CHAPTER 2Macroeconomic Perspectives: THE IMPACT OF DEBT, DEFLATION, AND MISPRICED MONEY ON ASSET MARKETS
It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.
—Ludwig von Mises
This chapter makes a leap to macro thinking from the micro considerations of the last chapter. Although not shocking, it seems that what makes sense for the individual may not always make sense for the group. Highlighting how this paradox of aggregation operates, Paul McCulley notes:
Anybody who's ever been a spectator at a crowded ball game has witnessed the difference between microeconomics and macroeconomics: from a micro perspective, it is rational for each individual to stand up to get a better view; but from a macro perspective, each individual acting rationally will produce the irrational outcome of everybody standing, but nobody having a better view.1
In economic spheres, this fallacy of composition can be more extreme and have more dramatic impacts on society. Specifically, analysis conducted at an individual level may not apply to groups.2 Consider home finance. Although it may be reasonable for an individual bank to believe that it can foreclose and sell a house for a value in excess of the mortgage amount, this conclusion is very suspect when considering millions of homes simultaneously being sold. The latter case will crash the market for homes and ...