Thursday, March 30, 2006

Fox wants to guard chicken coop

Would you hire a fox to guard your chicken coop? Probably not. Given that foxes eat chickens, anyone who hired a fox to watch his chickens would probably lose all of his chickens in the process.

Would you re-hire a fund manager who had invested your current portfolio in such a way that exiting the trade would result in disaster? Probably not. Why would you believe that people who had created the problem could now fix the problem?

A more intriguing issue to me is, why would a fox think he could con his way into a chicken coop? Why would a fund manager who had created a booby trapped portfolio think he could con his way into fixing the problem? Perhaps the fox doesn't know he is a fox.

Yesterday I wrote about what I call the "hiding behind a universal" form of argument with respect to a statement from President Bush. Presidents, however, are not the only people who use this argument form. People of all stripes deny wrong doing by asserting they are a parent, spouse, friend or lover, to name a few, or always do this or never do that and thus are incapable, by definition, of doing whatever they were accused of.

Those who use this argument form exhibit symptoms of what I call an "out of body" state. The idealistic self image to which these people seem to cling, good parent, spouse, friend, President, USTreasurer or University President, will eventually bear little resemblance to the person they are. More troubling, these individuals may find that people, with a lag, react to the person they are, not who they claim to be, leaving them confused. Thus a fox, having convinced himself he is something else, can entertain hopes of guarding a chicken coop and be surprised when the job is not offered.

Larry Summers, it seems to me, is exhibiting signs of being in just such an out of body state both in an individual sense and a collective sense.

In a recent speech, the ex-US Treasury Secretary argues that the international financial architecture needs to be reformed, citing the likely unsustainable and even if not, undesirable build-up in emerging market nation reserves as evidence. He argues, by virtue of the substantial portion of the imbalance being outside the G7/G8, that the G7/G8 is now an obsolete forum for solving the problem. He goes on to argue that emerging market nations should "invest" their excess reserves, in what I can best describe as an IMF managed hedge fund.

In his words: Perhaps it is time for the IMF and World Bank to think about how they can contribute to deploying the funds of major emerging markets rather than lending to major emerging markets. More ambitious than simply providing surveillance and monitoring that would support most ambitious investments by emerging markets would be the creation of an international facility in which countries could invest their excess reserves without taking domestic political responsibility for the process of investment decision and ultimate result.

I'll leave for a later post this very strange idea that national leaders will be able to avoid political responsibility for the ultimate result of their build up in reserves. Suffice it to write that it won't matter which acronym gets the blame, when the money is gone, people will be pissed.

Curiously, to me at least, this build up in reserves, particularly in emerging market nations was a result of policies Mr. Summers was intimately involved in crafting. He was Chief Economist for the World Bank from 1991-93 and then working first as Deputy to Robert Rubin and then as Treasury Secretary himself, Mr. Summers was there when the "strong dollar" policy was implemented and "excess" reserve accumulation commenced. During his time at Treasury Japan's reserves climbed from just under US$100B to to US$355B, China's reserves climbed from US$22B to US$168B, Hong Kong's reserves climbed from US$43B to US$107B and S. Korea's reserves climbed from US$20B to US$96B, all without a word of complaint.

What are we going to see next, Dick Cheney setting up a school for hunting safety without the hint of even a small mea culpa?

At some point, if it hasn't already happened, the rest of world's leaders will begin to note that the west set up the international financial architecture they now claim is flawed and didn't follow the rules of the system. The current gang running the show, from both sides of the aisle, has yet to come forward with a realistic plan for solving the problem other than suggesting that the world should continue to trust their ability, despite evidence that they are incapable of doing just that.

The idea that, having strong armed many emerging market economies into buying US Treasuries as a form of protection, the same economies should now hand over a large chunk of these reserves to be managed by the very guys who have put the US in the financial straits it currently finds itself, seems absurd to me. It's kind of like a fox wanting to guard a chicken coop.

Perhaps the problem also reflects a bit of extended adolescence. When you are a teenager or young twenty something you have your life ahead of you. You can speak truthfully about the person you hope to be and might become without too much of your past intruding on the view. Young people and young institutions have little to no track records as adults and working institutions.

At some point, however, time catches up to you. While I hopefully have a few decades of life left, I have decades of track record behind me. Thus I often find myself, when suggesting a course of action to another, qualifying my opinion with a, " I didn't do this or did do that and now regret it." I find the need to temper the youthful language of idealism with references to my own experience failing to live up to those ideals.

The Bretton Woods institutions, the IMF and World Bank, are not new institutions nor are the current gang in charge young people. The Clinton team, which still seems to control part of the DLC and the Bush team have track records. The current mess is their track record. They might paint a nice picture of the future but given the past, I wonder how they plan to get there. They already had their turn at the wheel even though they seem to be reluctant to have anyone focus on it. In Buddhist terms, they are people forever trying to run away from their karma, which is about as easy as running away from your shadow.

William James wrote, Sow an action & you reap a habit; sow a habit & you reap a character; sow a character and you reap a destiny. Young people have yet to establish adult habits, their characters are unformed. Older people's characters are formed, change is difficult without a mea culpa, and even then destiny awaits. Yes, destiny awaits, even for such august institutions like the IMF and World Bank, who would now like to be thought of as hipster hedge funds.

It's worse than a fox wanting to guard a chicken coop, it's like your grandmother getting her belly button pierced and buying the clothing to show it off.

Tuesday, March 28, 2006

Word games and the study of philosophy

The past few philosophy posts have been a bit heavy on the jargon and light on real world applications so I've decided to get into the practical today. One of the reasons I believe the study of philosophy has fallen into disfavor is the emphasis on the jargon and de-emphasis on real world application. It is as if the ability to quote Plato or Aristotle is seen as more valuable than gaining a sense of how the ideas history credits them, and other philosophers, with popularizing might help people understand the world around them.

No President Wants War

Consider the following statement from President Bush in response to a question from Helen Thomas:

Q I'd like to ask you, Mr. President, your decision to invade Iraq has caused the deaths of thousands of Americans and Iraqis, wounds of Americans and Iraqis for a lifetime. Every reason given, publicly at least, has turned out not to be true. My question is, why did you really want to go to war? From the moment you stepped into the White House, from your Cabinet -- your Cabinet officers, intelligence people, and so forth -- what was your real reason? You have said it wasn't oil -- quest for oil, it hasn't been Israel, or anything else. What was it?

THE PRESIDENT: I think your premise -- in all due respect to your question and to you as a lifelong journalist -- is that -- I didn't want war. To assume I wanted war is just flat wrong, Helen, in all due respect --

Q Everything --

THE PRESIDENT: Hold on for a second, please.

Q -- everything I've heard --

THE PRESIDENT: Excuse me, excuse me. No President wants war. Everything you may have heard is that, but it's just simply not true.

So, according to the President, No President wants war, regardless of what you may have heard. I call this hiding behind universals, in this case, President-ness. According to this particular President, the act of becoming a President makes one undesirous of war.

This makes me wonder why the nation ever went to war or why no President has ever resigned in protest of war.

Of course, this particular President waged a war. His administration led both the UN and Congress in that direction and according to numerous memos from the British Government, among other sources, was
trying to fix the facts around the already decided policy of war, instead of trying to avoid it, a behavior one might expect from those who don't want it.

Despite these memos, and other reports from administration insiders to the contrary, President Bush would like the citizens of his nation to accept his vision of President-ness. The modern habit of branding might come to mind. Just as modern commercial corporations would have you believe that corporation XYZ always has their customers' needs in mind, despite specific evidence to the contrary, the President would have you believe that Presidents don't want war, despite specific evidence to the contrary.

If I've explained this adequately you can see that there are two approaches to the issue. The top down approach of President Bush, and my bottom up approach. The top down approach takes Presidential qualities as a given, and asks that you disregard evidence to the contrary. The bottom up approach takes the raw data of Presidential desires and actions and tries to discover some generalities. The top down approach is called radical idealism and the bottom up approach is called empiricism.

Inflation expectations remain contained

The above statement can be found in many recent monetary policy press releases. It can also be heard on TV and read in many commentaries. Let's consider what it means.

Expectations are mental. To discover them one would could ask those whose expectations you are trying to qualify. More importantly, you can see what people do. People who expect inflation, in the current usage higher prices, will tend to buy early, carry inventory and budget accordingly.

Just yesterday, while riding home with a friend from 9 holes of wonderful early season golf, I heard an expectation of inflation. My friend, who owns a construction company, looked at the prices at the gas pump and said, "gas prices are going up again." He didn't say, "gas prices are high today so I'll wait until they come down again." His sense was that just as gas prices have risen recently so they will continue to rise. This sounded to me like an expectation of inflation.

Among people I know, admittedly a very small sample, most expect higher prices in the future and are acting accordingly. So who doesn't expect rising prices in the future?

The Federal Reserve Bank of Philadelphia surveys forecasters quarterly. According to the latest report, Beyond the very short term, the forecasters see little threat of accelerating inflation. One answer to our question is that the number crunchers don't expect accelerating inflation. Of course, this group takes as a given the government's measure of current inflation which makes their perspective a little suspect in my view.

I wish the survey included a question about the forecasters buying habits. To wit, of the forecasters who think inflation will remain modest, how many have purchased or plan to purchase a car that gets better gas mileage or perhaps a wood stove for the house.

The economy is strong

The above statement is so ubiquitous it is almost a mantra. I wonder what it means.

Is the economy a thing-in-itself, as Kant might have asked or is the economy the totality of the economic choices and experiences of all those whose actions comprise it?

The top down approach leads us to to aggretive measures like GDP, while the bottom up approach leads us to unpopular reports like changes in household income and spending habits. While recent GDP measures lead one to a view of a strong economy, a more pluralist perspective which takes into account individual households leads us at best to a view of a stagnant economy for the majority.

In other words, before one qualifies the economy as strong or weak, or more generally qualifies anything as anything, one must first define what you mean by the term in question.

The top down approach of radical idealism which holds that ideas of think trump the experience of the thing would lead you to believe that Presidents don't want war, inflation expectations remain contained and the economy is strong. The bottom up approach of empiricism would lead you to believe; given the United States' history of wars, that the commander in chief, on some level, wanted war, the expectations of inflation among the many might not be as contained as the number crunchers spread sheets suggest, and that the economy as experienced by the many might not be as strong as the aggretive figures suggest.

William James defined truth as that, the belief in which, improves one's life in some way. Truth is discovered in living life. Faith in untrue statements confuses. Faith in true statements clarifies. We will see if the top down or bottom up approach leads to a more accurate view.

Sunday, March 26, 2006


Two bothers were walking home from school on a path in the woods, discussing their latest philosophy lesson. About 50 paces in front of them a bird waits in a tree.

Startled by their conversation the bird takes flight, first away from the brothers and then towards them. Flying quickly, the bird passes between the two such that each sees but one side of the bird.

The younger brother, walking on the right side of the path asks his elder brother if he has even seen a cardinal as big as the one that just flew past. "All I saw was a blur of red."

The elder brother, with a patronizing expression of his face says that all he saw was a blur of black. "It was a raven," he asserts.

"Nonsense," the younger brother retorts, offended. "It was clearly a red bird. Are you color blind?"

"You know I'm not," the elder brother replies. "What do you know about birds anyway, you aren't a student of nature like I am."

Silenced by their rebukes, the two boys walked along nursing thoughts of the others' foolish obstinacy.

Upon reaching home and seeing their father outside the two brothers ran to him each proclaiming their story in renewed argument. Talking turned to shouting and the argument degenerated into name calling.

The father quieted his two boys and then, in an attempt to change the topic, asked them what they studied in school that day.

"Philosophy," they said in one voice. "We talked about pluralism vs monism."

"How interesting," the father responded. "And were you persuaded to take a side in the debate?"

"We are both pluralists," said the elder brother. "Haven't you been telling us for years that only God could see the universe as a unity."

Holding back a chuckle, the father told him he was correct. "Yes, I did say that. But it seems you missed some of my meaning."

"Perhaps," he went on, "one or both of you are incorrect in your perceptions. However, you might also both be correct."

"What?," they responded, totally bemused.

"Perhaps the bird was black on one side and red on the other. You are both trying to extend your limited perspective to the entire object and perhaps obscuring the truth as you do. Sometimes the truth of the matter is neither left nor right, nor a synthesis of the views both both together."

Friday, March 24, 2006

On the political manifestations of Hegelianism

Yesterday I outlined Hegel's Idealism in his words, today I'll use my own. Idealism, in a general sense, is the view that the objects of our mind are mental, not physical. We can think about a tree, but the tree itself, if it exists, does not enter our mind.

There are many branches of the view from this starting point. Empiricists in general argue that the objects of our mind are reflections of reality. Going further, Hume argued that our thoughts of a thing were images of the thing or nominal reflections, thus the term, nominalism. The key assumption of this branch of thought is that there is a material universe which provides the datum of our perceptions.

Hegel's view takes the follower away from realism. The idea, an objective, top down idea, is all. Particulars are but reflections of the whole as citizens are but reflections of the state. Hegel embraces Rationalism, the view that truth can be discovered by thought alone, without the need to check for empirical confirmation.

In my view, Hegel argues for deductivism from the assumption that the world is understandable. There is no mystery left in the universe, nothing left to discover. History, for Hegel, had run its course, the only thing left to do is lead the slow to the truth.

You might notice a similarity between Hegel and Objectivism, the philosophy of Ayn Rand. Although she describes the view as realistic, she too argues for a conflation of thought about existence and existence itself. The world is at it seems to her and those who dispute her view are just wrong. Theodor Adorno's intolerance of ambiguity is a key feature of both Hegel's and Rand's views. There are no experiments here, just certainty. Like a prophet claiming to know the mind of God, these apostles of human wisdom know how the universe will unfold.

As I was dozing off to sleep last night, after reading some Hegel, I realized that the exercise leaves a reader with the impression that the universe is understandable. Even though you might disagree with his particular slant, which would ordinarily lead one to wonder if Hegel was just fooling himself, the sense that one could get one's head around the universe is a difficult temptation to avoid.

Flowing from this sense of understandability is a sense of determinism. That is, if the universe is understandable it is determined, there is no waiting to see what will happen, it is already known, at least by those who profess the view. In The Dilemma of Determinism, William James asks:

What does determinism profess?

It professes that those parts of the universe already laid down absolutely appoint and decree what the other parts shall be. The future has no ambiguous possibilities bidden in its womb; the part we call the present is compatible with only one totality. Any other future complement than the one fixed from eternity is impossible. The whole is in each and every part, and welds it with the rest into an absolute unity, an iron block, in which there can be no equivocation or shadow of turning.

Indeterminism, on the contrary, says that the parts have a certain amount of loose play on one another, so that the laying down of one of them does not necessarily determine what the others shall be. It admits that possibilities may be in excess of actualities, and that things not yet revealed to our knowledge may really in themselves be ambiguous. Of two alternative futures which we conceive, both may now be really possible; and the one becomes impossible only at the very moment when the other excludes it by becoming real itself. Indeterminism thus denies the world to be one unbending unit of fact. It says there is a certain ultimate pluralism in it; and, so saying, it corroborates our ordinary unsophisticated view of things. To that view, actualities seem to float in a wider sea of possibilities from out of which they are chosen; and, somewhere, indeterminism says, such possibilities exist, and form a part of truth.

You can now perhaps see how Hegelianism Idealism lends itself to the view of Deterministic History moving with a purpose man can see. Whether the event is the rise of the Jacobins in France, which Hegel applauded as necessary antithesis, Marx's inevitable communist revolution, or Kojeve's and Fukuyama's inevitable capitalist victory, the path of the future is clear. No matter that each view flowing from the same basis saw his own team as the victor, a curious plurality of views from a presumed unitary universe, while each was riding the wave, they were right.

The prognostications of the Hegelians remind me of the old commodity broker trick. Call 50 people and tell half oil will rise and half oil will fall. The next day, tell half of the people who profited from your forecast that soybeans will rise and half that they will fall and so on. After a few days, those remaining few people will think you a genius because they are unaware of your errors. Which ever side won in the Cold War, Hegelians would claim victory.

One of my favorite physical arguments against determinism involves a pool table. The challenge to determinists goes as follows. Rack the balls, fire the cue ball using a finely calibrated machine and tell me where and when the balls will come to rest on the pool table. You can use the best super computers in the world and you can't do it. If the outcome is determined, it is beyond the ken of man to grasp.

If the motion of inanimate objects is beyond our ken to grasp in toto, how much more difficult would it be to determine the actions of animate objects like man. Today the army fights because they believe in the mission and fear the consequences of not fighting. Yet, history shows that tomorrow that might not be true. While I might, after the fact, explain the change, I doubt I could forecast it.

Not that such doubts cloud the minds of the neo-Hegelians. Fukuyama argues in his End of History that consciousness will ultimately remake the material world in its image which recalls the words of one Bush insider to Ron Suskind, "We're an empire now, and when we act, we create our own reality,' 'but the real world seems as reluctant to oblige more than a decade later as it was when Hegel argued similarly in 1806.

On the policy side, Paul Wolfowitz, whose reading of the Hegelian tea leaves led him to assert that Iraq had WMDs, has perhaps the best intellectual pedigree of the neo-Hegelians. He studied under Allan Bloom at my alma mater Cornell, and with Bloom's mentor, Leo Strauss at the University of Chicago. Thus far, Mr. Wolfowitz has managed to avoid the downside one might think would flow from the inability of his ideas of the world to manifest in the world.

It is tempting to argue that the rise of neo-Hegelianism is a function of the teachings of Mr. Kojeve, Mr. Strauss and Mr. Bloom, among others but in my view, their views merely found an always ready audience. In other words, the unitary objective world viewpoint, understandable by a single man, lends itself to those who wish to consolidate power. Hegel had his Napoleon and Wolfowitz has his Bush. The philosophy, whether by intent or not, cloaks the drive to power, any drive to power, in an aura of respectability.

If not Hegelianism, then what? you might be wondering. My recommendation is to walk out of Plato's cave yourself, and begin to see the world with your own eyes. I write "begin" because as of yet, the universe has yet to stop revealing itself to my curiosity, nor will I have time, during my short stint in the material plane, to grasp even a small part of the wonder of the world. This for me is the spice of life, a universe of surprises. The more I open my eyes to the unknowns the more ignorant I realize I am.

Who knows what tomorrow brings? Not me. The Hegelians however know. Just ask them tomorrow and they will tell you that the events of the day were obvious. Of course, if you ask them today about tomorrow you might find, when questioning them about forecasts that didn't come to pass, that you didn't really understand them. Whether they understand themselves seems to me a more important question.

But be kind to the Hegelians. Each of them is but an unforeseen disaster or two away from a more humble view of life.

Thursday, March 23, 2006

On the new Hegelians...they're ba-a-ack

Hi. My name is "The Dude" and I'm a Hegelian.

Ever since I was young I have been one of those people others consider "smart." Perhaps this was the inevitable outcome of the erudite manner in which I utilized the verbal and written symbols and sounds that comprise modern discourse. That is, I think people thought I was smart because I spoke and wrote as if I should know something.

And they weren't the only ones who thought I was smart. I too figured that words which sounded so good could hardly contain nonsense. After all, what good is it to learn how to read Hume, Kant and Hegel if not to obscure the ordinariness of one's thoughts behind a veil of dense abstraction, even from my own mind.

Fortunately, my Hegelianism found itself sharing space, as it were, with an intrepid desire to sample life. Unsatisfied with my ability to convince people I could or did, I would actually do the crazy deed. It was the worst of combinations, the gift of the gab which gave one free rein to act, and the drive to actually do it.

But, you might note, unbedazzled by my prose, I described this combination as "fortunate" and then two sentences later as the "worst of combinations," which seems odd.

Dear reader, you have violated the first rule of Hegel worship, do not expect to be able to judge my prose using the normal metrics of man. My words are wise, by definition, if you cannot see that, you have yet to evolve to a sufficiently higher plane. My words have both an exoteric and esoteric meaning and to your lower order mind the exoteric clouds the hidden.......

I'm sorry, my Hegelianism got the best of me for the moment, as I suggested in the title I'm a recovering Hegelian. Now back to your question.

In a world unlike the one Hegel dreamed of as the Absolute Idea, that is, a real world, an inflated sense of ability combined with a desire to test that ability is a poor combination. Thank God I didn't become President. It is only in hindsight that I describe the combination as fortunate.

One day, while nursing a shattered ego the wise words of Forest Gump came to me, stupid is as stupid does. Despite the rationalizing arguments that kept flowing into my mind, I knew I had done something stupid. Like a drunk awakening in a pool of his own vomit, I stared into the abyss, saw myself, and decided to turn away.

All of which is to argue that I feel qualified to write of the new Hegelians because I know the disease, intimately.

It is a subtle disease, a conflation of the more than occasional insight with knowing it all. More specifically it is the conflation of thoughts with the thinker, a confusion between being smart and being able to express ideas people think are smart. I'm not arguing that Hegel and those who followed in his path did not entertain more than their share of clever thoughts, rather I'm arguing that this does not qualify them as being able to grasp the mysteries of the universe.

As the topic is broad and I'm lazy, I'm going to stretch the discussion out for at least another day. Today I'm going to briefly describe elements of Hegel's philosophy and tomorrow I'm going to trace the progression of his views in modern times on both the left (Marx) and right (Kojeve, Strauss, Fukuyama).

The Wikipedia opens its description of Absolute Idealism with the following: Absolute Idealism is a monistic ontology attributed to G.W.F. Hegel. That is, it is Hegel's account of how being is ultimately unitary. It posits that in order for the subject to know the world, or object, some necessary point of identity between the two must exist. Otherwise, the subject would never have access to the object and we wouldn't be able to know anything about the world. That point of identity must itself give rise to different ideas, including subject and object, and must be the basis of all the concepts with which we think and make sense of the world.

Monism is the view that the universe is made of one thing, in Hegel's case, the absolute idea, which can be arrived at through synthesis of opposites, as in subject and object. Higher level thinking then, for Hegel, is the conflation of thinker and thought or to recast Descartes, instead of I think therefore I am, it's thought imagining itself as a thinking existent.

Hegel described the self as unity thusly: By the term "I" I mean myself, a single and altogether determinate person. And yet I really utter nothing particular to myself, for every one else is an "I" or "Ego," and when I call myself "I," though I indubitably mean the single person myself, I express a thorough universal. "I" therefore, is mere being-for-self, in which everything peculiar or marked is renounced and buried out of sight; it is as it were the ultimate and unanalyzable Point of consciousness. We may say [that] "I" and thought are the same, or, more definitely, [that] "I" is thought as a thinker.

Confused? Reading Hegel has that effect on people so don't be discouraged. Bertrand Russell described Hegel as the most difficult to understand of all the great philosophers. Reading Hegel can lead you to think that he must be a very clever man, which was, I believe, at least partially the intent.

However, his view that the universal only is real, which he used to negate the individual above lends itself to the view that the state trumps the individual, thus the attraction of Hegel to political absolutists on the left and the right.

I'll pick up here tomorrow, hopefully.

The economic costs of the Iraq War

In this paper, we attempt to provide a range of estimates for what those costs have been, and are likely to be. Even taking a conservative approach, we have been surprised at how large they are. We can state, with some degree of confidence, that they exceed a trillion dollars.

The economic costs of the Iraq War

Wednesday, March 22, 2006

The boys who cried "nuke"

China, Russia united on Iran

By Lindsay Beck
Tuesday, March 21, 2006; 7:59 AM

BEIJING (Reuters) - China and Russia are united in pushing for more diplomacy to resolve the Iranian nuclear issue, China said on Tuesday, a day after the two deflected Western moves to authorize U.N. Security Council threats against Iran.

Russia digs in against UN Council action on Iran

By Irwin Arieff
Wednesday, March 22, 2006; 4:11 PM

UNITED NATIONS (Reuters) - Russia's foreign minister on Wednesday firmly rejected a draft U.N. Security Council statement aimed at pressuring Iran to stop enriching uranium, despite a new offer of amendments by Western powers.


Russia, backed by China, wants to delete large sections of the draft statement the Security Council has been studying for nearly two weeks as a first reaction to Iran's nuclear research, which the West believes is a cover for bomb-making. Iran insists it wants only to produce electric power.

Both nations fear that involvement by the 15-member council, which can impose sanctions, could escalate and lead to punitive measures including possibly military action.

Moscow, diplomats said, opposes even the draft's request for a report to the council on Iran's compliance with the demands of the IAEA in Vienna, the U.N. nuclear watchdog. Russia wants the request to come from the IAEA board of governors, not the council, they said.

As the saying goes, fool me once, shame on you, fool me twice, shame on me. It looks like China and Russia are singing the classic Who song, Won't Get Fooled Again.

When I write "fooled" I don't mean to suggest that Russian or Chinese diplomats were taken by surprise by the US military action in Iraq. I think the surprise came in the way they have been shut out of the oil game. I don't think there would be so much dissension over Iran had the spoils of Iraq been divided up more evenly, including to the Iraqis themselves.

Of course, why divide the spoils if you think you are the horsemen of the new millennium, which, it seems to me, is what the Neo-Cons think they are. But that is tomorrow's story.

Tuesday, March 21, 2006

What makes a decision good?

And I know some would like me to change, but you can't be a good decision maker if you're trying to please people. You've got to stand on what you believe. That's what you've got to do, if you're going to make decisions that are solid and sound. President Bush, 3/10/2006


I'm telling you what's on my mind. And what's on my mind is winning the war on terror. And I understand war creates concerns, Jim. Nobody likes war. It creates a sense of -- of uncertainty in the country. The person you talked to in Cleveland is uncertain about our ability to go forward. She's uncertain about whether or not we can succeed, and I understand that. War creates trauma, particularly when you're fighting an enemy that doesn't fight soldier-to-soldier, they fight by using IEDs to kill innocent people. That's what they use. That's the tool they use. And it creates a sense of concern amongst our people. And that makes sense, and I know that.

And one of the reasons why it's important for me to continue to speak out and explain why we have a strategy for victory, why we can succeed. And I'm going to say it again, if I didn't believe we could succeed, I wouldn't be there. I wouldn't put those kids there. I meet with too many families who's lost a loved one to not be able to look them in the eye and say, we're doing the right thing. And we are doing the right thing. A democracy in Iraq is going to affect the neighborhood. A democracy in Iraq is going to inspire reformers in a part of the world that is desperate for reformation.

Q Will there come a day -- and I'm not asking you when, not asking for a timetable -- will there come a day when there will be no more American forces in Iraq?

THE PRESIDENT: That, of course, is an objective, and that will be decided by future Presidents and future governments of Iraq. President Bush 3/21/2006

Iraqis think US in their nation to stay AP

What makes a decision a good one? Is it, as the President argues, a function of consistency with previously held beliefs, or is it, as Jesus preached and William James cast as the Philosophy of Pragmatism, in the effects-good fruit coming from good trees and vice versa?

As most long time readers know, I bought into the long Gold trade right after 9/11. As I rank decisions relative to their effects, what James also referred to as their "cash value", I qualify the choice as good so far.

If, instead of doubling since that time, the price of Gold had been cut in half, I would not qualify the decision as good. I would be wondering what went wrong, and not for the first time.

Admittedly, there were many periods of doubt in the early going. Although I have been trading for decades, the ultimate test in that field of endeavor comes whenever you put a position on-when you see if your sense of the future will manifest. I find it a humbling experience mainly because I am keenly aware that my sense of the world is not the world. I have made many mistakes in the past, and been quite sure of myself while making them.

Fortunately, as I wrote, so far, so good. The causal forces I assumed would be working, seem to be working. The price continues to rise. It could, of course, all go horribly wrong which is why I keep reading the news and checking to see if the theories on which I based my decision are still valid.

Interestingly, I see that Ben Bernanke, in a speech last night expressed similar sentiments when dealing with ambiguous situations and in my view the future is always indeterminate until it unfolds.

Given this reality, policymakers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as are available.

In other words, if you can't know how good your initial decision is when you are making it, at least be willing to check its effects often so as to reset course when needed. I agree. Would that such thinking was evident elsewhere in Washington.


I'm working on a longer polemic on neo-Hegelianism, such as Fukuyama's End of History and its variants which so infuses the minds of the Neo-Cons with their deterministic dreams as opposed to my own ambiguous ones. Hopefully I'll get it up on Thursday.

Tomorrow I'm playing hockey in the morning and meeting a long time reader for lunch so tomorrow's output will be minimal if at all.

Monday, March 20, 2006

Living with booms and busts

In yesterday's post, I touched on the idea of a balance between over-reliance on a system of exchange and missing out on the virtues thereof which, in hindsight, I should have explored in more detail. The point I was trying to make was that the cycles of boom and bust inherent in the capitalist system were not in synch with the need to acquire the daily necessities of life. Simply put, a family can starve before a bust resolves itself.

Over the past few years, Stephen Roach of MSDW, among others, has warned of projectionist dangers. Recently, he worried about politicians lack of concern over the lessons of the 30s and counsels patience to let the "win-win" of globalization raise living standards around the world. I think Mr. Roach and I take different lessons from the period.

Advocates of the virtues of free trade in any and all circumstances see the Smoot Hawley tariffs as a prime contributor to the depression. Yet the depression hit the agricultural economy in the mid-west, to cite one example, in the early to mid-20s, long before the tariffs came into play.

Leaving debate over the choice of response to the problem aside for the moment, that there was a problem seems evident. The problem, in my view, was that the agricultural economy in the mid-west bet too heavily on the constancy of returns flowing from the system of exchange.
In financial terms, many were too exposed to the market.

My mother was born into a Missouri farming community which survived the depression reasonably intact because, in part, they weren't wholly integrated into the commercial system. Most families had gardens, kept livestock and traded within the community. While the depression reduced income for tradables, life could go on.

This focus on the downside of markets might seem to be a polemic on capitalism but that is not my intent. Rather, my argument is that in order to find a balance between the extremes of total self sufficiency and total integration within an international system of exchange, one should explore the downsides of both of those extremes. Just as I'm not knocking eating when I warn of the dangers of obesity or malnutrition I'm not knocking capitalism when I suggest that its virtues too are limited.

Of course, this view begs the assumption that one needs to find a balance-that total integration might not be such a win-win. As this is a contentious issue among those who see globalization as synonymous with good, let's not take it as a given.

Industrialization of a nation involves significant shifts in cultural behaviors. As more and more families migrated from rural to urban and suburban communities they slowly lost their abilities to fend for themselves and became more reliant on labor income from more specialized skills. While, for example, a father moving from a farm to a city might have learned welding among a host of others skills, his son, born and raised in the city, might be a better welder than his father by virtue of specialization, but without any of the other skills. This would be an example of "efficiency" Greenspan-style.

The father in our example has a choice. In the event of a bust, say a two year mortorium on new skyscrapers in a city, he can always go back to the farm. His son, however, would have to learn new skills, a tough thing for some, in order to move to the farm. This son is a product of the new culture of labor specialization.

Thus, I contend, the welfare state. Having imposed a compulsory national education system which fosters labor specialization, the leaders of a nation, and those made wealthy by it, bear some responsibility for those who have been, in a sense, forced to bet their well being on it, assuming they intend for future generations to make the same commitment.. The key point being compulsion. If you compel a man to spend a large portion of his life in a system, in my view, you are responsible for his upkeep. A domesticated animal rarely survives in the wild.

You might notice the theme of freedom in my arguments. I believe industrialization has improved the lot of man on earth, but forced industrialization, or industrialization in the extreme, has created its own new set of problems, an ever growing class of people ever more reliant on that system. I'm not arguing that non-compulsory industrialization would not have generated its own problems, it did. Rather, I think people, families and communities would have found the balance between extremes quicker.

As the welfare state has grown and morphed into a "let's make sure economic indicators all point to blue skies ahead" state the need to strike a balance has only grown, in my view. If booms and busts are part of capitalism and that is the chosen form of political economy then man should be free to choose how reliant on that system he wants to be. One cannot make that choice freely however, if the inevitable busts are considered things of the past by those promoting greater integration within the system.

It seems to me one way to eliminate the welfare state before it takes down the whole financial system with it is to allow people to find their own balance. The first step in finding that balance is honesty in discussing the virtues and vices of broader systems of exchange.

Sunday, March 19, 2006

What changed on 9/11?

Most importantly, I appreciate his understanding that after September the 11th, 2001, the world changed; that we face a common enemy -- terrorists willing to kill innocent lives; that we now recognize that threats which gather in remote regions of the world must be dealt with before others lose their lives. President Bush

And in a sense, sort of the theme that comes through repeatedly for me is that 9/11 changed everything. It changed the way we think about threats to the United States. It changed about our recognition of our vulnerabilities. It changed in terms of the kind of national security strategy we need to pursue, in terms of guaranteeing the safety and security of the American people. VP Cheney

Before a person studies Zen, mountains are mountains and waters are waters.

After a first glimpse into the truth of Zen, mountains are no longer mountains and waters are no longer waters;

After enlightenment, mountains are once again mountains and waters are once again waters.

Alexander Pope warned, drink deep or taste not the Pieran spring, there shallow draughts intoxicate the brain and drinking largely sobers us again, an idea expressed by the Buddha as, there are only two mistakes one can make on the road to truth, not going all the way and not starting.

Enlightenment, as the Buddhists will tell you, is a process, not a state. They describe it as a process of continual awakening as if from a deep sleep, which recalls Plato's metaphor of the cave and the process of leaving it into the light of reality. I like to think of it as the rekindling of childlike curiosity, which my son constantly reminds me, but why Daddy?, is insatiable. Each discovery merely paves the groundwork for more.

Of course, it is easier for a child, unburdened with the sense of knowledge, to learn. They accept their ignorance.

Older people, however, like myself, think they know. Thus the initial stages of enlightenment or awakening to the world as it is, leads one to the view that
mountains are no longer mountains and waters are no longer waters. Continuing on the path, or in Pope's words, drinking largely, lead one to the view that mountains were always mountains, we just had the wrong idea to begin with. The world is as it always is, only our views change.

September 11, 2001 was a day of awakening for many people in the United States. The End of History dream of Francis Fukuyama, the view that the world had evolved into the final form of human existence, was dashed. Cultural conflicts, which Fukuyama and his adherents had argued were now a thing of past, were manifesting in the third millennium much as they had in those preceding it. The world, as the Tower of Babel story suggested long ago, did not want to dance to the beat of only one drummer-to view the world through only one lens.

This dream, unfortunately, was seductive. Trillions of dollars have been wagered on an old dream, a corporate commercial structure which transcended nation-states. Yet the old problems have not been solved. How does one deal with the vicissitudes of the global market-with the ever changing terms of trade? What happens when you need to sell your exports but they are too cheap, or buy your imports and they are too dear?

The old solution to this problem was greater self sufficiency. Instead of expending all national resource on a few endeavors, some resource was diverted, redundantly from the perspective of those in search of ever greater global corporate efficiency, to providing for the necessities of life closer to home. Profits were lower than they would have been during the boom times but shortfalls in necessities were avoided in lean times.

The question for any economic unit, from a person to a family to a nation, remains the same, how to find a balance between over-reliance on a system of exchange and missing out on the virtues thereof.

The new solution to this problem will be, I believe, greater self sufficiency. The redundancies ex-Fed Chairman Greenspan spoke so highly of eliminating when waxing poetic on his hi-tech, hi-productivty dream will return. Price stability, the windmill at which modern Central Bankers tilt, will remain a dream. The terms of trade, and with it, the status quo, will always be in flux. Cultural dominance will remain as it has in the past, temporary.

The dream, of course, is not dying easily, particularly in the minds of those who bet on benefiting from its reality. Would it not be nice, they argue, to continue living in the world of 1999, to capture the sensibilities of the world in some computer program and fix them there, much as was depicted in the movie, The Matrix. Alas the dreams of prosperity for all which were so widespread in 1999 have been dashed in many minds. The bright future dreamed by many in 1999, proved to be much like the past in the living.

On September 11, 2001 we, in the US, learned that we lived in the same world we had been living in all along. It has been a harsh and cruel awakening from a wonderful dream-a dream like most that cannot be recaptured by going back to sleep, try as one might.

Life will be as it always has been or as the Zen Buddhists put it,
Before enlightenment; chop wood, carry water. After enlightenment; chop wood, carry water. At least that is how I see it, but perhaps I too dream.

Thursday, March 16, 2006

Let the monetization continue

WASHINGTON - The Senate voted Thursday to allow the national debt to swell to nearly $9 trillion, preventing a first-ever default on U.S. Treasury notes.

In 1987, right before the October crash, the national debt was $2.3T

But 10 short years ago, the national debt was a mere $5T, most of which was domestically owned.

When the 9/11 attacks occurred, the national debt was a shade under $5.8T.

Over the last few years the debt has been growing about $500B per year, more and more of which is going into foreign hands.

Got Gold?

Painless gains for sale!

Step right up and listen here ladies and gentlemen. What is have here in my hand is a bottle of the finest elixir known to man-the elixir of painless gains. Just drink it and within days you will soon feel and see the benefits of exercise without any of the work, you will become smarter and better informed without the need for study and contemplation, and your relationship with your spouse will improve without any work towards better communication whatsoever.

If you heard a man at a carnival shouting these words into some cheap bullhorn you would most likely shake your head at the foolish people lured into such an obvious deception. The notion of a snake oil salesman might come to mind-at least that was the idea I was hoping to evoke with the opening paragraph.

But not every snake oil salesman is so obvious. Some, like Henry Blodgett and his ilk, poked fun at the rubes who took their advice while lusting after the latest Porsche, partially aware of the deception, but I think, unaware of just how fast such things unraveled, and who would be exposed in the process.

Enron provides look at a plethora of snake oil salesmen. From Ken Lay's exhortations to the staff to invest in the company months before it collapsed, to Fastow's book cooking and LJMs, to Arthur Anderson's accountants who sanctified the books and the banks who went along with the financing.

These are guys whom most would think of as upstanding characters. They went to good schools, wear nice clothes, and they speak well....very well.

They have gotten ahead in life, in part, by virtue of that ability to speak, to tell a listener what he or she wants to hear before that person knows it themselves. Many are quite likely somewhat unaware of this "skill", they might notice and appreciate the effects, but not spend much time contemplating exactly how their success has been achieved.

The quote that inspired this rant came from Brad Setser's blog and his adulation of Robert Rubin.

But for now, I'll end in the same way as today's Bloomberg story on the current account deficit, with quote from Robert Rubin:

The U.S. government's budget deficit together with the current account gap represent ``unsound underpinnings'' in an otherwise ``good'' economic landscape, Robert Rubin, chairman of Citigroup Inc.'s executive committee and former Treasury Secretary in President Bill Clinton's administration, said in a Feb. 22 interview. ``At some point, these kinds of deficits are not viable,'' Rubin said. ``The probabilities are extremely high that if we don't address these imbalances, then at some point, and it could be years down the road, we'll pay a very big price.''

Include the greatest Treasury secretary since Alexander Hamilton in the gloom and doom caucus, budget and trade deficit division.

While I'm happy to read of a growing sense of urgency over the current account deficit, and usually agree with most of Mr. Setser;s views, the idea that one can address the imbalances and avoid the pain is part of the reason the imbalances have gotten so big. Stephen Roach also takes the view that the Central Bankers of the world have some magic wand that will make the problems all go away.

Nonsense.....dangerous nonsense.

The reason I don't find painless gain snake oil credible is because I have never seen any gain that was painless. Any change in habit requires work. Even when the end effect is substantially better, say when ending a cigarette habit, one still has to work through the cravings.

To the extent the problem is too much debt, the solution will mean less and that means more working first and buying later and less buying first and paying later. People will have to deal with craving the new house or new car without scratching that itch with new debt.

To use exercise as an example, for exercise to have an effect, the miles must be run, the laps must be swum, or the weights must be lifted. You can choose the form of the exercise, but the work required is the same. Those who are waiting for the no sweat, 3 minute workout at your desk at work 3 days a week before they get serious about losing weight are that must closer to diabetes, heart disease or whatever other ailment is being fed by their lack of activity.

Such, in my view, is the US economy. It calls to mind a 52 year old man who has been 40-50 pounds overweight for years while talking often about getting fit. Yet because he believes in the painless workout, and thinks the eventual consequences are far off, he just can't get on a durable exercise regimen.

As they say in some hospitals and doctor's offices, the only thing that is going to wake that guy up is a heart attack.

May it be a mild one.

Wednesday, March 15, 2006

Chain saws, Democracies and Savings

"When I use a word," Humpty Dumpty said in rather a scornful tone. "It means just what I choose it to mean - neither more or less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master - that's all."
Lewis Carroll

Imagine being in the viewing area of a medical school's surgical theater while a surgeon was demonstrating a "face lift." After carefully drawing lines to act as incision guides on the face the surgeon turns to his nurse and asks for a scalpel. The nurse bends over, lifts a chain saw from the floor, pulls on the starter cord a few times until it's running and then hands the idling chain saw to the surgeon.

The surgeon, now shouting over the roar of the chain saw, calmly looks up at the audience, guns the chain saw engine a few times and says, "I will now make the first, delicate incision over the eye in one smooth motion to ensure that scarring is kept to a minimum." Revving the engine to full speed, the surgeon holds the saw inches from the face and says, "like so."

Absurd, right?
Chains saws effect the world in one way, scalpels in another. Chain saws are not scalpels. Calling a chain saw a scalpel does not make it one. It only makes the person abusing language seem a fool, and in our example above, will likely leave more of a scar than hoped for.

Ahhh, the perils of the misuse of language.

Consider the term, democracy, which, via its Greek roots, means rule by the people, as opposed to aristocracy, rule by a privileged class. Democracy is clearly different from aristocracy and will have different effects. Those who expect the effects of democracy to flow from an aristocratic government and vice versa will be as disappointed as those who expect the effects of a scalpel when using a chain saw.

Democracy, it has often been said, is a revolutionary response. It is not imposed, for the imposition itself is not democratic. In one sense it is a bubbling over of the people in a society with a general aim of having all people in the society be equal under the law, along the lines of Rawls, A Theory of Justice.

One demonstrates faith in democracy by, among other behaviors, living within the same rules that all members of society live within, not by thinking one has one set of rules for the rulers and one set for the ruled. "Democracies" informed by the latter sensibility of two sets of rules, such as might exist in a colony are likely to eventually suffer a rather ironic, democratic, revolution.

Democracy though isn't the only word whose meaning seems to have drifted in the minds of some users. Savings is another.

The word savings refers to things that one has saved or made secure, insulated from external perils, from the Latin salvus and salvare. If one was a farmer, one might save grain, which would mean to put it aside in a place it would not rot and could not be taken. In real world economic thinking savings are always of this form, goods set aside for later use.

The use of the term savings to refer to money hoarded up is from the early 18th century. Back then, barring a few notable exceptions, money was specie, gold or silver, and quite tangible. Admittedly, gold and silver were not grain in a silo or meat in a ice box, but rare was the time one could not trade the former for the latter.

Decades and even centuries ago, when economists wrote of the effects of savings, they were referring to real things put aside for later use. I don't think Mr. Bernanke refers to the same things when he writes of a global savings glut.

Like the word, democracy, the word savings has come to mean different things through time, which might be why unexpected effects flow from old models which use them as variables. To wit, it sure seems strange to me to have prices rising when there is a global savings glut.

Even though money is, by law, or fiat, no longer a claim on any real world good, savings has come to mean money, not just hoarded, but in a bank, as in a savings and loan. Yet, by law, money has no claim on real savings, it is merely a means to settle debts.

Last year an auctioneer friend of mine was checking out the contents of a house for a possible auction and was shown a set of golf clubs. The owner was lauding the clubs, hoping they would fetch a nice price and my friend told her, probably without cracking a smile, "what you have here, Ma'am, is a used set of left handed golf clubs."

Fed Chairman Ben Bernanke might like to imagine the world is sitting on a "global savings glut" but the words of my auctioneer friend come to mind. What you have here, Ben, when you examine the balance sheets of the worlds Central Banks, is a huge pile of used debt. It is debt of a country which can, at will, devalue the currency in which the debt is to be repaid. You and your Central Banker buddies are likely to find it easier to turn lead into gold than to transform that huge pile of used debt into goods and services.

Ah the perils of the misuse of language.

Tuesday, March 14, 2006

Dark matter not so dark anymore?

The Q4 current account deficit set a record at just under $225B, or nearly $1T (that's trillion) annualized. More ominous, at least to me, the net investment income went negative in Q4. I wonder if the dark matter faithful are scratching their heads today.

Faith in the virtues of "dark matter" is strong among economists who don't worry about the the eventual effects of the US current account deficit. Dark matter being the term used to describe the curious phenomenon where US receipts on US owned foreign assets exceeds US payments on foreign owned US assets despite US owned foreign assets being valued at far less (roughly $2.5T less) than foreign owned US assets.

According to these economists, so long as the dark matter phenomenon holds true, there is little to fear from the growing imbalance in the net investment position as net income flows will remain US positive.

Net income flow in the external accounts can perhaps be easier to consider if viewed more simply as debt service. If you as an asset holder could go ever deeper into debt, but your debt service payments never exceeded asset income, you could continue to increase your debt with impunity. Until, that is, the curious condition was resolved.

Once debt service payments started to rise above asset income you would probably have to stop taking on additional debt and would likely look to pay off the old debt. Once the balance sheet becomes net income negative, the day of reckoning has arrived. This is the classic currency crisis of banana republics around the world. The greater the income outflow the greater the trade surplusses must be to compensate. It looks to me as if the US is nearing a similar state of affairs.

US net investment income has been trending lower since a peak in 1984, as one would expect with the positive net investment position shrinking to zero during the 80s and going negative ever since. There is, however, an anomalous spike in net investment income data for 2003 and 2004, which is the basis for the dark matter speculations.

My sense is that ultra low US rates and recent corporate tax breaks for foreign earned income explain the anomalous behavior of the net income data better than the dark matter hypothesis. As the effects of the tax breaks recede and US rates normalize and quite likely, assuming the Fed intends to save the US$ eventually, exceed foreign rates, net investment income will become negative better reflecting the negative net investment position.

Once faith in dark matter is shaken, perhaps the economic powers that be will take a fresh look, a concerned look at the ever widening current account gap.

Friday, March 10, 2006

I'll be back Monday

My wife is out shopping and I'm spending the day with my son so this will likely be it until Monday.

My aim is to write on the "global savings glut" hypothesis of Bernanke.

Have a good weekend.

Thursday, March 09, 2006

On the declining value of US gift certificates

Gift certificates can be a great or horrible gift depending upon the issuing store.

If the certificate is from a store you frequent, or would like to, it's worth its value in cash.

If the certificate is from a store you know has nothing for you, it's worth less than cash to you, unless you can work out a swap with someone who wants those particular goods sold by the store in question.

The worst kind of gift certificate, it seems to me, would be one from a store at which you wanted to shop, only to find out that they kept removing merchandise from the shelves each time you went to buy it. I wonder if the US$ is behaving a bit like this worst kind of gift certificate.

Decades from now, I'll bet economists will be scratching their proverbial heads trying to figure out why the rest of the world went on a US$ reserve buying spree, all with approval from the issuing country, beginning slowly in the late 80s and accelerating rapidly as the 90s progressed. I'm assuming these economists will be viewing our time with the benefit of hindsight, in full awareness of the effects of the resolution process we have yet to experience.

I can remember when US$50B in reserves was quite a bit. In 1986, Japan had only US$42B. They currently have more than US$800B. That's a lot of gift certificates.

The Bank of Taiwan has a page which lists the growth of reserves over time for quite a few nations. You can see Japan's reserves grow, particularly once Rubin at Treasury and Sakakibara at the MoF rescued the US$ in 1995-6.

You can see the effects of the lesson of the Asian Crisis. Having convinced themselves that the reason for the crisis, or at least reason for an inability to mitigate its effects, was a lack of US$ Reserves, Asian Central Banks went on a buying spree. S. Korea had US$34B in reserves prior to its crisis, they currently have over US$200B. That's a lot of gift certificates to accumulate in 10 years.

China, Russia and the Middle East are also accumulating gift certificates at a rapid pace. More troubling, they are constantly learning that some items on display are not for sale.

China tried to buy Unocal in July of last year. Their efforts were rebuffed. The value of those gift certificates in China fell. Interestingly, the $ price Gold broke to new highs in the weeks following China's decision to drop their bid for Unocal.

The UAE has now bought P&O but may not be able to take control of the US ports. If the House rebuffs the UAE, as they are saying, the value of the gift certificates in the UAE will fall.

When next you read some economist claiming that imbalances don't matter remember these deals. When a nation runs a trade deficit it can either sell equity assets or debt, which in the case of the US, is really just a swap of fewer gift certificates for more gift certificates in the future-a delaying tactic. Let me repeat, for emphasis, the sale of US debt to foreigners is really just a delaying tactic-a swap of their gift certificates now for more later.

The fewer equity assets for sale, like Unocal, or the ports' operations, the less valuable the gift certificates become, particularly as the only convertibility guarantee for these certificates is for US$ denominated debt, something the rest of the world has been paying off quite rapidly over the past half decade.

I'm not arguing that Congress should or should not approve the deal. I'm merely pointing out the risks of the imbalances which are the driving force behind the need to sell assets to foreign companies. The nation has three choices: 1) radically curtail credit, slash government expenditure and deflate the equity and real estate bubbles 2) sell its equity assets and become Buffett's sharecropper society 3) not sell them and hasten inflation's manifestation in the goods markets.

If Congress kills this deal and raises the debt ceiling, the effect of which has reduced debt monetization since early this year, I would expect to see the inflation trade come back in full force.


ps That was fast, according to CNN, Dubai Ports will transfer US port operations to a US entity. Assuming this isn't some corporate shell game, such as the UAE opening a shell company in the US to shield its ownership from clear view, the gift certificates are already shrinking in value.

Wednesday, March 08, 2006

Mr. Greenspan, meet Mr. Newton

This ongoing shift of [gross domestic product] to more conceptual and less physical products and services has, and will continue to slow the growth of our energy requirements. This will be important to our future since the worldwide growth in the demand for oil and natural gas, coupled with the prospect of inadequate investment by the nationalized oil companies, is likely to keep energy prices high. I will offer a set of policies that, although problematic in the current political climate, must be adopted if we are to fend off a crisis. Alan Greenspan's not so modest book proposal

While reading Mr. Greenspan's views on energy above, the country boy in me was wondering, what does a saxophone blowin' city boy like Greenspan know about work anyway. The physics boy in me then pricked up his ears, figuratively writing, and thought, that's right, what does a computer screen readin' city boy like Greenspan know about work-that's work defined as force times distance and force defined as mass times acceleration. In my view, he might know something about macro-economics, but he doesn't know much about energy. I think his view may well be shared by others at the Fed.

Greenspan likes to use words like technology but when discussing energy I prefer the word machine which I define as a device consisting of fixed and moving parts that modifies mechanical or potential energy and transmits it in a more useful form.

A few generations ago, machines were lauded for their labor saving quality. This didn't mean less energy intensive, but rather less human energy intensive. Moreover, the total amount of work done in any specific task did not change, the energy source of the work did.

For instance, a 20 mile trip that used to require human power, in the form of walking, running (if you were in shape) or riding a bike can now be accomplished by an automobile and some gas. As a physicist, the energy expended walking, or riding a bike is far less than that expended driving a car, because moving you now also means moving an automobile. In other words, while driving is much less labor intensive, it is much more energy intensive. Mr. Greenspan, meet Mr. Newton.

Greenspan seems to think our economy is less energy intensive because GDP is rising faster than the physical products and services component thereof. There is, it seems to me, an easier way to check US energy use. Go to the EIA.

They tell me that the US used 54 Quadrillion btu in 1965 and 100 Quadrillion Btu, a record, in 2005. So the US is consuming more energy than ever before, almost doubling consumption in 40 years. Labor saving yes, energy saving, no.

Admittedly, the slope of the energy use curve over time has flattened out from the rapid growth during the 50s and 60s when the US used to make those "physical products and services" Greeenspan wishes we wouldn't make but was building the plants to make those "physical products and services." Even oil refineries require energy to build.

All of which is to write that Greenspan, and many others, in my view, have confused the effects of inflation on economic variables with reduced energy use. 'Cause you see, Al, work is work. But you wouldn't know anything about that anyway. Maybe I should invite him over to split some wood with me.


On a related note while doing some research for this article I came across this information. In 1976, the median household income was $12, 686, the cost of a new home was $48,000 and a gallon of unleaded was $0.61. In 2004,
the median household income was $44,684, the cost of a new home was $264,000 and a gallon of unleaded was $1.88 (now 2.44). Relative to income, driving was a little more expensive in 1976 but housing was more expensive. That technology better start making the average guys life better soon.

Tuesday, March 07, 2006

Can the central banks control inflation?

As long as a man knows very well the strength and weaknesses of his teaching, his art, his religion, its power is still slight. The pupil and apostle who, blinded by the authority of the master and by the piety he feels toward him, pays no attention to the weaknesses of a teaching, a religion, and soon usually has for that reason more power than the master. Friedrich Nietzsche

I remain convinced that central banks are always in control of the liquidity spigot. Stephen Roach

In a recent research report, Stephen Roach notes, the biggest news in close to a decade is that the Bank of Japan now appears to be on the cusp of abandoning its policy of ├╝ber accommodation. In doing so, the BOJ would be following the lead of the other two major central banks in the world -- the Federal Reserve and the European Central Bank. Expectations, as Mr. Bernanke would be quick to remind you, are key to guiding behavior. In that regard, I think the next few quarters will be quite key to affirming or dashing expectations of the power of Central Banking to control inflation.

As quoted at the opening of this post, Mr. Roach believes that Central Banks are still in control of the money supply. I agree, but only in the abstract. As a practical matter, I disagree. Ex-Fed Chairman Arthur Burns also disagrees and he knew whereof he spoke.

As Mr. Burns noted in his Anguish of Central Banking; As the Federal Reserve, for example, kept testing and probing the limits of its freedom to undernourish the inflation, it repeatedly evoked violent criticism from both the Executive establishment and the Congress and therefore had to devote much of its energy to warding off legislation that could destroy any hope of ending inflation. In other words, just as the FISA courts were supposed to have the power to stop the Executive Branch from spying on Americans without a warrant, but as a practical matter could not, so too, I contend is the Fed supposed to have the power to stop inflation, but as a practical matter will not.

Mr. Burns points to the expansion of government deficits in the context of "undernourished inflation" as the primary cause of inflation in the 60s and 70s. I assume that still holds true today. To curb inflation not only will the Fed need to tighten the money supply, the government will need to move back into surplus.

Thus, it seems to me, the Catch-22. In order to protect dollar hegemony, the US military must be used as enforcer. Yet, wars are expensive, and given the unwillingness of US politicians to pay as they go, inflationary- consequently destructive to dollar hegemony. The very act of protecting dollar hegemony reduces the value of the dollar.

As Mr. Burns has much more experience in these matters I'll let him close the argument. But whatever the virtues or shortcomings of central banks may be, the fact remains that they alone will be able to cope only marginally with the inflation of our times. The persistent inflation that plagues the industrial democracies will not be vanquished-or even substantially curbed-until new currents of thought create a political environment in which the difficult adjustments required to end inflation can be undertaken.

Monday, March 06, 2006

On Gold and savings

Gold consumption in Saudi Arabia and the UAE rose by 13 per cent and 10 per cent respectively last year, despite high global prices, the World Gold Council said in a report. Reuters

con·sume Listen: [ kn-sm ]
v. con·sumed, con·sum·ing, con·sumes
v. tr.

1. To take in as food; eat or drink up. See Synonyms at eat.

2. a. To expend; use up: engines that consume less fuel; a project that consumed most of my time and energy. b. To purchase (goods or services) for direct use or ownership.

3. To waste; squander. See Synonyms at waste.

4. To destroy totally; ravage: flames that consumed the house; a body consumed by cancer.

5. To absorb; engross: consumed with jealousy. See Synonyms at monopolize.

If the verb "consume" means what the dictionary says it does, and the noun "consumption" means the act of consuming as the dictionary also argues then Gold is rarely if ever consumed. Gold is saved.

Because of this long standing behavior, state guarantees of currency convertibility to Gold, as in the classical Gold standard, tends, I believe, over the long run to lead people to view money as a form of savings. By extension, if the leaders of a nation want the people in that society to save, as in the act of consuming less than they produce, make your currency convertible to Gold.

By contrast, currency convertibility to debt, as is currently the case in the US, tends, I believe,
over the long run to lead people to view money as a means of paying off debt or meeting other obligations. If the leaders of a nation want the people in that society to go into debt, as in the act of producing less than they consume, make your currency convertible to debt. Evidence suggesting this relationship can be seen in rising debt levels even since the Nixon administration closed the gold window.

If VP Cheney thinks, as this article reports, that Americans need to save more, I would suggest one short term and one long term solution.

Over the short term, he should realize that one single "body" is most to blame for the lack of savings in the nation, the government.

Moreover, the larger the corporation of government becomes, the more its policies will become the economy. If government revenue was 5% of GDP, even a very large deficit of say 40% of revenue would equate to a deficit to GDP ratio of 2%.

However, currently, government revenue is 17% of GDP. Thus the current deficit of 20% of revenue leads to a deficit to GDP ratio of 3.5-4% of GDP.

Over the long run, my read of economic history argues that currency convertibility to something that is saved, like Gold, will, over time, lead people to save more.

Last week, I wrote of the centralization of reserves that accompanied the passage of the Federal Reserve Act and the centralization of consumption that has accompanied the passage and growth of the Income Tax act. If the government was a person, I would tell him or her, you wanted centralization, thus you are now both the problem and the cure.

Physician, heal thyself!

Sunday, March 05, 2006

On the denial of man's inhumanity to man

Man's inhumanity to man
Makes countless thousands mourn!
Robert Burns

A potential Off Broadway production of "My Name Is Rachel Corrie," an acclaimed solo show about an American demonstrator killed by an Israeli bulldozer while trying to stop the destruction of a Palestinian home, has been postponed because of concerns about the show's political content.

The production, a hit at the Royal Court Theater in London last year, had been tentatively scheduled to start performances at the New York Theater Workshop in the East Village on March 22. But yesterday, James C. Nicola, the artistic director of the workshop, said he had decided to postpone the show after polling local Jewish religious and community leaders as to their feelings about the work.

"The uniform answer we got was that the fantasy that we could present the work of this writer simply as a work of art without appearing to take a position was just that, a fantasy," he said.
New York Times

I have a dream. One day the world won't need laws against Holocaust denial because the story of man's inhumanity to man, all of it, for no culture is without guilt, will be deemed vital in order that man reduces the frequency of repetition of this most heinous of sins.

  • Let us not forget the murder of Rachel Corrie.
  • Let us not forget the murder, torture and displacement of the Jews under National Socialism.
  • Let us not forget the murder, torture and displacement of all the other "undesirables" under National Socialism.
  • Let us not forget the murder, torture and displacement of "undesirables" in Stalin's Russia.
  • Let us not forget the starvation in Mao's China.
  • Let us not forget the murder, torture and displacement of Armenian Christians under Ottoman Rule.
  • Let us not forget the murder, torture and displacement of native Americans under American rule.
  • Let us not forget the bombing of London during World War II.
  • Let us not forget the bombing of Dresden, Hiroshima and Nagasaki during World War II.
  • Let us not forget the murder and torture of Christians by pagans under the rule of many Roman Emperors.
  • Let us not forget the murder and torture of pagans by Christians under the rule of many Roman Emperors.
  • Let me not forget my own sins.

Guilt is a solid rock upon which morality can be built, but awareness of sin must come first.

Look not alone on youthful prime,
Or manhood's active might;
Man then is useful to his kind,
Supported is his right:
But see him on the edge of life,
With cares and sorrows worn;
Then Age and Want - O ill match'd pair! --
Shew Man was made to mourn.

'A few seem favourites of Fate,
In Pleasure's lap carest;
Yet think not all the rich and great
Are likewise truly blest:
But oh! what crowds in ev'ry land,
All wretched and forlorn,
Thro' weary life this lesson learn,
That Man was made to mourn.

'Many and sharp the num'rous ills
Inwoven with our frame!
More pointed still we make ourselves
Regret, remorse, and shame!
And Man, whose heav'n-erected face
The smiles of love adorn,--
Man's inhumanity to man
Makes countless thousands mourn!

Robert Burns

Friday, March 03, 2006

The financial road less traveled by

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I--
I took the one less traveled by,
And that has made all the difference.
Robert Frost

BIS Working Paper No. 193, ponders the profound question, Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework? Very deep. Very serious. But, if you chip away at the big words, breaking them down to a level of tangible meaning the paper admits and then almost asks, the system is broke, should we fix it? I say almost asks because it seems to me the listed "fixes" are just variations of the same themes that created the mess in the first place.

I like to think of free will as a gift of the word to man. It is, I believe, by virtue of language that man can, if he avails himself of it, see forks in the road. To me, Robert Frost's poem inspires thoughts of free will; seeing a fork in the road, contemplating which path to take with full knowledge that to take one is to not take the other, and finally taking the road less traveled by because we have a sense where the other leads.

It seems to me the thinking which informs the past century's trend towards greater financial centralization isn't really much thinking at all but simply walking the same well worn path. In yesterday's musing I noted one key aspect of the creation of the Federal Reserve, centralization of reserves.

The Federal Reserve and the Income Tax Acts, in my view, effectively ended the period of true faith in protestant democracy, by which I mean the view that any man, if he so chooses, can discern the truth for himself and moreover, the individual decisions of the many would lead to better outcomes than decisions for the many by the few. However clever the few might be at first, the power, as Tolkein's trilogy argued, and Lord Acton stated, will eventually corrupt its users.

Since the creation of central banks, in virtually each and every instance, man's designs have become bigger-bigger projects, bigger wars, and bigger problems. Getting back to the profound question asked by the BIS, I think it is fair to argue that there would be no way this problem would have ever gotten so out of hand but for the centralization of reserves in the hands of a few.

The BIS working paper, after recognizing that external imbalances are a problem that needs to be fixed offers a few options:

This leads on to the question of whether there are institutional changes that might be recommended to strengthen the international adjustment process. Three possibilities might be considered.

First, consideration could be given to going back to a more rule-based system. A number of academics and others have suggested reverting to the gold standard or establishing a single international currency. More realistically, one might recommend a small number of more formally based currency blocks (say, based on the dollar, euro and renminbi/yen), but clearly they would have to float more freely against each other.

Second, consideration could be given to a system more like that of Bretton Woods, but with the IMF accorded substantially more power to force both creditors and debtors to play their appropriate role in the international adjustment process.

Third, consideration could be given to informal cooperative solutions, based on the mutual recognition of interdependencies and the need to avoid circumstances that could lead to systemic disruptions. At the very least, this would require representatives of large creditor countries to share views with debtors as to whether problems were emerging and, if so, what policies might help resolve them.

Notice that all solutions are institutional, even when the Gold standard is raised it is in the context of a Central Bank administered, by which is meant with centralized reserves, system. These solutions seems to me to be a form of doubling down. They hope that if even greater centralization of reserves is achieved, the problems might be solved. Yet this will be so only if centralization is not the cause of the problem. If centralization is the problem, a solution of this sort merely delays the inevitable.

What's my solution? Make currency convertible, preferably but not necessarily into Gold on an individual level. Decentralize the reserves, distribute decision making. Essentially, make the financial system more like the internet, where pieces can go down but the system remain robust. If even the BIS can admit there is a large and growing problem, perhaps it is time to take the road less traveled by. After all, insanity, they say, is defined as doing the same things and expecting different results.

Formulating all these thoughts reminds me that William James both foresaw the problem and offered the solution in a much more elegant form. I'll defer to my betters and let him end this essay.

I am against bigness and greatness in all their forms, and with the invisible molecular moral forces that work from individual to individual, stealing in through the crannies of the world like so many soft rootlets, or like the capillary oozing of water, and yet rending the hardest monuments of man’s pride, if you give them time. The bigger the unit you deal with, the hollower, the more brutal, the more mendacious is the life displayed. So I am against all big organizations as such, national ones first and foremost; against all big successes and big results; and in favor of the eternal forces of truth which always work in the individual and immediately unsuccessful way, under-dogs always, till history comes, after they are long dead, and puts them on top.—You need take no notice of these ebullitions of spleen, which are probably quite unintelligible to anyone but myself.