Thursday, December 22, 2005

Bumming out with Baudrillard

The simulacrum is never that which conceals the truth--it is the truth which conceals that there is none.

The simulacrum is true.


To dissimulate is to feign not to have what one has. To simulate is to feign to have what one hasn't. One implies a presence, the other an absence. But the matter is more complicated, since to simulate is not simply to feign: "Someone who feigns an illness can simply go to bed and pretend he is ill. Someone who simulates an illness produces in himself some of the symptoms" (Littre). Thus, feigning or dissimulating leaves the reality principle intact: the difference is always clear, it is only masked; whereas simulation threatens the difference between "true" and "false", between "real" and "imaginary". Since the simulator produces "true" symptoms, is he or she ill or not?


Abstraction today is no longer that of the map, the double, the mirror or the concept. Simulation is no longer that of a territory, a referential being or a substance. It is the generation by models of a real without origin or reality: a hyperreal. The territory no longer precedes the map, nor survives it. Henceforth, it is the map that precedes the territory — precession of simulacra — it is the map that engenders the territory and if we were to revive the fable today, it would be the territory whose shreds are slowly rotting across the map. It is the real, and not the map, whose vestiges subsist here and there, in the deserts which are no longer those of the Empire, but our own. The desert of the real itself. Jean Baudrillard: Simulacra and Simulation

To me, reading a new author is like trying on new shoes. The initial impression of seeing the shoe leads me to try it on in the shop and perhaps purchase it but it is only after walking in the shoes for a period of time that I can make a final judgement. I found the recent experience of "trying on" Baudrillard a bit like wearing shoes that didn't fit right at all after being broken in but looked appealing in the shop. It reminded me of my time first reading Nietzsche. While I found the observations quite penetrating, the theme of incoherence promoted by both authors expressed itself in dense prose. Of the two authors, Baudrillard's prose is far more advanced in its embrace of incoherence. To express the difference in art terms, Nietzsche's prose reminds me of Dali's surrealism while Baudrillard's prose recalls Jackson Pollack's abstract expressionism. The point of Baudrillard's prose, it sems to me, is that there is no point.

The angst of both authors stems, in part, from a similar cause, a loss of faith in divinity. In Nietzsche's case that of God as seen through the eyes of Luther and in Baudrillard's case, that of God as seen through the eyes of Marx, i.e. the cause which will bring the inevitable revolution of the common man. A cursory glance at Nietzsche's biography hints that his loss of faith in God might be related to the loss of his father, the last in a line of Lutheran Ministers, at the age of 4. In Baudrillard's case, the failure of the tumultous 60s and 70s to produce the forecast revolutionary overthrow of the aristocracy may well have led him into the endless swamp of radical idealism.

For those who might be unfamiliar with the term, idealism in philosophy, crudely stated, is the view that the essence of the universe is, in a sense, thoughts in the mind. This is contrasted with empiricism which asserts that the essence of the universe is material. Early in Baudrillard's writing career, as noted, he had a more materialist and determinist view. Like billard balls on a pool table, the cue ball, according to Marx, had already been struck and all that was needed was to wait for the balls to fall in their pockets. When the ball didn't fall, i.e. when capitalism didn't implode, Baudrillard looked for a cause, came across the work of McLuhan and went, a ha, (really, just like that, a ha) it's the media lying to the people, forever cutting them off from the truth. The later Baudrillard, with this theme ever more firmly entrenched in his mind, became, I believe, a worshiper of the power of incoherence. This might explain his dissatisfaction with The Matrix, a film based on his Simulacra and Simulation. In Baudrillard's vision there is no real world, the simulations of what we suspect is real hides its absence. It is, I believe, a mental frame from which there is no logical escape.

While I disagree with his world view, simply stated because I believe 1) that there is a material universe 2) that our sense of this material universe is mediated and not directly perceived 3) that one can come to a coherent view thereof, a position which used to be called believing in God, I find some of his observations and metaphors quite insightful. Consider this view of America's exploding debt, nothing like a disappointed ex-communist to point out the absurdities of the fiat money system:

An electronic billboard in Times Square displays the American public debt, an astronomic figure of some thousands of billions of dollars which increases at a rate of $20,000 a second. Another electronic billboard at the Beaubourg Center in Paris displays the thousands of seconds until the year 2000. The latter figure is that of time, which gradually diminishes. The former figure is that of money, which increases at a sky-rocketing speed. The latter is a countdown to second zero. The former, on the contrary, extends to infinity. Yet, at least in the imaginary, both of them evoke a catastrophe: the vanishing of time at Beaubourg; the passing of the debt into an exponential mode and the possibility of a financial crash in Times Square. In fact, the debt will never be paid. No debt will ever be paid. The final counts will never take place. If time is counted [si le temps nous est compte], the missing money is beyond counting [au-dela de toute comptabilite]. The United States is already virtually unable to pay, but this will have no consequence whatsoever. There will be no judgment day for this virtual bankruptcy. It is simple enough to enter an exponential or virtual mode to become free of any responsibility, since there is no reference anymore, no referential world to serve as a measuring norm.

The disappearance of the referential universe is a brand new phenomenon. When one looks at the billboard on Broadway, with its flying figures, one has the impression that the debt takes off to reach the stratosphere. This is simply the figure in light years of a galaxy that vanishes in the cosmos. The speed of liberation of the debt is just like one of earth's satellites. That's exactly what it is: the debt circulates on its own orbit, with its own trajectory made up of capital, which, from now on, is free of any economic contingency and moves about in a parallel universe (the acceleration of capital has exonerated money of its involvements with the everyday universe of production, value and utility). It is not even an orbital universe: it is rather ex-orbital, ex-centered, ex-centric, with only a very faint probability that, one day, it might rejoin ours.

That's why no debt will ever be paid. At most, it can be bought over at a bargain price to later be placed back on a debt market (public debt, national debt, global debt) where it will have become a currency of exchange. Since there is no likely settlement date, the debt has an incalculable [inestimable] value. As long as it hangs like that over our heads with no reference whatsoever, it also serves as our only guarantee against time. Unlike the countdown which signifies the end of time, an indefinitely deferred debt is the guarantee that even time is inexhaustible... And we really need a virtual time insurance since our future is about to dissipate in real time.
Global Debt and Parallel Universe

One phrase of his in particular sticks out when I consider the current economic situation, the precession of simulacra, i.e. the assumption that the model is more true than that which is modeled. The effect of this assumption in the mind is to disregard real world phenomenon that diverges from the model. Some readers might be familiar with Schopenhauer's view on truth: All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. I would add a few steps from Baudrillard. Once a truth is seen as self-evident the decay begins.

These would be the successive phases of the image:
1. It is the reflection of a basic reality.

2. It masks and perverts a basic reality.
3. It masks the absence of a basic reality.

4. It bears no relation to any reality whatever: it is its own pure simulacrum.

As William James argued, truth happens to an idea in the mind. During the Schopenhauerian phase, if you will, of increasing acceptance of certain ideas as true, cultural awareness is expanding. In the Baudrillardian phase, what I call the false prophet phase, the sense of these truths become exaggerated and eventually so absurd that there is no meaning left, but like Pavlov's dogs, some still ascribe to them truth. Then reality bites and the cycle begins anew.

Consider the decay of the US monetary system or so I see it, in Baudrillard's 4 phases of the image metapor. 1) Money, it is thought, should be a reflection of a basic reality, thus some convertibility standard for all who use the money. 2) The stability of money having been conditioned in the mind of the people, their ability to convert their paper for Gold is removed, although some vestigal conversion is possible on the nation state level, thus the Gold exchange standard. 3) even the vestigal conversion is now removed because there simply isn't enough Gold to pay off the debts, thus Nixon's closing of the Gold window. 4) You have a guy like Greenspan who embraces the same obscurantism as Baudrillard answering questions to Congress like this:

But as I have testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was, and indeed since the late 1970s central bankers generally have behaved as though we were on the gold standard. And indeed the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation, which in turn undermines economic growth. So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I do not think so, because we are acting as though we were there.

Would it have been a question, at least open, in 1981, as you put it? And the answer was: Yes. Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances; [
note: as opposed to now Alan. Even the man you are about to cite, one of those Central Bankers who, according to you, learned, claims that circumstances are as intractable as he can remember, i.e. at least as bad as 1981] interest rates were up sharply; the system looked to be highly unstable; and we needed to do something. Now, we did something. In the United States, Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit, and that led to a long sequence of events here, which we are benefiting from up to this date. So central banking, I believe, has learned the dangers of fiat money, and I think as a consequence of that we have behaved as though there are indeed real reserves underneath the system. - Alan Greenspan July 20, 2005

How an objectivist can possibly believe that "central banking" can learn, as opposed to individual central bankers, is beyond me. Paul Volcker has learned, and Arthur Burns has learned, but they aren't calling the shots anymore, Greenspan is and Bernanke will be. I'd bet big money that Ayn Rand would shout "collectivism" at the top of her lungs on reading that one-central banking learning. I guess they have invented artificial intelligence after all.

More puzzling is this reference to liquidity contraction as a sign that monetary authorities recognize that excessive creation of liquidity creates inflation. What liquidity contraction, that which occurred under Volcker? So, by this logic, if my grandfather saved his money because he believed it was better to be a saver than a debtor then even though I don't save I know
it is better to be a saver than a debtor? I get as lost in Greenspan's tautologies to nowhere as I did reading Baudrillard until I realize they share the same post-modern view-there is no truth, never was. Thus Greenspan can assert with a straight face that even though there are no real reserves under the system, the purpose of which was in part to try to ensure that imblances could be liquidated using those reserves, central bankers are behaving as if there were, by letting those same imbalances rise unchecked well beyond any hope of liquidation at anything near current prices, and few cry foul. The simulacrum of a value holding medium of exchange, call it Marx's commodity fetishism on steroids, that is the US$ is true in its own right, or so Greenspan would have us believe....and many do, but not, I believe, for too much longer.

Getting back to the cyclicality of truth notion, consider an earlier version of Baudrillard's descent into skeptical madness, that of his countryman Descartes. In the heuristic that made him famous, Descartes opined:

SEVERAL years have now elapsed since I first became aware that I had accepted, even from my youth, many false opinions for true, and that consequently what I afterward based on such principles was highly doubtful; and from that time I was convinced of the necessity of undertaking once in my life to rid myself of all the opinions I had adopted, and of commencing anew the work of building from the foundation, if I desired to establish a firm and abiding superstructure in the sciences.

In other words, if you find that you have believed bullsh*t in the past, fear not, you can rebuild your sense of the world assuming you come to believe that you are in charge of your beliefs, not the media or anyone else, and that there is an external world which is understandable in some sense by man, even though you might from time to time get confused. In contrast to bumming out with Baudrillard, I call this drilling down with Descartes. It is a positive approach and one I would expect to find in the intellectual growth phase of a culture. So it is with Descartes, who published his Meditations in 1640, as knowledge of the external world among European inteelectuals was expanding rapidly.
All of which is to argue that you can interpret the phenomenon noted by Plato in his metaphor of the cave, that most people walk around in a general state of varying confusion, at least two ways. You can take the Cartesian view and go, oh well, at least I can improve my own sense of the world or you can take the Baudrillardian view, throw in the towel and declare there is no truth. Me I prefer to drill down with Descartes.

Cogito ergo sum

ps Why do I think that Blink was a such a good introduction to this discussion on Baudrillard? It is the blink, or cursory inspection where one looks only for a few signs of a thing, that confuses. Adherence to that first impression cements the view in mind. In theory, the GDP measure was an attempt to quantify progress or contraction as some basis por policy. In practice, over time, that the data were seen to rise became far more important than actually seeing what was going on in the economy, a view which won Friedman a Nobel Prize. Now, as Gorbachov famously said in reference ot Soviet economic data, paraphrased, the data is always good. Blink and you might miss it.

Monday, December 19, 2005

The Cycles of Empire

The expansion of the Ottoman Empire from 1481-1683

I've written about 5 different beginnings of the promised Baudrillard piece but, perhaps by virtue of the depressing effect contemplation of French Existentialism has on my mind, my thoughts end up going in circles. William James defined philosophy as an unusually stubborn attempt to think clearly so I think I'll just need to be a bit more stubborn to tease some clarity out of Baudrillard's message. In the meantime I thought to comment a bit on the President's speech last night.

As one who loves to read History, I've found the ahistorical perspective of most of the public discourse, including the President's most recent speech, disheartening in the sense that the debate has no context (which, by the way is Baudrillard's point, ideas which bear little to no relation to the world of experience are seen as true in their own right). Additionally the administration tenaciously clings to the old sound bites as if they were sacred hymns. This further obfuscates any chance of reasoned debate for how can one debate that which is improperly defined. This war is not a "war on terror", which is a tactic, not an opponent, nor, in my view, is it a war against "radical" Islam but rather against political expressions of Islam. Seen in that light, it is a War that the West has been losing since the end of WWI.

Consider these facts. By the end of WWI, when the Ottoman Empire was "wiped off the map", while the Persian Empire became a paper tiger, political autonomy for Islamic people reached its nadir. Western powers ruled, either directly or indirectly, albeit in many instance tenuously, much of the Middle East, Northern Africa, what is now Afghanistan, Pakistan and India, as well as the Malaysian peninsula and Indonesian Archipelago. The Islamic faith, while still a spiritual guide to millions, had virtually no political voice.

Since 1920, slowly but surely, political Islam has made quite a comeback. As European powers gave up on their experiments in colonialism, Islamic countries like Indonesia, Malaysia and Pakistan, among others, have regained their political voices. The Russian expansion into Islamic territory has mostly been unwound. America too, has been, from this perspective, fighting a losing battle for political control. The "success" of Saudi Arabia, by which I mean the ability to persuade that nation to recycle their export earnings into US securities markets, should be seen in the context of the loss of control of the Shah's regime in Iran, Saddam's regime in Iraq, and the mujahideen in Afghanistan. In each of those three countries, the trend has been towards greater political expression of the Islamic faith. Both the Shah and Saddam tended to be more secular, Western leaning rulers. Their replacements have proven far less so.

Before I get called a defeatist lets consider this from an even broader perspective. Both Islamic and Christian (and Buddhist, Hindu et. al.) Empires have been rising and falling for thousands of years, one following another in this seemingly endless quest for control. Political Islam has already gone through the expansion and contraction cycle twice (depending on how you qualify things): initially under the Caliphate with its numerous manifestations (Omayyad, Abbasid, and Fatimid) and secondly as the Ottoman Empire. At the point of greatest expansion, the Ottoman's reach into Europe almost encompassed Vienna, the battle for which in 1683 was the beginning of the end for that Empire.

The graph above shows the expansion of the Ottoman Empire from 1481-1683 to give some sense of the rise and fall of these political entities. One could, of course, make similar graphs of the Spanish, French, British and American Empires. Interestingly, for those who think that history might have some lessons to teach us in the present, the initial Crusades were, ostensibly an attempt to rule the first tribe of nomadic Turks, the Seljuks, who had moved into Anatolia. The less public reason was that the Western Popes wanted to take over Byzantium, whose Bishops refused to admit the supremacy of the Pope. After fighting the west on and off for many decades, and losing quite a bit initially, a second tribe of Turks, the Ottomans, learned how to win, as you can see above.

Sometimes, as Frank Herbert of Dune fame argued, fighting people over decades makes them "hard" as they say in the military. All of which is to warn that the initial aim of the Popes, to impose supremacy on Byzantium ended up creating the conditions, including the western sacking of Constantinople, which paved the way for more than 5 centuries and counting of Islamic rule in what is now called Istanbul.

In my read of all this history it seems to me that, contra the views of Bush or Kissinger, Empires seem to grow fastest and remain stable longest when they fight the least. That is, when the organizational form of the expanding empire is, in fact, a much better form, usually as a result of intellectual decadence of the empire in decline, it takes less coercion to win converts. Roman expansion is a fine example in that the Romans would come in, depose the elite, if they opted to fight, and then build roads, bring the new territory into the Roman commercial sphere and in the process improve the material well-being of a good chunk of the population. As the expansions tended to become exercises in exploitation, either for resources or slaves, resistance increased. This is, in my view, the most glaring error of the current War in Iraq.

While there are likely many causes to the current problems, one key element, in my view, which has yet to become a feature of the public debate is the functionality of the organizational form we are trying to export. What are we going to teach these new "democracies" of which the President speaks so fondly, how to borrow other's people's money without paying it back? Greenspan keeps talking about the economics of Adam Smith, but it seems to me that our model is more like Tom Sawyer's exercise in whitewashing the fence. Heck, if we can't rebuild New Orleans, what are we going to do with Baghdad? Usually if you want to teach someone something you should first make sure you know how to do it better than they can.

ps While researching this piece I came across this Cambridge University Journal abstract which caught my attention:

Between 1854 and 1881, the Ottoman Empire went through one of the most critical phases of the history of its relations with European powers. Beginning with the first foreign loan contracted in 1854, this process was initially dominated by a modest level of indebtedness, coupled with sporadic and inconsequential attempts by western powers to impose some control over the viability of the operation. From 1863 on, a second and much more intense phase began, which eventually led to a snowballing effect of accumulated debts. The formal bankruptcy of the Empire in 1875 resulted in the collapse of the entire system in one of the most spectacular financial crashes of the period. It was only six years later, in 1881, that a solution was found in the establishment of the Ottoman Public Debt Administration that would control a large portion of state revenues. The new system restored the financial stability of the Empire, but profoundly modified its rapports de force with Europe by imposing on it a form of foreign control that would have been unthinkable only ten or twenty years earlier.

Funny how external debt leads to bankruptcy and then eventually foreign (creditor) control in a form unthinkable but a few years prior. In the case of the Ottoman Empire, it took 70 years from the first foreign loan until the Empire was wiped off the map. Maybe there's something to this self-sufficiency stuff after all.

Tuesday, December 13, 2005

There is no spoon

While I cobble together my thoughts on Baudrillard in the context of Blink (as an aside the more I reflect on it, the more I realize how suited the ideas of Blink are as intro to Baudrillard, ah the virtues of having friends recommend books, thanks Thomas) a stray thought popped into my head I wished to share.

If you haven't seen the film, The Matrix, this comment will seem a bit like the simulacra of Baudrillard, without foundation, which may or may not be a troubling affair.

There is no spoon...the price of Gold in particular and other commodities in general is not rising.....the real value ascribed to the promises captured on paper and quantified in computers is falling. While some might argue that this decline in ascribed value is a forward looking process I take the view that it lags the real world experience of returns.

Monday, December 12, 2005

My "blink" on Blink

1. What is "Blink" about?

It's a book about rapid cognition, about the kind of thinking that happens in a blink of an eye. When you meet someone for the first time, or walk into a house you are thinking of buying, or read the first few sentences of a book, your mind takes about two seconds to jump to a series of conclusions. Well, "Blink" is a book about those two seconds, because I think those instant conclusions that we reach are really powerful and really important and, occasionally, really good. from author Malcolm Gladwell's website

On the recommendation of a friend I'm going to read Blink, Malcolm Gladwell's latest book. I've ordered my copy, thus I haven't read it yet, but thought to do a little experiment on the theme. I've listened to a description and read the sales pitch from the author so I'm going to give my "blink" on Blink, a cursory, first impression, or, by its cover judgment of a book about such things. Those of you who watched the TV show Seinfeld might be "blinking" on Kramer's coffee table book about coffee tables that was itself a coffee table while those of you who are unfamiliar with Seinfeld might now be blinking that I'm a bit nuts, a thought that may or may not stick with you after reflection.

On one level I am struck by the enthusiasm Mr. Gladwell's prose seems to inspire in people in that I write on similar themes, without inspiring anything like the same enthusiasm. In reading his website I can see some of the reasons, aside from his greater skill as rhetor, for the different responses. One of the themes of my writing is "there's nothing new under the sun," by which I mean that the problems facing civilized man are roughly the same now as they were millennia ago. When Whitehead argued that all of western philosophy is but a footnote to Plato, he is suggesting, inter alia, that those who get their head around Plato will find that much of what we think is new, isn't.

Gladwell takes a different approach. As he argues on his site, the core of the book is research from a very new and quite extraordinary field in psychology that hasn't really been written about yet for a general audience. My "blink" on this statement was that it was wrong, along similar lines as an example in his book where certain people with expertise in Greek sculpture could tell at a glance whether a piece, which was assumed by a team of researchers to be real, was fake.

"Blink" seems to me to be about intuition, or perhaps better stated, prejudices. Mr. Gladwell, however, doesn't like "intuition", or as he puts it; You could also say that it's a book about intuition, except that I don't like that word. In fact it never appears in "Blink." Intuition strikes me as a concept we use to describe emotional reactions, gut feelings--thoughts and impressions that don't seem entirely rational.

Remember back before the Nasdaq bubble burst when the talking heads on CNBC all used to speak of the internet "space" or the B to B "space." These wise men, or so they were considered at the time, didn't want to use such a prosaic term as industry with it's historic connotations of cyclicality. No, these wise men wanted a new word with positive connotations. In the end analysis though, those who thought of the grouping of companies as an industry fared a bit better than those who thought of them as a "space." Sometimes those connotations, built up over time, convey useful information, although often not apparent on first glance but only after reflection.

It seems to me that Mr. Gladwell inspires enthusiasm, at least in part, by claiming that research on intuition or prejudice is a new, new thing.
Excitedly talking about the new, new thing sells, while a more matter of fact, you know, Plato was writing about this 2400 years ago, doesn't evoke the same response in most. Oh well, Mr. Gladwell can get rich while the Dude toils away in obscurity, such is life. When he argues, with agreement from me, that it is useful to pay attention to this process of reflexive association my mind blinks on one of my favorite quotes from William James, sometimes thought of as the father of modern Psychology,

Most people think they are thinking when really they are just rearranging their prejudices.

The quote above, which came from decades of psychology research by James, is more than a century old which pours a bit of cold water on the new, new thing approach. Going back a bit further, Plato's analogy of the cave, with its inhabitants responding to the shadows of things, instead of their true nature, also touches on that same theme: Much of what we consider "thinking" is really just intuition, the quick, or as James puts it in his Principles of Psychology, association by contiguity in the stream of consciousness, followed by justification of the intuition. In the chapter on reasoning linked above, James argues;

But as, according to our view, there are two stages in reasoned thought, one where similarity merely operates to call up cognate thoughts, and another farther stage, where the bond of identity between the cognate thoughts is noticed; so minds of genius may be divided into two main sorts, those who notice the bond and those who merely obey it. The first are the abstract reasoners, properly so called, the men of science, and philosophers -- the analysts, in a word; the latter are the poets, the critics -- the artists, in a word, the men of intuitions. These judge rightly, classify cases, characterize them by the most striking analogic epithets, but go no further. At first sight it might seem that the analytic mind represented simply a higher intellectual stage, and that the intuitive mind represented an arrested stage of intellectual development; but the difference is not so simple as this. Professor Bain has said that a man's advance to the scientific stage (the stage of noticing and abstracting the bond of similarity) may often be due to an absence of certain emotional sensibilities.

I include the selection as demonstration that people have been thinking about and researching this topic for a very long time and perhaps to jog other thoughts upon relection, if you are so inclined.

So, am I arguing, without reading the book, that it isn't worth reading? Not at all, as I stated at the open, I'm engaged in a little experiment, giving my "blink" on Blink. Some of those who have enjoyed the book might likely be thinking that I need to read the book, and if I did so I would come to different conclusions. How ironic that those who enjoyed Blink might argue that one should reflect before answering, the generation of which thought was one of my aims, reflect on this for a moment. Regardless, I'll let you know if my view changes after reading the book.

However, in a sense I was being a bit disingenuous when I suggested that I was giving a "blink" on Blink, because I have been pondering the various modes of cognition and the various integrations thereof for years. More to the point, I am not hamstrung by the unfounded intuition that this is cutting edge research, which affords me access to a great many works on the topic, from James to Pavlov to the Greeks. As long time readers from Chaos-onomics days might recall I often write of moments of revelation, like when one spouse who has suspected the other of cheating, finally becomes conscious of the affair, an analog of the opening in Blink where gamblers discover that a certain deck of cards pays much better then others in a game.

All of which is to argue that my "blink" on Blink is that the book itself, by virtue of the author's decision to recast old thoughts in new language, is but a surface scratch or "blink" of what has been a serious topic of research, i.e. in the patois of the author, blinking, for millennia now. In that regard it is a wonderful metaphor for our times. I've now come full circle with my earlier allusion to Kramer's coffee table book. Blink is itself a blink about blink, at least in the eyes of this dude who hasn't yet opened its cover.

OK, you're right, enough with the word play.

If you haven't given much thought to the thousands of intuitions which comprise each man's daily mental experience, and outside of nut cases like myself with lots of time for reflection on their hands, a background in Philosophy and a voracious appetite for reading, you likely haven't, I'll bet that Blink is a wonderful book. Expanding one's consciousness to include awareness of such mental behaviors can be very useful, it was in my case, particularly given my sense that, as has happened from time to time over the past millennia, a great many intuitions are leading to false signals. Why that might be is a topic for my next post, wherein I'll ponder Baudrillard's Simulacra and Simulation, which is itself an cynical exploration of the same theme of surface scans, intuitions or blinks vs. reflection on the real.

In sum, Blink strikes me as an accessible examination of a vitally important phenomenon of which to be aware. Let me close with a Buddhist saying: There are only two mistakes one can make along the road to truth; not going all the way, and not starting. Blink seems like a great way to start the journey into self-awareness........just remember to keep going.

Tuesday, December 06, 2005

Bastiat's house floods, productivity rises

If I had to sum up a phrase that captured the essential character of Alan Greenspan during his time at the Fed, that phrase would be, "the boy who cried productivity." Just as the boy who cried wolf eventually discovered, after being fooled a few times people won't believe you anymore.

As I recall, one of the reasons Greenspan gave for cheer leading the Technology boom was its supposed dividend, higher productivity. So sure was Greenspan that productivity was rising that he decided to revise the manner in which the data were collated, as he describes in this speech from 2000:

To make any headway toward understanding productivity trends, one must first understand the data. In that regard, disaggregation often uncovers troubling implications of the underlying data that are not immediately obvious. For example, separating nonfarm business sector output per hour into nonfinancial corporate, financial corporate, and noncorporate sectors has revealed disquieting problems with the measurement of productivity, especially in the noncorporate sector. The Commerce Department will soon release data on output by industry, or "gross product originating," which will allow this decomposition to be updated to more fully reflect the benchmark revision to the national income and product accounts (NIPA) published last fall. Taken at face value, the prerevision data suggested that the level of noncorporate output per hour was no higher in the late 1990s than it had been in 1985. Indeed, the data pointed to falling levels of productivity for many years in such industries as construction and medical, legal, and business services--areas that are important in the noncorporate sector. These statistics, however, are wholly at variance with our casual day-by-day experiences. Perhaps this Thursday's re-benchmarked GPO data will paint a significantly different picture. But, their doing so would only reinforce the argument for downweighting from our analyses sectoral data that are subject to such large revisions.

From a qualitative perspective, by which I mean with an idea of productivity as more output with less effort in mind, the third quarter seems to me to have been a disaster. Surely flooding the city of New Orleans was non-productive. Surely the deterioration in the levee system was non-productive. Surely the "shut-in" oil and gas production since Hurricanes Katrina and Rita, now approaching 18% and 14% of annual Gulf production was non-productive. Surely waging war is non-productive. Bastiat's window broke, half the house blew down, yet "productivity" rose faster than it has in years, and somebody still wants to argue that the phenomenon this data measures is "productivity?" To quote easy Al back at him,
These statistics, however, are wholly at variance with our casual day-by-day experiences.

Reading today's data release reminded me of an old story I wrote, A Fruity Fable, which I'll append here.

Imagine, if you will, a group of people whose health depends upon eating a specific type of apple every day. While not immediately fatal, a failure to ingest the nutrients from that specific apple each day led to immune system suppression. Given this physical foundation, these people became quite adept at both producing and accounting for these apples.

Over time, the two functions of production and accounting began to dominate the culture of these people. Good harvests of the apples were cause for celebrations, awards were given for study which led to more efficient use of the nutrients and the whole society was kept up to date on the quantity of the special apples in the storerooms.

One day, a young student, while examining the price changes of luxury goods, noted a relationship between the prices and the reports of increased apple stocks. As the people read of higher apple stocks they felt better about their future prospects and purchased more luxury goods. Enterprising thoughts raced through his mind at this discovery.

Eventually, this young student shared his research with a group of luxury goods merchants who were quite eager to hear of his work. This group, in turn, worked to build relations with the apple accountants, a monastic group known for their attention to detail.

After years of wining and dining, relationships were formed between some of the luxury goods merchants and some of the apple accountants. These people formed research foundations whose aims were to stress the similarities between the special apples and other types of apples. Over time, it became harder and harder to find apple accountants who had firm ideas about the qualities which comprised a "good" apple. Meanwhile, t-shirts and billboards began to appear exhorting people to eat an apple a day, with pictures of generic apples.

Coincidentally, the nightly reports of apple stocks started showing unprecedented growth rates. Some people, who came to be known as "apple fundamentalists" protested that the reports were incorrect but they didn't manage to capture the imagination of the people, who were quite pleased to read of their good fortune. They were so pleased that sales of luxury goods soon followed the trend of the apple stock reports. Lost in the shuffle of the new wealth was a disturbing up trend in immune system deficiency among the poor in the society, who often cut corners and did not buy their apples at the finest stores.

In time, however, the up trend in apple stocks leveled off which led to a decline in the purchase of luxury goods. Due to the extent of the just ended boom in luxury goods purchases there were now many members of the society engaged in the production, distribution and sale of these goods. Unhappy with the notion of a less affluent lifestyle, they turned to the daughter of the man who discovered the relationship, now known as the "wealth effect", between apple stocks and luxury goods demand.

After a careful study of her father's later work with the apple accountants, she recommended the creation of a foundation whose aim was to stress the similarities of apples and oranges, a very plentiful fruit in their country. This foundation not only worked with the press, it also worked with the education department. The foundation, whose motto was, "fruit is good food", eventually won an award for funding the purchase of textbooks for the entire nation, replacing the old, outdated models.

Soon the nightly reports of fruit stocks began to rise again, indeed, they rose faster than during the past boom. Predictably, sales of luxury goods exploded, making investors in that sector fabulously wealthy. The "apple fundamentalists", now an even smaller group on the fringe of society no longer organized protests. Instead they worked to buy up old apple orchards, known for producing a particular type of apple whose yield was far less than other apples and dwarfed by the yield of orange trees.

The plague began suddenly. Following a weekend of frivolity after a spectacular orange harvest, children and old people began to fall sick. Hospitals were unable to keep up with the creeping illness, one which oddly did not decline with the injection of orange juice. One group, however, was spared. In a matter of weeks the only people able to help were those crazy "apple fundamentalists". Like angels they visited the hospitals and cured the sick, sparing the lives of many in the nation.

Now chastened, the King of Fruitland ordered a special TV program honoring the head of the apple fundamentalists. During the ceremony, the King asked this man what their error had been. This man, who had been raised to believe that one can only quantify a qualification, that qualifications of value were functional, not formal, and to lose the spirit of the qualification was to destroy the validity of the quantification said simply, "you can't compare apples and oranges".

So now you know where that idea comes from.

That surreal feeling

There are some events in life that must be experienced from a certain perspective to be even remotely understood. For example, you don't know what it is to have a child until you have one of your own. Some, most of whom don't have children, might argue otherwise. Yet it is an argument that can only be settled one way, by having a child, the effect of which almost always leads to a changed view.

In that class of events having to be experienced to be understood I place a breakdown in civil society, which I saw in Asia during their financial crisis of 97-98 and, the focus of this post, the breakdown of normal market function when prices cannot be found and when you have a position or stake in the outcome.

Ask any parent if they have ever had a moment of terror when they couldn't find their child, thought they ran out in the road, or even, after months of crying every two hours to be fed, slept soundly for 6 hours (Oh my God! I've been sleeping for 6 hours, is the baby still breathing?!), and they will likely say yes. It is a strange feeling, as if the universe isn't working right, which can only be assuaged by confirmation that, yes, the baby or child is fine.

Far less shocking, at least to me, but evoking a similar surreal feeling have been those moments which stretch into minutes when your brokers shout market out, looking for a price. Back when I was trading FX and FX options I used to sit on a trading floor which looked somewhat like this, rows of computer terminals and price screens manned by rows of people. Little speakers carried the voices of brokers into the room continually updating foreign exchange rates:
25-8 on 121 for 10 dollar Yen (which means the broker has a client(s) who will buy 10 million US$ in exchange for Yen at 121.25 and sell 10 million US$ in exchange for Yen at 121.28). After a while the clamor from the little speakers fades into the background of the mind, although, like a parent listening to a sleeping child, you always have an ear out.

Once that clamor has become normal to a person, that sense of always being able to get into and out of a position quickly grows. You might make a bad trade but, you think to yourself, at least you can always get out. Indeed, the idea that one can always get out or hedge is, to a greater or lesser degree built into most option pricing and derivative portfolio risk management models-yes a great portion of the mountain of dervatives whose notional value exceeds many multiples of world GDP are using a flawed model. The Black Scholes model, which won the "inventors" a Nobel Prize in 1997 is one such model that assumes continuous pricing. Ironically Myron Scholes, of Black-Scholes option pricing model fame, was a partner of
LTCM, the hedge fund that collapsed in 1998, in part because they bet on continuous markets and learned their lesson, the hard way.

I have witnessed quite a few times when that assumption is wrong, very wrong. It's funny, even when I've been on the right side of the move, the absence of prices, the panic in voices has evoked that surreal feeling in me, as if water were flowing uphill. With the benefit of hindsight I think the surreal element comes as the veneer of civilization, which I believe is only as deep as our sense of the world is true, is peeled off and the animal panic is exposed. One of the articles of faith among those, whether they are aware of this or not, who believe in the variations of the efficient market theory, is that on some level, markets are run by reasonable, deliberative people who might miss a few things but will surely see the big picture. Yet the history of man is filled with just such mass revelatory events.

Have you ever lost a million $ in a few minutes? I have, fortunately it was the bank's money. It evokes a feeling of impotence. You want to get out, you are screaming at the brokers and colleagues to get you a price but they can't ..... and on that silly screen you can see the price going against you faster and faster.

I've watched the same feelings manifest on the faces of fellow traders. The initial anger quickly switches over to panic and finally the color drains from the face and the jaw goes slack as the inherent risks of the game are brought home in a profound way. Perhaps crude language expresses the crude feeling best, it hits you in the gut. It is a humbling moment, and one I hope to never forget, although I'm stupid enough to have needed a few refreshers.

Yet, even though I can print graphs and describe the action and feelings to people it is often like explaining those moments of terror as a parent to the childless. There is, I believe, a rotten little secret at the core of the Religion of Finance of which many players are aware on some level but not in their guts, if you will. The markets, as with all human endeavors, are prone to error and in some of those cases of error, only those who get out before it is obvious get out at all. The rest then learn a valuable lesson. The more I think about the line from a recent post by Stephen Roach; We all know these imbalances you speak of are unsustainable -- we just can’t afford to focus on the endgame, and my own communications with the professional investing community, many of whom seem to be searching for the elusive moment right before everyone else is going to put on the defensive trade, the more I realize that sooner rather than later I'll be experiencing that surreal feeling once more.

Monday, December 05, 2005

Fool me once, shame on you. Fool me twice...

According to the Department of Justice: the indictment states that during August 2001, Lay participated in Management Committee meetings at which reports were presented showing earnings shortfalls in virtually every Enron business unit, totaling approximately $1 billion. During early September 2001, Lay attended a Management Committee retreat in the Woodlands, Texas, at which the serious problems besetting Enron, including underperforming business units and troubled assets, were further discussed. Among other things, executives discussed the need to take in the third quarter of 2001 at least a $1 billion charge and that Enron had committed an accounting error in the amount of $1.2 billion.

The indictment alleges that throughout the remainder of September 2001, Lay engaged in a series of high-level meetings to discuss the growing financial crisis at Enron and the likely impact on Enron’s credit rating. Among other things, Lay knew that the total amount of losses embedded in Enron’s assets and business units was, at a minimum, $7 billion. Lay also knew that Enron’s auditors had changed their position concerning the accounting treatment of four off-balance sheet vehicles called the Raptors, which required Enron to determine in short order whether an acceptable alternative methodology existed or whether, instead, Enron would have to restate its earnings and admit the error.

Despite this on Sept 26, 2001, in an intranet chat with employees, in response to a question asking how employees could increase the $25 share price, CEO Ken Lay suggested that employees "talk up the stock." He went on:

The company is fundamentally sound. The balance sheet is strong. Our financial liquidity has never been stronger.

On Dec. 2, 2001, Enron admitted it was bankrupt

One can correctly deduce from the Enron collapse that people who run large corporations will sometimes lie, cheat and steal even from those whom they are obliged to serve.

On Friday, Dec. 2, 2005, President Bush said:

Thanks to good, old-fashioned American hard work and productivity, innovation, and sound economic policies of cutting taxes and restraining spending, our economy continues to gain strength and momentum.

We have every reason to be optimistic about our economic future. I mean, when you think about the news that's come in, the jobs report, the recent report on strong economic growth, low inflation, strong productivity, lower gasoline prices, a strong housing market, increases in consumer confidence and business investment, our economic horizon is as bright as it's been in a long time.