Confessions

I do most of my writing, typing actually (I tend to contemplate the ideas and formulate the articulation lying in bed at night, driving without music and walking by myself) in my barn/office a very short walk from my home. After publishing yesterday's piece I didn't even make it into the house without the urge to edit hitting home. "Dude," I said to myself (talking to one's self seems to me an occupational habit of philosophers) "you too played at being an expert in the 90s. Had you risen to Bandow's stature would you have turned down the money?" I thought of a few instances which suggested no, but then many others which suggested otherwise. I wouldn't do it now, but I think differently about money and words now than I did then. In general I took money more seriously than words, a view that doesn't fit comfortably in my mind any longer.

1600 years or so ago, in a book which inspired this post, a man recalled his own episodes of linguistic a$-kissing for money.

I recall from the incident of the day on which I was preparing to recite a panegyric on the emperor. In it I was to deliver many a lie, and the lying was to be applauded by those who knew I was lying. My heart was agitated with this sense of guilt and it seethed with the fever of my uneasiness. For, while walking along one of the streets of Milan, I saw a poor beggar--with what I believe was a full belly--joking and hilarious. And I sighed and spoke to the friends around me of the many sorrows that flowed from our madness, because in spite of all our exertions--such as those I was then laboring in, dragging the burden of my unhappiness under the spur of ambition, and, by dragging it, increasing it at the same time--still and all we aimed only to attain that very happiness which this beggar had reached before us; and there was a grim chance that we should never attain it! Augustine of Hippo Confessions Book 6 Ch. VI

Like Augustine the African, I too played the game and wondered, at rare intervals, why. But mostly I just played the game. My critique is not meant to be from on high but from the trenches-been there, done that (whew!, glad I escaped). I understand the drive if I don't now agree with it.

I've been on TV and spoken at conferences around the world and as I recall my talks much of what I said seems to me now silly rhetorical nonsense packaged with enough of the received dogma to fool others whose studies were of equal depth as my own (lots of those) although at the time I was sure it was quite clever, though crafty seems more apt. In other words, the first person I fooled was myself. Looking back, I assume I was picked to stand as "expert" because of my ignorance, ambition and skill as rhetor. Ironically, I feel far more qualified to speak on economics now yet have almost no desire. I guess there is a difference between wanting to be thought of as someone who knows and actually learning.

As I was writing, almost as soon as I finished my last post, I felt the urge to edit but didn't, deciding instead to post a follow-up confession. I then watched a bit of TV and was almost embarrassed to recall myself doing what I was seeing on the tube. Ah, to be on TV. To have one's opinion begged. To laugh overloud at the host's jokes in order to be called on again, only to prove the wisdom of Mark Twain: it is better to remain silent and have people suspect you are a fool, than open your mouth and remove all doubt. Ah the human condition, better learn to love it, because leaving it is so terminal.

In the end I share Augustine's sense that if I could come to see how silly I was (and may still be, I'll let you know in a decade, if I'm still kicking around) there is always hope for the world.

Will the real expert please stand up

Do you remember the old American TV game show, To Tell the Truth, which popularized the phrase, "will the real ... please stand up?" I recalled the show after reading Louis Menand's review of Philip Tetlock’s new book, Expert Political Judgment: How Good Is It? How Can We Know? According to Menand's read, Tetlock's view is that people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. In other words, these so called "experts" aren't so expert in their professed field of expertise- an idea which begs the question, will the real expert please stand up?

Unlike Mr. Menand, who seems to not believe in expertise, I think there are experts in their field, but as Nietzsche warned; 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. The influence of a man has never yet grown great without his blind pupils. That is, those who truly have expertise tend to be aware of the limits therein, while their followers overstate the predictive benefits of the learned metaphors and by virtue thereof attract the greater following.

According to Mr. Menand, Mr. Tetlock thinks that we’re suffering from our primitive attraction to deterministic, overconfident hedgehogs, defined as those who “know one big thing,” aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who “do not get it,” and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. Yep those hedgehogs sound a lot like Nietzsche's blind pupils of an ideology to me.

Baudrillard's notion of the precession of simulacra comes to mind as I consider this issue. It seems to me that the problem noticed by Mr. Tetlock arises because of the assumption that if the TV or other form of media denotes someone an expert, they are, especially if they promote an idea people wish to believe. As he might put it, the term "expert" at least as portrayed in the media, has lost its meaning, its connection to the real world. The issue gets ever murkier when you consider the "payola" scams being uncovered these days.

Consider the case of Doug Bandow, ex-senior scholar at the Cato Institute, who apparently took money from indicted fraudster, Jack Abramoff, to write columns favorable to Mr. Abramoff's clients. "Expertise" it seems is a salable commodity. This may not be a surprise to anyone who has been paying attention to Wall St. and the media machine that promotes it.

The world of finance provides a wealth of examples of expertise gone awry and raises even more disturbing issues. I remember seeing Merrill Lynch's Henry Blodget on TV quite a bit before the Nasdaq bubble deflated. I wasn't surprised to discover that his "expertise" in securities investing was limited to the latter half of the 90s bull market. The surprise for me came in reading the emails that were made public during his trial. He seemed to know that he was promoting garbage. So, to the extent that one measure of expertise is ability to predict, Blodget was, in a sense, an expert in recognizing the lack of quality in the stocks he promoted, he just chose to push the more lucrative view, for him that is.

Curiouser and curiouser, as Lewis Carroll, a famous chronicler of incoherence, might have put it. Who knows, maybe some of the so called experts on TV actually are expert in their field, but they would rather promote a view for money instead of hewing to their ideals. Of course, this is not a new development among humans. The Catholic Church had great difficulty policing simony, a term whose definition grew from accepting money for positions in the church (which we might consider today to be akin to being named an expert) to taking money for absolution, also known as the sale of indulgences. Dante, who, I suspect, would have agreed with Tetlock's observations, placed the fraudulent, including Pope Nicholas III, in the eigth circle of hell. It seems to me a feature of humanity that no sooner does an institution gain favor with a population than some will move to exploit that faith.

In closing what struck me most about the review was not that such things happen, but that people are surprised that they do. Mr. Menand closes his review with the recommendation, think for yourself, which I second wholeheartedly.

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.

Ecclesiastes

.....

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.
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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.

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.

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.

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.

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.

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.

I agree with John Snow, China moves...or else

It is imperative that China move towards greater flexibility as quickly as possible. US Treasury Secretary, John Snow

The Benefits of victory in Iraq - N.S.C. Victory in Iraq
- economically, by facilitating progressive reform in the region and depriving terrorists control over a hub of the worldÂ’s economy.

Sadly, I agree both with Mr. Snow that it is imperative that China comes back into the Forex Market as international trade relations mediator paradigm and with the National Security Council brief that control over Iraq's oil fields in hands unfriendly to US interests would severely harm the national economy, inter alia.

The Forex Fumble

Never forget that it is the spirit with which you endow your work that makes it useful or futile. - Adelaide Hasse

Most readers are likely familiar with the notion, the spirit of the law, as opposed to the letter thereof. In the arena of political campaign finance, the spirit of any reform law almost always aims at the same ideal, one man, one vote-pure representative government. The intent is to stop concentrations of wealth from producing concentrations of votes. As a practical matter, this intent manifests in a series of written laws. Those who, for a variety of reasons, some of which include placing personal over systemic gain, disagree with the spirit of the laws then work diligently to get around the letter of the law. This idea of the spirit can apply, as the opening quote suggests, to all human endeavor. People can either go through the motions or do it like they mean it and eventually those observing your actions will know what drives you and act accordingly.

While the recent unsatisfying, to the extent one aim of elections is the easing of popular tensions, elections in Iraq might be a good example of the distinction between a good faith election and a going through the motions election, I'll stick to a collection of elections with which I had some first hand experience, those in Indonesia in 1997-1998.

On May 29, 1997, Golkar, the Party headed by Suharto, Indonesia's de facto dictator for the preceding three decades, increased their majority in Parliamentary elections. The result was never in doubt to those in the US House of Representatives Committee on International Relations, where, on May 7 of 1997, Rep. Berman of California stated, No one doubts that the ruling Golkar Party will once again win on May 29. Next March, I think it is everyone's expectation that President Suharto will win a seventh 5-year term.

By the end of 1997, the Asian Financial Crisis, which lists as its proximate causes, rising current account deficits and a large stock of external debt which made further debt expansion unlikely, once the hot money crowd got cold feet, was being felt in Indonesia. I was living in the region at the time and used to do quite a bit of island hopping, with Bali, just east of Java, the main island of the Indonesian archipelago, one of my favored destinations. As something of a regular I noted the stark change in attitudes around this time. Even the Balinese, noted for their non violent variant of Hinduism, were depressed and conditions in Jakarta, the capital city in Java, not known for their non-violence, were extremely tense.

In March of 1998, Suharto won election as President (surprise!) for the seventh time. As a result, tensions, which had only occasionally manifested in violence previously, boiled over. The student demonstrations became bigger and bigger, and the riots become more and more violent. By the end of May, after trying a few political tricks, like offering to change his cabinet, Suharto finally stepped down. In October of 1999, Abdurrahman Wahid was elected President in what was billed as Indonesia's "first free presidential election." Although tensions still manifest in Indonesia, that they were increasing while the people felt that they had no other option and were decreasing as people saw that they could affect change seems clear. As President Kennedy opined, Those who make peaceful revolution impossible will make violent revolution inevitable.

As an aside, I sometimes wonder if Paul Wolfowitz, now head of the World Bank but before that one of the architects of the Iraq War and notably one of those who pushed the "they will welcome us as liberators" view, based his sense of things on his experience in Indonesia in particular and SE Asia in general. Prior to his incarnation as Bush II's War Chief, Mr. Wolfowitz was Ambassador to Indonesia during the 80s. As one of the advisors to Suharto, Mr. Wolfowitz pushed a banking sector deregulation plan which set the stage for the currency implosion a decade later. Only a few months before Indonesia's financial sector was thrown into turmoil, the effects of which on the poor I saw first hand, Mr. Wolfowitz spoke to the aforenoted Committee on International Relations, clapping himself on the back for his role helping (quoting from his testimony): to not privatize the Indonesian economy, because that was a bad word, but they used the word deregulate. Does anything this guy touches turn out right? Not so far on the public stage, but then again, Ms. Hasse has perhaps suggested to us why that might be.

How sad that in 1997 you can already see the same bait and switch tactics, oh if the people think privatizing is bad, we will call it deregulation. And this was the guy who wanted to promote "democracy" to the world. What kind of democracy is it when the leaders routinely mislead the led?...a corrupt one. To avoid misunderstanding, I'm not arguing that aristocracies are inherently wrong, or democracies inherently right. What seems wrong to me is calling an aristocracy a democracy...but that, I guess, is what happens as cultures become sophisticated. Anyway, by early 1998, as part of the Project for a New American Century, Wolfowtiz and the rest of the gang, perhaps emboldened by the ease with which long standing governments were falling in SE Asia, began to push for War with Iraq. Now, back to our main program.

I use the election metaphor to allegorically describe what I sense in the forex markets these days. As elections are the theoretical means by which people are able to affect government polices, the foreign exchange markets are the theoretical means by which investors are able to affect change in economic policies. In both cases, these are the means by which the led can give feedback to the leaders.

Lets go over a bit of history to flesh out this point. The currency crises of the early 70s which led to the breakdown of the Bretton Woods system arose in part because the US was unwilling to abide by the rules of the game, and because others correctly bet that they would be unwilling, as seems to be happening now. Although the spirit of the Bretton Woods accord called for member nations to adjust their policies so as to avoid significant trade imbalances before such actions were necessary, the enforcement mechanism of calling gold to settle external debts was the supposed Sword of Damocles. Nixon's closing of the Gold window in 1971 was, in our election metaphor, like telling voters they could vote for whomever they liked so long as it was Nixon. Hit this link to read the opinion from Japan's Ministry of Finance on the topic (go to bottom of linked page)

One of the reasons behind the financial turbulence in the 70s was the lack of a system in which investors felt comfortable to invest over the long term. This isn't to suggest that financial flows ceased but rather that their character changed from longer term real sector investment to hot money, speculative flows. The foreign exchange market, which prior to the point had been a rather minor banking function, was then chosen as the new means by which external adjustments could be signaled and enforced.

By the late 1980s, when I found employment in the Forex market, it was booming. In part the boom was an effect of the profits made during the first US test of the new external account enforcement mechanism, the Plaza Accord. In the frame of this discussion, the Plaza Accord was like a free election in a time of domestic stress, proof that the players in the system could affect change and that the big guys were willing to take a hit. In terms of daily trading volumes, the Forex market has never looked back, rising from US$206 Bil in March 1986 to US$2,408 Bil in April 2004 (BIS).

In the intervening years since the Plaza Accord, many nations have suffered the ill effects of forex market mediated external account adjustments, from Britain and Italy in the early 1990s to the aforementioned SE Asian nations in the late 90s, to Russia right thereafter. Particularly in the case of the SE Asian nations, initial currency weakness led eventually to contractionary policies; higher interest rates, reduced public sector debt, and a much weaker currency. Admittedly, most of the nations in SE Asia initially tried to hide the problems, a choice which eventually left some of the former leaders in jail. Eventually, however, they all took their medicine. Generally, the forex market was proving to be a means to affect change or as Ms. Hasse might put it, people were acting in the spirit of the articles of agreement of the IMF.

As noted above, the economic prescription which follows from the forex market as signal for external adjustment will often lead to political change. Argentina, Brazil, S. Korea, Indonesia, Thailand and Russia all experienced political change in response to the contractionary economic policies of external account adjustment. As an aside, I don't think there is much a nation can do to avoid the pain of the contraction besides acting sooner, under the view that it is easier to lose 5 pounds on a diet than 50.

Following in the footsteps of the late 90s financial turmoil, attention began to turn to the United States, whose external accounts in terms of both stock (net investment position) and flow (current account) were negative and deteriorating. The collapse of the Nasdaq bubble and the election of George W. Bush, who ran on a platform including a return to responsible government that would abide by the rules, in 2000 hinted that the long awaited adjustment might be upon us. The attacks of 9/11 poured cold water on those harboring that hope. The current account deficit reported by the government was US$389B in 2001. By 2004, that deficit had climbed to banana republic status of more than 5% of GDP at US$668B and continues to increase.

Statistics like these and the historical perils to which they allude in part led investors like Warren Buffett to enter the forex markets assuming that they were the preferred vehicle by which such adjustments were instigated. This is to argue that investors, like Mr. Buffett, acted in good faith by accepting that in the new post Bretton Woods order, other currencies within the forex system would be the anti-national currency, not gold or other valued goods.

As I think on it now, keeping the economic players of the world on sides, so to write, within the paradigm they created and managed was a stunning achievement by the financial industry. In accordance with that paradigm, the US$ lost value in a fairly ordered way. By late in 2004, the speculative world was heavily short leveraged US$, perhaps with visions of those Plaza Accord profits in their heads and the financial press was abuzz with demise of the US$ stories. The writing, as they say in Daniel, was on the wall. Then, the fumble, as I see it, although in terms of history, the instant replay judges have obviously yet to rule.

In early 2005, as the USDX (an index value of the US$ vs a basket of different currencies) flirted with multi decade lows while speculators of a contrarian nature were shouting "oversold" and old timers responded with graphs of the US$'s post Plaza Accord descent, a curious thing happened, at least with respect to the forex market as adjustment mechanism paradigm. The US$ failed to break to new lows. Perhaps it was just recalcitrance on the part of the US, intransigence by the Chinese, the inherent flaw in the system which is that you really can't force the guy in charge, he must submit voluntartily, or more likely some combination of those and other factors, including the sense behind this bon mot via Stephen Roach, We all know these imbalances you speak of are unsustainable -- we just can’t afford to focus on the endgame. There's a slice of wisdom for ya, being unable to afford to focus on the end game, which is admitted to be inevitable. Reality, in my view, bites hard for people who live within that paradigm.

By the middle of this year, the US$ had recovered nearly 10% from its nadir. Just recently, I see that the fumble was picked up by the other team, so to write. While a few countries like Argentina, who had earlier thumbed its nose at the IMF, had been buying gold as reserves it was only recently that Russia's Central Bank, which used to speak of, and in fact, implemented the policy of decreasing the percentage of US$ in its reserves by buying Euros, announced they would be doubling the percentage of current reserves they denominate in Gold. I also see that Warren Buffett has begun exiting his US$ shorts, and taking a bit of a loss in the process. This is where I see the true faux pas. Buffett, as far as I know, was not a leveraged speculator but a true asset hedger. His US$ sales were attempts to shield his clients from the inevitable effects of overdue government policy. He, and others who acted within the paradigm put forward by the financial world acted in good faith and got smoked.

One cost of this process is that the commodity inflation that would have been visited on the US has been shared with the rest of the world. That is, the US$ didn't rise over the past 12 months, all the other currencies just lost more ground versus goods and services. This is a sign to me that this resolution is not to be forestalled much longer. Another, and I think more costly error for those hoping to keep the investing world within the current financial paradigm, is the loss of faith, the experience of a rigged election, if you will. If the forex markets are not going to be the vehicle through which external account adjustments are mediated, and given that the effects of the adjustment, by virtue of the US$'s position as reserve currency, will extend far beyond US shores, the political will to take that route seems small, then investors will look for alternatives. That is, if being short US$ in the forex markets is no longer a hedge against a depreciating US$, then Gold, which has been the anti-national currency of choice for millennia, seems the next obvious choice.

Given the decoupling of Gold to the US$ in 2005, perhaps other investors are of like mind. Speculators in 2004 had made great money buying Gold when the Euro rose and vice versa. This year, however, Gold is breaking out in all currencies, while the US$ gains within the forex system. The game laid out in the IMF's articles of agreement seems to be at a crucial point. The desire to divest from the US$ seems strong but like Hotel California, it seems like you can check out any time you like, but you can never leave. Either the US$ begins to decline within the forex exchange system, with US-Asia rates bearing much of the change thus validating the post Bretton Woods paradigm, or this new game of token currencies will end. The good faith, engendered by the decision in 1985 to abide by the spirit of the agreement, will ebb.

In a sense it is kind of ironic, the problem, as I see things, with the old systems of bi-mettalism, gold standard, or gold exchange standard, to name a few, weren't with the systems themselves but rather in finding the will to go along with the rules, to act in accord with the spirit of the agreement, whatever it was. You can build the most high tech scale we want, write the most complex law, and devise the most intricate computer monitoring system, but it won't do any good unless you are willing to change your behavior.

The benign metaphysics of Ms. Baum

While reading Ms. Baum's latest views, which strike me more as demagoguery than argument, it becomes quite clear that one of us will look the fool in the medium term. I think the key distinction in the articulation of the opposing views, rather than the substance of the arguments, is that I am aware of this possibility. One of the reasons I am so dogmatic about inserting "in my view" or "as I see things" in my writing is to remind both myself and all 3 of my readers that my views are just views. Views are much easier to change when new facts come to one's awareness or old facts are seen in a new light than an accepted metaphysics. As Aristotle noted, it is the mark of an educated mind to be able to entertain an idea without accepting it.

To which elements do I refer when I sense more demagoguery than argument? Take her description of Safehaven website, a site I've enjoyed for many years, as a place "where fantasy and reality mix" or the liberal peppering of "conspiracy theory" throughout the essay as examples. Methinks she reads the site with closed mind. Intriguingly, she holds up as as "far-out" a view which is as unfounded as hers, that of Robert McHugh. This isn't to dispute his view, but merely to suggest that ultimately, "why" the Fed chose to drop M3 reporting will be seen in light of their future actions. Mr. McHugh may be correct or Ms. Baum may prove correct, but neither is correct now, the experiment has yet to run its course.

I chuckled a bit reading her newest essay in light of my last post. While in my chosen world view, exposed in my last post, judgments about events can change as their effects become clearer, in my read of Ms. Baum's world, judgments quickly become unalterable truth. Notice how quickly she concludes; "So while the discontinuation of a series [M3] very few people pay attention to may have been a surprise, it was not nefarious. Nor was it a prelude to a massive, secretive money-printing operation on the part of the Fed, which is how the hard-core conspiracy theorists are playing it. " Perhaps that will prove to be true and perhaps not. I'll wait to see what happens in the first year of no M3 data before jumping to any conclusions.

As a general proposition, it seems to me that the more data presented to investors, the more likely can those investors draw reasoned conclusions about the corporation in question, be that corporation the Fed, GE or Enron. By the same token, the less data presented the less likely can investors draw reasoned conclusions. I wouldn't go so far as to argue that less data always means something is being hidden but rather that something might be being hidden. The Bank of Thailand spent the first half of 1997 delaying the release of current account data, a choice which later came to be seen, in the aftermath of the Asian Crisis, as nefarious. Who knows, maybe the Fed is earnest about their reasons for terminating the series. Of course, if the US finds it harder to finance its deficits and resorts to monetizing debt, the resultant inflation will likely lead people to view that policy choice as a poor one. The intent of the Fed won't matter in the post hoc analysis, only the effects.

Woodward as Rorschach

In every object there is inexhaustible meaning; the eye sees in it what the eye brings means of seeing. Thomas Carlyle

In these days when institutional education is more and more devoted to getting the "right" answer on multiple choice tests, some people are, perhaps unintentionally, taught that regurgitating a common answer is thinking. As the philosophically minded might put it, the art of discerning your own truth has been replaced by the acceptance of a common metaphysics, an oft recurring phenomena of human consciousness through time. The idea of soul as something to be fed and nurtured gets replaced by a more materialist notion of brain, in the current variation, a brain that naturally evolves and thus needs little maintenance. Afflictions of the soul from a century ago are now thought of as mental illnesses.

Thomas Szasz argues that mental illness, absent some organic dysfunction, is a myth. Insanity, in his way of thinking, with which I agree, is just a term man uses for, at best, non-normative thoughts or radically unique perspectives. Sanity then, in popular usage, would be evidenced by "normal" thoughts. In the US this might include some sense of the date, season, President, and perhaps sports teams. As late night comedians are wont to point out, these "normal" thoughts would probably not include, say, the names of the two sides who fought in the Civil War.

I sometimes wonder if the idea of "mental illness" springs from the view that "truth" is this thing which naturally just finds its way into your head, perhaps with a little help from public education, or the great god TV, rather than Truth, into which the totality of human experience fits easily- a totality comprised of each individual perspective through time, obviously far too much data for any human to even remotely grasp. When "truth" with a small "t" is missing from someone's head, in the "parlance of our times", they must be mentally ill. The risk, as I see things, in this view of truth is that it will, over time, prove confusing. For in this simple ideal version of truth, governments and other institutions are virtuous, natural disasters can be avoided and the good guys always win in the short run. This view of the truth can be found in the most curious of places.

Contra this small notion of truth, Ralph Waldo Emerson argues, man is explicable by nothing less than all his history...epoch after epoch, camp, kingdom, empire, republic, democracy, are merely the application of this manifold spirit to the manifold world. The notion of one soul's "portion" or slice of that totality of human experience seems clear in Emerson's world view.

The world views of Emerson, Carlyle and Szasz share a sense of humble perspective. Life, in that frame of mind is a kind of rorschach or ink blot test for everyone. What you "see" is at least as much evidence of your mind than the objects to which you refer. As it takes practice to hit a golf ball, hockey puck or soccer ball with any proficiency, I contend it takes practice to develop a sense of a durable truth of the times relevant to one's own self rather than acceptance of a popular mythology which fails. To cast the notion in current economic lingo, thinking is not something one should ever "outsource."

These thoughts were inspired in contemplation of Bob Woodward's admission that, in the course of interviews for a book on the Iraq War, he was one of the first journalists to whom Valerie Plame's identity as CIA agent was revealed. During my recent trip out to the mid-west I read Sy Hersh's, Chain of Command. Upon my return I read most of Woodward's Plan of Attack and the notion of life as Rorschach test popped into my head. I wondered, if Sy Hersch had the same access to those in power, what kind of book would he write? If Bob Woodward didn't have that access, what kind of book would he write? These are, in some sense, silly questions as the access or lack thereof is at least a function of a lifetime of choices. Woodward seems to me to be as unlikely to endanger his access as Hersh would be to court it.

As an aside, I'm not arguing that one perspective is better than the other. Read them both. I found the synthesis of Woodward's view of the inner sanctum and Hersh's view of the practical effects thereof fascinating. Better yet, let Woodward go through the ringer and read the next book he writes, I'll bet it will be a doozy.

I was also intrigued to see that the "few bad apples" defense seems just about as useful now with respect to Abu Ghraib as it was 9 centuries ago when Henry II's wondering aloud, will no one rid me of this troublesome priest led to Thomas Becket's murder. In the 12th Century English version, Henry avoids the excommunication imposed on the 4 Knights who acted on his words. Who could have suspected (asked with tongue firmly placed in cheek) that some might zealously carry out the expressed wishes of those in power.

These thoughts also led me to revisit my argument with Ms. Baum's (et. al.) notion that if there was some collusion between public and private sector financial institutions to enforce price levels, that there would be evidence and it would be revealed. Well, not if the financial equivalents of Bob Woodward are the only people with access, there wouldn't. And, I think that is the case. Those with access to "smoking guns" rarely spill the beans because they don't think there are any beans to spill. Those who think there are beans to spill are usually on the outside peering at the effects of inscrutable policy.

Judging by Woodward's public comments on the Plame matter, he certainly didn't think there were any beans to spill. "No crime here," just a bit of "chatter," according to this half of the Watergate gadfly duo. Perhaps underneath these public comments is the sense acquired from years of observation that similar things happen all the time in Washington and it isn't a big deal. While this may be true, it is immaterial. As many people are about to learn, "crime" is whatever a prosecutor can prove to a jury. When the mandate of heaven vanishes as it is wont to do from time to time, the action thought to have been committed with the best of intentions becomes a malicious deed. This is the peril of using ends to justify means, if the ends aren't seen to materialize you're already in trouble over the means.

There are many means by which "economic stability is ensured", "the homeland is protected", and "the common good promoted" among other lofty ends. Usually, at least as I understand history, it isn't until it is blindingly obvious that economic stability has been lost, the homeland is under attack and the common good is not even a concern for the ruling class that the means by which these goals were meant to be achieved come under scrutiny. As George Washington put it, according to Ellis' His Excellency, the people must feel before they can see. Falling back on the lost language of the soul, revelation is that change of spirit when one feels sufficiently to begin to see things in a new light.

That the American Revolution is generally seen as a virtuous exercise in the US, according to the Pragmatist frame of mind, is a function of its effects-good fruit coming from good trees. Had Gulf War II produced the effects of Gulf War I, Woodward's sense of "no crime here" might prove accurate. The same behind the scenes debates that filled The Commanders fills Plan of Attack. It is only that with the virtue of hindsight, those who forced their view into action are seen in light of the effects of those actions. Washington lost quite a few battles and, according to Ellis made some poor military decisions. Had Britain won, his fate would have been far different, such are the ways of men. Returning to the present, I would not be surprised to find that equally nasty affairs attended the implementation of Gulf War I, but with the ends so fruitful, the means were not questioned. That is the risk you run when you play in the big sand box, whether that sand box is the Vatican, the court of Charlemagne, the board room of the Dutch East India Company or the court of Kublai Khan.

All of which brings me back to hidden nasties I believe lurk in the global derivatives markets. As a general proposition, in our truth with a small "t", the past 2 decades have been very good for financial institutions, their share of global corporate profits has gained substantially under the Greenspan Fed. They are the protected industry. Yet as even Greenspan noted, that success breeds it own risks. Just as it takes a War gone bad, and likely needing to get worse still before real political reform occurs, it will take a big default to lead the elite to look under the hood of the derivative machine. Refco and the copper default out of China might just be warning signs of an impending big default, perhaps one of the London or NY commodity markets or more dire still, perhaps the new oil industry contracts being signed under the aegis of the newly imposed Iraqi constitution will prove, in the end, to be in default. In a sense it all ties together. An out of control financial industry leading to out of control dreams of world dominance. Each myth needs the other to survive.