before their own lives are at risk. Or maybe that's just my mentality. Those bonus "extractions" - sounds like a dental exam- include sales taxes, (sometimes) state income taxes, property taxes, capital gains taxes, payroll taxes, social security taxes ("Who is FICA?"), estate taxes, etc. Lest we forget excise taxes on fuel, building permits, vehicle registrations, tolls, sin taxes (cigarettes, alcohol, etc.) You get the idea... "The price we pay for civilization..." We all fully recognize that federal taxes did not exist as recently as 100 years ago, so it can be done. And it can be done better at the local level.

I even have to pay property taxes to Kerr County on my computer equipment at the office. Annually. Because Kerr and Gillespie Counties provide what services on that equipment, I'm still uncertain. (Who knows, maybe they're the one disabling my printer capabilities every three weeks instead of some diabolical collusion between HP and Microsoft?) I bet you were unaware that small businesses like mine are subjected to Kerr County taxes on my wood office desk annually. So for me, I know and accept that I have to go back to work after dinner until about midnight most weeknights to recoup the money I "lost" during work hours. And that's a real drag, man. I would love to work less than 12 hours a day, but I also know that social security won't exist past 2030 and so I accept that I need to make up the amount I am sending to the AARP crowd.

Financial repression (as well as rising interest rates and inflation) strikes me as a particularly immoral method of tax, since it's so much more oppressive towards the poor.

Others might argue differently (but definitely not me...) that it's two components- suppressing rates and printing money - alone are collectively fairer than our current "progressive" income tax regime because in addition to their direct extraction of your labor through the various taxes above, the government and the Federal Reserve also facilitate wealth distribution indirectly though inflation. The inflation heist serves to take from all Americans fairly equally, regardless of income or even if you have a job at all. But that's a conversation for another post.

As a result, it doesn't take a genius (thankfully for me!) to see how inflation is specifically designed to inflict the greatest impact on the poor (with little savings and primarily liabilities and expenses), the retired and/or elderly, who cannot go back to work to earn more income and realize additional COLAs (cost of living adjustments).

One would be strained to argue that this is not clearly the M.O. of our current executive and legislative branches. And yet, the poor and retired always tend to vote for policies that exacerbate inflation- forgiveness of student loans, expansion of the welfare state, enhancement of spending on the Military Industrial Complex (MIC), consolidation of government control of the economy (health care, financial and tech sectors) and law enforcement, etc. It's ponderous.

In the end, it's probably most accurate to consider it all petty theft. (Or social justice, depending on your political leanings and the quality of your upbringing.) That's not my opinion, that's a fact anyone with even rudimentary knowledge of economics can deduce...

McDonald’s menu in 1953. Who suffers most from inflation? And why?

Despite the tax state we all enjoy, it's still very important to all of our most powerful pillars of society for the citizenry to feel financially comfortable (translation: numb). This is because groundbreaking studies have found that people who feel broke don't spend as much as those who don't. The corporations need their customers to feel rich enough to buy their products without stressing over the cost. Counties need residents to believe their properties have increased enough in value to continue supporting municipal spending proclivities without too many complaints. More than anyone, the federal government needs citizens to feel financially safe and comfortable enough with the stock market to continue supporting our current version of capitalism, and frankly to maintain their jobs and physical safety.

None of these manipulations are necessarily nefarious on their surface, if they are transparent and offer mutual benefit. Unlike vaccine mandates (for instance, in Ottawa), agricultural reform (in the Netherlands), climate change legislation (Green New Deal) and police defunding initiatives (Minneapolis, Portland, Seattle); if something is effective, the mutually positive results should be abundantly clear to the majority and will sell themselves without a lot of heavy-handed tyrannical behavior. In those scenarios, these entities applying their will on the populace will simply be perceived as a guiding hand. If, however, the leaders think their constituents are an inferior gaggle of buffoons, or their own behavior is morally abhorrent or simply a power grab, they're likely to experience significant resistance. That is a big part of the narrative in 2022.

"I don't like the idea that I’m not in control of my life" – Neo (The Matrix)