The Capitalist Axiomatic

I want to invest in lobbying

2011-04-25T09:22:00.001-07:00

The Big Picture has a nice infographic today that lets you calculate the compound annual growth rate of lobbying expenditure for various industries. The top spenders have grown at around 10% per annum for the last decade. That's a pretty booming industry.

If you step back for a second and just look at government lobbying as any other industry, you can see that the basic laws of competitive advantage make this sort of growth inevitable. Congress consists of only 535 members, which makes it a limited resource; the returns are high; and you can turn a first mover advantage into a durable competitive advantage by making a politician who may be around for many years beholden to you from the start. In such circumstances, capital will find a way. That is the magic of the market. In fact, if I weren't deeply opposed to the very existence of this market, I would be looking to invest.

If you want to read a well-crafted and very detailed tale about the rise of lobbying as an industry, I can wholeheartedly recommend Robert Kaiser's So Damn Much Money. Reading about the history of post-war Washington is very illuminating and helps to understand why the system we have now is subtly different from the basic corruption that bedevils government everywhere and always; these days, we have learned to mass produce corruption.

And by the way, all hail a hedge fund manager brave enough to call for public financing of elections.

QB or not QB

2011-04-08T08:49:00.001-07:00

I've been reading these guys' letters for almost 3 years now, ever since they came through our office trying to raise money for their fund. Eventually, the Big Picture and a few of the other widely followed contrarians picked them up (dare I say syndicated them?). I think they have many good points, and they have definitely helped me to develop my own thinking about the practical realties of monetary policy and monetary regimes. Also, they give good (if long) letter.

Unfortunately, to borrow a phrase from somewhere I cannot remember, they manage their persona better than their portfolio; if they're so smart, why aren't they rich? Last time I checked, these boys weren't even keeping up with the S&P500, let alone the price of gold, despite how much they yammer on about the bankruptcy of the modern monetary system and praise that barbaric yellow relic, and even despite the incredible run it has had over the last 2 years.

I see two reasons why these guys are better off writing incendiary columns than managing money:

They have religion about their thesis. Confident contrarianism is one thing, and probably a necessary thing for producing excellent returns. Courage of your convictions is another thing, and is usually the kiss of fucking death.
They are wrong. They simply haven't thought through this problem all the way, despite discussion of "war-gaming" their central thesis. So, credit them for getting to second base when the vast majority of the world is still on first, but don't get too convinced that they have seen how the whole game develops. It's long and complicated and contingent and they have stopped in the middle -- they outline one possible monetary future and call it inevitable. It reminds me of Nozick's pithy phrase regarding a priori truths in philosophy, "Lack of invention is the mother of necessity".

Exasperation aside, let me address point 2 in a more substantive way.

US dollar are debt, technically (Federal Reserve Notes) and in practice. Their ongoing value is supported by a system of government oversight that ultimately relies upon convincing private counterparties to use them in transactions. As all modern global currencies are directly or indirectly benchmarked to the US dollar, they too are unreserved debt, literally and functionally owed by sponsoring sovereign governments and backed by the full faith and credit of their taxpayers.

The fundamental question all global commercial counterparties must answer upon each transaction is, "will my currency maintain its purchasing power until the next time I need it?" If a quorum of economic counterparties begins to answer negatively, the currency in question will soon lose sponsorship and fail.

This may sound insightful to small children taking their first steps into the wide world of political economy. Wow! Money, like reality, is nothing but a collective hunch! Let's throw off our clothes and run free through the fields of hard asset backed currency and pick daisies! There's nothing to fear but everyone else fearing fear itself! Revolution! Mister T pities the fool who doesn't buy gold.

Good try, but this is NOT all there is to money, any more than all there is to the government in general is our collective decision to obey it. Yes, sure, if we all woke up tomorrow and decided that cigarettes or leaves are money, then they would be. And if we decided to have a revolution and throw off government oppression worldwide, we could. While an valuable thought experiment, this is a lot easier said than done of course.

In the case of money, what is difficult is the fact that we cannot collectively decide what constitutes money independent from collective deciding what constitutes acceptable government. You cannot ignore that money was invented by governments, for governments, in order to collect government taxes. You cannot talk about money without talking about taxes and politics. The bedrock reason we all primarily use government backed currency is because that is the only thing they accept as tax payments, and if you don't pay your taxes, guys with guns come and put you in a very unpleasant little cement floored cage opposite a shackled man in an orange jumpsuit. This fact is not incidental to money. It is the fucking DEFINITION of money. It is the crystal out of which the money network condenses, as it were. To write about what money supposedly is without mentioning taxes is not an oversight. It is a fundamental error. They are not just early. They are wrong.

In short, money is inherently political, like everything else. The change of monetary regimes is therefore also inherently political. Economics and politics intersect, no doubt, but one does not determine the other. If you want to predict the trajectory of either, you have to understand both. But if you really want to focus on something, I still think that politics precedes even being.

Am I paranoid?

2011-04-05T16:04:00.001-07:00

Or is this the sort of chart that Google will one day employ to demonstrate that late model humans should be phased out in favor of more efficient forms of working memory that do not depend on clumsy mechano-magnetic mechanisms?

One of my favorite ideas in Accelerando was that the solution to the Fermi Paradox (if there's lots of other intelligent life in the universe, why haven't we seen it yet) could simply be lack of decent effective bandwidth.

To sketch out the concept a little ...

Any brain is a distributed system.
No matter how big your brain gets, it still has to be instantiated in some physical form.
A big brain is going to have lots of individual parts, aka matter.
The individual parts have to communicate with one another and be tightly integrated to form an intelligence.

ERGO:

Even if you have the brain the size of a planet, it still has to be relatively dense or the speed of light constraint will introduce too much latency in the information transfer between the parts to do any really serious thinking. Bandwidth is important to thinking. Well, effective bandwidth. The question is actually latency, but if you have to send lots of packets of information back and forth, the two are less different than you might think.

COROLLARY:

You cannot spread a brain out over cosmic distances (unless you are willing to have it think very slowly).

FURTHER:

Since most of the universe is not energy/matter dense, a very large brain will not want to leave the house because the effective bandwidth is going to suck. It's a long way between planets. Which means that a big brain is either going to bring the matter to itself, or accept shipping a much smaller version of itself around the cosmos if it wants to get away from home. Big brains cannot travel light.

QED.

Bricolage

2011-03-30T07:22:00.001-07:00

My views on net-neutrality, I can see from the various draft posts I've got sitting around, have grown by accretion, and are far from finished. While I'm certain that the lack of timely Anarcho-theist scripture has prevented most of you from meanwhile making effective use of the intertubes, it does not appear that this situation will be quickly remedied. However, in lieu of a positive, final, stone tablet type set of open internet principles and prescriptions, I can, at minimum, identify those areas where I believe we are falling from grace.

Witness this bullshit:

Regulation is to the rescue. ISPs will not be allowed to block access to (legal) websites, or unreasonably discriminate in the way traffic flows. Customers choose. ISPs are open. The network is neutral. What's not to like?

On January 10 2011, we found out. MetroPCS, hit with its first formal complaint, is an upstart wireless network offering low prices and short-term contracts. As part of their $40 a month "all you can eat" voice, text and data plan, they slipped in a bonus: free, unlimited YouTube videos, customised to run fast and clear.

Activist groups, led by Free Press, went ballistic. Their petition to the FCC declared that the mobile provider was favouring YouTube over other video sites, creating just the sort of "walled garden" that would destroy the internet. "The new service plans offered by MetroPCS give a preview of the future in a world without adequate protections for mobile broadband users," they wrote.

The complaint performs a great public service, revealing just how net neutrality would "adequately protect mobile broadband users". In fact, MetroPCS advances the interests of consumers by supporting enhanced access to the applications most popular with users. Such arrangements do not sabotage internet development, but drive it.

MetroPCS possesses no market power. With 8m customers, it is the country's fifth largest mobile operator, less than one-tenth the size of Verizon. Under no theory could it force customers to patronise certain websites. It couldn't extract monopoly cash if it tried to.

This is precisely what you don't want to happen with net-neutrality regulation. So precisely, in fact, that I wouldn't put it past AT&T to have lodged this complaint as part of a lobbying strategy meant to discredit the new FCC guidelines (remember, these boys are playing chess, not checkers).

Saying that you can't discriminate against certain sites cannot mean that you cannot promote others. While I realize that the competitive advantage tied to how fast a site loads is measured relative to others, this systemic effect of these two rules would be entirely different. In the first case you are sticking cats in everyone else's tubes in order to make yours appear relatively faster, which results in the overall efficiency decreasing. In the second case, someone is building a new, and admittedly private, tube. This improves the system overall, though the benefits clearly accrue disproportionately to those doing the building. To use an analogy, someone built a toll road alongside the crowded highway, though in this case, it appears that everyone is free to drive on the new road in exchange for watching a few more Youtube billboards sail past.

I do think that we need to have a serious debate about the long term effects of more internet traffic going over toll roads. If investment were drawn exclusively to building these roads, it's hardly far-fetched to imagine the public arteries eventually reduced to pot-holed rubble. In addition, having a decent public infrastructure could be important for maintaining competition over the long term -- if you need tons of cash and expertise to ship stuff around on the internet, this may favor those who already dominate the traffic in bits. All things considered, I think it's very likely that we want to maintain some sort of quasi-public information highway, or at least to impose some sort of wholesale level regulation on this infrastructure if we decide to leave it private owned (and remember, leaving it privately owned has gotten us pretty far already -- it ain't public right now).

Unfortunately, however, our mechanism for building public infrastructure of any kind here in the US is entirely dysfunctional. While fixing this is a noble goal (PUBLIC FINANCING OF ELECTIONS! PUBLIC FINANCING OF ELECTIONS!) we can't let that hold us hostage and prevent us from achieving some of the same ends by other means. We simply cannot afford to discourage investment in the internet while we wait for a perfect government.

PS. There are a million other issues that come up here, not the least being the relationship between my last statement and my view that the AT&T - T-Mobile merger is a disaster and should be prevented. After all, AT&T has promised to invest in significantly more 4G buildout if the merger is approved. And to use the Jimi Hendrix version of the national anthem as their hold music. Do we really want to discourage that?

On the bus

2011-02-16T17:06:00.001-08:00

I think we have another winner here:

Two collegiate-looking dudes are arguing intensely in German: The translation stream in his glasses tells him they're arguing over whether the Turing Test is a Jim Crow law that violates European corpus juris standards on human rights.

BINGO!

2011-02-16T15:59:00.001-08:00

Peter Orszag, formerly of the Office of Mangement and Budget, and now of Citigroup, has come up with a brand new system for encouraging savings in America: a savings lottery.

In the quest to raise saving rates, this allure of lotteries may be quite helpful. To be sure, most of any increase in national savings will come from a reduction in budget deficits. But a secondary priority is higher household savings, especially among lower- and middle-income groups.

This is where prizes can help. A recent paper for the National Bureau of Economic Research laid out the case for a savings vehicle coupled to the opportunity of winning a large prize. One way to think of these "prize-linked" accounts is that they can offer an expected market return, but in an innovative way. They pay a guaranteed return below market interest rates, but also provide a lottery ticket whose value makes up the difference.

To be specific, a lottery-lined savings account could offer a lower rate of interest, but also say a one-in-a-million chance of winning $1m for each $100 deposited. Mathematically, the expected return is the same, but the chance to win $1m makes the account much more attractive.

What he fails to mention is exactly who is supposed to be running the lottery. He does acknowledge that lots of states have lotteries now, and that the expected return is well below one (on average you "win" 50 cents by buying a one dollar lottery ticket). And he mentions that if the state is running the lottery, this amounts to a form of regressive taxation because more poor people play, and lose, than do rich folks. But then he sort of slips a gear and proposes his altruistic scheme where the expected return is equal to exactly one -- 1 million people put up $100 each, you take the resulting $100m and invest it a 2% return, and at the end of the year, you give everyone $101 back except for one lucky soul who receives $1m. Very tidy.

But who is running this show I wonder. The same state that already fleeces the guy in the food stamp line every week with the current lottery? Or some more altruistic state that runs the whole thing like a small town raffle and skims nothing off the top?

Assume NC starts a program like this and is giving you back, on average, $100 plus 2% interest, for every $100 you save. It proves wildly popular and NY decides to copy it. Only they realize that they might attract more people if the prize is $2m. Naturally, in this case, after the prize, there's no money left over to pay everyone else their interest, but they still get back the $100 they saved. Would people be more interested in this lottery? The expected return is lower, but the prize is bigger. How about NJ, who decides to offer $10m in prize money, and reasons that even with this princely sum, they will still be giving $92 back to the losers for every dollar. That's not the end of the world, is it? And the expected return is still exactly one. And if these lotteries prove popular why wouldn't NM perk up to a chance to change things ever so slightly and give everyone $90 back, give away $10m, and just keep $2m for the guvna? Wouldn't people play this lottery too? They already play ones that are much less rewarding.

So then what prevents a state from skimming a little? And then the next from skimming a little more? Until we reach the point where the odds are so bad that the it limits itself, which would represent something like the market price for the gambling instinct. I mean, if the odds were worse, fewer people would play so they would raise less revenue but pay out less, and if the odds were better more people would play but they'd have to pay out more. Don't states already set the odds on their lotteries to raise maximum revenue?

I was joking, but now I'm kinda curious.

Anyhow, my point was just that we already have a household savings system linked to a lottery ticket, and we call it the stock market. The odds are most definitely rigged, but people still LOVE to play. And the house, just like the state lottery, keeps a big chunk of the kitty. Perhaps this accounts for Mr. Orszag proposing this scheme now that he has moved over to Citigroup. It makes me feel terribly modern to know that the government could outsource corruption.

Mr. President, we must not allow a wine shaft gap!

2011-02-15T06:12:00.000-08:00

Fukuyama discovers Deleuze

2011-01-23T08:51:00.001-08:00

Francis Fukuyama can be a thoughtful guy (The End of History screwed the pooch in spectacular fashion, but Trust was really interesting). Here he reflects on the differences between governance in China and the US.

Nonetheless, the quality of Chinese government is higher than in Russia, Iran, or the other authoritarian regimes with which it is often lumped – precisely because Chinese rulers feel some degree of accountability towards their population. That accountability is not, of course, procedural; the authority of the Chinese Communist party is limited neither by a rule of law nor by democratic elections. But while its leaders limit public criticism, they do try to stay on top of popular discontents, and shift policy in response. They are most attentive to the urban middle class and powerful business interests that generate employment, but they respond to outrage over egregious cases of corruption or incompetence among lower-level party cadres too.

However, if the democratic, market-oriented model is to prevail, Americans need to own up to their own mistakes and misconceptions. Washington's foreign policy during the past decade was too militarised and unilateral, succeeding only in generating a self-defeating anti-Americanism. In economic policy, Reaganism long outlived its initial successes, producing only budget deficits, thoughtless tax-cutting and inadequate financial regulation.

These problems are to some extent being acknowledged and addressed. But there is a deeper problem with the American model that is nowhere close to being solved. China adapts quickly, making difficult decisions and implementing them effectively. Americans pride themselves of constitutional checks and balances, based on a political culture that distrusts centralised government. This system has ensured individual liberty and a vibrant private sector, but it has now become polarised and ideologically rigid. At present it shows little appetite for dealing with the long-term fiscal challenges the US faces. Democracy in America may have an inherent legitimacy that the Chinese system lacks, but it will not be much of a model to anyone if the government is divided against itself and cannot govern. During the 1989 Tiananmen protests, student demonstrators erected a model of the Statue of Liberty to symbolise their aspirations. Whether anyone in China would do the same at some future date will depend on how Americans address their problems in the present.

The praise of China's ability to turn on a dime is nothing new, even though this does not make it any less praiseworthy -- their ability to make things happen simply because they make good economic sense is sometimes awe inspiring to me; it represents a level of cohesion that seems laughably distant in the US.

What's more interesting here is how the arch-theorist (/apologist) of liberal democracy has started to add in a practical element to his analysis. Maybe the details matter and history isn't over. However the think tanks label it, the reality on the ground marches on. Maybe, just maybe, Hegel is bunk. Maybe it's the mechanism that moves the spirit, and not just spirit sovereign and absolute playing charades with the world.

Should we call this (implicit) new idea the Forest Gump theory of legitimacy: Democracy is as democracy does? Should we finally admit the what we're really interested in is not some grand theory but in analyzing the precise mechanism by which power is constructed and continually reconstructed every time it is obeyed? If there is more effective feedback to this mechanism in "authoritarian" China than in the "democratic" United States, should we ship the statue of liberty to Shenzen instead?

The question is facetious of course, but the idea of evaluating the government on the basis of its ability to process and respond to information -- or better yet, ultimately on its ability to facilitate information processing systematically and generate a coherent, consistent, outcome -- is a good direction to move this debate in. Thankfully, wikileaks has already opened up new terrain in the theory of computational governance.

Switching Sides

2011-01-23T08:09:00.001-08:00

One of the things I most enjoy about the current US relationship to China (and here I mean more our cultural and intellectual relationship, not simply our State department's diplomatic relationship) is the knack it has for dredging up ideological issues that confuse the fixed-in-stone left-right sides which constitute our country's stale parody of political debate.

For example, in an irony Jeremy Grantham noted a while back, China is widely if warily admired in the business community, as if it were just another very large and successful business. How did all these rabid free market types end up envying an economy run on the communist party's five year central planning?

Today's twist is brought to you by Hu Jintao's recent visit:

As the two leaders stood side by side at a nationally televised news conference, he called on China to live up to human rights values that he said were enshrined in the Chinese Constitution, adding that Americans "have some core views as Americans about the universality of certain rights: freedom of speech, freedom of religion, freedom of assembly."

Mr. Hu, for his part, seemed to hearten White House officials by acknowledging that China had a ways to go on human rights issues. "China still faces many challenges in economic and social development," he said. "And a lot still needs to be done in China in terms of human rights."

Looking at a few other articles, you can already see it dawning on people that China treats a basic level of economic freedom, freedom from poverty at least, as a human right -- in fact, as perhaps the most basic human right. So, "a lot needing to be done," here means doing a lot more to raise everyone's standard of living so that they don't remain forever locked to the land or the factory floor. The mainstream left, in its clamor for "human rights in China", does not tend to sympathize with this much more radical point of view on human rights, which I associate with Chomsky's notion of anarchy (succinctly introduced in this video, by the way).

Seeing a certain level of economic development as itself a form of freedom takes the left's question of human rights in a more radical but also more pragmatic direction. The same thing happens to the debate about the wonders of the free market when you see representatives of the right acknowledging the productive role state involvement can play in practice. I'm hardly saying that either side has found a solution to these problems, but I hopefully imagine that the rise of a (relatively) pacific new superpower could alter the terms enough to make progress.

Makes me wonder what happens to the political debate in China when they have to talk about the US.

A Financial Allegory

2011-01-18T08:02:00.001-08:00

Debt is a zero sum game where the debtor's liability is equal to the lender's asset.

This makes debt akin to a game of musical chairs.

Musical chairs can be a fun and exciting game to play if the number of chairs keeps increasing over time -- yes, there may still be those crazy moments where everyone scrambles for a chair, and in the fear and uncertainty some may even irrationally grab two or three at once, just to be on the safe side. But in general, with more chairs, things will work themselves out pretty quickly even if the music stops. Capitalism can be fun for the whole family!

Musical chairs is a lot less fun to play when people keep removing the chairs.

The following charts are taken from a recent Bank for International Settlements report on the interaction between balance sheet recession and demographic trends. Looks like Chuck Prince is going to need to dance a lot faster in the future.

See and download the full gallery on posterous

Circular Reasoning

2011-01-11T06:50:00.001-08:00

Yesterday I read a report about the European Sovereign Somethingorother Fund (EFSF), one of many acronyms Ma Merkel assures us is set to ride to the rescue should the campaign to recolonize -- sorry, I mean rescue -- the PiIGS (Portugal, ireland, Italy, Greece and Spain) gets really hairy. In includes the first chart, which details the respective contributions various European countries have made to this particular Deus Ex Machina, which represent $440b in total firepower.

This sounds like the big guns at first, but it turns out to be remarkably expensive to bail out even rinky-dink little countries like Greece and Ireland (and Portugal pretty soon). For example, later in the report they give a breakdown of Ireland's recent $85b bailout. About a quarter comes from raiding the country's pensions (65 year old Irish have just doubled down on Guinness), about a quarter comes from the EFSF, and the rest from the IMF and related alphabet soups. The point being that Ireland is set to receive $22b out of this $440b, despite the fact that it contributed only $7b. Of course, if they only got out what they put in, it wouldn't be a bailout.

But take a glance at the other chart, from this morning's WSJ, which has the CDS spreads on these countries' debt. Credit Default Swaps are insurance the lenders can buy in case the guy they're loaning to skips town -- so this chart shows how everyone is confident that the Germans will pay their debt back, but increasingly less so for the rest of the dominoes. Looking at this got me thinking about what the appropriate CDS spread for the EFSF itself would be. After all, this is essentially a distressed bond fund like any other. Each country agrees to put up the capital shown, and on the basis of this collateral, the fund will go out and borrow in the markets. True to form, S&P and Moody's have blessed this structure with their kiss of death -- a perfect AAA rating -- so it's practically guaranteed to blow up. Because the ratings agencies are walking on eggshells at this point, they did manage to extract a pound of flesh, and the fund will only be able to issue $367b worth of debt, so that the total sovereign guarantees backing it are 120% of the amount of bonds it can issue and subsequently use to make rescue loans. That sounds safe, ¿right?

Look at what happens, though, when you try to bail out one of the big PiIGS. Ireland gets $22b from the fund, Greece got $110b in total, and let's say that includes $28b from the fund, just to use the same breakdown between rescuers. This means that Greece got between 2 and 3 times what they put in. They haven't announced Portugal's package yet because they are still busy denying that it will need a bailout, but we can guess that if Portugal is about the same size as Greece (as measured by their contributions to the fund, which I'm assuming were calculated off of something like their respective contributions to eurozone GDP) it will get about the same amount of bailout. So the little countries -- the P, the lower case i, and the G -- are eating up around $75b of capacity. If the ratio of fund bailout to fund contribution hold at, say, 2.5 times, bailing out Spain would require $156b and Italy would cost $236b.

Let's see then:

P+i+I+G+S

$28 + $22 + $236 + $28 + $156 = $470 billion > $440 billion >> $367 billion

Hmmmm ...

Maybe we should be generous and assume that Italy won't need a bailout. In that case, the fund would disburse $234b, or 64% of its total capacity to the 4 remaining borrowers. However, given that it doesn't make much sense for Spain to try pulling itself up by its own bootstraps (the last entity that crafted a successful program of loaning to itself was called Enron), there is a clause in the fund whereby a country being rescued is no longer liable for their contribution. If Spain pulls out of its $52b commitment, the fund's available capacity would be reduced by 120% of this amount, leaving it with $388b nominally and around $305b of effective firepower, $234b of which (77%) would have been loaned to PiGS. And that's not even adjusting for the guys who are exempt because they're already being bailed out (though they are smaller) Of course, theoretically Germany and France could just pony up more, but try telling the Germans and French that.

So now look at this bond fund from the perspective of an investor. You loan these guys $440b, of which only $388b has a contingent guarantee that does not contain a political bomb, and they're going to go invest 60% of it in dodgy Southern European countries that have had huge property bubbles, face years of austerity budgets and wage deflation, and already have other sovereign debts about the same size as the GDP (not to mention private and financial sector debt, which we have seen migrates to the sovereign as a last resort). I admit, you have some wiggle room. You could probably get your money back if the losses to these guys were under 20%. But what sort of credit spread would you demand for investing in this? Where should the price of its own CDS fall in the continuum of that chart?

On second thought, I'm probably being just pessimistic. I'm sure somebody will bail out the bailout. So what could go wrong?

See and download the full gallery on posterous

UPDATE: Apparently, the Capitalist Axiomatic is not big in Japan. Go figure.

Japan has pledged to buy more than 20 per cent of the eurozone’s first ever bond issue, raising expectations that other international investors will support the pioneering fund-raising move and help ease the region’s debt crisis.

The European financial stability facility, the €440bn ($570bn) eurozone bail-out fund, is marketing its first bond issue of up to €5bn among investors in Europe, the US and Asia. Bankers close to the deal are confident of attracting support from sovereign wealth funds in China, Norway and the Middle East.

Japan Inc.

2011-01-08T13:46:00.001-08:00

The other day, the FT ran a comment that put a very different spin on the last 20 years in Japan:

Is Japan the most successful society in the world? Even the question is likely (all right, designed) to provoke ridicule and have you spluttering over your breakfast. The very notion flies in the face of everything we have heard about Japan's economic stagnation, indebtedness and corporate decline.

Ask a Korean, Hong Kong or US businessman what they think of Japan, and nine out of 10 will shake their head in sorrow, offering the sort of mournful look normally reserved for Bangladeshi flood victims. "It's so sad what has happened to that country," one prominent Singaporean diplomat told me recently. "They have just lost their way."

It is easy to make the case for Japan's decline. Nominal gross domestic product is roughly where it was in 1991, a sobering fact that appears to confirm the existence of not one, but two, lost decades. In 1994, Japan's share of global GDP was 17.9 per cent, according to JPMorgan. Last year it had halved to 8.76 per cent. Over roughly the same period, Japan's share of global trade fell even more steeply to 4 per cent. The stock market continues to thrash around at one-quarter of its 1990 level, deflation saps animal spirits – a common observation is that Japan has lost its "mojo" – and private equity investors have given up on their fantasy that Japanese businesses will one day put shareholders first.

Certainly, these facts tell a story. But it is only partial. Underlying much of the head-shaking about Japan are two assumptions. The first is that a successful economy is one in which foreign businesses find it easy to make money. By that yardstick Japan is a failure and post-war Iraq a glittering triumph. The second is that the purpose of a national economy is to outperform its peers.

If one starts from a different proposition, that the business of a state is to serve its own people, the picture looks rather different, even in the narrowest economic sense. Japan's real performance has been masked by deflation and a stagnant population. But look at real per capita income – what people in the country actually care about – and things are far less bleak.

...

In a thought-provoking article in The New York Times last year, Norihiro Kato, a professor of literature, suggested that Japan had entered a "post-growth era" in which the illusion of limitless expansion had given way to something more profound. Japan's non-consuming youth was at the "vanguard of the downsizing movement", he said. He sounded a little like Walter Berglund, the heroic crank of Jonathan Franzen's Freedom, who argues that growth in a mature economy, like that in a mature organism, is not healthy but cancerous. "Japan doesn't need to be No 2 in the world, nor No 5 or 15," Prof Kato wrote. "It's time to look to more important things.

Devoted regular readers (allow me to briefly flatter myself) will realize that this idea that the state is not primarily about economic growth is an idea close to my heart. I'm sure an interesting intellectual history could be written about the transition from Adam Smith's classic liberal critique of the state, to our current situation, where the rhetoric of endless growth has gotten deeply baked into all politics, regardless of where it locates itself on the left-to-right spectrum. However, I won't bore you now with another rant about how growth is an outcome of functioning government, not a goal of it. Come back tomorrow.

Today, I'm more interested in the way Japan is leading the rest of us. This is the first big, developed economy to actually start facing up to a population that is past the steepest part of the S curve, and in fact even declining at this point. And given that something about Japan's culture causes it to act as a closed system, which of course the earth ultimately is (excepting sunlight and the occasional meteor), I think it pays to look at their experience as a precursor. As Kato puts it in that linked op-ed:

Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake. In a world whose limits are increasingly apparent, Japan and its youths, old beyond their years, may well reveal what it is like to outgrow growth.

When you put things this way, you can actually start to see Japan as a success story, which turns out to be one of Richard Koo's points. He argued that the ability to manage a bust of the scale of the bubble economy in 1990 without ending up in a depression should be counted as a major victory. While his point was strictly macroeconomic, I think you can extend it a bit and see it as a political and social victory as well. It's hardly a daring hypothesis to see their bust as, at least partially, a lagged effect of the dramatic step change in birth rate that happened in 1974, which would mean that what they really had to handle, at bottom, is the transition from an economy predicated on continual growth to one where a main driver of economic growth has flattened out. In my mind, it's obvious that increasing debt makes perfect sense in the first system, but will only have a very limited role in the second. But this deleveraging is just the macroeconomic indicator that gives a number to a much more profound transition.

If you keep going with this thought, you start to wonder whether the other obvious ways in which Japan is leading the rest of the world are related. For example, is it all but inevitable that technology increasingly reigns supreme in a flat-population world? The Japanese have long been leaders here, especially with the mobile stuff, and their fascination with robots fits into the same theme. I don't want to engage in too much armchair sociology, and of course there are cultural differences that clearly play a role (ex hypothesi if we're trying to get at what happens in general to a closed system). Still, we might consider it hopeful that those who have preceded us have, for all the difficulties encountered, been managing reasonably well if you look at the big picture and consider the scale of the problem.

Public and Private

2011-01-05T13:50:00.001-08:00

With more time, one could write a lot about this question, but I just wanted to pass along a quick bit of commentary from John Battelle on the big financial news of the week: Facebook's decision to stay private.

Facebook is the greatest repository of data about people's intentions, relationships, and utterances that ever has been created. Period. And a company that owns that much private data should be accountable to the public. The public should be able to review its practices, its financials, and question its intentions in a manner backed by our collective and legally codified will. That's the point of a public company - accountability, transparency, and thorough reporting.

If Facebook wants to stay private and not be part of the social mores which we've built that govern major corporations (flawed though they may be), well I think that would be a major strategic blunder, one that would ultimately doom the company. It's fine for all sorts of companies to stay private, for all sorts of reasons. But a company like Facebook, with its unprecedented grasp of our social data, should be accountable to the public. If it isn't, we'll migrate our "social graphs" to a company that is.

If Zuckerberg doesn't want to be a public CEO and deal with the realities of that, as this Reuters piece argues, well, he should find a CEO who is willing to do the job.

I think this is absolutely a valid point. Privately owned businesses are still part of a larger democratic system, and they shouldn't be able to hide from scrutiny if they become an important part of that system just because they are able to pull off some fancy financial shenanigans. The reasons for having publicly regulated markets go beyond their usefulness to the companies that list on them. They serve to improve transparency in the overall economy, which improves price discovery, policy making, and strategic planning for everyone. I don't know what size is too big to be private, because I haven't thought carefully about how to quantify the social benefits involved, but I'm positive that Facebook is bigger than that.

If your gut reaction is to disagree, I recommend you follow through, and only invest in countries where most of the big companies are sprawling family run conglomerates.

This system of property rights works great!

2011-01-04T10:43:00.001-08:00

From the 2009 10-K of Borders Group, a notorious not-quite-for profit making headlines for other reasons today.

In October 2009, U.S. Ethernet Innovations, LLC offered us an unsolicited license to 35 U.S. and foreign patents relating to Ethernet technology for a one-time fee of $3.0m, and implied that it would commence litigation if we do not accept the offer. We are evaluating the offer, as well as the amount of our potential exposure, which could be greater or less than $3.0m, if we do not accept the offer. We intend to seek indemnification from the relevant equipment vendors. We have not included any liability in our consolidated financial statements in connection with this matter and have expensed as incurred all legal costs to date. We cannot reasonably estimate the amount or range of possible loss, if any, at this time.

Slow Day

2010-12-27T12:54:00.001-08:00

Sure, there are people who sell chocolate bars, and there are people who sell bolts, but no one can compete with our unique bolt-in-a-chocolate-bar product!

While the company faces many competitors in each of the domains it serves, we believe Company XXX doesn't have a single competitor that competes in all of the same domains. This does not diminish the quality of the competition, but does suggest to us that competitors do not enjoy the same synergies and economies of scale that Company XXX does.

I'm reaching for my revolver.

Toll Roads

2010-12-23T15:50:00.001-08:00

So, I'm still thinking about the whole question of net neutrality and the new rules of the road issued by the FCC (well, sorta rules -- this is still hand-wavey enough that all sides are claiming victory and defeat at the same time). But at the same time I'm reading the FT bemoan the downfall of congestion pricing schemes for the kind of traffic that still has wheels.

Most weekdays, slow-moving traffic forms a barricade between the two halves of King's Road, the main thoroughfare through the well-heeled London district of Chelsea. For about 1km from Sloane Square, at the eastern end, taxis, buses and four-wheel-drive cars sit bumper to bumper, engines running, inching towards their destination.

Nonetheless, on Thursday 20 sq km of Chelsea and other parts of west-central London will be removed from the capital's congestion-charging zone – the area drivers must pay to enter during weekday working hours – reducing it to its original 22 sq km. Even Transport for London, the body responsible for the scheme, acknowledges this will worsen jams. Vehicle numbers are expected to rise by 15 to 20 per cent. Congestion – measured by the extra time a journey takes compared with clear road conditions – is poised to worsen by as much as 18 per cent. Emissions of harmful gases will go up sharply.

And it made me realize that there are probably a lot of people whose knee-jerk reaction would be to support congestion pricing on highways, but to simultaneously demand that anybody can drive as big a semi as they want onto the internet, and pay the same price as a Yugo. Net neutrality gets more complicated the further you dig into it -- technically, economically, and of course politically/philosophically. But it's hard to see a huge amount of difference between these two cases, which analogy maybe prompts us to rethink both of them. Some form of congestion pricing may be essential to making this infrastructure function well under heavier loads.

Chief Internet Evangelist

2010-12-21T06:13:00.001-08:00

Cynics among you will undoubtedly claim that I am merely talking my book, but I will nevertheless take this opportunity to exercise my divine right to such a time honored tradition, and pass on a straightforward comment by Google's very own Vint Cerf: Governments Shouldn't Have a Monopoly on Internet Governance.

... last week the UN Committee on Science and Technology announced that only governments would be able to sit on a working group set up to examine improvements to theIGF—one of the Internet's most important discussion forums. This move has been condemned by the Internet Governance Caucus, the Internet Society (ISOC), the International Chamber of Commerce and numerous other organizations—who have published a joint letter (PDF) and launched an online petition to mobilize opposition. Today, I have signed that petition on Google's behalf because we don't believe governments should be allowed to grant themselves a monopoly on Internet governance.

Democracy is as democracy does, and if we let the UN take charge of it, just calling it democracy is not going to save us.

Wrong Question

2010-12-18T13:27:00.000-08:00

Today, Daniel Henninger, Prince of Darkness (aka director of the WSJ editorial board), takes a stab at the profound.

A radical (in the best sense) 21st-century tax debate—such as over Bowles-Simpson's three stripped-down marginal rates, topping at 23%, and lower taxes on business—would challenge the conventional 100-year-old idea in the U.S. that the first purpose of a tax regime is to ensure the functioning of the state. In the hypercompetitive world we will inhabit for at least a generation, might not it be time to rewrite the textbook? To ensure American well-being, the pre-eminent purpose of a modern tax system should be to achieve the highest possible level of growth in the private economy with a competent, efficient state in a supporting role.

For a split second this argument sound superficially intelligent. Don't we need to face up to a world where the nation state is in decline? Where borders mean nothing to business and the only thing that holds us together is our collective commitment to the two car garage? Don't we have global problems that need a global solution? Isn't the logic of the "hypercompetitive" free market the final and inevitable verdict of history? And shouldn't all these taxes at least ensure we stay ahead of the chinese?

But after this brief and bracing moment of radicalism, we are suddenly forced to look down and discover, much like Wile E. Coyote, that there is absolutely nothing under our feet; the question was not what taxes and for, but what the state is for. While it may not be far from the truth in actual practice, I don't think any one of you big state liberals out there (you know who you are) really argued that we pay taxes to support the state so that the state can collect taxes. So to pretend that he's making a radical critique by suggesting that taxes actually have a purpose is not so much rhetorical as just plain idiotic.

After these smoke and mirrors are deployed, he goes on to be just completely flat out fucking wrong. The purpose of the state is emphatically not to maximize economic growth, so that can't be the purpose of the taxes supporting it either.

The purpose of the state is to keep us free. While this may require a certain base economic level -- people not getting enough to eat are shackled just as surely as if they were in chains -- that level is not the endpoint but merely the beginning of what we want out of a state. I don't mean to imply that this base level if fixed forever at food, or is ever going to uncontroversial in practice. I simply mean that it's philosophically very important to realize that economic growth is not the primary thing we want out of a state, and is not at all the metric on which it should be judged.

In fact, the state should have very little to do with economic growth. Once it fulfills its basic function of facilitating cooperation, once it frees us to do the things we want with one another without worrying about people doing things to us we don't want, its role in the economy is over. I suppose you could call that an "efficient supporting role", by analogy to the way an agnostic supports a Catholic, but it does seem to stretch the language.

Whatever happened to the real libertarians I wonder. The ones where your liberty didn't ultimately boil down to the size of your pile of gold?

The two eyes

2010-12-04T14:28:00.001-08:00

Namely Iceland and Ireland.

John Maudlin writes a newsletter too often to say much of anything new each time, but other than that he's all right. If you haven't been following the bouncing ball of our little European economic experiment, you can look here for his quick recap and clunky foreshadowing (reality is just such a tawdry and obvious plot device). I won't bother to quote any of it, because the only thing that interested me was the graph, which you can see above. Some folks will look at this chart and say that the Irish are a bunch of stubborn idiots for not simply defaulting, and they will point to Iceland as a sort of success story by comparison.

I dealt a bit with this logic back when I saw folks implicitly or explicitly suggesting that Greece should just default, drop out of the eurozone, and get it over with, but perhaps I can refine my point with this chart. It's not that the chart is wrong or anything. It's just that it leaves out one very crucial element, which is the real value of savings in the two countries.

How much tuna and ammo does the 1,000 Krona she had in an Icelandic bank buy Bjork now? I'm sure there are plenty of Irish who are upside down on their mortgages, just like people are here in the US. But there really are some middle class folks who have positive net worth. Those folks might plausibly trade some decline in real wages for the preservation of the purchasing power of their savings. If you added this factor into your calculation, you might legitimately still reach a utilitarian conclusion that default would be better for more of the population. But you cannot simply ignore it.

Of course, all this is a little bit by-the-by; the actual decision making process is not going to be based on an economic calculation at all, but on a political one.

P.S. There's a whole 'nother discussion to be had regarding whether Ireland should have saved their banks in the first place, or whether they should have only guaranteed Irish depositors and let everyone else go screw, but that gets complicated.

Deep thought of the day

2010-12-03T05:53:00.001-08:00

Breaking left-right symmetry makes something looks a lot more strange than breaking top-bottom symmetry, for some fairly obvious reasons.

Why is there no animated mate-with-bombilla emoticon?

It's also not productive to completely waste your time

2010-11-30T05:50:00.001-08:00

So this article in the WSJ about the failing of economics and the search for a new model to replace the current drunk-looking-for-keys-under-streetlamp-because-that's-where-the-light-is breed of DSGE models (dynamic stochastic general equilibrium for those of you not familiar with Dr. Pangloss's theories) is actually not bad.

One of the things that puzzles me about these debates though is why everyone seems to place the emphasis on exotic theories of behavioral economics. Here, someone goes so far as to suggest that we need a nearly Freudian theory of people's ability to fantasize about the value of pets.com. Not that I don't think you should incorporate models of human behavioral agency into the economy -- it's ridiculous to continue to pretend that people always behave like calculators, and to throw out all data to the contrary as 'exceptional'. But I really just don't see this as the core of the problem with modeling the economy. Which is why I find it odd to have the whole article devoted to this stuff.

Not to be an ass (I mean, I'm not an economist, and like Barbie said, economics is hard) but I think the problem is relatively obvious.

Economists don't understand MONEY. They still pretend it doesn't exist. Which forces them to pretend that the financial system doesn't exist. Which, fairly naturally, leads them to leave out altogether the impact of financial (as opposed to simply real economic) incentives on an agent's behavior. Which, ahem, doesn't work well. So do we need a grand new theory of economics? Or, apropos of Krugman and Eggertsson's new paper, should we just start by assuming the existence of money instead of a can opener? Turns out that just pretending nominal money is real, something you may note humans have a strong tendency to do, explains quite a lot.

Which is why I had to chuckle at the last line here:

Some of academia's most authoritative figures say the new ideas are out of the mainstream for a good reason: They're still very far from producing a model that demonstrably improves on the status quo.

"I guess I'll wait until I see these models and what they can and cannot do," says Robert Lucas, an economist at the University of Chicago who won the Nobel Prize for his work on "rational expectations," the concept at the very heart of modern orthodoxy.New York University's Mark Gertler, who with now-Federal Reserve Chairman Ben Bernanke did ground-breaking work in the 1980s on how financial troubles can trip up the economy, says economists already have many of the tools they need to fix the current models.

"It strikes me as not productive to say that all we have done is a complete waste," he says. "The profession is extremely competitive. If you have a better idea, it's going to win out."

I'm sure academic economics is as competitive as finance. After all, the stakes are so low. Given that finance managed to invent a whole host of better ideas that won out -- like, you know, CDO-squareds -- I'm sure that economists can manage something even more fantastically divorced from reality.

Last Straw

2010-11-29T15:45:00.001-08:00

I quit. I feel like I'm watching an incompetent version of Ronald Reagan in blackface.

President Barack Obama on Monday proposed a two-year salary freeze for all federal civilian employees, ahead of negotiations with Congress on deficit-cutting that are likely to dominate Washington next year.

Though in effect for two years, the proposed freeze would save $28 billion over five years and more than $60 billion over 10 years as the government pockets savings from a lower wage base for its civilian work force, said Jeffrey Zients, deputy White House budget director for management.

Workers were due to have a 1.4% pay raise in 2011. Federal wages generally rise each year in step with inflation, though Congress often makes adjustments.

Not only is the move completely cynical and cowardly -- the Pentagon pisses away more in toothpicks on Tuesdays -- but it won't even fucking work!! Does anyone really believe that this transparent bit of hustle will suddenly have the Republicans drooling all over themselves in a bipartisan frenzy?

I sympathize that he may not have the easiest job right now, but, let's face it, we elected a lightweight. The next two years are going to suck.

Bailing out Bono

2010-11-22T04:38:00.001-08:00

I don't really have that much beyond I told you so to say about Ireland's new bailout. I continue to find it amazing that people can get up in the morning, look at themselves in the mirror, and wonder with a straight face whether knocking down this domino will have any effect on the others.

In Ireland's case, using the fund has proved to be much more difficult than anyone had anticipated. Instead of welcoming the aid, Ireland—reluctant to give up control of its tax and spending policies—caught other EU nations off guard by fiercely resisting help. Rather than setting an example of how the bailout mechanism could lay concerns to rest, the process unsettled markets and exposed the difficulty Europe has in showing a united front. That has fueled concerns that investors will now begin to batter the euro zone's other weak members, especially Portugal and Spain.

It occurs to me that if the equity markets are like a small nervous animal by turns afraid of its own shadow and emboldened by how big it looks when its hair stands on end, the credit markets would be a sort of dim witted lumbering pack of sheep surprised every morning by the brilliance of the sun.

The real question is still just who gets to pay for this. I'm getting ready to bet that the EU has found a conveniently deep and foreign pocket to pick, and it's called American high tech multinationals.

The Irish government bowed over the weekend to the rising pressure from the EU and financial markets, conceding it needs outside help to shore up its public finances and ailing banks. But Irish officials said they hadn't backed away from their insistence that the country be allowed to preserve its 12.5% corporate tax rate—which German and France view as an unfair way of luring companies to Ireland at other European countries' expense.

Abstract Geography

2010-11-17T05:45:00.000-08:00

I've never really considered myself much of a history buff, which is why I've spent some time since returning from the Middle East pondering just what it is I went over there to see. It's been several years now that the beginnings of urbanization have interested me, even though I haven't put much effort into reading about it and have only picked up a few things here and there. So, if it's not some general cultural history I'm keen on ... if I don't much care who conquered the Hittites, what exactly am I looking for here?

I think the fundamental thing that interests me is the transition from a nomadic hunting and gathering economy to an urban civilization. Once settlement has gotten going and labor specialized and divided, the rest is just a list of Empires won and lost, gods and priests and pharaohs served and betrayed, weapons and pots gradually improved. The coming together is what I find fascinating. How did a bunch of roving neo-monkeys launch this revolution?

The first time I can remember thinking about this stuff was when we read Lewis Mumford's The City in History for book club. I remember this as a great sprawling account of urbanization down through the millenia, written from the perspective of someone who insisted that technology (and what is the city but a bit of social technology?) should be made to serve human ends rather than its own. It was more than anything, a history of the way our technology gets the upper hand. Since book club languished ten years ago already (alas), I decided to go back and reread some of the early chapters where Mumford speculates about the precursors to urbanization. True to form for thinking with serious firepower, it's lost nothing of its shine in the intervening decade (or for that matter since the 60's, when it was written).

Right off the bat, Mumford observes that settled life may have begun with the dead. After all, they don't move around much. A peripatetic tribe can at least be counted on to return to wherever they buried their ancestors. The first city was the city of the dead, and it remained at the center of urbanization for years to come. His comment resonated with the simple observation that the little bit of the fertile crescent I saw was littered with tombs. And while Herr Doctor pointed out to me that the necropolis never the literal physical center of the city, it is also never far off; it seems plausible to attribute a central psychological significance to the city of the dead. It holds our first dearly guarded but rarely accessed links to the past, though it's more important, perhaps, for the gatherings of the living it facilitates than for anything the dead themselves per se. These gatherings may have existed as periodic rituals and pilgrimages for a long time before the echo of death's knell resonated with permanent habitation.

Fast forward a bit.

Last week I went to an investor day for Equinix, a company that builds giant data centers to house internet servers (otherwise known as colocation, aka, cities for computers). With more and more stuff going to "the cloud", the explosion in virtualization, and the monster bandwidth requirements and latency intolerance of video over IP, it's boom time for the data center industry. As an investor though, you have to be careful, especially when you understand all this techno-babble as poorly as I do. The demand for colocation space may be there, but if the idea is just to build a concrete bunker with a long power cord and fat pipe, it seems like it should be pretty easy to bring new supply to market. Indeed, essentially the entire industry went bankrupt in 2002 despite the fact that there was only a mild slowdown in the demand for space and bandwidth.

Equinix is only interesting as an investment because some portion of their business is related to customers who use their facilities to directly connect their traffic to other customers without having to route it through all the various hops that a typical packet can experience in an increasingly overloaded best effort network. The more direct routing reduces latency and improves reliability, and is thus worth big money to a guy running a snappy Web 2.0 app, or, you guessed it, to an algorithmic trader who makes money every microsecond. This sets up a network effect where new customers show up simply because the people they want to connect with are already there, not because of anything intrinsic to the place where they are meeting. Metcalf's Law, owning the most liquid marketplace, eating at strip clubs, blah blah blah, you get the idea. Equinix essentially runs a digital souq. Put a tollbooth on something like this and hire yourself a marketing department and it's easy money.

Which and so but this brings me right back to my interest in transitions. When you see network effects and feedback loops like Equinix's data centers or some Assyrian urban agglomeration, the typical concept of cause and effect doesn't really do them justice. It's not history any more. These phenomena don't have proper necessary and sufficient causes. It would be better to say that they are seeded by some prior state of affairs. Or to complicate the crystal analogy, we could call these, a la Cymatics, patterns created by the resonant coupling of some driver with the characteristics of a particular medium (if you haven't already heard me wax cosmological about Cymatics, you should go check out the videos for yourself).

I swear I'm being difficult for a reason here. Because it's easy to fall into the trap of thinking of these things too causally and linearly. First they buried a few people here. Then they moved in permanently. Or first they found a well or an oasis or a defensible hill, then they built a citadel. Or in the case of Equinix, it turns out that these data centers originally became valuable because they were neutral, third-party-owned places where the competing Tier 1 internet backbone providers could trust one another to come together and exchange traffic. One network effect leads to another, and now they are popular with financial exchanges and streaming media providers.

I don't want to dispute the importance of these initial facts to what happened later. Simple geography clearly has a great deal to do with where ancient cities are situated. And you can hear the echo of New York's perfect port in the data centers built for the stock exchange only miles away from where it has stood since the 1700's. I just think its wrong to think of these factors as causes when they are more Archduke Ferdinand style triggers. Of course, I don't mean to abandon determinism with this, just to complicate the simple stories we often fabricate to convince ourselves that one link in the chain leads inevitably to the next. Perhaps this is why I find these moments of transition so interesting. In retrospect, everything looks obvious. This is where two rivers came together. This was on caravan crossroads. Washington DC was unused swamp precisely halfway between important places. This data center was near enough to a big urban population. And yet if everything is so obvious, why are these things are so difficult to predict in advance?

There is a bit of magic in the resonance between one level of organization and the next. There's something creative there. There are new needs that pick up the detritus of the past and adapt it to the new purposes in unpredictable ways. Maybe we should plant some of those felafel trees next to where we buried granddad? Maybe we should put a data center in Siberia instead of right next to all those people? If history didn't have some creative element in it, it would all be determined by geography, all from the beginning, like some giant billiard shot. And there would be no such thing as qualitative change. Once some crystal had formed it would expand forever uniformly. I am suddenly reminded of The Grid Book, which described how the very innovation and productivity that every standard fosters actually creates new forces that end up undermining or at least decoding its own logic. History isn't unpredictable only because some chance external force meddles with its causal crystalline perfection. The mechanism actively generates randomness, which is what makes growth and decay, coming together and falling apart, such interesting phenomena.

Having said all that, I must admit that I started writing this because of a simple analogy which suggests that even history's creativity my have a sort of language to its patterns. Today, another wave of change is sweeping over Equinix's data centers. Some of the big customers like Google and Facebook are moving a lot of their servers out to their own data centers because this is much cheaper over the long run. They still leave some machines with Equinix though, because of the latency issues; the bulk of a popular Youtube video might live in a Siberian data center built on a cheap geothermal power source, but chunks of it are still cached closer to the people likely to request it, to make sure it plays smoothly. Facebook's monster collection of photos apparently works the same way.

Data center ROM becomes the mirror of our own long-term memories, and these stack up like so many ancestors. Eventually we push the necropolis aside to make way for the interactions we want to have every day. These companies bring only their freshest produce to market, and leave our digital dead buried like memories in an abstract geography.

In Transit

2010-11-15T14:03:00.000-08:00

Rolling. Fucking. Luggage.

When the apocalypse hits these people are going to be like lambs to the slaughter.

The Balance Sheet Recession Continues

2010-11-09T05:13:00.001-08:00

Despite the fact that rates are down, fine print transparency is up, and people are starting to get new card mailings, Americans don't seem terribly interested in borrowing.

The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts.

Additionally, this quarter's supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers' cash flow.

This is so Richard Koo and Japan that it's not even funny anymore. I probably should put a moratorium on posting anything more about this, given that it's the same situation we had a year and a half ago. The only new element is the Fed's decision to "do something" that will pretty clear not do what they think it will do; in Japan, QE2-N were gigantic non-events where the central bank gave money to the banks who sat on it for a while and then returned it. Maybe you can argue that there's some cultural difference in the US (and there's a clear demographic difference, which is why I don't think we're going to get 20 years of stagnation) and that people are more go-go and inclined to roll the dice, but I think that they obvious place to do this is in the financial markets and not in the real economy. Free money is not going to encourage anyone to actually start a business that they weren't going to start anyways, because the people who are supposed to be buying the stuff that the hypothesized business sells, are, in fact, using the money to pay off their credit card debt.

We may see a terrific spike in commodities, stocks, and bonds. Though the higher commodity prices part of this makes the new new bubble self-limiting -- $5 gallon gas will simply produce another US recession. And then what?

It's not a conspiracy

2010-10-05T18:30:00.001-07:00

I hate conspiracy theories because, as Laplace famously observed of the idea of God, I have no need for that hypothesis. You could argue that this should logically result in my merely dismissing the tinfoil hat cranks, but, alas, their pernicious influence is like that of the undead -- with their zombie arms outstretched in an endless search for brains they risk infecting all of us.

So though I absolutely agree with Barry Ritholtz when he says:

For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.

The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual.

if you see the world in terms of Left & Right, you really aren't seeing the world at all . . .

I still get nervous about the way he puts it.

In my mind there is no question that the far and away the most important political question is this one of corruption, because it is the first question, the one that comes before the smokescreen of debate between left and right even gets started.

But I disagree with the idea that we should think of the corporate takeover of our political process as us versus the CEOs of Goldman Sachs and BP. It will do us no good to blame the low moral standards of corporations, and even less to try and put a face, even a short hooked nosed Jewish one, to "our enemy". The enemy, as usual, is within. The enemy is the mechanism by which we elect Congress. The enemy is the military-industrial-congressional complex. It is a sprawling beast that even as gifted a sniper as Dick Cheney would find hard to shoot in the face.

If we do not directly recognize the simplicity and inevitableness of this feedback mechanism we risk falling into the very trap that Ritholtz is trying to avoid. Every time we invent a purpose and a personality to go behind a blind feedback loop we make the same error that believers in intelligent design make with respect to true evolution. We invent a teleological conspiracy where there is only an endlessly functioning mechanism.

Maritn Wolf observed during the financial crisis that the genius of Keynes was his belief that we should not treat the economy as a morality play. Well, we shouldn't treat politics as one either. It's just a broken piece of technology. We should try to repair it.

Because fundamentally, it's not us versus the corporations, nor even us versus their executives or owners. If we phrase things this way we will soon end up right back where we started, arguing about whether we should keep the tax cuts for the rich, and watching all the power of the tea and coffee parties get co-opted by the established political machine. Fundamentally, it's us versus ourselves, us divided against ourselves as a cancer that destroys its own body.

Eric Schmidt quotes The Capitalist Axiomatic

2010-10-04T14:26:00.000-07:00

I, for one, want to see the augmented humanity research department as soon as possible.

Investment theme of the day: buy chips, sell chimps.

And now back to our regularly scheduled meltdown ...

2010-09-23T09:13:00.001-07:00

Today's chart is brought to you by the letter B, as in fucking broke. The idea is that bond yields more or less track economic activity, in this case the comparison is between ten year bunds and a survey of German industrial production expectations. I have annotated the picture to better reflect current reality -- it appears that the PIGS fit nicely into this gap (yes, I know, it's fiesta time in Spain for the moment, don't ask me how, so I guess the plural is out for now). All the demand for those bonds has sensibly run towards the ever disciplined bosom of mama Merkel.

UPDATE: The same report also shows where you can stick China. One of these days they are just going to have to get their own damn financial system instead of leeching of off ours. Attentive readers will note that either of these graphs could be interpreted as bearish for bonds (dramatic yield increase in the offing, which of course was the point of the report), or bearish for the economy (maybe the bond market is smarter than the people surveyed). I'm going to stick with my explanation however. This correlation is falling apart because of fundamental imbalances in our global financial system.

Agent Smith Arbitrage

2010-09-03T14:07:00.001-07:00

Today's FT has a fantastic story unearthing a few more details of the high frequency trading world. I love reading about this stuff because it makes it completely clear that 58% of US equities by volume and 38% of EU equities by value are now, officially, a casino. But what a casino! This is the greatest poker game in the world. I can't believe there's no reality TV show about HFT. You could have great interludes where 20 year old Russian hackers score millions and go out partying all night with the Jersey shore girls, only to wake up next week and discover that their botnet was caught in a "Bandsaw II" pattern (pictured below) by some clever Serbian helping the Mexican drug lords go completely legit before they shut down Vegas ... er ... I mean, Oaxaca.

Anyhow, all joking aside I can imagine a new business model where somebody proposes an exchange that actually has rules. This is kinda like the fancy backroom of a casino where everybody is rich and agrees to play like a gentleman. The big pensions funds, endowments, insurance companies, etc ... could simply give up some of the decrease in trading costs they've seen over the last 20 years, in exchange for a less volatile market. Wouldn't an investor owned exchange be a viable model if you could get it off the ground? Why are we always stuck getting screwed by Wall Street -- let's go around them already. If Calpers, Vanguard, and a few others said that they were going to start a new exchange that only traded, say, once a second, and that they were not going to buy shares in any company that did not list on this exchange, wouldn't others follow along, and subsequently wouldn't issuers be forced to move venues as well. Not that you'd have to twist their arm. I mean, I'm pretty sure P&G got nothing useful out of the twelve second in which the company was worth $0.50. In fact, nobody is getting anything useful out of this except the algo guys themselves. They are an invasive species in our capitalist garden of Eden.

But I digress. There's a million problems with that idea, and in the meantime there's money to be made. I doubt that "latency arbitrage" is "making markets more efficient by providing liquidity", but I can certainly image it being possible and profitable:

Mr Cronin is not alone in suspecting that certain kinds of algorithms are actually predatory. Analysts at Nanex, a Chicago market data company, say high-frequency traders may be using algorithms to send unusually heavy traffic to exchanges and other platforms in a deliberate attempt to slow down their data systems.

Knowing that a certain exchange’s system is about to run more slowly gives a trader an opportunity to set up a buy or sell order in advance. The process is called “quote stuffing” and is used in a strategy known as “latency arbitrage” – latency referring to the speed at which message traffic moves through a system.

There's one thing the online version of the article leaves out, so I snapped a picture of a box that appears in the print version.

Don't let your VCR strangle you

2010-08-31T16:04:00.001-07:00

Stanford Law prof Mark Lemley has written a brief and entertaining paper about the content industry's ongoing "Chicken Little Syndrome". One particularly purple passage is good for a chuckle.

The content industry warned us that the VCR must be stopped. Here was Jack Valenti of the MPAA, speaking to Congress:

"the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace. We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages of this machine"

If that were not enough, he went on to say, "I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone."

It's also remarkable to read how many times music, television, and film producers have been saved from themselves by the slimmest of Supreme Court margins, and how badly it has gone for them in the few cases they have "won" -- remember DAT tapes?

We did, however, successfully shackle next-generation audio technology in the early 1990's with the digital audio tape. Here the perceived threat was the same as audio cassettes but worse. Audio cassettes turned out not to have shut down the industry, true. But if you gave customers digital audio cassettes, content owners warned, if you allowed them to make a digital-quality copy, then they had no reason to buy our better quality copy, and we will be shut down. That argument carried the day in Congress. Digital audio tapes were then subject to a compulsory licensing scheme and were never heard from again by mass-market consumers. The technology flopped once it was put under the control of the content industry.

No, I didn't think you did.

As I think about these problems of property, which range from patents to copyright to net neutrality to agricultural production, the basic pattern becomes more and more clear to me. Create just enough private property to encourage people to engage in non-zero sum games. Maybe 500 years ago, when the king owned everything, we erred on the side of too little, but we are rapidly getting bogged down in having too much. The default presumption is not that property should be collective until otherwise stated -- I'm not arguing that all private property is theft from the common hoard. The default presumption is that there is no such thing as property until its absence stymies activity or we get into enough of a row over it that makes both sides worse off at the same time. Plenty of cases fall under that heading. Just not many from the media world.

Debt not "Privatization"

2010-08-27T14:43:00.001-07:00

When I hear the word "privatization" I reach for my revolver; everyone has a different definition invented to fit their ideological leanings, and they react without examining the economic substance in question.
So you see debates like this in the WSJ.

Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.

California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs

"Privatization"—selling government-owned property to private corporations and other entities—has been popular for years in Europe, Canada and Australia, where government once owned big chunks of the economy.

In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations. On a toll road, for example, a private operator may have more money to pump into repairs and would bear the brunt of losses if drivers used the road less.

While asset sales can create efficiencies, critics say the way these current sales are being handled could hurt communities over the long run. Some properties are being sold at fire-sale prices into a weak market. The deals mean cities are giving up long-term, recurring income streams in exchange for lump-sum payments to plug one-time budget gaps.

That passage muddles the entire issue. Privatization, as an economic movement, was intended (in theory at least) to take a government run monopoly, break it into pieces, sell each to a different investor, and then let them compete. The break-up of AT&T into the baby bells would be an example of this. This type of privatization makes a fair amount of sense in my opinion, as you substituting competition for a monopoly. There are certainly instances where the magic of market competition fails to deliver the outcome you were looking for better, faster, and cheaper, but competitive markets are an awfully powerful tool in many cases. I still rate markets up there with language and duct tape in the pantheon of humanity's greatest achievements.

When I first moved to Latin America, I remember espousing this point of view to friends and future blog audience members, and broadly defending the concept of privatization. Fireworks. I don't know if anybody said yanqui go home, but that was the basic idea. After a while though, I realized that we were talking about completely different things when we used the word "privatization". In Latin America, the only privatization they ever saw was one where the government sold a monopoly intact to some friend of the President. They were entirely right to see this sort of "privatization" as essentially synonymous with "theft". Unfortunately, this wonderful version of the concept appears to have migrated north.

The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.

After the deal, some drivers complained about price increases as well as meter malfunctions caused by the overwhelming number of quarters that suddenly were required.

Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion.

"The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.

So I read this, and I can't even tell what's happening. It's clear that the city sold a monopoly on the collection of parking meters to MS. Is this a regulated utility now though, or can MS charge "market" rates? In one breath it sounds like the city retained control of the pricing and the parking laws, and in the next we hear about how rates went up so much that there's a shortage of quarters (sound familiar?) Honestly, I haven't looked at the deal, so it sounds like one of two things happened. Either they really did just sell the whole monopoly to a private group and let them gouge to their hearts content (I assume that meter rates are (or were) significantly lower than parking garage rates in the same neighborhood). Or, they just sold the rights to collect the money, in other words, they outsourced the operations of the meter readers for an upfront payment. That is what you call debt, albeit maybe with an equity kicker if MS enforces the rules like a real asshole.

The problem is that either of these possibilities sucks.

In the first case I suppose it's possible in theory to auction the thing off at a high enough initial price that the average taxpayer is no worse off. Clearly, MS is going to jack the rates once they get going. But if they are made to pay so much up front for the rights to this extortion, and this money is somehow returned to citizens via lower taxes or low rider jeans subsidies or what have you, then what you in effect get is a transfer of wealth from parkers to non-parkers. Hooray. It kinda reminds me of the riddle about selling your vote. Why don't we allow votes to be sold? The government that purchases your vote may be awful, but isn't there some price at which you are compensated for how awful they might be? Wouldn't you rather get this money directly than have candidates blow it on advertising? While a theoretically interesting case, in practice it's really hard to price the thing high enough to limit the returns you might extract from this sort of "privatization". So if the city does not control the rates, I would suggest that practically speaking this is just Chicago going Latin American stylee -- the transfer of a public monopoly intact to private hands for a paltry sum.

On the other hand, it's possible that they will not allow MS to set rates and rules, which makes this look more like a regulated utility. We would need more details to know whether the agreement gives MS any incentive to reinvest, as in the case of a utility which is offered a decent fixed rate of return on capital. I'm not sure how you profitably invest in parking meters though, unless you control the rules. And without the potential for reinvestment, this deal stops being a privatization at all. It becomes debt, pure and simple, no different than Greece "privatizing" the revenues from the Acropolis by letting Goldman Sachs collect the entrance fee in exchange for paying now. That's a bond. Stop calling it "privatization". It's just a bond. All we need to know about it is the maturity and the effective interest rate (including any changes in meter rates that were agreed as conditions of the sale). Don't confuse the issue. Don't claim that you have done anything besides go into hock in a way that moves the debt off your balance sheet so as not to scare your existing bondholders.

Given the figures in the article ($60m in revenues on $1.16b upfront), the rate is only a little over 5%, which doesn't seem outrageous given that the 30 year US treasury is at 3.5%. Of course, we don't know if there are escalators (for inflation or otherwise) in the meter fees, so we can't tell whether Chicago is getting screwed or putting one over on whoever Morgan Stanley is flogging these off to via securitization/private equity fund/derivative contracts only a particle physicist can parse -- you didn't think they were rolling out of here naked did you?

Those wacky Germans

2010-08-27T13:03:00.001-07:00

There is a short and very interesting story in Der Spiegel about an academic study regarding the effect of copyright differences on publishing volumes and industrial development in 19th century Germany and England.

Indeed, only 1,000 new works appeared annually in England at that time -- 10 times fewer than in Germany -- and this was not without consequences. Höffner believes it was the chronically weak book market that caused England, the colonial power, to fritter away its head start within the span of a century, while the underdeveloped agrarian state of Germany caught up rapidly, becoming an equally developed industrial nation by 1900.

Even more startling is the factor Höffner believes caused this development -- in his view, it was none other than copyright law, which was established early in Great Britain, in 1710, that crippled the world of knowledge in the United Kingdom.

Germany, on the other hand, didn't bother with the concept of copyright for a long time. Prussia, then by far Germany's biggest state, introduced a copyright law in 1837, but Germany's continued division into small states meant that it was hardly possible to enforce the law throughout the empire.

The peanut gallery would like to shout something about anarchism and decentralization here, but are afraid certain (sorta) German blog readers would probably take issue. Anyhow, back to our story ...

Höffner's diligent research is the first academic work to examine the effects of the copyright over a comparatively long period of time and based on a direct comparison between two countries, and his findings have caused a stir among academics. Until now, copyright was seen as a great achievement and a guarantee for a flourishing book market. Authors are only motivated to write, runs the conventional belief, if they know their rights will be protected.

Yet a historical comparison, at least, reaches a different conclusion. Publishers in England exploited their monopoly shamelessly. New discoveries were generally published in limited editions of at most 750 copies and sold at a price that often exceeded the weekly salary of an educated worker.

London's most prominent publishers made very good money with this system, some driving around the city in gilt carriages. Their customers were the wealthy and the nobility, and their books regarded as pure luxury goods. In the few libraries that did exist, the valuable volumes were chained to the shelves to protect them from potential thieves.

In Germany during the same period, publishers had plagiarizers -- who could reprint each new publication and sell it cheaply without fear of punishment -- breathing down their necks. Successful publishers were the ones who took a sophisticated approach in reaction to these copycats and devised a form of publication still common today, issuing fancy editions for their wealthy customers and low-priced paperbacks for the masses.

One of these days people are going to wake up and realize that vast chunks of intellectual property should be done away with because they represent a major intrusion by the state into the free market. That's right, the true free market liberal should only grudgingly allow for the existence of copyright at all, and only in those cases where the market has demonstrably failed to produce stuff we all benefit from. While you can make some legitimate argument that no one will spend billions getting a drug approved without some guaranteed property at the end, the same argument is much much weaker when it comes to the time invested in writing a book, coming up with a new programming idea, or recording your new hit single. After all, we have an awful lot of the latter three, despite the fact that most of the creators don't make spit. If the market ain't broke, don't let the government fix it; the whole idea is to design a system where, as Einstein put it, we have as simple a definition of property as necessary, but not simpler. Potentially, this means a principled free market will involved dramatically less private property.

The whole thing reminds me of another juicy tidbit out of an entertaining interview with Robert Laughlin that JEA recently recommended (you can download the audio if you don;t want to read the transcript):

Q. So you are suggesting that the increased scope of patent laws is a response to the flow of jobs and knowledge overseas?

A. Yes.

Q. Why are you worried about that?

A. That was my take on it. And also I read it. The same goes for the patent laws. Knowledge for the sake of itself is not very useful to us; we want things that are owned by us; that someone else learns them and takes them and we can prosecute them, it's against the law. Now what's the problem? What I figured out is that it's actually quite fundamental and obvious--it's elementary economics. If you live in the world where knowledge is the currency, there must be less of it. Why? Because no one will pay for something you get for free. So, in the Jeffersonian ideal world, everybody's a farmer and they write letters to each other--they exchange information but they charge you for corn. The world we have increasingly grown into, is where we have to have secrets. That's how you make your living. Making a living is not nice--I'm not going to give you the thing unless you pay for it. My measure of of success is whether I can shoehorn a very large amount of money out of you for this thing. The way economics works is that process isn't solid unless you really want to give me the money. The amount of pain you have to pay is a measure of how valuable the thing is that I'm giving you. So, in the information world where information is the economy, there has to always be paying in exchange of information; has to always be money exchanged. There has to be something scarce. That means that strewing the world with enlightenment can't be. So, knowledge can't be free any more. Not only that, but the sense of the law is it's not just acquiring knowledge--it's if you go and acquire it yourself, you are violating the law. In some cases that is a criminal act. Learning things of technical value is theft, and that means that the whole idea of just learning stuff and bettering yourself doesn't make any sense if the thing itself is valuable, owned by someone else.

Create artificial scarcity, aka control the supply, is the first rule of almost every business. And it's the only rule the State Apparatus ever has.

Downhill as fast as you can run

2010-08-25T13:17:00.001-07:00

I guess presidential elections are coming next year so el gobierno KKK feel they need to pull out all the stops. Now they've decided to nationalize the largest manufacturer of newsprint.

Para evitar un nuevo "pacto", el Ejecutivo enviará al Congreso un proyecto para declarar como servicio público la producción, distribución y comercialización del papel para diarios. El objetivo central de esta normativa buscará darle un trato igualitario a todos los diarios del país. A su vez, buscará ampliar la capacidad de producción de Papel Prensa para que no haya más importación. Con esta jugada, la Presidenta obligará a todo el arco opositor a discutir sobre un proyecto esencial "para la libertad de prensa", tal como fue definido por la propia mandataria. También se propondrá la creación de una comisión bicameral de control.

I almost get the feeling that with each move the excuses are getting deliberately more and more far fetched. I guess this is a good strategy. First you get people used to being lied to by changing technical little numbers like the inflation rate. Then you move on to things that are arguably legal and even sensible, if controversial, but that at least play to popular issues, like the fight with the farmers over export tariffs a few years ago (I for one sided with the government on that question). But, finally, you just make shit up as you go, like claiming that the fact that 40 years ago they strong-armed the paper company means the market today is incapable of providing newsprint. I can't think of anything more ridiculous than this one, though I feel sure they've got something else up their sleeve. In all of these cases there is an argument to be made for what they're doing. Some justification can be invented that paints them as crafty fighters of the people's fight. After a while though, you have to pick your head up and see the pattern, to reflect on where you've seen similar chains of justification lead. At some point you have to quit trying to salvage the motives of government by fiat and realize that this turns the government into a political and economic weapon available to the highest bidder. It's no secret that the Kirchner's have already mysteriously turned themselves into millionaires. They might not be Boli, but they sure seem like garcas to me.

In the end it doesn't matter whether you think you're moving to the left or the right in these cases -- there's really nowhere to go but down into corruption.

A Hacker's Paradise

2010-08-23T17:01:00.001-07:00

Today the FT finally let the cat out of the bag.

Brokers who allowed high-frequency traders to have access to the markets without undertaking proper checks on them face potential fines as part of a clampdown following the "flash crash", the head of a US watchdog said on Sunday.

The Financial Industry Regulatory Association is undertaking a "sweep" of broker-dealers that offer market access to high-frequency traders to find out if they allowed these firms to run computerised trading programs – algorithms – without undertaking proper risk-management controls.

"The brokers should be satisfied they know who's really operating these systems," Richard Ketchum, chairman and chief executive of Finra, told the Financial Times. "The sub-custodian chain can bury the identity of high-frequency traders in Eastern Europe and elsewhere who raise serious regulatory concerns."

If I had any coding skills I would be spending all my time trying to hack the high frequency trading market. If all of your buy and sell decisions occur within microseconds of one another, you eliminate a substantial portion of the uncertainties inherent in investing. At those time scales you can essentially eliminate the humans and compete entirely against other peoples trading algorithms. A little good old fashioned ex-Soviet reverse engineering could make stealing lists of credit card numbers look like high school hi-jinks.

The only remaining question is how much of it was funded by Putin, and whether that makes it cyberwarfare. Or maybe the state has already effectively privatized this industry and just rents the botnet for a few hours.

UPDATE:

The NYT apparently hasn't heard about the exciting new possibilities in interactive erotic trading yet.

According to the Secret Service statement, Mr. Horohorin managed Web sites for hackers who were able to steal large numbers of credit card numbers that were sold online anonymously around the globe. Those buyers would do the more dangerous work of running up fraudulent bills.

Underscoring the nationalistic tone of much of Russian computer crime, one site featured a cartoon of the Russian prime minister, Vladimir V. Putin, awarding medals to Russian hackers. “We awaiting you to fight the imperialism of the U.S.A.” the site said, in approximate English.

Computer security researchers have raised a more sinister prospect: that criminal spamming gangs have been co-opted by the intelligence agencies in Russia, which provide cover for their activities in exchange for the criminals’ expertise or for allowing their networks of virus-infected computers to be used for political purposes — to crash dissident Web sites, perhaps.

Times Change Quickly

2010-08-23T15:24:00.001-07:00

But I will eat my shorts if there are really 165 decent broadband providers in Capital.

En el documento elaborado por el Ministerio de Planificación se destaca que en el país hay 489 prestadores de acceso a Internet distribuidos en todas las provincias. Por ejemplo, en Capital Federal figuran 165, en la provincia de Buenos Aires 116, Santa Fe 64 y en Córdoba 55. El gerente general de Cablevisión, Carlos Moltini, aseguró el viernes a este diario que "casi todos son revendedores de ADSL de las telefónicas". En una solicitada publicada hoy en los principales diarios del país, el Gobierno busca refutar la afirmación de que esas firmas venden por cuenta y orden de las telcos al señalar que "muchas pequeñas empresas y medianas, como así también cooperativas, tienen sus propias redes (incluyendo centrales, softswich, cableados, antenas y otros).

Looks like Team K is at it again. I'm sure there's some merit in breaking up a Fibertel-Cablevision monopoly. But given that the result will be slower broadband (ADSL being technologically inferior to cable for high speed) provided by a different monopoly, namely Telecom, you have to suspect that this is an entirely political move that has nothing to do with economics. Hopefully this will turn out better than Chavez, I guess even Saddam wouldn't be that bad.

CARACAS, Venezuela — Some here joke that they might be safer if they lived in Baghdad. The numbers bear them out. In Iraq, a country with about the same population as Venezuela, there were 4,644 civilian deaths from violence in 2009, according to Iraq Body Count; in Venezuela that year, the number of murders climbed above 16,000 Even Mexico's infamous drug war has claimed fewer lives.

If el gobierno KKK really wanted to do something for the gentuza they'd make fiber a wholesale government regulated utility like they do in France or Japan. This looks like something else entirely.

The end of squeaky voices

2010-08-23T12:55:00.001-07:00

Sometimes I wonder how capitalism can work with natural resources. Looking at these businesses, you always assume that the price of the commodity falls to the marginal cost of production. If a bunch of companies go out and dig mines, then the cost of those mines are, literally, sunk. Once they wake up to their position,mine owners will change their calculations and keep pulling the stuff out of the ground as long as the price pays for the cost of marginal extraction (plus maintenance, the occasional corporate jet and Latvian hookers, etc ...). So for a while, nobody invests, until finally growing demand or shrinking supply creates a pinch, prices skyrocket, someone gets optimistic, and we dig another hole.

Lather, rinse, repeat.

It's a bit miraculous to me that anybody invests in this stuff, which implies that it's miraculous that we actually have any of it, which I guess defeats the miraculousness of the first clause. The whole idea that you get this promising looking hole dug just in time to watch prices fall, and are then obliged to sit there waiting for the next, likely brief, spike in order to try and recoup your capital just seems so ludicrously speculative. Obviously people do it, but I have to say that I'd be curious to see a calculation (adjusting for survivorship bias of course) of net industry return on capital over the last 50 years, I suspect (without proof) the mining industry might be like the airline industry -- a public service.

Which actually brings me to the part of the post where I completely change my mind about what I was writing. I was going to suggest that digging up the commodities necessary to make the economy function seems like a reasonable place to wonder whether the government shouldn't be involved in at least coordinating the amount produced, so that we have enough and at the same time assure that prices don't spike out of control and create shocks. Naturally though, I was assuming that the government would treat this sector as a regulated monopoly and assure people putting up capital some sort of stable, though modest return on investment. Alternatively, I guess you could run the whole thing as Big Brother Mining Inc. and just allocate some of the federal budget to digging stuff up, and then set the prices so as to break even. Now, however, I realize that the system we currently have is much much better. We can convince these saps to invest even though on balance as an industry they will lose money, at least if it's anything like the airlines. As a taxpayer, this is better than break-even. So I say let them drill baby drill.

As it turns out, this whole rant was inspired by one of the extraction industries where the government is already dominant. We taxpayers own most of the world's helium supplies, it turn out. In the case of helium, the government apparently took care of this problem for us ... by making it dramatically worse.

Surely industry must be paying more and more for helium if it is in short supply.

No, the price is dictated by a calendar. The US government established a national helium reserve in 1925, and today a billion cubic metres of the gas are stored in a facility near Amarillo, Texas. In 1996 Congress passed an act requiring that this strategic reserve, which represents half the Earth's helium stocks, be sold off by 2015. As a result, helium is far too cheap and is not treated as a precious resource.

Privacy Schmivacy

2010-08-18T09:55:00.001-07:00

I'm sooooooooooooo bored with the privacy debate at this point.

Google's Eric Schmidt just can't keep his foot out of his mouth.

The guy has a proclivity for giving Big Brother-like quotes to the press—which would be quaint if the guy didn't have so much access to so much of our private information.

Do Google's flacks sweat when Schmidt gives an interview? Or are they stuck in the Google Is Good bubble with him, helped along by a mostly admiring press, as well as gurus whoimplicitly compare the company to Jesus Christ?

So, no, I don't think that Google is "good", however you should choose to define that. I think they are a business. I think they respond to the market, and yes, shape the market to some extent as well. But the truth is that almost nobody cares about privacy, and the media pushing it with scary stories is, coincidentally, the very same media that is getting crushed as we all spend more time on the internet. The idea that "the media", especially the WSJ, admires Google is nuts. Murdoch never fails to use the Journal's pseudo-reporting to stick his thumb in their eye. So every day we have to read through the same cycle of scare stories. Every day people get up in arms about Facebook's privacy terms, and every day they go right back to doing the same damn things they did yesterday. These companies are responding to the market, and the market -- the real market that votes with its time and attention and not with breathless column inches produced by plagiarising sub-hacks -- is telling them that it doesn't give a shit about privacy.

There's a real story here, but it's not that Google or Facebook are terrible Big Brother monopolies. Think about it for a second. What awful things can Google do to you, exactly? Do you think they're going to start blackmailing you with photos of your last Halloween costume that you uploaded to Picassa? The danger is not from the companies, it's from the government. From the government using the companies. Apropos of my last screed about functional anarchy, the problem is that these monopolies could become part of the big monopoly in the sky. More competition would in theory be lovely, though there are clear networks effects in these businesses that would make little sense to break up. In lieu of more competition, the thing to do is not to let the Biggest Brother regulate the market's failure to account for some supposed externality of lost privacy. It's not to centralize everything in one Panopticon; it is to build a firebreak between these monopolies and the government. The only thing worse than the current privacy regime would be the government taking over the system.

If you think getting Congress involved in guaranteeing your privacy is going to give you more of it, I would encourage you to submit the details of your dealer's whereabouts in the comments section -- you are smoking some quality kind.

EX ANTE UPDATE:

I know that Tech Crunch is not exactly the go to place for careful, thoughtful analysis, but still, this post perfectly indicates the overall half-wit-ed-ness of this debate.

Google made their "opt out of street view" service live in Germany today, giving select Germans until September 15th to exclude their properties from being mapped when the Street View service launches. The function will be available for a limited time in the 20 cities that are mentioned which includes Berlin, Dresden and Hamburg and then extend to all cities covered as Google Maps Germany rolls out.

While I've contacted Google for analytics on the number of people who have requested building camoflaging, the fact that private citizens can mass opt out of certain Google search functions is unprecedented until now. Why not give people the option to opt out of search entirely? After all, a hypothetical "Opt out" or rather "Do not index these pages I swear are about me and harmful" is considerably less far-fetched a privacy solution than Erick Schmidt's suggestion that people change their names.

What gives this twit the right to force Google not to index the blog entry in which I call him a twit?

Capitalist Axiomatic Trapdoor

2010-08-16T15:08:00.001-07:00

Martin Wolf is probably off somewhere getting some yacht time, though it seems he's reading something other than teen vampire novels.

In his final book, Power and Prosperity, the late Mancur Olson argued that the state was a "stationary bandit". A stationary bandit is better than a "roving bandit", because the latter has no interest in developing the economy, while the former does. But it may not be much better, because those who control the state will seek to extract the surplus over subsistence generated by those under their control.

I guess "stationary bandit" would be another name for the capitalist axiomatic. I actually don't see this as the state in its pure form, but as the more highly evolved strain that learned how to avoid killing off its host after interbreeding with the barbarians (who are more predators than parasites). After all, states rise and fall. Empires crumble under their own weight over and over again when they push the limits of exploitation. The parasite does not start off with a mechanism that takes its host into account, and so like most, it chokes itself along with the economy that supports it. Later mutations improve on the design.

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As for the rest of the post, I'm not sue how helpful I find it. He basically says that the state is the the place where we come together to make decisions that effect all of us. And he says that we cannot make those decisions a priori via a constitution that limits the state to what libertarians would see as its proper role. In other words he's taking direct aim at the early Nozick (who later decided in The Examined Life that the state should also be able to function as a forum for our shared values).

Wolf claims that this is intellectually indefensible because some people want the state to do more. On the face of it, this seems to me a terrible argument; you can't compensate me for being forced to work in a prison camp by the fact that lots of folks, including other prisoners, would like free health care. But perhaps his larger point is that there has to be some hierarchy of coercion/freedom here -- we want rights other than just to free speech and a vote, we want to eat and not die of small pox as well -- freedom is pretty pathetic if it just means freedom from state coercion. We have to be free to something as well. I agree with this larger point (if I'm reading him correctly) as far as it goes, but you very quickly run into the problem of just what those other rights are. We can multiply them as quickly as our bleeding little hearts desire, but just enumerating them ain't going to make it so.

Which bring us to the second objection to severely limiting the state from the outset, namely that it just doesn't work. Eventually the constitution gets re-written. Eventually you find that the government is spying on you and you still have to pay your taxes and that your neighbor couldn't give a damn if they haul you off just so long as it was the jews that lived on the other side of the street, this time. This, I really do agree with -- limiting the state by declaring our "rights" is just fighting a war of attrition. I don't know why we spend so much time talking about human rights and freedoms when it convinces no one. Harry Frankfurt diagnosed the problem perfectly when he said that the defining characteristic of a bullshitter (as opposed to a mere liar) is that he doesn't care whether you actually believe him or not, he just wants you to give the appearance of believing him. Human rights is just something we talk about amongst our privileged selves in order to convince each other that we really care just enough to calm us all down so that we can go back to doing what we were already doing before. You're a good guy, I'm a good guy ... great, let's go have a beer. The high minded speeches and UN dinner parties are immediately contradicted by the participants' daily actions, and the only shared social consciousness they really rally us to is a universal torpor and patience for this bullshit.

Ultimately I've come to see this question as a purely practical one. We can safely forget all about deducing the moral limits of state intervention because the real world is not now and has never been moral. Nobody cares what we think the state should do. A certain reality is indeed created by shared bullshitting, but it is not durable in the face of a mechanism geared towards continually inflating itself. The sovereign parasite will eat up everything it can get into its slavering leviathanical mouth. Pretending that we can limit it with mere words and concepts is futile. We have to take a more pragmatic and less idealistic approach.

In this case, Wolf does that by simply accepting that the modern state will be necessarily quite large because it must enforce a large and legitimate social consensus -- healthcare, pensions, pollution, etc ... You'll notice that he nowhere addresses the question of where the limits of the state should lie. His view is expansive. What should the state do? The state is a "protective" organization, and what it is protecting us from may begin with physical threats, but can come to encompass everything from indigent old age to poly trans fats, all filed under this one label of "protection".

Naturally, I think this is the wrong direction to go in. Not because of some philosophical difference with Wolf, but simply because I think it is a terrible idea pragmatically. I think that a far better way both to get what we want out of the state and at the same time to limit the damage it can do, is to break it up into much smaller separate pieces. I propose functional anarchy.

Let's consider this from the same perspective as Wolf for a second, and not worry about how to limit the state from the get go -- we will at first rely on the exit, voice, restraint curbs Hirschman pointed out. Now, consider all the things we might want the state to do as part of protecting our shared values. Maybe it should keep a record of who is sleeping with whom, or married to whom. Maybe it should monitor all of our communications. Maybe it should defend us against terrorists. Maybe it should provide public goods like protection from pollution and financial fraud. Maybe it should give us free parking. Maybe it should give us healthcare, and keep us fed and provide for our old age, and ... there's really no limit here. And my point is not that there should be some inherent philosophical limit, my point is simply that I don't see at all what these desires have to do with one another. Why does it all have to be the same state? If this were any other industry we would call it anti-competitive bundling.

Federalism goes some way to addressing this issue, obviously. Slowly but surely though, the pretense that the Federal government was set up only to deal with the questions that explicitly could not be handled by the lower levels was dropped. I think we need to resurrect that pragmatic and structural approach to limiting the state. We should break it into many different pieces, geographically as well as by function. After that, if there is a problem that requires the pension funding piece to come together with the marriage regulating piece, well, then, we'll have a summit of sorts, and negotiate that decision from the bottom up. This way, instead of empty bitching about the right to this and the right to that, we'll actually have a part of the government -- a mini-government in fact -- dedicated to actually solving that specific problem that we as a society share a desire to solve. And if it doesn't work, we'll know what to change. We'll know which government is wasting our taxes and not fulfilling our shared vision.

I submit that this disaggregation of government function will also vastly reduce the possibility of abuse -- not theoretically, but in actual fact. For something like fascism to occur, all of these individual units would have to be aligned, despite the fact that they express radically different an even contradictory desires that we share. If the marriage government (which and just for the record this one shouldn't even exist at all) and the healthcare government and the information retrieval government are all separate, it's suddenly much less threatening to be open and honest with each of them. As long as we don't let the paranoid defense government hijack the whole works, each of these little governments will only be around to fulfill its very limited function. There may be a continuous tendency to invent new desires, but as I also propose to fund these things separately, I think the creep would be easier to handle.

In the end, each of these little governments is like tiny monopoly. They can be expected to suffer from all the problems that monopolies suffer from. But at least we could avoid one giant monopoly that mixes all the desires and decisions of 300 million people into one great corrupt stew. We might even *gasp* create a market for government that lets us separate and weigh the value of each part.

El Pelado de Calvo

2010-08-11T05:49:00.001-07:00

I found this Guillermo Calvo article over at VoxEU interesting. His basic point is that spending more on stuff we don't need is a bad idea. I think that part is completely correct, and I agree with the idea that you can't just pump more money into the economy and expect it to instantaneously go back to its pre-crisis trend.

Proponents of expansionary fiscal policy claim that the government should increase expenditure – spending what B can't and Lwon't – by issuing the Treasury bills that L wants. This closes the circle, the additional fiscal deficit is financed by L and the economy goes back to full employment.

But, unfortunately, economies in crisis are not that simple. The argument assumes that the government channels additional spending towards the very same goods that B cannot afford. This is not true in general. In the US, for instance, small firms lost access to working capital that the government spends on solar energy. Hence, sectoral "lack of demand" is unlikely to vanish. The sun will set on B goods and shine on government goods.

Fiscal expansion could thus have little impact on unemployment, because the unemployed in the sector that caters to B's tastes are unlikely to find new jobs in those sectors that benefit from the government's largesse. One important reason for sluggish employment creation is that stimulus packages are transitory and hiring-and-firing is costly. Sectors producing government goods will go on overdrive, but will be reluctant to hire new workers. Equally important, labour reallocation is costly and cannot take place in the spur of the moment: a bricklayer does not become a computer technician overnight.

This is what I take to be the part of Austrian theory that is useful. There really is a hangover because there really is a process by which our economic system discovers what people want and gears up to make it; equilibrium, if such a thing exists at all, is not instantaneous. The more radically people's wants change, the bigger the hangover.

However, I'm less sure I buy the pot shots he throws at the Keynesians.

The subprime crisis is a financial crisis that threw a dark cloud of mistrust on financial intermediation; lender L stopped lending to borrower B, not because B became a rogue, but because L hears that people like her are worried about the health of the financial sector. That's the central reason why a small financial problem catapulted into the present global crisis. Many professional economists agree with that.

Once this is acknowledged, "lack of demand" is almost a corollary. If L does not lend to B, B's demand will have to fall. L is a lender and, therefore, now she has to find a place to park her money. The easiest alternatives are cash or Treasury bills. Therefore, B's forced austerity is not offset by L's overindulgence, and "lack of demand" springs to life. B's sudden austerity – it is worth stressing – is due to a credit crunch. He didn't become anorexic or lose his self-esteem as some Keynesians want you to believe. These psychological diseases may happen to him as crisis evolves, but the roots of his austerity are in a suddenly malfunctioning credit market.

At this point I'm pretty sure that the party line the banks use in front of congress -- don't regulate us because it will restrict credit which will kill the recovery -- is mostly full of shit. The credit crunch was a trigger, I agree, but not a cause, as he seems to claim. But that doesn't make the psychological malady produced by the trauma less real. The problem really is that there really isn't any demand -- for loans or much else. This isn't because B became a rogue or because L is too nervous to lend. It's simply because B is already in way over his head, and no matter how cheap you make his loans, he's done. Do I need to cite mortgage rates and current housing market stats to convince you of this? Go read Richard Koo again. And again. Till the logic of the zombie holding pattern sinks in. So I don't think that the fundamental problem is a credit crunch any more than I think the fundamental cause of WWI was the shooting of Fritz. The problem was fundamentally an unbalanced economy that can't get back into balance quickly because the debt used to drive it away from equilibrium governs the speed with which it can return. I wish that economists could wrap their noodles around the idea that money is real.

But there's no point in getting academic over this. Hayek and Keynes can rap about it till they're blue in the face, and the question will still be what do we do. In the end I am tempted to side with the suggestion he makes here of cutting back on general fiscal spending but expanding policies that put money in the hands of people without jobs. In an ideal world I might be inclined to argue that this is a perfect time for the government to spend on things like infrastructure that we have neglected for a long time. But in the real political world we live in, I think this is a lost cause. The spending we have engaged in so far, and the spending we are likely to continue to engage in may keep us out of a depression, but it will be aimless and useless in the long term, just as Japan's has been. The government is an incredibly lousy allocator of capital. That's the sort of system you get when the whole thing can be held hostage by some nitwit from Nebraska. And there's always the looming threat that the best jobs program it can come up with is a war.

The next best option then is just letting the economy adapt on its own -- to let people go bankrupt, to let mortgages get written off, to let wages and house prices and equity prices decline till we get back to some semblance of equilibrium where we are actually able to start making the things people now want again -- and in the meantime to make sure no one starves. This is pretty close to what Calvo is arguing. And it seems to me the most politically plausible path closest to the very best solution, which is to get everyone in a room and have a fast track national bankruptcy procedure. Writing off the pipe dream promises made to creditors wouldn't in itself right the system, but coupled with some changes in finance to prevent a recurrence, it seems to me that it would get things going faster than any other method.

Adrenaline rush posing as a flash of insight

2010-08-04T15:28:00.000-07:00

I went for a run the other day. Too early as it turns out. It's been hot here, and the sun obviously did me in, because I found myself reflecting on the Will to Power.

Recently, I claimed that the history of technology commonly conceived was in fact a sub-class of the history of social technologies aimed at improving cooperation. I also asserted that there was no universal progression towards paradise in the sense that neither specific technologies, nor our more general technologies of cooperation, are inevitable, and we always face the possibility of regression or even extinction.

However, there was some secret part of me, the perennial American optimist, that wanted to say that, "where there's a will, ultimately, there's a way". And my desire to reach this point of view is reinforced by my still uncertain belief, a la Freeman Dyson, that consciousness is, like a virus, something that spreads throughout the cosmos -- maybe not inevitably, but with high probability.

Luckily, at just this moment I recalled glancing over Deleuze's introduction to his book on Nietszsche.

This suggests the correct formula is actually, "where there's a way, there's a will".

Los Boligarcas de Venezuela

2010-08-04T12:58:00.001-07:00

It doesn't matter whether you call it capitalist or socialist or the revolutionary Bolivarian army -- modern governments exist to fuck you. And when you strip away the rhetoric from the leaders left-wing academic types always love, you inevitably find nothing more than a corrupt and incompetent populist enriching himself and his buddies. Don't believe the hype.

In the past, a number of Venezuelan presidents were more-or-less infamous for embezzling funds – abetted by a deeply, perhaps deliberately so, inefficient state. The presidents' friends and other insiders grew rich. Almost everyone else became poor.
This explains Mr Chávez's democratic rise to power. He appealed to a genuine need and a forgotten constituency. In a country of "ins" he spoke to the "outs". The problem is that the "outs" thought that under Mr Chávez they would become "ins", and only very few have, the so-called "boligarchs" – with their government connections they have become the latest generation of nouveaux riches to drive sports utility vehicles and wrinkle their noses at the proletariat.
Economic mismanagement meanwhile threatens the social gains. One oft-cited example is a near halving in unemployment since 1999 – in part thanks to a near doubling of state employees to 2.3m. Yet while more people might be employed, high inflation also means everyone earns less in real terms than they did 11 years ago.

I've been hearing people talk about how great Chavez is since 2003. If he's so great, why do his people keep getting poorer?

Hypothesis

2010-08-03T14:55:00.000-07:00

The history of technology is fundamentally the history of technologies of cooperation -- ethics, language, government, markets, internet, borg assimilation.

These are so much more fundamental than the specific technologies that are invented within these frameworks. Without the framework for cooperation, what we usually think of with the word technology does not work its magic of creating non-zero sum games and increasing returns.

Note that I am not saying the same thing as Robert Wright. Social technologies have to be invented and perfected historically. Krugman's work makes this history an inherent part of economics, and emphasizes the way that social context and simple chance bear on development -- which is why they gave him the Nobel Prize for it (watch the lecture). These technologies are not at all inevitable, and in fact, we march backwards away from them all the time.

Now are you an anarchist?

Eponymous 2

2010-08-01T14:51:00.001-07:00

To put it simply, capitalism is a strange interbreeding of the War Machine and the State Apparatus that represents an alternative branch along the evolutionary path of their undying enmity. It's a whole new species of organization altogether, though you can see how it's formed from the interaction of the same two forces. (I would love to think about how these forms of organization are really like evolving animals, but that becomes an absurdly complicated question about something they call the machinic phylum).

One the one hand capitalism inherited a bit of the war machine DNA. It's creative and productive. It rolls over every barrier it confronts, whether this is technological, societal, or international. The image of swash-buckling pirate finance that runs continually beyond the reach of governments is a common one. Multinationals and markets get a bad rap because of the way they seem to be bigger than the system -- impersonal, uncontrollable, and unpredictable. Think also of the way these companies seem to have no regard for the "meaning" of anything -- they are trying to take capital and turn it into more capital. Full stop. Don't bother them with a bunch of petty limits.

On the other hand, capitalism, as it is currently practiced, depends on some features of the state apparatus. We set up markets as rule based games within an over-arching state system, hoping to capture the fruits of their competition for productive purposes while constraining their natural tendency to overrun any regulations as part of that very competition. It may sounds paradoxical, but the market, if it were really freed in some deeper sense, would perhaps cease to take money as its sole objective. If we place capitalism on the side of the war machine for a second, we can see how mafia capitalism, or state capitalism is very akin to the Nazi war machine taking over its state. It's a mistake to think that this takeover, though motivate by a strictly monetary competitive logic, would stop with money. In some sense, limiting markets to dealing in money is the way the state apparatus domesticates them.

I think now you can start to see how the original concepts get interlaced to the point where you're not sure which side to root for. The state apparatus and the war machine seem to flip back and forth without either having the upper hand. Everything has been over-coded into units of money, and yet this is a strangely open-end and flexible set of rules to mark off a new territory. Do we cheer the destruction of the old forms of power, or have they simply changed shape and tightened the noose? There is a real ambiguity in Deleuze when it comes to these questions -- he is clearly on the side of the creativity of the war machine; it's just not clear which side that is.

But why call capitalism an axiomatic?

Well, the idea is that an axiomatic is meant to limit the acceptable statements, dividing them into true and false. This at least was the dream of mathematicians like Hilbert when they proposed to reduce mathematics to this sort of system. You have a few axioms, some rules of inference, and the thought was that with these you could crank through any possible mathematical statement someone made, and decide whether it followed from the axioms or not. The axiomatic is meant to mark off the territory of truth.

Unfortunately (sorta) Godel famously made mincemeat of this desire. Any useful axiomatic runs into all sorts of problems. Some of the statements may turn out to be undecidable. Others you know to be true will fall outside of the system. You can incorporate these, or you can take away other axioms, but the problem of things slipping outside your perfect system will persist. In addition, it turns out there's a whole branch of mathematics called Model Theory, that they invented when someone realized that even if you could formalize mathematics axiomatically, there might be several different number systems that all followed the same axioms. The book makes this theory analogous to the way in which capitalist, communist, and totalitarian states all participate in one larger world market as distinct models of the axiom system.

So the basic idea is that reducing all questions to questions about money and efficient production is meant to order all the crazy desires our species comes up with. And this reduction provides a whole new way of looking at things that does away with a lot of cloying moralistic control and opens up all kinds of new horizons (people pay to dress up their virtual poodles). But it is still an attempt to reduce these desires to something we can manage and understand, and ultimately try to control. Which is I suppose why they stick the explanation of the capitalist axiomatic under the chapter on the state apparatus.

Sorry if this explanation borders on the insane. I'm certain everyone knows where to find "Mark As Read".

What is evolution a theory of?

2010-07-31T13:45:00.001-07:00

Real quick for the biologists in the house. I want to pare this question down to the minimum so that maybe someone shows me where I'm going wrong.

People claim to believe in something they call the theory of natural selection by differential reproduction. What does this theory purport to explain?

Does it explain the origin of life? No, it takes reproduction as one of its premises, so it can't be expected to explain that.

Does it explain species we find on earth today? Well, yes, insofar as it contends that current species are produced by modifications of old species. However, it really only explains the selection of new species, and not their production, per se. It says that species that are more adapted to their environment will reproduce better, and so selection will assure us that these are the ones we find later on. But then it measures how adapted an animal is by how well it reproduces, which leaves you with a tautology, not a theory. I guess there is some amount of content to claiming that the things we see are around because they are good at making copies of themselves. You could imagine a world populated primarily by things that lasted a really long time individually, and not by things that reproduce at all. But do we really take evolution to be a theory that primarily says that it's really hard to keep existing without making a copy of yourself?

Does it explain how new species arise or explain the diversity of life? Not at all. It says that there will be lots of copies of things that reproduce more. When you ask why something started reproducing more, they tell you that it's because of better adaptation. When you leave aside the tautological question above and just ask, well, how did it get better adapted, you are told that it was a chance mutation. Sometimes you get a slightly ore sophisticated answer about a chance mutation that improved its adaptability or ability to learn, but in the end, the answer to the question of why is the biological world so diverse seem to boil down to "chance". But chance is explicitly outside of the theory. The theory talks about how you end up with more or less of what already exists. No matter how slow you imagine change to happen, you still have to invoke some change to get anywhere at all, and it still inherently falls outside of the theory which deals only in similarity. You will recall how Zeno proved movement was impossible.

So if evolution is not a theory of any of these things, then what exactly is it a theory of, pray tell?

It seems we need a theory of chance. A theory of difference instead of reproduction.

Eponymous

2010-07-31T13:13:00.001-07:00

For no particular reason, I thought I would take another stab at explaining the title of the blog. The quote at the top actually comes from A Thousand Plateaus, a seminal bit of post-structuralism penned back in 1980 by French philosopher Gilles Deleuze and Italian psychoanalyst Felix Guattarri. In an effort to dramatically boil this down, I would claim the thesis of their book is that the world is created by the intersection of forces of stasis and forces of change. See, I told you I could simplify it; it's just like Star Wars. They even give these forces names, almost like you would mythological characters (kinda like Freud and the Oedipal complex, now that I think about it) -- the force of stasis is called the State Apparatus, and the force of change is called the War Machine. In general, these forces work at odds to one another, but they can also interbreed and combine in strange ways, and the Capitalist Axiomatic is the half-breed offspring of the two.

It's hard to write something like this in any sane amount of space without falling into what feels like intellectual parody, but I will nevertheless forge ahead.

The State Apparatus is an apparatus of capture. The State is basically a parasite in this theory. In and of itself it doesn't produce anything. It is not creative. It takes existing mechanisms (of production, of language, of culture -- the idea is not mainly economic) each with its own codes and conditions and coordinates and over-codes them. In other words the state apparatus is a force of unification, organization, systematization, and homogenization. It marks off a territory, puts a fence up, and starts collecting taxes.

In the book, they base part of this theory around the way the earliest states, like Sumer and Ur, actually functioned, but you don't need to buy the anthropology to get the idea. Every system that's going to stick around has to come up with some sort of mechanism of stabilization that serves as its foundation and lingua franca. The important thing to realize is that this foundation is not generative, not creative. The state apparatus doesn't build it. It's not the seed or the root of anything. All the production is already occurring. It just comes along later and brands the whole works and appropriates a slice. The State Apparatus sets out limits, closes things off, and divides up the results. Middle management in short.

This is a very different view of the state (and of organization more generally) than some are used to. We're often brainwashed into thinking that organization is somehow more central than the forces it organizes. As if the state itself created the organization, instead of merely coordinating already existing forces. This is perhaps why we think that leaders have such an exaggerated importance, rather than understanding that they are more fundamentally an effect than a cause. This is not to say that the state doesn't have a real existence and real effects. The state is perfectly real, it's just a reactive and derived reality that has to do with maintaining a form and an equilibrium that came from somewhere else.

What's really creative is the War Machine. The basic principle of the war machine is that it accepts no limits. It is a force of change and mutation that will attempt to overrun every fence you put up. The war machine has no purpose other than indefinite expansion. It's not looking to conquer territory, which is only of concern to the state. It doesn't have any sense of self-preservation or equilibrium. It simply refuses to be contained; it is that element of chaos in any system that falls outside of control, and hence is the fountain of all novelty and change.

In the book they link this to the relation of nomadic tribes to the early states. Again, the point isn't crucial, except insofar as it helps to understand that the real object of the war machine isn't war in our modern sense. The real object is simply to preserve the openness of a system and to avoid being captured and forced into settling down. Instead of first marking off a territory and then filling it up, the war machine goes out and populates the little desert oases as it finds them, following the lay of the land without imposing an external order on it. The war machine represents the system destroying barbarians at the gate.

This may be starting to sound sort of obvious -- sure, things break down, people and species and systems die off -- so I just want to pause for a moment to emphasize how odd it actually is. Something fundamental happens when you try to think about the necessity of what, from the point of view of the stable forms trying to maintain themselves, are accidents. Necessary accidents; failures and innovations that somehow have to be part of your theory instead of relegated to special exceptions. Through this you bring chance into the world as a real active force, rather than just something that comes from beyond and fucks your shit up. You give possibility a deep reality. I can't think of a more profound philosophical stance, and this is what draws me to Deleuze in general (a lot of his more academic work is devoted to sorting out what kind of reality we could attribute to possibility, following the line of suggestions made by those few philosophers who share this tendency -- Spinoza, Hume, Nietzsche, Whitehead). It may sound like a simple inversion, but to look at the world and see the flow between the forms as more active, more creative, and maybe even more real is to see a whole new world. Chance reigns supreme and the rest is just bureaucracy.

Anyhow.

Given the opposition of the state apparatus and the war machine, you would think that these forces were forever irreconcilable. But part of the beauty of Deleuze's thinking is the way that he very clearly lays out oppositions to make a conceptual point, and then goes on to show how they inevitably combine to in very complicated ways to make the real world. In this case we pass from the pure cases of Sumer and the Huns respectively, to a much more mixed modern situation. The idea is that somewhere along the way, the State came up with the bright idea to capture the War Machine. Capture is the defining action of the state after all, and the war machine was a constant threat.

So in our little mythico-historical drama here, the modern European states represent the partial success of the State Apparatus in capturing the War Machine and incorporating it into its system. Hence the wars fought over territory in the 17th through 19th century, which differ dramatically from than the sacking that brought down Rome and even the Crusades (a form of religious war machine). Napoleon and his idea that the entire state should be mobilized for absolute territorial war is the pinnacle of this movement. The war machine becomes the preferred tool with which the state captures. And you can tell it's the state behind these wars if you ask "what do you do after you capture"? The answer is basically nothing -- you don't change anything, you mostly let them go on like they were, and impose enough control to tax them. The parasite is only looking to expand the host. Or as Clausewitz put it, war is just politics by other means.

The story doesn't end there though, because its not that easy to keep the war machine penned up (which is really impossible, by definition), so capturing it is fraught with peril. From the Napoleonic state employing a pet war machine, it's only a short jump to Hitler's war machine getting the upper hand and using the state for the purposes of pure destruction. Hitler was no parasite. He wasn't interested in the tax base. He wasn't interested in capture. He was just going to wipe everyone out. One of the truly remarkable things I've discovered in the little reading I've done about the psychology of Nazi Germany is how all that precise organization was consciously directed at destruction as its unique goal (Goebbels said some profoundly fucked up shit to those who were listening, though this may take the cake: "In the world of absolute fatality in which Hitler moves, nothing has meaning any longer, neither good nor bad, time nor space, and what other people call success cannot be used as a criterion ... Hitler will probably end in catastrophe").

What does all this have to do with capitalism?

Stay tuned for next week's exciting conclusion!

I am not a liquidationist

2010-07-30T06:18:00.001-07:00

Okay. So you're doing a hundred miles an hour in an SUV that only turns left. You've been making donuts like this for a while when a squid darts into the road in front of your left bumper. You smash into the thing and end up sitting in the middle of the road a smoking heap, calling for help. The mechanics show up fast and get the car running again, but aren't able to fix the steering before some dude with 12 arms zooms up behind you in his new Nano. You're about to get rear-ended. Panicked, you start to step on the gas when you remember that you still can't steer, unless by some magic the crash happened to change that.

BUT HE'S RIGHT BEHIND YOU!

Let's just floor it and hope for the best?

Another Tidbit from Wolf

2010-07-26T14:39:00.001-07:00

One of the curious things I've often wondered about is the vitriol that the current Republican party shows toward Keynes. I find it odd because it seems clear to me that the Republican supply-side theory of growing the economy by cutting taxes and running deficits, is at base a deeply Keynesian theory. The distinction between demand-side Keynesianism and a supply-side version seems like a second order one when you consider that both rely on the idea that the government should stimulate an economy that for whatever reason is not operating at fully efficient equilibrium.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: "supply-side economics". Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.
The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.
In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world's most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

The post goes on to make clear that the real honest-to-god fiscal conservatives like Mankiw and Friedman don't believe this logic. They want a smaller government, with the tax cuts balanced by spending cuts, just because they hate the fucking Eagles.

Diversification as Monoculture

2010-07-23T11:13:00.001-07:00

Recently I've been reading about the mechanics of American corporate governance. In theory of course, corporate governance is entirely straightforward and democratic -- one share, one vote. Of course, there are some special cases where founders or their heirs maintain control over a company by setting up a special class of shares that get a disproportionate representation. While this is more common than one might imagine, it's still an exception (forgive my lack of statistics, it's Saturday) and for the most part the economic owners are in nominal control of a company.

The reality is pretty different though. The owners are officially in control, but they naturally have to appoint a board of directors to represent them and hire a manager to run the business and make day to day decisions. The CEO is inherently going to end up much much closer to the business than the board, who in turn is much closer to it than the shareholders. Multilayer representative democracy is not exactly a ... ahem ... flawless system, so stuff gets lost in translation. If you want to read about just how complicated this process of translation is, read the SEC concept release, which goes over the mechanism from top to bottom. The consequences of making sausage with this mechanism are as obvious as they are widespread -- wildly overpaid management that has little of its own money at risk, incentivized to either placidly chew the cud and milk their control, or to go for broke at someone else's expense.

At first it seemed to me that the problem was about the dispersion of ownership. I rant endlessly about how America is just too damn big and how they wrote the constitution to serve 4 million and not 300 million people; I thought the problem in corporate governance was similar, large corporations simply have too many shareholders to be governable. The centralization of control opens the door to corruption.

The more I've thought about this though, the more I've decided that it's not the number of owners per se that is the overwhelming problem. After all, even in a large company with many owners that is not controlled by its founder, say GE for example, a solid portion of the ownership lies in the hands of the largest asset management firms. In the case of GE, the top 10 institutions own 17.4% of the stock. They shouldn't have that much difficulty getting their way, especially when you consider that a lot of the little holders don't bother to vote at all or let their broker vote for them. And I submit that they wouldn't (have trouble) if they had any clue what their way was. Unfortunately, these big owners own, quite literally, everything. The biggest owners are almost always one flavor or another of index fund or its modern equivalent , the ETF. They just track "the market" and are professionally agnostic about the individual companies in it. They don't have an opinion about how a company should be run, and there's no way they could have an informed one about all 500 plus that they own. Rather than acting as a powerful concentration of ownership, they are just another middleman muddling the mechanism.

How did we get to this state then? How did the real beneficial owners end up so far from the thing they own? A big part of it was the encouragement people have gotten over the last 50 years that there was something out there in the wild called "the market". This idea grew out of the work of the Chicago School and the capital assets pricing model. They designed a toy model of a perfectly functioning market, which is an inherently equilibrium tending machine, from whence they went on to prove that in this toy model return was proportional to risk (defined as volatility). From there, if you presume that the individual assets are uncorrelated, it's a short step to touting the wonders of diversification in providing you the highest return for a given level of risk. You just buy your share of "the market" which is defined as "all of the assets" and you let it work it's invisibly handed magic.

This model explains the market okay if you squint just right and throw out the major data points of the century, like, say, the Great Depression, so naturally it was taken as gospel. It also created a whole wonderful new industry for Wall Street because now they could own the same thing as everyone and charge a fee for doing so without getting blamed if things went bad. But I'm being facetious and cynical. The theory really isn't that stupid, even if you can hardly call it empirical science. It does more or less explain long stretches of data in a parsimonious fashion. And in the end, I can't say I have a better suggestion than this extreme diversification for the amateur investor. Like so many things in economics though, it's clear that the George Soros principle of reflexivity applies here as well -- once everyone does what the theory says they should, it ceases to be valid. In this case, everyone diversified into the same stuff, and the correlations increased dramatically, which invalidates the premise.

Now it's pretty obvious where I'm heading with this. It seems to me that the problem was that we grew a monoculture of diversity. Once this monoculture was established, the combination of finance and politics swept through it like a virus. We unhooked the basic premises of capitalism, namely that owners with varying preferences care what happens to their property. If it's only ever 1% of your property it can't really be worth worrying about, right? In that case why would you bother with governing the investments you make? None of them is individually important and you can't know about everything. On top of that, they've already proven to you that you can't beat the market, and proven too that when you just buy a bit of everything, it will all magically work itself out, even if it's immediately obvious that if most people are following this advice it can't possibly work. So there's no point in even trying to govern the corporations you own for your benefit. Sit back, drink your coffee and enjoy your divine right to a little slice of America.

In the end, this monoculture reminds me of socialism. Instead of centralizing economic decisions in one 'party brain' that wisely and benevolently decides how we should allocate resources, we have centralized decisions in one theory that wisely and benevolently declines to make those decisions. It's kinda like a lobotomized socialism. And of course, once you take away the patient's higher brain functions, they end up running on the old autonomic reptile brain power. Just how ancient is the Vampire Squid?

These are not the droids you are looking for

2010-07-23T07:55:00.001-07:00

Felix Salmon pretends he has heard something that escaped most of us:

Matt Cameron picks up on an interesting tidbit from the most recent Goldman Sachs earnings call:

“As a result of meeting franchise client and broader market needs, we had a short equity volatility position going into the quarter. Given the spikes in volatility that occurred during the quarter, equity derivatives posted poor quarterly results,” Goldman’s chief financial officer, David Viniar, told analysts on a quarterly earnings conference call on July 20 …

In fact, Goldman managed to put the bold clause in every single article I've seen regarding their earnings -- they veritably shouted from the mountain that whatever their business as usual is, it won't qualify as prop trading. Volcker and Congress must have been thinking of someone else ...

Mafia State

2010-07-20T05:15:00.001-07:00

It seems to me that Martin Feldman has a largely good idea ... that will never ever happen.

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.
These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.
For example, the Joint Tax Committee identified more than a dozen tax-based programs that subsidize education and training. These include small ones like the Coverdell education saving accounts (with a 2010 tax expenditure cost of $100 million) and much larger ones like the various tax credits for tuition (costing $11.7 billion). The hundreds of other tax expenditures include a $500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.

Ignore for a moment the blatantly partisan nature of the the examples (gee, I wonder if businesses ever benefit from these type of tax expenditures? Nope, looks like it's only education and transportation and liberal bullshit like that). Ignore also that some of these benefits exist to make the tax code more progressive (nominally at any rate, I for one still think there's an proportional relationship between how progressive they make the tax code on the one hand, and how much they let large businesses take it out of poor people's pockets by reducing competition on the other).

Neither of these objections matter really because it would be simple suicide for congress to relinquish its power to micromanage the tax system. If they don't first condemn you, and then grant you a stay of execution, they lose all their power to collect protection money in the form of campaign contributions. Congress doesn't regulate in order to improve an industry, it regulates, first and foremost, to extract its paycheck. And the way it "regulated" finance in the last decade should remind us that congress is in the unique position of getting paid for doing stuff, and for not doing stuff as well.

Don't disappoint me

2010-07-14T18:54:00.001-07:00

So I'm interested in finding out whether hydraulic fracturing (aka fracking) for the purposes of extracting natural gas from shale formations is safe and efficient. I begin with no opinion. For the most part, in my experience, people are wrong. So I'll just have to sort through it on my own.

In trying to find out, I read a lot of folks from the industries involves saying that it's perfectly safe, we've been doing this for years, for god's sake it's happening way below the water table, how can it be a problem, etc ... This is marginally convincing, because it does turn out to be mostly true. Fracking has been around long time, no one has really ever noticed a problem with it, and it does almost universally happen below the water table. But then again, the N isn't huge here, as the process hasn't really been used in lots of geographies and at large scale. Plus, you can't exactly trust the people most likely to benefit financially.

So I go and read some of the other side. Vanity Fair wrote this article. Basically it says that fracking will make your hair fallout and your teeth turn green. Sounds grim, but how likely is that claim to be true on a wide scale. Vanity Fair just exists to sell magazines after all, and this smells a little sensationalistic. If you read through the article though, you do see a few claims that need addressing. The process requires what sounds like a lot of water. The water has to get trucked into some god forsaken PA town where they haven't even managed to put out the coal fire they started in the 60's. That burns up a lot of oil, and of course uses the water. And then to get the gas out you have to shoot the water down into the rock at high pressure with a bunch of chemicals and sand that fracture it. These are not the nicest chemicals, and not all of them seem to stay way down in the well on all occasions. In other words the article points out that we should probably think about whether this is safe and efficient or not. Which was the question of course. Which we still haven't answered of course, because the article has no fucking numbers in it. Because, you know, numbers aren't as scary as green teeth.

But okay then, that's Vanity Fair. If that was my go to source for information, I'd be even poorer than I am. So I check out this engineering professor Anthony Ingraffea's lecture. He's been around the science of this for a while, he's consulted for the industry -- certainly he will have something useful to say? The lecture's got some numbers and some data and some more stuff to think about, but it is in fact a colossally awful and biased piece of work. Go ahead and watch it and decide for yourself. It does also brings up some good points. You have to make lots of small wells for this process to work, so you have to end up with a landscape full of wells. It takes a while to drill lots of wells, so there will be lots of noisy dirty activity in your backyard, if you happen to be sitting on the right to lease your privileged piece of geology. And then you've got to truck waste in and pipe gas out, and deal with the potential toxic fluid leakages, and waste, and etc ... Important stuff to think about undoubtedly. But this guy's entire presentation is designed to scare, and not to inform. Not to balance and calculate and weigh pros and cons. Certainly not to suggest solutions that would alleviate whatever the problems are.

I mean, how about a calculation of the carbon footprint of the trucks that carry the water compared to the emissions savings of producing more electricity with gas. What if you used the gas to power the trucks, would that make carbon sense? And how about the water issue. I don't want a comparison between the amount of water fracking requires and the amount that goes over Schuchyll Falls in the time it takes me to quaff another Yuengling. I want it compared to how much my neighbor dumps on his lawn and car every Sunday afternoon while I vomit. And don't tell me that the fluid is really really really scary and has fangs. Tell me how I can deal with that by changing it or storing it better or whatever. It's so disappointing because this guy has the knowledge (if not the speaking ability) to be able to put together a good, fact filled presentation that says on the one hand this, and on the other hand that. But everybody today is just like Truman, they all want a one-handed economist. Truman would have loved environmentalists though -- I've never met one with two hands. This guy just wants to scare you so that you keep the hell away from his trout stream. So disappointing. And yes, I know there are a million caveats to my annoyance here involving the difficulty of mobilizing and educating people, or dealing with government, or beating corporations with serious lobbying budgets, etc ... that would make you look less harshly on Herr Doktor -- but I also want some facts and context occasionally. Why are the two so impossible to combine?

Back the drawing board I guess. I still have no real sense if fracking at scale is honestly dangerous, or whether it's the equivalent of those complaints you heard circa 2002 about how ugly those cell-phone towers are, and ... are you there? ... hello ... reception is terrible around here.

¿Vos también estás luchando para la gentuza?

2010-07-14T05:27:00.000-07:00

Only 600 over the curve. Ain't socialism grand?

Argentina's transport secretary, said the pact calls for China to invest in 10 separate rail projects in Argentina over the next two to five years, including construction of rail lines and equipment. Among these is a $2.5 billion rail-renovation project in the capital, Buenos Aires, Mr. Schiavi said. Mrs. Kirchner, who made the announcement during a visit to Beijing, said Argentina will get the funds in 19-year loans carrying an interest rate of Libor plus 600 basis points, or hundredths of a percentage point. Further details of the financing detail are scarce.

The real question is whether the deal is denominated in pesos, renminbi, or beans.

Would you like some bananas with your politics?

2010-07-12T16:45:00.001-07:00

Interfluidity today passes along what has become one of my favorite Keynes quotes: I love the way this forces you to twist your perspective on the Roaring Twenties, the ensuing Depression, and, by implication, the massive stimulus project the Nazis undertook.

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924–29] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
I do not take this view. I find the explanantion of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…

He goes on to point out that the same cannot be said of the idiotic investments we made in our last boom period -- a 3,000 sq.ft. house with two SUVs in the garage is about the least productive investment I can think of. If we extend our definition of the "boom" in the most recent cycle to include the internet bubble, the case is less clear, but at any rate his point is well taken. We've malunderinvested in a lot of useless crap, as Bush might have put it.

Was this because of some grand failure of the free market though? It seems to me that this was principally a failure of our political system. He addresses this question, though only tangentially:

In theory, we have two overlapping systems, a financial system and a political system, whose shared purpose is to make information-dense decisions about how best to use or conserve our resources. It's not clear how we should make these decisions when both systems seem badly broken.

So, yes, let's be clear. Both systems are broken. But I think you miss something fundamental if you don't see how the problems are connected. Finance is broke in large part because politics was already broken. I mean this in two ways.

First, on a practical level, the government simply reneged on its duty to regulate the market. In the end anyone with a deep belief in the market as tool (as opposed to a fundamentalist faith in the market as a dogma) still can see that it's the job of politics to set up the rules of the game so that when the financiers and entrepreneurs compete for the spoils, they actually provide a benefit to other folks as well. Politics designs, and finance executes.

Second, if politics disdains design, finance will execute us right into oblivion. The market, as machine, runs on its own logic of profit maximization. If politics is broken enough to allow for its own purchase as a viable business strategy, it will, inevitably, be bought. I'm sure loyal readers who hear me say "feedback loop" one more time will reach for their revolvers, so I will shift gears a bit ...

Does this observation mean that economics or politics is more fundamental? It seems clear that the answer should be politics. An equilibrium tending free economic market governed by an invisible hand is actually a very special type of political game. Economics is a sub-discipline of politics. Not to be outdone, Interfluidity knows this as well.

Shlieffer and Vishny's famous coinage, "the limits of arbitrage" is not strong enough, because it suggests that efficient arbitrage is the norm subject to some exceptions and limitations. It is more accurate to view efficient arbitrage as the unusual special case, in bond markets as well as in equity markets.

I would extend this logic further, however, and say not only that the actual market works according to theory only on occasion and almost by accident, but that it's almost accidental that we even occasionally have a market to begin with. We take democracy and markets for granted because we have seen a few rare examples of them, and because the idea is so pretty and easy to theorize about. Unfortunately, the real world -- whether political or economic -- only teases us with an intermittent tractability. This is actually true of every science we attempt, though it's obviously much worse if you're trying to invent a science of economics or politics. In fact, I feel like this logic applies to whole bunch of problems, from the definitions of life and consciousness all the way to our efficient market theory and maybe even our basic philosophical assumption that stability is somehow more fundamental than change. We pattern seeking monkeys are experts at making a general rule out of a tiny special case.

Kinda reminds me of the old math joke: "Classification of mathematical problems as linear and nonlinear is like classification of the Universe as bananas and non-bananas".

Allow me to eviscerate

2010-07-08T05:38:00.001-07:00

Art Laffler, yes, the Laffler of famed Curve, has an op-ed in today's WSJ. He pretends to look at some evidence, and concludes that we're only having a recession because the lazy bums don't want to work.

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.

He goes on to tell a lovely and plausible story about what would happen if unemployment benefits were $150,000 per year. This of course, makes his point undeniable. So I have to agree that we should keep unemployment benefits below this level. Given that the average check amounts to around $15,000 per year (if you could claim it for an entire year) it looks like there's about a factor of 10 between Dr. Laffler and the truth. This doesn't stop him from producing "evidence" in the form of the following chart:

This again is quite undeniable. The chart incontrovertibly shows that the government pays more in unemployment if there are more unemployed people. Science motherfucker! Put that in your pipe and smoke it you liberal cur!

Honestly though, the whole thing is either so stupid or so evil or so dishonest that I'm already bored with making fun of the guy. Just listen to some of this stuff:

There isn't a "tooth fairy," or as my former colleague Milton Friedman repeated time and again, "there ain't no such thing as a free lunch." The government doesn't create resources. It redistributes them. For everyone who is given something there is someone who has that something taken away.
While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
To see this, imagine an economy that produces 100 apples.

Um, have you ever heard of this Keynes guy? Krugman and DeLong and Thoma are right; it's honestly like living in the dark ages. I guess Laffler has been working on modeling the 100 apple economy. Actually, maybe that's still too complicated.

To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.

Now that we have a nice realistic model of the economy as two frictionless billiard balls rolling around in Art Laffler's head, we can clearly conclude that the best thing would be to cut taxes. What? You don't see the connection? Come on man. Learn the refrain. They've been teaching it to you like it was Sesame Street. The punchline is ALWAYS cut taxes.

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

With that out of the way, Dr. Laffler, PhD, can now get down to the serious business of writing tomorrow's op-ed, which of course exposes the scientific inevitability of US budget deficits causing the invisible bond vigilantes to flee US Treasuries and drive interest rates to the moon. Science is never more fun than when you just get to make it up as you go!

Grotesque. Irresponsible. And just plain flat out fucking wrong.

Credit is just trust with a number

2010-07-07T06:02:00.001-07:00

The ever-enlightening M. Pettis churned out another of his trademark monster missives (well, monster by typical blog post metrics). This one touches an issue dear to my heart, namely the fact that we are all already bankrupt.

For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital. For reasons I discuss below, this will have a large adverse impact on private consumption.

The only question left is how we deal with it. In the end, the response is more of a political question than anything economic -- modern politics specializes in sweeping problems under the rug long enough for them to become someone else's ... ad infinitum. Pettis goes on to point out that the most likely version of events is something akin to Japan. They have had banking problems for 20 years now, and all the while they have forced their consumers to continue bailing and bailing via passing this debt onto the state's books (sound familiar?) and then holding interest rates for short term depositors artificially low (sound really familiar?) while letting the banks rake in a fat spread.

... in Japan, during the past twenty years the Japanese government and the beleaguered Japanese household have been tasked with keeping the banking system alive. I don't know whether or not the banking system has finally been cleaned up, but for the purpose of my calculations it doesn't really matter. The Japanese government has been saddled with a huge nominal debt burden, which is only bearable because interest rates are kept artificially low. Forcing down the interest that depositors and bondholders receive means that borrowers are getting (albeit not visibly) substantial amounts of hidden debt forgiveness funded by household depositors.

So while he outlines a variety of logical possibilities for dealing with the aftermath of our recent giddy surfeit of trust, they all basically boil down to household consumers footing the bill one way or another as in Japan. Somebody that thought they weren't going to have to work so hard or live so well is now going to have to get off their keister. Politics is there to help us decide who.

One thing that he doesn't really go into in this post is the possibility of distributional differences. From a macro perspective this question is meaningless. Households will pay. It doesn't matter to a first order approximation whether these are rich or poor households. It seems clear to me though that there is a political dimension to the division of this burden. Perhaps one of the reasons that Japan's Great Recession has been so smooth (honestly, I know it sounds crazy, but Japan might be a success story, at least when compared with the Great Depression) is that they have a relatively egalitarian society. Here in the third world, we might expect a few more bumps in the road.

The end of his post also contains a very interesting suggestion that I haven't thought through yet completely.

Until the banking messes are cleaned up, I think we shouldn't count on household consumption to save us. The only solution I can think of for this problem is if governments — especially China, Germany and Japan — use their resources of wealth to clean up the banking mess without forcing households to do it. How? they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth. This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there.

Privatization is sort of a bad word today, especially in places like China, but I bet it will become eminently respectable again in a few years. But until then, and as long as the banks are in such bad shape, do not expect consumers to ride to the rescue.

If the basic issue is getting people to trust one another and their government enough to get back to fucking work, then letting them feel some access to the wealth they have collectively built up in the form of State ownership might be a good solution. Unfortunately, the biggest problem we have everywhere is that the mechanisms that hold these collectives together are malfunctioning. We are at the point of completely dropping any pretense that any political party can act "for the people". It was always a bit mystical, this "people", but perhaps there was some amount of mechanism there for their "will" to get transmitted. Now, it's like we've got one guy working the brake and another handling the wheel, and the two can't even talk to one another. So it's hard to count on these guys to come up with the most equitable and efficient division of labor.

What is a number?

2010-07-05T19:01:00.001-07:00

I've been obsessed with this question for quite a while now. I think it dates back to reading Wolfram's A New Kind of Science, especially the part where he goes into what sort of computational system mathematical proof might be, and in particular the picture on page 153 that shows how the classical iterative map from chaos theory is actually just a digit shift when you look at it in binary notation. So is chaos very simple, or terribly complicated? Well, it depends on how you right down the numbers involved. The idea that the notation you use to represent a number matters in a deep way really got under my skin.

Unfortunately, it turns out to surprisingly hard to find other people who are also obsessed with this question. Shocking, I know. But, today only, for your blog perusing pleasure, I present Brain Rotman, mathematician, philosopher, and author of Ad Infinitum ... The Ghost in Turing's Machine: Taking God Out of Mathematics and Putting the Body Back In. An Essay in Corporeal Semiotics. This is a very interesting little book (though with a title so long that you have to wonder whether it's a cheeky joke) that takes issue with every known philosophical interpretation of mathematics, and tries to open up a new and more realistic way of thinking about just what this particular animal behavior pattern is all about.

First, Rotman dispenses with the age-old absurdity of the Platonist viewpoint -- mathematics as a language for describing pre-existing truths about eternal objects. As loopy as that sounds, I think most mathematicians still look at it this way. They're not inventing stuff, they think they're discovering it. To me, this account of the activity is so obviously theological that it's not even worth exploring. I mean, once you start asking how the apes get in touch with the essences the whole thing sinks faster than the Hindenberg.

Next, he goes on to dispense with Hilbert's reinterpretation of mathematics as a purely formal and computational enterprise devoid of all meaning. As if Godel hadn't already managed that. His critique here is not the same as Godel's of course. He's not concerned with the fact that the computers will never make it to the "end" of mathematics, he's just wondering why on earth anyone would be interested in math if it merely consisted in taking a set of axioms and some rules of inference and grinding out tautological proofs.

Finally, while he has the most sympathy for it, he has a fundamental objection to the constructivist-intuitionist branch that Brouwer and Kronecker advanced under the flag of the latter's infamous, "God made the integers. All the rest is the work of man". He likes their idea that mathematics has to be founded on procedures that could actually be carried out by mathematicians (and hence shares their problems with Cantor's transfinites), but he's not so thrilled with the idea that the acceptable "construction" is judged by some slightly mystical pre-verbal intuition rather than anything as concrete as a symbol processing system. And he's especially not thrilled with that notion because it enables them to sweep under the rug the very thing their intuition most takes for granted: namely, the integers.

Ultimately then, that's what the book is about -- the constructivists should have been constructivist about the integers. Are the natural numbers really so natural, or is that the baggage left behind by some theological dogma? This is the question Rotman is interested in, and after a long introduction dealing with the philosophical impediments that have prevented us from even asking the question, and outlining his own stance -- short version: mammals do math with machines -- he gets down to work on a new theory of arithmetic.

So how do we make the integers then? This is pretty straightforward; we count. And then we add, which is just shorthand for counting and counting again, and then we multiply, which is adding and adding again, and exponentiate, and hyperexponentiate, and ... you get the idea. So we actually count twice. Once at the level of the integers directly, and once at this meta-level that keeps track of our counting operations. In both cases we just repeat the last step again.

And we presume that it doesn't change anything. We presume that the context of the repetition doesn't have any effect on the outcome. In other words, we assume that going from 5 to 6 is the same as going from 10^10^5 to 10^10^10^6. It's just adding zeroes, so to speak. We could continue on like this indefinitely. Or could we? I mean, if we start with a general philosophical acknowledgement that it's monkey doing this mathematics (maybe with computers now) we immediately have to wonder both how far the monkeys and their machines can really count, as well as how far they can really meaningfully conceptualize. I mean, I get a stack overflow just trying to parse hyperexponentiation, and while my mac may get a little further, I'm pretty sure I can blow it's stack as well. So it seems all repetitions are not created equal after all.

So if we start from a mathematics situated in this universe and not mysteriously floating free of it, we have to ask ourselves what we actually mean when we say we count and we put more zeros or levels down ad infinitum ... There has to be some, certainly very large, physical limit to any actual counting. That "..." is just a figure of speech. In real life, counting, like every other physical process, is going to be dissipative. It's going to burn up energy and produce entropy/information. You can't have it endlessly for free. The counting to infinity that mathematicians use in nearly every proof is really a sort of waking dream. No actual agent could ever carry on like that, but everyone knows what you mean when you imagine this ghost in the machine.

And this of course is Rotman's point. He's not trying to "disprove" regular arithmetic. He starts from a general idea that mathematics is a language, and a language is fundamentally a way to generate an interesting inter-subjective game and not, primarily, to describe an objective world. From that perspective it is only necessary to point out that the rules we assume counting plays by are not the only ones. Regular arithmetic imagines some disembodied agent that could never exist in our physical world, and that counts forever and never loses track of whether they are hyperexponentiating or hyperhyper ... or ... is it a weekday? We know what you mean by that even if it is imaginary. But we could also imagine something else.

The situation is exactly analogous to the axiom of parallels in Euclidean geometry. For 2 millennia no one could imagine two parallel lines crossing. It was taken as both a logical axiom and a true description of real geometry. It took until Riemann for people to realize that you could put together a coherent curved geometry that violated Euclid's axiom. And it turns out it was not just a logical possibility, but a better and more general description of reality (even if you wouldn't want to use it to build a bookshelf).

Rotman proposes a model for a non-Euclidean arithmetic, where counting is "locally flat", but, because of dissipation occurring in the real universe, starts to "curve" at very large numbers. I will spare you the definition he tries to present of the terms in quotes. Suffice it to say that counting and numbers take on a very different appearance afterwards, though much like an M.C. Escher drawing, things look pretty normal in the middle. It's really interesting to see what happens when you break the stranglehold that simply counting forever has on our imagination. You see that a whole new system is not only logically possible, but you even start to wonder whether perhaps this model would be a better description of the reality of time. If Riemann's geometry was a more complete description of the structure of space, perhaps non-Euclidean arithmetic would help us investigate the structure of time. After all, what is counting but our image of the passing of time.

Anyhow, interesting stuff. The writing is slightly clause-heavy and academic -- I will chop of his finger the next time he reaches for the comma key -- but it's quite lucid and easy to follow. He also wrote a book about the history of zero which might be interesting. I can predict the punchline of that one already though -- zero merged writing numbers and calculating with numbers.

This is not my fault

2010-07-02T12:04:00.001-07:00

Our at least I don't remember anything about it.

A former oil broker was fined and banned from the industry for five years after the UK regulator said he made unauthorised trades from home and triggered a spike in oil prices after a weekend of heavy drinking.

Did I ever mention how I think the market is a machine for producing randomness?

Volcker Rulz

2010-06-30T06:49:00.001-07:00

So, anyone who can help me out with this one earns my undying loyalty. I'm trying to figure out if this Volcker Rule thing will make any difference at all to the big banks.

Now, you remember the Volcker rule, right? Tall Paul said that we shouldn't let the shadow banking system gamble with the house's money -- in other words if you are a bank with access to the Fed's discount window, effectively a state guaranteed bank (which we already know is broader category than a deposit taking institution), you would not be able to engage in proprietary trading. Sounded pretty smart to me. The devil is of course in the details. How do you define proprietary trading and distinguish it from market making? I didn't see this problem as insurmountable, just something requiring definition. In fact, I imagined that if you pushed most of the stuff that the banks want to claim they are just "making markets in" onto exchanges, this would nigh unto solve itself.

But one of the things that seemed would be obviously off limits was explicitly sponsoring an in-house hedge fund. I mean, if Goldman puts up their own LP capital alongside the LP capital of other investors, and then goes out and leverages this up and tries to make a fortune trading some reverse-credit-default-swap-strangle strategy that only a former string theorist could love ... well this would appear to be obviously against the rules. After all, that's state guaranteed capital they're playing with. Nobody believes that if this fund blows up and threatens to sink GS as a whole, the Fed would hesitate in coming to the rescue.

The whole point of the Volcker rule was to eliminate these "heads I win, tails you lose" bets. The banks screamed bloody murder of course, and when they first proposed it, I was convinced that there was no way they would ever enact any reform this strong. That was before Congress decided they had to look tough on the banks though, and I was anyways naive in thinking that the banks would oppose the idea completely rather than just rewriting the details so that it appeared as if there was some reform despite business continuing as usual. The back door solution makes everyone happy. Banks keep trading and congress keeps its pockets lined, all the while being able to put on a populist face.

And that's exactly what the banks did. Instead of not being able to sponsor in-house funds at all, they now have to whittle down the equity they put up until it is only 3% ... of total ... capital, by ... 2022 ... at the ... latest? Wait. Does anyone else think that maybe this is "reform" designed exclusively for the midterm elections? And anyway, just how much whittling is there to be done here. I mean, how much of their capital was in these in-house funds to begin with? Such numbers are a little vague, and hard to come by, but the estimates I've seen peg it at less than 10% of capital for most of the big banks, and maybe slightly more than that in the case of Goldman. So reducing it to 3% does something I guess, but hardly seems like some revolutionary reform to me.

But then this brings up a whole nother question. Why did Goldman sponsor these funds to begin with? If these are such money making machines, why did they only put 10% of their capital into them? When you start to think about this more, you see that the equity in these funds is really beside the point. Sponsoring these funds is really Goldman selling the equivalent of subprime to the other LPs. They don't even really want to put up their own money. They only do this to convince the other LPs, who are endowments and wealthy families and pension funds and the like, that they have "skin in the game" so that they can raise funds. These LPs are not typically the sharpest tools in the shed, because I can tell you from personal experience that it's really quite obvious that these things are the dog food of the fund world and you wouldn't want to go near something so riddled with conflicts of interest. The real purpose of the fund is not to make money, but, as so often in finance, to take management fees on someone else's money.

When Goldman sponsors one of these funds, it will own a chunk of, if not all of, the GP, who is charging 2% of the assets under management, and taking 20% of any profits. From their perspective, the less capital they have to put up, the better; if the other LPs only want them to invest 3%, then in 1.5 years they have made back all of their initial investment in fees. Now, even if the fund blows up and the LPs get zero, Goldman has come out ahead.

But wait, there's more (if you're a vampire squid). On top of the management and incentive fees, it's pretty obvious that Goldman's fund will trade through ... Goldman. And given that most of the money in this in-house sponsored fund is in fact coming from outside Goldman, this prime brokerage type relationship is likely to be, ahem, under-negotiated. To top that off, Goldman is famous for front-running it's clients trades and taking a little extra off the top, and trust me, they don't have an in-house fund where other LPs can invest in this part of the business (that's what GS stock is, essentially). One would have thought that Volcker really meant curtailing this type of proprietary trading that masquerades as "market making" for "third party" clients. This is not 3% or even 10% of Goldman's business -- it's more like 70%.

But wait, there's even more! Because undoubtedly, this fund is going to want some leverage to generate the first couple years of really juicy returns that attract LPs like moths to flame. Luckily, they have abundant access to leverage because they have a great relationship with their prime broker, who in turn has a great relationship with the Fed and Treasury! We don't seem to have done anything about this problem, which falls outside the Volcker rule completely -- it's entirely possible that the bulk of the capital in the fund is actually debt, and not equity, and this rule doesn't say anything about how much you can lend to the fund. Some of you may recall a little operation called Long Term Capital Management. Goldman and other banks invested a little of their money in the name of "optics", stroked the egos of some Nobel prize winners, went out and convinced a bunch of other LPs to invest with these geniuses, and then fronted them 100-to-1 leverage. When the fund blew up, they were forced to bail it out, and the Fed was in turn forced to bail them out (recall that the bubble supercycle was not coincidentally kicked into overdrive at about this time of the asian/russian crisis -- 1998). When times are good this leverage is a normal banking spread business which contributes nicely to the bottom line. And when times are bad ... well that's what the Fed is for. This isn't proprietary trading, it's just too big to fail shadow banking, but it has the exact same effect, systemically speaking.

So now, you tell me, is Goldman upset that they are forced to reduce their investment in this fund? As long as they can continue to convince the other LPs to pony up, it seems to me that they should be very happy indeed. In fact, it reminds me of a great joke I recently heard:

So there are these two beggars in Mexico with a bowl in front of each of them... one has a cross in front of his bowl, and the other a star of david.

Anyhow, people walk by and put money into the bowl with the cross. The bowl begins to collect a lot of money... No one puts any money into the bowl with the star of david.

Finally, a nice man comes by and explains to the beggar that "Mexico is a Catholic country, no one is going to give money to a Jewish beggar." He goes on to tell him that, "In fact, people are pretty religious here and they might even give more money to the guy sitting next to you just to prove a point and spite you, what do you think of that?"

One beggar turns to the other and says, "Morris, looks who is trying to teach marketing to the Goldberg brothers!"

The Poetics of Space

2010-06-27T14:52:00.001-07:00

I recently discovered Gaston Bachelard's The Poetics of Space. Such an absolute delight to find a book filled with so many little twists of insight that curl up from the page and make you dream of the shapes of smoke. It's really a gem and I highly recommend it.

There's not much point in my trying to summarize the argument; despite how lucid Bachelard's philosophy is (the book really makes you want to read the bulk of his work in the philosophy of science) there really isn't one. Suffice it to say that it's about how we experience spaces in general, and particularly intimate places -- about how we connect with space, as it were. If there is something like a thesis, it would be that humans don't experience the world "as it is" but as it intertwines with a whole set of daydreamed images that run alongside it. This might give you a clue as to what philosophical school you could slot him into, if you're into that sort of thing -- he considers himself a phenomenologist, something which I side with the late great Leszek Kolakowski in not knowing what the hell it's supposed to mean exactly. But don't write him off just because you think you're a hard core Heideggerean or something. The book is light on theory and heavy on poetic examples.

In fact, Bachelard mostly just uses the term phenomenology in order to distinguish himself from a psychologist or psychoanalyst, and not to align himself with a philosophical school The key difference lies in how you approach the life of an image. Psychologists and psychoanalysts try to explain an image by relating it to another image, and from there, back to the psychology or life or childhood or even cultural history, of the imaginer. In other words, they try to explain the cause of the image, and hence to reduce it to a mere effect of something supposedly more real and fundamental. They center their view on humanity as the creator of images, deny the reality of the image itself, and explain away the flower in the fertilizer.

Bachelard doesn't really disagree that this is one way to look at things (he did start off as a physicist after all), but he goes on to take seriously the being of images in themselves. Words and images are things too, and they have a life of their own. Maybe, like the Jewish mystics imagine, the white spaces are just as important as the black letters, and we humans are just the bees that keep the flowers blooming (unless we're the fertilizer).

This actually brings up one of the ideas that most resonated me in this book, albeit through the metaphysical backdoor. And that is: read generously! People (myself very often included) are terrible readers. Yes, I mean rushed and ADD and made stupid by the internet, though this type of reading may have some place for us worker bees. But more than that, I mean that we so often read and think with some angle in mind. We come to a text with so many preconceptions that we have to fight through layers and layers of dismissal before we can even hear it. We find it so difficult to change our minds, to listen to new arguments or new facts and decide that perhaps we see it differently now. Fearful even of the possibility, we show up spoiling for a fight. We immediately fill ourselves with feigned outrage and petty critique before we even try to understand why someone might make that argument and what it might mean, regardless of whether we agree or not. When I am reading well, I open up every book hoping to find a brand new treasure, and listen to every argument with the idea that there is some new side I have not weighed in the balance. Which is probably why I contradict myself so much.

Bachelard critiques a similar type of haste in our approach to poetry. We breeze through the mounting construction of an image without ever really living it. It's only when we go slowly enough to genuinely feel the image, to really experience it, that we actually bring it into being. This requires us to read slowly and generously, bending our mind into the shape asked by another until we recreate the same magic that they felt in putting it on paper. It also requires us, as philosophers, to read reality generously, so to speak. We have to explore the reality of an image in all its obvious power to move us, rather than reducing it to confusion and mere metaphor. We have to suspend our desire to get to the bottom of things and grant reality to everything with an effect, no matter how superficial an image may seem at first.

But what exactly is an image? How does it come into being and propagate? Bachelard doesn't try to come up with a full theory of this, though his introduction does sketch out some interesting ideas about the image as the cutting edge of being or the place where life and being overflow themselves. Almost paradoxically, he calls this absolute creation of novelty a kind of reverberation, because the image comes into being and is lived anew each time it is truly experienced. You are following the bouncing ball if you realize that this creates strange questions about the meaning of concepts like "cause" and "identity".

The real beauty of the book, however, is in the wealth of images Bachelard waxes rhapsodic about. It's a grand tour of French poetry in little snippets, with a commentator who draws out all kinds of interesting currents that run beneath. Which is to say that I think it's well worth reading even if you have no special interest in philosophy He begins with the images of shelter and solitude that constitute the basis of the house -- a lone lamp in the distance protectively enveloping the dreamer within. Then he moves on to houses that open to the world; we don't close ourselves up in huts but open our windows to the universe. And once he has covered the house as whole he goes back to examine the images we associate with all the tiny parts in several chapters on drawers, wardrobes, nests, shells, and corners. Then gradually, towards the end, he works his way back around to more metaphysical speculation by examining the Alice In Wonderland quality of our relationship to miniatures and the strange way they open into immensity -- an apple becomes a model of the solar system. And finally, we end with a long chapter on the dialectics of inside and outside and the brilliant observation that anything that marries these two opposites, fusing diversity into unity, seems somehow pleasingly round, even if it is a tree. In fact, maybe Being is Round. It's sure sounds fun to say. Maybe after a few drinks you can even feel it.

One day it will see God
And so, to be sure,
It develops its being in roundness
And holds out ripe arms to Him.

Tree that perhaps
Thinks innerly
Tree that dominates self
Slowly giving itself
The form that eliminates
Hazards of wind!

I don't believe in imaginary property

2010-06-25T05:26:00.001-07:00

Okay. That's an exaggeration. But I certainly don't believe that companies should be allowed to choose to live off it in the lean times by extorting money from newer, smaller competition. As Milton Friedman put it, not giving people the option to go back and decide to suck the the life out of their old patents is a "no-brainer". Which is what makes something like Kodak's "strategy" distressing.

In commercial printing, Mr. Perez has high hopes for a fast digital printer introduced in the first quarter called Prosper Press, aimed at publishers and catalog makers. Mr. Perez says more than 100 companies have requested the Prosper Press but so far Kodak's only shipped four of them because of manufacturing complexities. The commercial printers cost $1.4 million to $4 million each.
He says Kodak so far is incapable of making more than "a few dozen" this year. "We're desperately trying to get the technology under control so we can expand," he says.
While he has worked to build these new businesses, patent payments have provided a cash cushion for the company. In 2008, he set a goal to generate between $250 million and $350 million on average each year in intellectual property licensing—mainly its digital imaging patents—through 2011. He later extended the target for that goal to 2012 but had disclosed little on his plans afterward.
In the past year, Kodak settled lawsuits with Samsung Electronics Co. and LG Electronics Inc. receiving lump sums of $550 million and $400 million respectively. In January, it filed lawsuits against Apple Inc. and Research in Motion Ltd. alleging their smart phones infringe Kodak's digital-imaging patents. Analysts say it may be difficult for Kodak to match its earlier success in the latest patent fights.
But Mr. Perez says he'll wean Kodak off the patent fights once the commercial and consumer printer businesses are profitable. "We'll find more value getting into business relationships that generate revenue working with some other partner rather than asking for cash," he says.

So your strategy for not having a strategy is to paper it over by legally shaking down smarter competitors till you (maybe) get back on your feet? This is why we have patents?

Do we really think a system in which competition increasingly occurs in front of judges and behind closed congressional doors, instead of in the marketplace for products and ideas, is a system that will produce gains for everyone? These games are zero-sum. If we play more and more of them, that's exactly what we'll get.

Tarde just in time

2010-06-22T20:46:00.001-07:00

I'm going to take another crack at this. Every time I've tried to articulate my theory that the stock market is a machine for ever more closely approximating total randomness, I have fallen short of capturing what I mean by this.

This time though, I've got a running start. I'm in the middle of one of the recent Prickly Paradigm Press pamphlets -- Bruno Latour's introduction to the economic theories of Gabriel Tarde: The Science of Pasionate Interests. I love these little pamphlets. This one covers some late writings of the brilliant but long forgotten turn of century French sociologist. Tarde got briefly famous for writing The Laws of Imitation, which turns out to be one the first versions of the theory of mimetics, and he went on to turn the "society as organism" metaphor inside out and the push it into new territory before he was unceremoniously run out of academic favor by Emile Durkheim. 100 years later Durkheim looks like a bond company stooge, and the upper hand, to my mind at least, is on the other foot ... intellectually speaking. So while he's impossible to find in English, Tarde is worth tracking down if you read French, or even Spanish, and he sounds bizarrely modern to my ears.

Enough background though; vamos al grano. Tarde's pamphlet contends that economics is not a real science. Yeah, I know, yawn. File under overpaid underworked Marxist professorial twit and move on. But wait, what's interesting about Tarde is why he feels that economics falls short of being a science. Unlike what you would expect, Tarde is upset that economics is not quantitative enough. He doesn't complain about how it reduces all of human values to merely monetary calculations and thus fails to take into account the unmeasurable qualities of the human heart. No, he wants to measure everything. And in 1902 no less. He thinks that all value is measurable, it's just not all (directly) measurable in money. Money is really just a poor indirect proxy for value. It's like trying to diagnose an illness exclusively by taking someone's temperature. So to construct a decent theory of production and consumption we need more direct measures of the things that influence these, and cannot just settle for looking at the price and inferring everything else according to some pitiful black box type theory of how individuals operate. We need to measure how individuals and institutions actually operate, you know, empirically, like we were, um, scientists. He shoulda worked for Google.

The argument runs something like this. Science is supposed to be quantitative and empirical investigation. You take a system and you try to figure out how to measure something about it in a way that allows you to 1) predict the future values of this measurement and 2) have the measurement be useful for something you want to do. Some scientist types might disagree with (2). They may claim that true science shouldn't be concerned with practical and useful questions. They may defend "pure" science. What they have in mind though is really a political, rather than a philosophical objection. There is no such thing as "pure" science, because there is no obvious measurement. When you approach a new system, it's not at all clear what you should be looking at, what you should be measuring. Maybe you should be measuring how fast the ball you dropped is going when it hits the ground. Maybe you should be counting how much wind it produces. Maybe you should care what shape it is. Maybe you should ask how much heat you can get out of this ball dropping gig. There's a million things you can measure. Some will be fruitful and multiply, and others will be dead ends. Science progresses like that. It invents new things to measure and new theories that these quantities would correspond to. And it invents them, always, according to the two conditions I mentioned.

If this sounds like a critique of science, you're right in a sense. The idea that science is Objective and Universal strikes me as ludicrous. Bunch'a apes running around with slide rules, congratulating themselves on not creating a black hole? You call that Objective? This stuff is as contingent as it gets. Which doesn't make it any less objective and real in a simpler sense of course. Drop shit and it falls. Regardless of your political position. I'm not trying to suggest that science is wrong or completely arbitrary, just that it is partial and always fragmentary. It is an animal behavior pattern. What else would you expect?

Yes, I aware this could be a long discussion.

Anyhow, enough philosophy of science. Tarde argues that economists chose the wrong thing to measure. Or at least, they chose to place too exclusive a value on the one variable they decided to measure. They did because they based their choice on faulty analogies with physics and chemistry. Again, it's important to understand that he's not saying that human behavior is inherently less quantifiable than the behavior of balls and atoms. His point is that physicists chose to measure simple thing about balls, like their mass and position because they could not get inside them to see how these machines actually worked. As these sciences have progressed and their tools for looking inside smaller and smaller balls improved, they discovered a completely different set of forces operating on the inside. In other words they started off by measuring what they could get their hands on.

Economics, imitating physics, pretended it was on the outside of its object, even though we are all in fact right in the middle of the economy. The system economics wants to study is so big that it's all around us. You don't need a microscope to see exchanges of value taking place. You don't need a particle accelerator to break the economy apart and see how it ticks. We already have a particle accelerator for the social. It's called the internet. We live inside this explosion of data that measures the system at the micro level. Why not use all this data to create a science of economics which would then be dramatically more empirical and quantifiable and less dogmatic? Why settle for pretending that humans are nice tractable little black box utility maximizing agents when that doesn't convince anyone?

Tarde's point is that the real economy is filled with real people and that -- unlike what happens in a proton -- we know all kinda of things about what real people want and how they interact. We can measure these things in clicks or surveys or traffic patterns or church attendance or whatever. All we have to do is look around.

Now that I'm so off topic that you quit reading ages ago, I feel like I should back up a bit and bring in the central thesis of the other Tarde I have read. It will give us a good analogy for thinking about this stuff.

The basic idea of Monadology and Sociology is that everything is a society. I'm still partial to Deleuze and Guattarri's formulation of this as, "politics precedes being", but whatever. Everything is a society because everything is composed of interacting parts, all the way down to Leibniz's monads, which are less the tiniest subjects than just raw sparks of belief and desire (hence the two parts of the title). Ignoring the indivisible unity of the monad question for the moment, this thinking makes sociology the queen of the sciences, a startling reversal of the usual way of looking at things. If everything is a society, then sociology is the study of things. And one of the images that Tarde goes back to repeatedly in that book is of a brain so large that we could walk around inside of it and observe the society of neurons, as it were, with the naked eye. If we could do that, we could start to understand the brain as a society, and, running the analogy backwards, to understand society as a sort of brain, or at least a sort of organism.

You can see how this fits perfectly with his ideas about economics. Economics, or "psychological economics" as Tarde later book is entitled, should be the study of the societal brain from the inside. We walk through the organism we wish to study everyday. We observe at first hand how the parts of it function. We only lack the ability to integrate all of our observations into a coherent whole. That quantitative integration is the science we want to build.

We can keep using the brain analogy to illustrate why just keeping track of money will be insufficient to study the economy. If you studying a brain, it surely might be useful to know what parts are active at what time. And you might measure this by blood flow and take pictures of it with an fMRI machine. But you can't tell me that even the fanciest theory of of predicting the hue of a bunch of red, blue , and green pixels on a map of the brain is really going to fully explain how the system works. You're going to need to measure all sorts of other things too. "Activity" is fine, and so is money, but these are tremendously crude measures of the inner workings of value, or information processing. The economy is like a brain is like a society is like an ecosystem-- and it's a jungle out there. We lack the science that would enable us to understand systems like this, because the sciences we have all started very very far outside their objects, at a distance where the complexity was impossible to see. What we need are new measures of all different kinda of things. We need to measure more than just money, or activity. We need to get in there and drop some mushrooms and do some electrophysiology.

WHICH BRINGS ME TO MY POINT

We actually have a great data set that simultaneously measures all kinds of things about the economy, but economists have traditionally ignored it almost completely. The market (a misnomer really, as what we have is a set of numbers rather than a unified anything, a fact which dark pools and algorithmic trading is making increasingly obvious) is connected to everything. It measures everything. It is indirect squared though. No number in the market measures any one thing in particular. All the wires are crossed and everything is jumbled together. But each number measures a little bit of everything. Taken together, these numbers are the best data repository we have so far. It's all in there, somewhere. Economics in the usual sense, but also psychology, culture, politics, technology, everything. And it's all perfectly quantitative. Little numbers, little meters, moving up and down all the time.

There's a book I haven't read, but which sounds interesting (though is reportedly awful, unfortunately) called Investing: The Last Liberal Art. The idea being that investing is the last refuge of the renaissance man who needs to know a little bit about everything. But maybe it should be titled "Investing: The First Social Science". Investing is, after all, the art, or science, take your pick, of predicting these little numbers. They, in turn, incorporate the whole world, though in a giant jumble (which incidentally is what makes the big casino so much fun)*

Incorporate and reflect it, and of course feed back into it as well. Which is naturally where your real nasty randomness gets started. If blowing the the system up to "life-size" proportions helps to measure it easily from the inside, it also means that we are, um, inside the system. New meters will build are also part of the system, and act on the system, which is how is grows and incorporates ever new vistas of measurement.

Consider, for example, the "Flash crash" we had a few weeks back. For a second there, the little numbers went berserk. P&G spent 7 seconds trading at a nickel. The weather vane was caught in a hurricane of its own making. Think how much richer our data set got though. That was a beautiful way to incorporate the latency of servers, the new programming languages, the growing importance of our computational infrastructure. It's in the record now. As is the regulatory response that precisely measures our desire to control the range and time scale of change. All in the form of numbers, if only we knew how to read them. Someday we will improve at this. Though by then the machine will have moved on. It has to if it is going to continue to incorporate everything. If has to if it is going to be the increasingly rich raw data for our science of human desire, if it is going to incorporate and perform wider and wilder variations, to support the proliferating diversity of value. Like the universe, it has to get more and more random every day, just to keep up with us.

I don't know whether I did my original thought justice this time either. In the hopes that it helps summarize, I leave you with a quote from Freeman Dyson's Infinite in All Directions.

As a working hypothesis to explain the riddle of our existence, I propose that our universe is the most interesting of all possible universes, and our fate as human beings is to make it so.

I Pangloss on acid.

* I'm not claiming to have a science of the markets. I do, however, know about some swampland in Florida ...

Circulation

2010-06-21T06:50:00.001-07:00

Money is like a tree falling in a forest; if it doesn't make some noise, it might as well not exist.

Naturally, I take this to be an almost metaphysical statement about how movement is actually more fundamental than the thing moving (if this sounds silly, think for a second about the surf). But for the moment I'm just thinking of the more prosaic aspect of it -- there's no inflation, and paying down government debt is going to kill the economy unless someone else wants to invest those funds. All of these debates at bottom boil down to people thinking of money as a thing -- a brick of gold, a herd of cattle, a docile wife or extra zeroes next to your name -- rather than as a process. Money only becomes a thing when it moves, when it circulates through the economy. This is why Krugman and others fear that our new found faith in austerity will mean that we cannot grow no matter how much money the Fed prints up, and if we aren't growing, then there can be, to mix my metaphors, no match to light the fire to the Fed's powder keg and cause inflation.

So today you escape a lecture about Whitehead. Because we've got plenty of time (at least by financial market standards) before this bomb goes off and the waves roll in over our little fiscal atoll.

I feel sure they got this sign backwards

2010-06-19T11:44:00.001-07:00

But it could be that I'm getting cynical in my old age as well.

But have I mentioned that our poltical system is broken?

2010-06-18T11:01:00.000-07:00

The Daily Show With Jon Stewart

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An Energy-Independent Future

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Not subtle

2010-06-17T05:28:00.001-07:00

I'm not even in the mood to bother with the subtleties of this stuff right now (Argentina's playing in a few minutes) so let me just lay it out quick.

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

What exactly is the definition of "unprofitable" here? Because I thought banks borrowed money from me at low rates and then lent it out at higher rates. And given that a checking account ain't worth a warm pitcher of spit, in terms of the rate the banks pays to borrow from me, I would think that they could at least keep my name next to a number in some database and maintain a website and still manage to make a spread on lending the stuff out again.

Now, if it really costs $300 a year to maintain a checking account, and the average account has $1,000, then this clearly isn't going to work. About the only place to make a 30% interest rate loan is India, and that will be for $7 at a time. However, I'm wildly skeptical of this figure. Some quick estimates suggest that Fiserv (one of the largest outsourced processors of these accounts) charges around $50 per account, and that's going to be a package deal including debit processing, etc ... (Incidentally, this suggests that the WSJ is once again essentially a corporate marketing vehicle and not a news organization, a shift which the informed investor can potentially profit from). I'm having trouble finding the average checking account balance, but BOA does disclose the average interest spread, which was 4% last year. So we might guess that a $1,000 checking account is about break even for a bank, which makes sense given that the article cites this as the pain point. Even that seems a bit expensive to me, given that maintaining a checking account should cost about $0.05 more than maintaining a gmail account at this point, and somehow Google manages to give this away to 150 million people all over the world.

But I feel sure that the median US checking account has a balance substantially in excess of $1,000. Which means that the bank isn't running this whole system at a loss, and that this is really question, once again, of financial extortion. That is what you should hear every time you read something like, "banks must replace lost revenue by raising fees". Sometimes, you don't get to replace lost revenue. Especially if your whole goddamn industry should shrink. Somewhere along the way people keep forgetting that the success of any financial reform can be judged by how much smaller we make finance. There's really very little way to finesse this issue. Finance is an intermediary that grew to enormous proportions. At the peak it was close to 40% of all corporate profits in America. This just can't continue. We can argue about which part of the industry needs to shrink. Maybe it's trading and derivatives and not checking account fees. But some revenue has to get lost and NOT get replaced -- getting smaller is how shrinking happens.

Reflex Action

2010-06-11T13:32:00.001-07:00

I don't know much of anything about Andy Kessler, but he's got an op ed in today's journal that perfectly illustrates why I find the part of the right wing I reckon I'm supposed to agree with so goddamn frustrating.

He frames a debate over internet regulation by first talking about how AT&T's new monopoly over the iPhone and their recent move to charge by the GB is is going to stifle the growth of the mobile internet in the same way that AT&T's old monopoly over the telephone lines stifled their interest in adapting them to new purposes (like the internet). He then goes on to complain that there's no competition in many markets for high-speed broadband -- cable is often the only game in town. Finally, he writes about the FCC's recent decision to reclassify the internet from Title I (lightly regulated information services) to Title II (heavily regulated telecommunications services) in the wake of losing their net neutrality beef with Comcast in front of the Supreme Court.

And so a month ago, on May 6, the FCC announced its intention to reclassify portions of broadband as a common carrier telecommunications service and start regulating like crazy—imposing net neutrality, setting rates and data speeds, and who knows what else.

At this point in the story, you might be confused. He's bitching about monopolies with their lack of incentive for innovation and their extortionate pricing, but when the most obvious solution to the problem is presented -- they need some sort of regulation -- he tries to scare you about that too. To make it worse, the scare tactic is factually inaccurate; the FCC does intend to reclassify broadband, but they explicitly and in no uncertain terms say that the do not intend to set rates, enforce data speeds, treat data as a common carrier situation where cable companies would be forced to sell wholesale access to their pipes, or, in fact, anyone knows what else. He's simply full of shit here. It's impossible to describe the FCC move as an intention to start "regulating like crazy". If you don't believe me, read the damn thing yourself.

So, what exactly does Mr. Anti-Regulation think we should do about these progress crushing monopolies? Well, he proposes we regulate them:

I think competition fixes all that. But according to a study a few years ago by Smartmoney.com, less than 1% of 30,000 cable markets had more than one provider in 2000 and 2005. Any guesses for 2010? In Paris and Tokyo, competition is vibrant, with eight to 10 competitors, speeds higher, and prices much lower than in the U.S. More competition here is the way to keep bandwidth charges reasonable.
Thinking a few more chess moves ahead, the FCC can use the threat of regulation to kick-start real competition in wireless data and cable broadband. How? Just threaten local cable companies with common carrier/telecommunications service regulations, unless they can prove that there are viable competitors, municipality by municipality. And not pokey phone-company DSL competition, but real broadband providers offering service at, say, 10 megabits per second.
To do this, the FCC would set common-carrier pricing for consumers of now-Title I designated cable-modem Internet service just below the debt-servicing level of the cable companies. Comcast has almost $30 billion in debt, Time Warner Cable $24 billion, and Cablevision $11 billion. With potential negative cash flow, see how fast cable companies will start lobbying for competitors.

Again, this is all tremendously sloppy and factually misleading -- it's not the number, but the size, of individual markets without competition that matters, there is, by hypothesis, no competition in these markets, so asking the cable companies to prove that there is asks them to come up with some scam; and they will not start "lobbying for competitors" if you set the price of cable broadband so that it falls just short of servicing existing debt. Remember, they call them cable companies because 70% of their profits come from, um, cable. If you say that they should be able to pay their interest bill out of internet profits, you are effectively subsidizing cable TV with higher broadband prices, which is hardly the progressive position he imagines himself supporting.

But the fact that this guy's head is so far up his ass that he needs a periscope to take aim at the crapper is not, ultimately, my point. I have a simpler and more conceptual concern. Here's your typical WSJ guy praising the virtues of competition and the free market, and scaring you off about the big bad government coming in to regulate. But the actual market does not necessarily police itself in all instances, and is demonstrably failing to police itself in the instance we're discussing. Competition is wonderful, if it exists. And when there's no competition, there is typically a reason why, so simply saying that it would be nice if it existed is not going to make it magically happen. Of course, it's also clear that over-regulation can ruin competition. It happens all the time, and I'm the biggest beater of this dead horse that you can imagine. But it's pretty hard for over-regulation to ruin what you're already claiming doesn't exist.

My point is that competition and regulation are two sides of the same coin If you are in favor of competition, you are in favor of regulation. It's that simple. I'm sick of people like this who abstractly pretend that competition is the opposite of regulation.

Competition is the only way we can stop talking about allocating scarce resources via regulation and network neutrality and start talking about how we are going to use a future bandwidth bounty of 100 megabits per second. Maybe video calls will finally come of age.

Without some regulation, you have no competition. That's why you're writing the fucking op ed you moron! You want regulation. In fact, by proposing we regulate the end price for broadband consumers, you propose more draconian and invasive regulation than the motherflippin' French. The whole reason competition is vibrant in Paris and Tokyo is because they force the big pipe providers to sell wholesale data access to anyone who wants to resell it at the retail level. In other words they have competition because they have regulation.

The only truly free market is the one where we go around hitting each other over the head with bones and dragging women back to our caves by the hair. Every other market is a game. We set up a game with certain rules to keep things interesting and to be able to keep playing the game. The game has to be designed with strong enough rules that it doesn't immediately stop, and few enough that it's still interesting to play. The rules have to apply to everyone and they have to be enforced. And if the game of making up the rules of the game gets too prehistoric, then all the other games are ruined as well. Designing games and meta games is not easy, but you can't just pretend that stable, satisfying ones will design themselves (at least on relevant human time scales).

The question is not whether we should regulate. We have always-already regulated in some way, explicitly or implicitly. The question is how we should regulate. And the answer is usually "in inverse proportionality to the amount of competition". I know that's not the only question in regulation (externalities and blah blah blah), but it's a pretty good start. Design a fun game that people enjoy playing and that leads to even more fun and games. After all, that's what existence is all about.

Elves first. Jews line up behind.

2010-06-10T20:07:00.001-07:00

Honestly, I never did trust that Santa fucker.

In the long run, even Keynes is dead

2010-06-07T15:43:00.001-07:00

I remember writing a strategic piece for work at the beginning of this year. To be provocative, I started off with the observation that, despite the apparent recovery in the economy and financial markets (at the time), we were in the midst of the second Great Depression. And I think the first 6 months of this year have borne out that observation. I don't mean because the stock market has tanked in the last few weeks, or even specifically because the Greeks are giving the Germans the finger. These things are symptoms of an underlying disease called "debt", and it's precisely them same disease that caused GD 1.0, even if the exact symptoms may look quite different this time.

The essence of debt is trust. And the essence of a depression is a collective loss of trust. This is why a depression seems so "irrational". How is it that we can't just make what we made yesterday? We didn't run out of people, or fuel, or ideas. What ingredient did we have in such abundance in 2007 or 1927 that is now suddenly in such short supply? What we have is a shortage of trust.

Debt is the quantitative version of trust. I'll work more and consumer less now and you'll consume more now and work to pay me back later. That basic promise of trust is made at lots of levels, from the unspoken accord about sharing the dish-washing duty, right up to the biggest and most liquid market on the planet.

GD 1.0 was a failure of that trust on the private level. The crash of '29 was only the trigger for that loss of trust; the real collapse happened when people lost faith in the banks where they had stored those promises of a brighter future, a destruction of trust that was a self-fulfilling prophecy. And GD 1.0 was eventually solved by a restoration of trust -- people began to trust the banks and those promises again because they trusted their governments. In fact, they came to trust their governments so much that they ran off a cliff for them. Trust is always a crowd phenomenon, even when it happens between two individuals.

GD 2.0 is a new twist on the same problem. Underlying everything is the same crisis of trust, the same panic of promises, the same fear that all that hard work won't get us what we imagined. Only this time the crisis reaches all the way up to our trust in government. Fundamentally, we no longer trust that our system of portioning out promises is fair. We no longer trust our governments when they say, "get back to work and we'll make sure everybody gets their share". Why work when it seems so obvious that the game is rigged against you? Why dedicate yourself to the arduous cooperation needed to carry out any large project when it's every man for himself?

Obviously, an economist will talk about all this as question of monetary or fiscal policy. He'll tell you about multipliers and balance sheet recessions and inflation and optimal currency zones. He'll make the same argument Keynes so correctly made (more correctly than he might have hoped) so long ago:

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they're part of the euro zone, AND they're badly overvalued thanks to huge capital inflows in the good years; as a result they're facing years of grinding deflation. Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.

And he'll miss the point that our fundamental problem is that we no longer trust the last line of defense.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?
The answer is, to reassure the markets — because the markets supposedly won't believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.
So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren't actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

These market responses look less irrational than they seem at first when you realize that they are the final desperate flailings of a bankrupt system of trust.

Left, Left, Left-Right-Left

2010-05-24T18:06:00.001-07:00

Yves at NC periodically has articles that claim, to make a long story short, that everyone should just wake up on the same day, say fuck you to their creditors, and go spend the afternoon drinking pan-galatic gargle blasters and just generally outliving the hell out of everyone else. She's done this with Iceland, and the Lativians, and now she's focused, like everyone else, on what Greece should do. In this context, comparisons with Argentina come up naturally, and the temptation is to go grab the GDP chart, examine their post-crisis period from 2002-2010, and conclude that it works -- you default, and you play hardball with your bondholders, you get yourself some anti-capitalist religion and swerve dramatically to the left (always rhetorically more than actually of course), and life is grand. Argentina's strong growth recovery from their crisis is meant to prove this, and the question is, should the Greeks take the same caserolazo to the Germans.

I don't, as a matter of principle, have any trouble with this line of reasoning. Which is to say that I don't think that anyone should feel some sort of moral obligation to pay their loan shark. I don't take it as gospel that the right way to divide up the post-bankruptcy value is the give it all to the creditors, and I certainly don't take it as a given that that is what's going to happen. But let's slow down for a second and consider the analogy, and think about just how cushy life has been in Argentina over the last decade, and just how costless nuclear default really is.

Because it's really not. Costless, that is. In fact, it's pretty miserable. Instead of romanticizing the yanqui-hating Argentinians, let's look at the whole history of the situation, which turns out to be remarkably easy to find (all hail the great and mighty information oracle). If you click through, you will see that the nominal GDP for Argentina now exceeds the pre-crisis peak by maybe 15% (the numbers stop in 2008, so I'm adding more growth to what they show here). Looks like a V-shaped recovery to me!

Except this is to confuse the whole notion of "V". The idea is not just that it goes up after it goes down. That's almost inevitable once the whole country is no longer out in the streets beating on pots and pans. When people talk about a V-shaped recovery, they mean that GDP springs back to the same trendline it was on, as if nothing had been permanently lost, not simply that the economy starts growing again. Argentina is only just now, one decade later, making the same amount of stuff that it did before the crisis. This is pretty meagre success when you think about it.

The other thing to remember in all of this is that all of the people who had savings before the crisis in pesos = dollars, now have savings in pesos = 0.25 dollars. It's true that costs have been re-denominated in cheapened pesos as well, though this had the predictable effect of driving inflation to the moon. So anyone with the smallest amount of middle class savings has gotten completely fucked in this deal. Maybe it's true that they would also have gotten fucked by the rising taxes, lower spending, and slower growth necessary to avoid default, but to paint the solution as painless or even to be taken lightly, is irresponsible.

I don't know what the right solution is for Greece. Probably best is some negotiated default that leaves them in the Euro and imposes serious but manageable deflation. Or some inflation in Germany. This isn't going to be fun no matter what. But the crash that happens when an economy temporarily reverts to barter because no one know what money is any longer is also a pretty painful thing. All I can do is repeat what an Argentine told me when I said that it looked like Greece had the same problem: "pobres".

The government is always the problem and never the solution.

2010-05-23T18:14:00.001-07:00

You just have to have the correct definition of "government", that's all. A definition that does not include Goldman Sachs and Halliburton and BP as part of the government is simply delusional. Once you put lobbyists and media back into the government, once you, in short, stop looking at what you think democracy should look like, and start looking at how it actually functions, it's very easy to see how the government is at the center of our troubles. Just more of the same government we've got is just going to make things worse, regardless of whether you brand it as capitalism or socialism, which are ultimately nothing but two species of the same parasite that funnels the labor of the many into the hands of the few.

Show me a government that is sustainably not a kleptocracy and I'll show you how it can be a solution; until then you're just a bunch of royal archists fucking with my an.

Today's rant is brought to you by the always wonderful P-krug (all hail the intertubes yet again) who doesn't always quite get it all right in my opinion.

First, he points out something everyone should keep very ready to hand in the coming years of deficit hysteria -- by and large, the world doesn't have debt problems because they let the government spend too much, but because we had a huge crash that reduced revenue.

You see, what the [IMF] report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren't there before. So spending cuts and tax increases loom.
But here's the question: where are those structural deficits coming from? It's not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: the report shows that discretionary spending increases are a minor cause of rising deficits even in the crisis, and these increases will be reversed as stimulus winds down.
It takes careful reading to discover what's really going on:
The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits.
Aha. Most people who look at the IMF report will, I suspect, read it as telling a tale of government profligacy getting us into a hole. But what the report actually says is quite different: it says that the financial crisis has made us permanently poorer, which among other things reduces revenue, and governments have to tighten their belts to make up for that loss.

He's right here, and this is very important to remember I think. Pretending that this was all caused by government waste is counterproductive because it leads you to think that firing some teachers and auctioning off some gold plated toilet seats from the Pentagon will solve all our problems.

However, he's wrong, because it was in fact all caused by the government. Not government profligacy but the takeover of the government by finance. Without the lever of government backed leverage Achilles wasn't going to get far lifting the world.

Next, he points out something very simple and very basic, even if he only points out one side of it.

If libertarianism requires incorruptible politicians to work, it's not serious.

I remember Nozick somewhere saying that you really had to put the repeated failures of a given political system back into your definition of the system. In other words, the idea of communism does not entail the idea of authoritarianism, nor does the idea of capitalism necessarily include inequality. But how many times do you have to see the same story play out in either case before you stop deluding yourself as to what's really involved in either system? There is no such thing as a pure system that has been perfectly designed to withstand the idiocy of the apes, which P-dad here aptly points out without going on to confront the flaw in his perspective on the world; his brand of liberalism would require that the whole government be run by ... well ... Paul Krugman, or some other equally brilliant and wide-ranging technocrat. This faith in an uber-competent regulatory paradise is just as unserious as the faith in markets and incorruptible rules he critiques.

UPDATE: as an aside, he has actually already responded to this critique of his critique of libertarianism. In my mind there's no question that he's right as far as he goes -- tort law is inferior to regulation in principle in various circumstances and it's easy to find practical examples of this. Naturally, it's not a question of whether or no this statement is true, but how often. More directly it's a matter of what principles you use to make this decision, or whether you just assume by default that everything is guilty of needing regulation until proven otherwise. The whole point of developing a political philosophy is to think through what underlying principles would lead you to lean towards regulation or away from it, so you aren't reduced to simply rooting for the donkeys or the elephants.

V.I. Lenin. Vladimir Ilyich Ulyanov

2010-05-19T18:03:00.001-07:00

As if we would ever dreeeaaam of taking their bullshit money.

He said: “If banks don’t have enough capital [to meet the new rules] ... they cut assets. We are kidding ourselves if we think they are only going to cut trading desks and activities that some people say are socially useless. There will be real impacts on real businesses.” Mr Green’s call for phasing in the new rules may well find sympathetic ears.

Unlike the Japanese, these guys are obviously not golfers:

Ja, it seems you have forgotten our little Keynes, Mr. Green. Without demand there are no fucking loans, and without a hostage to your financial terrorism there is no regulatory ransom. That's what ransom is. Those are the fucking rules.

I'm just waiting for Congress to toss their dirty undies out the window so we can double back and beat it out of them.

Exterminate Capitalism Lobster Package

2010-05-12T16:32:00.001-07:00

Today's graphic is inspired by the wonderful New York Times article on signs in "chinglish".

When countries are very poor, they spend pretty much all their money consuming stuff. After the basics, there's not much left over. As they get a little richer, and have a little bit left over, they tend to save and invest it. They consume a little bit more, but invest a lot more -- building roads and bridges and factories for themselves -- and that's how they get even richer. Eventually, they get so rich that they run out of good investment opportunities and go back to blowing it all on hookers and cocaine. I promoted the graphic that shows this process from a vampire squid report I was perusing this morning.

So far so good. But take a closer look. Can you tell me which of these countries is not like the others? Maybe we should call the Chinese system, "chapitalism". At any rate, something was obviously lost in translation.

The State Racket

2010-05-10T14:43:00.001-07:00

So lately, it's all about the government. This is the next stage in our version of the Great Depression. Back then, they didn't have the big governments we are using as a fire break to contain the contagion in the financial system. Now, we'll see if ours are big enough. Today the pages are filled with Greece and Spain, and tomorrow you can be sure the Tea Baggers will claim that the US is next. And really, they are right. Just about any way you look at it, the developed world is bankrupt.

Yeah, there you go, I just said it. Superficially, it matters a lot whether Greece or Spain or Ireland formally restructure their bonds. But on a deeper level, all that we are seeing with any of this is the initial stages of a bankruptcy proceeding. The acute liquidity crisis has passed (though it can always come back). We've got the Fed and the ECB playing the part of daddy DIP (debtor in possession, for those non financial types). And now we have to get to the dirty work of sorting out which creditors get what. The real question is how do we split the pain.

Consider the European case a little more closely. Should they just let Greece formally restructure the debt? How is this any different, you might ask, from cramming further loans down their throat and then demanding that they take a massive pay cut in order to make good on them? Well, let's look at it as a typical corporate bankruptcy proceeding. It's really a question of who owns the post re-organzation value of the nation. Does the creditor (Germany) end up owning the whole company, or do the equity holders (the Greeks) have the upper hand? Donald Trump's famously serial bankruptcy negotiations were an example of the latter -- if you want there to be any value, Mr. Creditor, you will take a big haircut now. The bank forclosing on your house is a simple illustration of the former.

These are important questions with real consequences. And it's not just a question of dividing a fixed pie, as the Trump thought experiment shows. But if you step back for a second, you will realize that all of this is actually secondary. The primary thing is facing up to the fact that we're bankrupt. Maybe the Greek people get stuck with it. Maybe the German people do the bailing out. Maybe the Greek government forces a haircut on the creditors. Maybe this causes banks runs in Greece. Maybe it causes bank runs in Germany. Maybe the Germans don't directly bail out the Greeks, but they have to bail out their own banks. Maybe this time they stick it to the bank equity holders. Pay your money and pick your color, this is what the big casino we call international finance is all about.

But don't lose sight of the fact that one group worked because they were promised that they wouldn't have to in the future. And another group consumed now and promised to work later. Now they have to get together and sort out whose going to make the donuts. And there's simply no way around this.

UPDATE: I wrote this last week after reading some of these related articles. Superficially, things are completely different now, as the EU put together a massive fiscal bailout and quantitative easing bailout over the weekend. The division of pain progresses at full speed, even if the realization of how much it will hurt only dawns gradually. How fast we run to stay in place!

The bums will always lose!

2010-04-30T13:54:00.001-07:00

You don't go out looking for work dressed like that, do you?

Greece has agreed the outline of a €24bn (£21bn) austerity package, including raising the retirement age from an average of 53 to 67, in return for a multibillion-euro loan from its eurozone partners and the International Monetary Fund, according to people familiar with the talks.
On top of a three-year wage freeze, public sector workers will lose their 13th and 14th monthly salaries, paid at Christmas and Easter, and see further cuts in allowances.

Er, is today the 14th month?

In America

2010-04-27T05:53:00.001-07:00

We have a trickle down system of corruption. Other former colonies, from what I've seen, tend to be corrupt from the bottom up, or at all levels equally. In the US, we are outraged if we have to bride the cop or the building inspector, but somehow we accept as inevitable the fact that the President lies us into a fake war or that laws are written by the companies who sponsor them. Basically, most Americans like to play by the rules, they like to trust one another, and they like to deal fairly with people (and be dealt with fairly) even when there's probably no explicit enforcement mechanism and it would be easy to get away with being corrupt at an individual level. We might relate this to our Protestant heritage, and the way it creates a culture of social trust that is not based on the family, as it so often is in more Catholic countries.

This little personal reverie is meant as introduction to a very interesting post over at The Big Picture. Barry's got a former SEC attorney explaining how the bureaucracy of the SEC works and in what sense the Goldman case is "political". The case, of course, IS political, but only in the sense that normally, politics would have squashed it from the top down by now.

... it's up to the lower-level enforcement attorneys to decide when to bring the case to the Commissioners. It is possible that these attorneys saw that it was politically convenient to bring their action now — actually, 8 months ago when they got approval for the Wells notice — but their motivation was not political: It helps their careers (and mental well being) to get their cases approved.
Attorneys are unwilling to put a case up for a commission vote if they didn't think it was strong enough. These attorneys are judged on the success of the actions they bring and wouldn't jeopardize that to appease the politicians that are currently serving on the Commission. The senior people who make promotion decisions will see Commissioners and Presidents come and go but senior staff outlasts them all.
The Commissioners power is wielded not to instigate investigations but to kill them by not approving them — this was rampant during the Bush administration.

This is one instance, but you can see the same thing in lots of places (eg. Gillian Tett's discussion of the rating agency emails). In my opinion, this is the American way. The lower level guys are just doing their jobs and trying to get ahead. They take the rules as given, and play the game they see in front of them without really trying to change it. Not that they are especially moral, mind you. When the boss says kill some towel-heads or rate some AAA, you don't fuck around with the obvious idiocy of these requests, you just look at your co-worker, cite some Dilbert, and git'er'done. But it's not like they would have come up with this crap on their own. It's not like the individual guys at the rating agency thought they could get Goldman to pony up a little extra for a phat rating, or the individual attorneys at the SEC had politics in mind.

For all its rugged individualism and entrepreneurialism, the corruption in the US starts at the top and trickles down. Which is why it's hardly a surprise that our great financial meltdown occurred on the watch of our most corrupt president.

I never liked calculus

2010-04-22T17:49:00.001-07:00

Alan Blinder usually has a balanced and useful perspective on political/regulatory issues. I remember being impressed by his speech at last year's Minsky conference -- it kinda made me think of what I imagine Paul Volcker is like when there's no TV cameras (Volcker having become the administration's thick-browed-big-stick-wielding-bank-basher for the moment). From today's Journal:

Derivatives dealers have already shed crocodile tears over the alleged benefits of customization to end users. After all, how else could, say, an airline swap February euros for May jet fuel? Well, I've got an answer. It could sell standardized February euro contracts (for cash) and buy standardized May jet fuel contracts (with cash), on organized exchanges, paying vastly smaller fees to dealers in the process.
Yes, there are unusual cases in which customization is important. But let's not deceive ourselves: The primary beneficiaries of customization are the dealers, not the customers. In the U.S., that basically means five big Wall Street firms—each of which has an enormous stake in the outcome. If they can stave off standardization and exchange trading, comparison shopping will remain very difficult and profit margins will remain sky high. But if reform makes standardized, exchange-traded products dominant, competition will squeeze profit margins to the bone. Here we have what may be the clearest divergence between the interests of Wall Street and Main Street.

I liked this point. Even though I rarely have much to do with Goldman or Morgan's three-card-monte divisions, every 10-K has disclosures about a company's derivatives position, so I do get a first hand view of this industry (if such a term can be used in reference to footnote 945697/b). And I rarely see any fancy stuff. People hedge currencies,interest rates, and maybe the price of one or two major commodities, that's about it. I don't feel like looking up the statistics, but I would guess that accounts for 90% of the derivatives that Main Street uses. Yeah, occasionally people fashion crazy custom weapons of mass destruction (as Buffet calls them). I remember having the guys in a big bank's leveraged loan division explain to us (6 times) how one company had directly pledged a percentage ownership of their natural gas fired power generation assets as collateral for one leg of a complicated a spark spread hedge. The basic idea was that as gas got more expensive the price of electricity went up, so despite the fact that gas was the major cost they were trying to hedge, the company's assets were more valuable. Instead of putting up more cash collateral to cover the hedge, they simply has someone agree to own more of a now more profitable generation asset. Or something like that. I don't remember the other legs of the trade, and yes, the company had recently emerged from bankruptcy and was already flirting with it again, why do you ask?

My point being that I have also understood the whingeing about higher collateral requirements to be coming mostly from the banks, and not from the corporate end-users of these things. These contracts should by and large be transparent, plain vanilla, adequately collateralized in cash, and traded on exchanges. If you want a custom derivative, by all means, go to Vegas baby! And if you truly don't have the capital to put up for a real hedge, do what anybody with a solid idea and a decent reputation does -- borrow it. I don't think the banks have a leg to stand on here. They are just resisting their clubby high cost barter system being turned into the ultimate commodity: money. Not that I blame them really. Resisting commoditization is every businessman's first priority, unless of course you build your business on inducing it.

My gosh grandma, what big banks you have!

2010-04-21T05:42:00.001-07:00

All the better for global economic growth my dear.

See and download the full gallery on posterous

Thank You Sir May I have Another

2010-04-20T07:30:00.001-07:00

Wow. That was some bailout they engineered.

Yields on Greek bonds pushed to fresh highs on Monday and shares in Athens sank as investors continued to worry about the country’s near-term ability to finance its debt. Some raised the specter of default even if international aid arrived soon.

Rebooting Democracy

2010-04-19T05:52:00.000-07:00

The evolution of Larry Lessig from copyright critic to corruption crusader continues. Here is the latest version of his presentation. I think his solution of calling a constitutional convention would be the greatest thing that's happened to the US in a long time.

For good measure, I looked up the two studies he mentioned. One asserting that the return on investment for a particular piece of lobbying was 22,000% and another a quite obvious model answering the question of why "there isn't more money in politics". This last contention appears over and over again from people who claim that if there were really $100 bills lying around Washington someone would already have picked them up. I've always considered that logic about as compelling as the economic version, but it's nice to see someone work out in empirical detail why the actual funds disclosed are less than you would at first imagine (short version -- nobody counts the unconsummated threat to give you opponent money). Lobbying is just another business expense -- you try to minimize costs and maximize the returns.

Financial reverse engineering

2010-04-16T16:32:00.001-07:00

Da Wolf, at it again.

First, it would be extremely helpful to reform the taxation of companies, to promote investment. In an interesting discussion of this issue, Andrew Smithers of Smithers & Co argues that a radical reform of corporation tax, to end interest deductibility, offset by a lower rate of tax would reduce indebtedness and lower the pre-tax return needed to achieve a given post-tax return on equity. The result should be a bigger capital stock. Such a measure could be combined with higher deductibility of investment, which would be helpful to manufacturing.

Trust me

2010-04-16T08:12:00.001-07:00

I spend money way more carefully when it comes out of my own pocket.

Posted via email from The Capitalist Axiomatic

Further fascinating attempts to square the circle

2010-04-12T05:45:00.001-07:00

I'm just waiting for the "angels on the head of a pin" debate to really take off. If a tree falls in the woods, is it really a bailout?

From the NYT:

Under the plan, Greece would receive loans at about 5 percent interest, significantly lower than the rate of 7.5 percent that the markets were demanding last week, though not as low as Greece had wanted.

Mr. Peruzzo said he expected the interest rate on Greek bonds to drop sharply when markets opened Monday. The rate of 5 percent "is now the benchmark," he said. "This is a step of clarification the markets are waiting for."

Yeah, for about 5 minutes or until the Greeks decide it's time to ask the Germans to bend over for round two (you know they secretly love it).

The Greek finance minister, George Papaconstantinou, said his country would try to avoid drawing on the European Union and I.M.F. money. "The aim is for us to continue borrowing as normal from the markets, and we believe we will be able to do this now," he said.
He added: "The Greek government has not asked for the activation of this mechanism despite the fact that it is immediately available."

Hmmm ... where have I heard that one before?

And here's the biggest howler:

The loan rates are "nonconcessional," or close enough to market rates that they do not constitute a bailout, Mr. Juncker said.

If Greece is not being given any concessions, how exactly is this going to help their budget situation? Do we really think that the 2.5% less interest they will pay on the15% of their total debt they need to issue this year will solve all their problems, even if they do get the don't-call-it-a-bailout? They will or they won't put their fiscal house in order. I'm guessing they won't, and this loan will be necessary and politically very unpopular both in Germany and Greece. We'll see what happens then.

Another round ...

2010-04-09T04:26:00.001-07:00

... in the ongoing saga called, "politicians don't understand markets". This one brought to you by Greece (again).

The presence of the aid package might have been expected to calm markets, but continued opacity over its workings and fears that political disagreement could prevent swift disbursement have left investors with more questions than answers. Greek 10-year bond yields hit 7.49% Thursday, a level unseen since 1998, sending the country back to pre-euro-era borrowing costs. But the real damage is at the short end of the curve and in the volatility of prices: Two-year Greek bond yields have risen more than two percentage points in just two days to 7.68%, 6.75 percentage points above German debt.

Remember how if Hank Paulson had a bazooka in his pocket there was no way he was going to need to take it out in order to keep the other boys at the urinal in line? Well, looks like Merkel's wasn't big enough either. Not that you can't fool the market some of the time -- there really are such mysterious things as self-fulfilling prophecies in finance -- but it was pretty obvious even to a naive observer like myself that the "bailout" was all smoke and mirrors. "We'll help if things get really bad" has about as much logic as "it's so crowded nobody goes there anymore".

Nice job reinventing the cosmic wheel without destroying all of us boys!

2010-03-31T15:22:00.001-07:00

Far out man

Posted via email from The Capitalist Axiomatic

A tidbit for you

2010-03-31T10:41:00.001-07:00

My opinion, as a professional investor, for what it's worth, is that health care is a scam. Every single group involved in it, from top to bottom, has their hand in the till. I've seen it at the levels of pharmaceuticals, medical devices, insurance companies, companies sponsoring healthcare plans, doctors, hospitals, etc ... In fact, I would say that this is the single most complicated corrupt industry I've ever seen, which is precisely what you would expect when, at every level, one guy gets the service, and another guy pays for it. Mumble mumble Milton Friedman mumble mumble. I know we're never going to, nor would we want to, have a true market in healthcare, a system which would leave grandma's corpse rotting in front of the hospital. But this ridiculous hybrid system we've so recently enshrined anew is just going to get worse and worse if basic changes are not made to it.

This rant is brought to you by the following lines out of Emdeon's 10-K:

Healthcare expenditures are a significant component of the US economy, representing $2.3 trillion in 2008, or 16.2% of GDP, and are expected to grow at 6.2% per year to $4.4 trillion or 20% of GDP in 2018.

In addition, industry estimates indicate that between $68 billion and $226 billion in healthcare costs are attributable to fraud each year.

For the math challenged out there, that's between 3% and 10% of the entire amount of money spent on healthcare. And that's just outright fraud. That's not the institutionalized graft I was referring to at the start.

Defeat fascism!

2010-03-26T10:45:00.001-07:00

Download now or preview on posterous

MS 22Mar Roach on Consumer-led China.pdf (623 KB)

Do a J today!

But seriously. There's lots of debate out there about about Chinese revaluation. Normally, this would be just so much financial arcana, but even with some semblance of "recovery" underway in the developed economies, it's impossible to relegate these questions to the back page -- a weak renminbi is a form of trade subsidy and it could eventually become the initial shot in a trade war, especially given 10% unemployment and what I would almost call the beginnings of "political instability" in the US.

The solution to all this is actually really obvious. The Chinese need to rebalance their economy as much as we need to rebalance ours. We spend less money and make more stuff, and vice versa for them. Normally, markets would tend to rebalace this stuff on their own (though potentially through a depression), but there's no way the political parasites are going to let this happen without extracting useless work out of the disequilibrium. Obama-Jibao get my vote for Maxwell's Demon.

Just as the left wing in the US is fond of pointing out (yes, correctly, in lots of ways) that our own culture has some structural factors that encourage consumption and discourage savings, we should also point out that the Chinese have the opposite problem. The Chinese government massively subsidizes manufacturing and particularly export manufacturing. Partly this is for economic reasons that were reasonable -- we were willing to go into hock to buy all their cheap plastic shit; you can develop really really fast with an export model because you only have to worry about the production half of the economy, etc ... -- but partly it's just politics. It's simply much harder to control an economy and a society that has a more open demand side. The Chinese weren't never dumb, and they always knew this. Which is what makes the otherwise very good Steven Roach not below a bit of a puff piece.

To have a real sustainable economy, you have to have a feedback loop of production and consumption, a circular flow of goods where, ultimately, workers are getting paid enough to buy the shit they make. This is just Marxism 101 -- slaves don't buy anything. But if you flip this over ...

(and brief aside here on how thoroughly disgusting I find supposedly progressive intellectuals drooling at the chance to be mini-dictators of their own. Remember in the 70's when anybody with 2 cents of liberal credentials was a convicted Maoist? Or in the 60's when the Soviet Union was held up as the model? Will the deep left ever quit implicitly lionizing benevolent dictatorship and get on the freedom train?)

... if you flip this phrase over, you realize that if you want to keep people slaves, you shouldn't let them buy anything.

This is precisely what China is doing. Their "economic miracle" is built on the back of a fascist control, and not accidentally, but quite deliberately. You see them now, with that famous Asian obsession with saving face, unwilling to back down. They know at this point that they've built a totally unsustainable model. And what have they done? They've doubled down on it. Economically it doesn't make any sense. It risks blowing a huge bubble and creating a massive crash a few years down the line. But it doesn't matter. They've made their political choice, and they are stickin' with it.

Red is Dead.

Posted via email from The Capitalist Axiomatic

Charlie don't surf

2010-03-24T15:09:00.001-07:00

The curmudgeonly but remarkably accurate boys at GMO sock it to the reds. I particularly liked this line, which is a phenomenon I find very amusing.

One of the wonders of modern China is that it has turned some of the world's most ardent capitalists into fervent admirers of an economy managed by communists.

I think investing is hard enough; I can't even imagine running an economy with 1.3 billion souls.