Adonis Diaries

Posts Tagged ‘financial crisis

Monkey businesses?

Note: Linked to the current financial crisis

Nutty Monkey Business (2002)

1.   Some tribes catch monkeys

Using a nut business contraption.

Other tribes use a banana’s contraption.

A sturdy box is firmly planted in the ground

With a nut or banana inside.

 

A hole is made large enough to let in the monkey hand

And small enough for a clenched fist out on the goody.

 

2.   Survival is a chance happening

Favoring the cowards or close,

Until we learn a few dangers

By trial and error.

 

Apparently, greed is one danger

We are not fit to learn to relinquish,

Monkey or no monkey.

 

By fetishising mathematical models, economists turned economics

into a highly paid pseudoscience, The new astrology

by Alan Jay Levinovitz

Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest.

In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major.

In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme.

The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes.

Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.

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Economic theory is caught up with abstract theories rooted in shaky hypotheticals. By mistaking mathematical models for empirical science, economists have become like astrologers, peddling ideas that a public is hungry to believe. Last week’s most-read: ow.ly/10cjf0

But despite the funding crunch, it’s a bull market for academic economists.

According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists.

For the top 10%  of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering.

These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)

Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline.

Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories.

Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect.

In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.

The failure of the field to predict the 2008 crisis has also been well-documented. (I think many predicted the coming catastrophe: The timing was political in nature)

In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’.

Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’.

What is the basis of this collective faith, shared by universities, presidents and billionaires?

Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?

In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps.

But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. (Math models should be generated from actual data, and Not used to generate hypothetical numbers)

As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan.

To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas.

‘An astrologer’ is, in fact, the Oxford English Dictionary’s second definition of ‘mathematician’. For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs.

The best astrology required the best astronomy, and the best astronomy was done by mathematicians – exactly the kind of person whose authority might appeal to bankers and financiers.

In fact, when Adams was arrested in 1914 for violating a New York law against astrology, it was mathematics that eventually exonerated her.

During the trial, her lawyer Clark L Jordan emphasised mathematics in order to distinguish his client’s practice from superstition, calling astrology ‘a mathematical or exact science’. Adams herself demonstrated this ‘scientific’ method by reading the astrological chart of the judge’s son.

The judge was impressed: the plaintiff, he observed, went through a ‘mathematical process to get at her conclusions… I am satisfied that the element of fraud… is absent here.’

Romer compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism

The enchanting force of mathematics blinded the judge – and Adams’s prestigious clients – to the fact that astrology relies upon a highly unscientific premise, that the position of stars predicts personality traits and human affairs such as the economy. It is this enchanting force that explains the enduring popularity of financial astrology, even today.

The historian Caley Horan at the Massachusetts Institute of Technology described to me how computing technology made financial astrology explode in the 1970s and ’80s.

‘Within the world of finance, there’s always a superstitious, quasi-spiritual trend to find meaning in markets,’ said Horan. ‘Technical analysts at big banks, they’re trying to find patterns in past market behaviour, so it’s not a leap for them to go to astrology.’

In 2000, USA Today quoted Robin Griffiths, the chief technical analyst at HSBC, the world’s third largest bank, saying that ‘most astrology stuff doesn’t check out, but some of it does’.

Ultimately, the problem isn’t with worshipping models of the stars, but rather with uncritical worship of the language used to model them, and nowhere is this more prevalent than in economics.

The economist Paul Romer at New York University has recently begun calling attention to an issue he dubs ‘mathiness’ – first in the paper ‘Mathiness in the Theory of Economic Growth’ (2015) and then in a series of blog posts.

Romer believes that macroeconomics, plagued by mathiness, is failing to progress as a true science should, and compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism.

Mathematics, he acknowledges, can help economists to clarify their thinking and reasoning. But the ubiquity of mathematical theory in economics also has serious downsides: it creates a high barrier to entry for those who want to participate in the professional dialogue, and makes checking someone’s work excessively laborious. Worst of all, it imbues economic theory with unearned empirical authority.

‘I’ve come to the position that there should be a stronger bias against the use of math,’ Romer explained to me. ‘If somebody came and said: “Look, I have this Earth-changing insight about economics, but the only way I can express it is by making use of the quirks of the Latin language”, we’d say go to hell, unless they could convince us it was really essential. The burden of proof is on them.’

Right now, however, there is widespread bias in favour of using mathematics. The success of math-heavy disciplines such as physics and chemistry has granted mathematical formulas with decisive authoritative force. Lord Kelvin, the 19th-century mathematical physicist, expressed this quantitative obsession:

When you can measure what you are speaking about and express it in numbers you know something about it; but when you cannot measure it… in numbers, your knowledge is of a meagre and unsatisfactory kind.

(The irony is that economics can be measured, and the math models are attempts to fit the massive data of all kinds of measures)

The trouble with Kelvin’s statement is that measurement and mathematics do not guarantee the status of science – they guarantee only the semblance of science. When the presumptions or conclusions of a scientific theory are absurd or simply false, the theory ought to be questioned and, eventually, rejected.

The discipline of economics, however, is presently so blinkered by the talismanic authority of mathematics that theories go overvalued and unchecked. (Should be at least evaluated at each crisis and changed)

Romer is not the first to elaborate the mathiness critique.

In 1886, an article in Science accused economics of misusing the language of the physical sciences to conceal ‘emptiness behind a breastwork of mathematical formulas’.

More recently, Deirdre N McCloskey’s The Rhetoric of Economics (1998) and Robert H Nelson’s Economics as Religion (2001) both argued that mathematics in economic theory serves, in McCloskey’s words, primarily to deliver the message ‘Look at how very scientific I am.’

After the Great Recession, the failure of economic science to protect our economy was once again impossible to ignore.

In 2009, the Nobel Laureate Paul Krugman tried to explain it in The New York Times with a version of the mathiness diagnosis. ‘As I see it,’ he wrote, ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.’ Krugman named economists’ ‘desire… to show off their mathematical prowess’ as the ‘central cause of the profession’s failure’. (At least the models should be simple for the financial people understand what they are applying)

The mathiness critique isn’t limited to macroeconomics.

In 2014, the Stanford financial economist Paul Pfleiderer published the paper ‘Chameleons: The Misuse of Theoretical Models in Finance and Economics’, which helped to inspire Romer’s understanding of mathiness.

Pfleiderer called attention to the prevalence of ‘chameleons’ – economic models ‘with dubious connections to the real world’ that substitute ‘mathematical elegance’ for empirical accuracy.

Like Romer, Pfleiderer wants economists to be transparent about this sleight of hand. ‘Modelling,’ he told me, ‘is now elevated to the point where things have validity just because you can come up with a model.’

The notion that an entire culture – not just a few eccentric financiers – could be bewitched by empty, extravagant theories might seem absurd. How could all those people, all that math, be mistaken?

This was my own feeling as I began investigating mathiness and the shaky foundations of modern economic science. Yet, as a scholar of Chinese religion, it struck me that I’d seen this kind of mistake before, in ancient Chinese attitudes towards the astral sciences.

Back then, governments invested incredible amounts of money in mathematical models of the stars. To evaluate those models, government officials had to rely on a small cadre of experts who actually understood the mathematics – experts riven by ideological differences, who couldn’t even agree on how to test their models.

And, of course, despite collective faith that these models would improve the fate of the Chinese people, they did not.

Astral Science in Early Imperial China, a forthcoming book by the historian Daniel P Morgan, shows that in ancient China, as in the Western world, the most valuable type of mathematics was devoted to the realm of divinity – to the sky, in their case (and to the market, in ours).

Just as astrology and mathematics were once synonymous in the West, the Chinese spoke of li, the science of calendrics, which early dictionaries also glossed as ‘calculation’, ‘numbers’ and ‘order’. Li models, like macroeconomic theories, were considered essential to good governance.

In the classic Book of Documents, the legendary sage king Yao transfers the throne to his successor with mention of a single duty: ‘Yao said: “Oh thou, Shun! The li numbers of heaven rest in thy person.”’

China’s oldest mathematical text invokes astronomy and divine kingship in its very title – The Arithmetical Classic of the Gnomon of the Zhou. The title’s inclusion of ‘Zhou’ recalls the mythic Eden of the Western Zhou dynasty (1045–771 BCE), implying that paradise on Earth can be realised through proper calculation.

The book’s introduction to the Pythagorean theorem asserts that ‘the methods used by Yu the Great in governing the world were derived from these numbers’. It was an unquestioned article of faith: the mathematical patterns that govern the stars also govern the world.

Faith in a divine, invisible hand, made visible by mathematics. No wonder that a newly discovered text fragment from 200 BCE extolls the virtues of mathematics over the humanities. In it, a student asks his teacher whether he should spend more time learning speech or numbers. His teacher replies: ‘If my good sir cannot fathom both at once, then abandon speech and fathom numbers, [for] numbers can speak, [but] speech cannot number.’

Modern governments, universities and businesses underwrite the production of economic theory with huge amounts of capital. The same was true for li production in ancient China. The emperor – the ‘Son of Heaven’ – spent astronomical sums refining mathematical models of the stars.

Take the armillary sphere, such as the two-metre cage of graduated bronze rings in Nanjing, made to represent the celestial sphere and used to visualise data in three-dimensions. As Morgan emphasises, the sphere was literally made of money. Bronze being the basis of the currency, governments were smelting cash by the metric ton to pour it into li. A divine, mathematical world-engine, built of cash, sanctifying the powers that be.

The enormous investment in li depended on a huge assumption: that good government, successful rituals and agricultural productivity all depended upon the accuracy of li.

But there were, in fact, no practical advantages to the continued refinement of li models. The calendar rounded off decimal points such that the difference between two models, hotly contested in theory, didn’t matter to the final product.

The work of selecting auspicious days for imperial ceremonies thus benefited only in appearance from mathematical rigour. And of course the comets, plagues and earthquakes that these ceremonies promised to avert kept on coming.

Farmers, for their part, went about business as usual. Occasional governmental efforts to scientifically micromanage farm life in different climes using li ended in famine and mass migration.

Like many economic models today, li models were less important to practical affairs than their creators (and consumers) thought them to be. And, like today, only a few people could understand them.

In 101 BCE, Emperor Wudi tasked high-level bureaucrats – including the Great Director of the Stars – with creating a new li that would glorify the beginning of his path to immortality. The bureaucrats refused the task because ‘they couldn’t do the math’, and recommended the emperor outsource it to experts.

The equivalent in economic theory might be to grant a model high points for success in predicting short-term markets, while failing to deduct for missing the Great Recession

The debates of these ancient li experts bear a striking resemblance to those of present-day economists.

In 223 CE, a petition was submitted to the emperor asking him to approve tests of a new li model developed by the assistant director of the astronomical office, a man named Han Yi.

At the time of the petition, Han Yi’s model, and its competitor, the so-called Supernal Icon, had already been subjected to three years of ‘reference’, ‘comparison’ and ‘exchange’. Still, no one could agree which one was better. Nor, for that matter, was there any agreement on how they should be tested.

In the end, a live trial involving the prediction of eclipses and heliacal risings was used to settle the debate.

With the benefit of hindsight, we can see this trial was seriously flawed. The helical rising (first visibility) of planets depends on non-mathematical factors such as eyesight and atmospheric conditions. That’s not to mention the scoring of the trial, which was modelled on archery competitions (Unrelated measure, Not measuring valid parameter). Archers scored points for proximity to the bullseye, with no consideration for overall accuracy. The equivalent in economic theory might be to grant a model high points for success in predicting short-term markets, while failing to deduct for missing the Great Recession.

None of this is to say that li models were useless or inherently unscientific. For the most part, li experts were genuine mathematical virtuosos who valued the integrity of their discipline. Despite being based on inaccurate assumptions – that the Earth was at the centre of the cosmos – their models really did work to predict celestial motions.

Imperfect though the live trial might have been, it indicates that superior predictive power was a theory’s most important virtue. All of this is consistent with real science, and Chinese astronomy progressed as a science, until it reached the limits imposed by its assumptions.

However, there was no science to the belief that accurate li would improve the outcome of rituals, agriculture or government policy.

No science to the Hall of Light, a temple for the emperor built on the model of a magic square. There, by numeric ritual gesture, the Son of Heaven was thought to channel the invisible order of heaven for the prosperity of man. This was quasi-theology, the belief that heavenly patterns – mathematical patterns – could be used to model every event in the natural world, in politics, even the body.

Macro- and microcosm were scaled reflections of one another, yin and yang in a unifying, salvific mathematical vision. The expensive gadgets, the personnel, the bureaucracy, the debates, the competition – all of this testified to the divinely authoritative power of mathematics.

The result, then as now, was overvaluation of mathematical models based on unscientific exaggerations of their utility.

In ancient China it would have been unfair to blame li experts for the pseudoscientific exploitation of their theories. These men had no way to evaluate the scientific merits of assumptions and theories – ‘science’, in a formalised, post-Enlightenment sense, didn’t really exist.

But today it is possible to distinguish, albeit roughly, science from pseudoscience, astronomy from astrology. Hypothetical theories, whether those of economists or conspiracists, aren’t inherently pseudoscientific. Conspiracy theories can be diverting – even instructive – flights of fancy. They become pseudoscience only when promoted from fiction to fact without sufficient evidence.

(But for no avail. Experimental minds to learn how to design and run experiments are Not formed in schools, even in most universities)

Romer believes that fellow economists know the truth about their discipline, but don’t want to admit it. ‘If you get people to lower their shield, they’ll tell you it’s a big game they’re playing,’ he told me. ‘They’ll say: “Paul, you may be right, but this makes us look really bad, and it’s going to make it hard for us to recruit young people.”’

Demanding more honesty seems reasonable, but it presumes that economists understand the tenuous relationship between mathematical models and scientific legitimacy.

In fact, many assume the connection is obvious – just as in ancient China, the connection between li and the world was taken for granted. When reflecting in 1999 on what makes economics more scientific than the other social sciences, the Harvard economist Richard B Freeman explained that economics ‘attracts stronger students than [political science or sociology], and our courses are more mathematically demanding’.

In Lives of the Laureates (2004), Robert E Lucas Jr writes rhapsodically about the importance of mathematics: ‘Economic theory is mathematical analysis. Everything else is just pictures and talk.’ Lucas’s veneration of mathematics leads him to adopt a method that can only be described as a subversion of empirical science:

The construction of theoretical models is our way to bring order to the way we think about the world, but the process necessarily involves ignoring some evidence or alternative theories – setting them aside. That can be hard to do – facts are facts – and sometimes my unconscious mind carries out the abstraction for me: I simply fail to see some of the data or some alternative theory.

Even for those who agree with Romer, conflict of interest still poses a problem. Why would skeptical astronomers question the emperor’s faith in their models? In a phone conversation, Daniel Hausman, a philosopher of economics at the University of Wisconsin, put it bluntly: ‘If you reject the power of theory, you demote economists from their thrones. They don’t want to become like sociologists.’

George F DeMartino, an economist and an ethicist at the University of Denver, frames the issue in economic terms. ‘The interest of the profession is in pursuing its analysis in a language that’s inaccessible to laypeople and even some economists,’ he explained to me. ‘What we’ve done is monopolise this kind of expertise, and we of all people know how that gives us power.’

Every economist I interviewed agreed that conflicts of interest were highly problematic for the scientific integrity of their field – but only tenured ones were willing to go on the record. ‘In economics and finance, if I’m trying to decide whether I’m going to write something favourable or unfavourable to bankers, well, if it’s favourable that might get me a dinner in Manhattan with movers and shakers,’ Pfleiderer said to me. ‘I’ve written articles that wouldn’t curry favour with bankers but I did that when I had tenure.’

when mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience

Then there’s the additional problem of sunk-cost bias.

If you’ve invested in an armillary sphere, it’s painful to admit that it doesn’t perform as advertised. When confronted with their profession’s lack of predictive accuracy, some economists find it difficult to admit the truth.

Easier, instead, to double down, like the economist John H Cochrane at the University of Chicago. The problem isn’t too much mathematics, he writes in response to Krugman’s 2009 post-Great-Recession mea culpa for the field, but rather ‘that we don’t have enough math’. Astrology doesn’t work, sure, but only because the armillary sphere isn’t big enough and the equations aren’t good enough.

If overhauling economics depended solely on economists, then mathiness, conflict of interest and sunk-cost bias could easily prove insurmountable. Fortunately, non-experts also participate in the market for economic theory.

If people remain enchanted by PhDs and Nobel Prizes awarded for the production of complicated mathematical theories, those theories will remain valuable. If they become disenchanted, the value will drop.

Economists who rationalise their discipline’s value can be convincing, especially with prestige and mathiness on their side. But there’s no reason to keep believing them. The pejorative verb ‘rationalise’ itself warns of mathiness, reminding us that we often deceive each other by making prior convictions, biases and ideological positions look ‘rational’, a word that confuses truth with mathematical reasoning.

To be rational is, simply, to think in ratios, like the ratios that govern the geometry of the stars.

Yet when mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience. The result is people like the judge in Evangeline Adams’s trial, or the Son of Heaven in ancient China, who trust the mathematical exactitude of theories without considering their performance – that is, who confuse math with science, rationality with reality.

There is no longer any excuse for making the same mistake with economic theory. For more than a century, the public has been warned, and the way forward is clear.

It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies, but who fail, like astrologers before them, at prophecy.

Liquidity is meant for the Internal market. Competitiveness is for External market?

Should the level of “Life-Style” be the same among the competitive and the challenged productive states within a Union?

This is not a fair condition to impose on States that managed to sacrifice and work hard for better life conditions.

States in financial crisis must have ready lists of 4 categories of enterprises:

1. The public institutions that are critical in the smooth transmission of liquidity to the various economic sectors

2. The mixed State/Private entities that have locations in many regions of the State and employ many citizens

3. The nationwide private companies

4. The medium and small productive companies that serve their local provinces

It is well know that medium and small productive companies constitute 70% of State production that cater for the internal market needs.

Any shortage in liquidity in these small private companies  and employment hit the roof and the citizens experience shortages in most commodities.

Giving priority to the local economies in the distribution (infusion) of liquidity is the first step in preventing mass unemployment.

There are public economic sectors that cater to the general public needs, such as energy, water and transportation… and the stabilization of these functional sectors in matter of maintenance is another urgent priority.

Before the internal market is reinvigorated and underway, it is of no use planning for the export sections to external markets in order to get the influx of “hard currencies”

Stability and security are the basis for a shift toward State development.

Having the autonomy to print money in period of liquidity shortage is the key for stabilizing the internal market.

The disadvantage resides in the society structure that favor the oligarchy and wealth disparity that eliminate the benefit of printing more money.

The crisis in Greece, Ireland, Portugal, Spain and Italy have demonstrated that it is a priority that a State has to reform its public service institutions to discard redundant and politically influenced service appointments.

Without a drastic realization that the political structure should be reformed, and for actually feel the pain associated with uneven equal rights to jobs and opportunities in the institutions, all the remaining reforms will be within the “patching” process.

The crisis in Greece was deep rooted because it lacked the two preconditions: Lousy political structure and not having the right to print money.

Ireland, Portugal, Spain and Italy had political structures that could remedy to the “unfairly” political conditions and to reform the system within the single Euro currency.

The EU has learned the lesson:

1. First, the State that asks to join the union zone must demonstrate that it is serious to undertake political reforms and the structure be designed to react in timely manners to situations of political reforms.

Many States have been included based on historical and ideological “myths” that didn’t match their current unstable realities.

The EU dominant responsibility is to gradually transform the States who applied to join the union into politically viable structure.

The States in waiting must acknowledge that it takes time to achieve stable and valid political structure.

How a poor and unstable State can become competitive in the external market? This is an impossible condition to withhold liquidity infusion that is meant to support local companies.

The “productively challenged States” in the Euro zone should not expect the same level of life-style as the most competitive among them.

And equal rights in life-style is not an equitable and sustainable demand on State basis.

 

Applications of Black Swan model to “Spring revolts” and the financial crisis

It might be good to read the concept of Black Swan before engaging part 2, but I will do my best for this article to be self-contained: https://adonis49.wordpress.com/2011/06/01/part-1-black-swan-model-can-rare-catastrophic-events-of-man-made-systems-be-controlled/

A few captions: “As it was predictable, the unexpected happened”; or “Excuse the catastrophe:  I am still getting familiar with the system”; or the adage: “If an event can occur, it will happen”, meaning, it does not matter how low the predicted probability of occurrence of the rare events, it will strike “unexpectedly”.

In a nutshell, the Black Swan theory states: “In complex systems, especially man-made complex systems, it is not feasible to comprehend all the interactions among the hundred of variables affecting outcomes. In man-made systems, we have to allow natural fluctuations that are at work.  The rare predicted calamitous events  will strike unexpectedly, and we will fail to react accordingly and adequately if we consciously avoid to consistently take them into consideration in our analysis and reports.”

What led manking to progress is due to periods of liberty in thinking, expressions, and free gathering, rather than the enduring periods of peace, as people were constrained to think within dogmatic ideologies (religious or others)

For politicians and decision-makers, risks must be visible and pragmatically pertinent to relay to the voters. The adage “Better fail early if we have to” is accepted by policy makers, but rarely applied in due time:  It is always too late to remedy efficiently and economically.  For example, democratic systems know that they are better off if dictators fall early on, but the powerful financial institutions beg to differ. The elite classes in “democratic systems” opted to negotiate with “reliable” potentates, rather demanding a referendum of the people on key issues.  For example, the Romans would not sign a contract except with “free men”, behaving according to Roman civil laws, but western democracies felt comfortable and expedient consorting with dictators and absolute monarchs.

We are better equipped to predicting lunar eclipses, but not stock evolution, or foreign political upheavals.  It is NOT the “last grain of sand that crashed the structure or the bridge…”  The last grain was the catalyst for the failure but not the cause.  The fault is in the designed system, and not in its components.

First case-example: The financial crisis of 2008 and its repercussions.  The “subprime” was not the cause of the financial crisis in 2008: It was just the latest among the catalysts of financial tools.  The last two decades witnessed several successive financial crisis that affected most States around the world: Latin America (Argentina), East Asia in the 90’s, Russia…

Actually, if the western European States decided to adopt a unique currency for the EU in 2000, it was because, given the political trend in the US refusing to regulate the financial institutions, they expected a major financial crisis and decided to face it as one block with one currency.

The cause was a faulty financial system that the political decision-makers failed to redesign in due time, requiring courageous and determined positions to ironing-out the serious problems growing out of proportions in risky behaviors, in an unregulated system, and in instantaneous pouring of massive liquidity to “stabilizing” a fragile outmoded designed and faulty system.

The first bias is our illusion in our capacity to control volatility in man-made complex systems. For example, we focus on the “normal working” of a system and we delete from our analysis and reports the minor fluctuations or rare events that are occasionally occurring.  In a sense, if there are no variations, there are no information worth controlling.  This tendency of feeling very comfortable dealing with only a “stable” system leads to forgetting the consequences of calamitous rare events.

The second psychological bias is the illusion that acting on a factor is better than doing nothing and letting the system work-out its fluctuations.  For example, authorities think or are pressured to think that they were elected or appointed to act and react on any variations, instead of doing nothing when fluctuations are within the norm.  Consequently, it is these actions that usually exacerbate a system going bad and out of proportion.  For example, Alan Greenspan and later Ben Bernanke lowering the central bank interest rates to almost negative rates in order to “stabilize” a fragile faulty financial system that needed major redesign.

Second case-example:  The “Arab Spring” revolts.  The upheaval started in Tunisia and Egypt and spread to other “Arabic” societies and overflew to European States.  President barack Obama blamed the incapacity of the CIA to failure to foresee the coming turmoils.  The CIA, as any other public institutions, works within the larger framework of focusing attention on models of “Big moderation”, and the illusion of being in control of the models they are using and have conceived and tampered with.

Since any complex model has inherent fluctuations, total and permanent control on power could not be maintained. In dictator regimes, opposition parties are repressed.  Consequently, democratic oppositions were demobilized, opposition activists seeked exile to resume their engagement from the outside, every expression, association, and community gathering were to be prohibited or tightly controlled. History demonstrates that the more constraints are imposed on naturally volatile society, the more radical are the changes.

For example, Italy has witnessed more government changes in the last century than any other democratic systems, but the changes oscillated stably around a point of equilibrium:  A change in power rapport among coalition forces could not annihilate the other opposition forces. Italy has true political parties with programs and policies.  The election laws in Italy are among the fairest and most equitable in the western States.  Frequent changes in governments didn’t prevent Italy to continue being among the leading economic powers in the world.  Italy is very generous in investing in the poorer nations and its grants are relied upon in most States around the Mediterranean Sea basin.  Italy has many contingents in the various UN peace-keeping forces…

The case of Lebanon is not as straightforward as Talib would like us to believe.  Lebanon is basically a non-State country with governments playing take-care functions.  There is no stable and consistent central government:  The real power is held by the 18 officially recognized religious sects and the financial institutions (banks).  The citizen is identified by his religious affiliation from birth to death, and the only sign of citizenship is represented by the passport. Read my post https://adonis49.wordpress.com/2011/06/03/is-lebanon-political-system-immune-to-radical-non-violent-revolts-think-again/

The case of Israel is different:  Israel has a system that required frequent change of government, but its “stability” is based on the total support of the USA and western European States, infusing Israel with billion of dollars and free military hardware…One characteristic of Israel system is that previous treaties are cancelled if the new government was opposed to the treaty.  Continuity was possible within the policies that all parties agreed with.  For example, treaties with Palestinians for establishment of a State were sidetracked with impossible constraints by the following government.  Israel is quickly converging toward a theocratic Jewish State because the old guards for a secular Israel are cowering in their comfort zones and refusing to fight the young zealots.

Third case-example: The Fukushima disaster.   The melting down of three nuclear reactors is a typical example.  It is NOT the earthquake and the tsunami that are the causes of the meltdown:  They were the catalysts.  The cause is a faulty designed system for generating electricity that is highly dangerous and built in a region frequently exposed to high levels of earthquakes and tsunami.  The economic-risk tradeoff was meant for normal functioning of a nuclear plant, and the consequences of  a serious event striking was swept under the carpet for three decades.

The owner of the power nuclear plant and the government blamed natural phenomena as the causes and toned down the lethal exposure to radiation for over a month.  Why?  It is better not scare the people! What?  It is better to let people die peacefully than give them the proper information to decide on their own plan of actions?

It is normal for mankind to be wary of the volatile aspects in life.  In the past, mankind managed to block-out drastic fluctuations from their consciousness in order to survive:  Mankind figured out the major trends in the hazards of life in order to foresee and adopt simple models they could control for administering and managing their lives and the survival of the community. The behavioral model should allow normal fluctuations in behavior to react within normal realities.

Simple models have been replaced by complex models, but within the past linear mentality and comprehension.  You may understand a few interactions among three main variables, but when man-made design inserted hundreds of volatile factors in a system, we should no longer expect to have total control on the complex system.

If we are not ready to design reasonable fluctuations in a system, and be ready to take seriously the problems of rare occurrences, and be trained to react to calamitous rare events, then it is wise to stick to simple systems that individual operators can understand and can control.

A man-made system should not be designed to eliminate all the faults, ill-behavior, and limitations of mankind, but to factor them in, and be trained to react adequately to these variations:  The operator has to be constantly motivated to learn and be vigilant to minor fluctuations and comprehend the main interactions.

Note 1: Nassim Taleb, a mathematician, was a trader and worked for 20 years as consultant to large investment banks in New York and London. He created Empirica LLC for trading.  He is engineering professor at the polytechnic institute at the University of New York.  Taleb published “Savage hazard” and “The Black Swan:  The power of the unpredictable.”

Note 2: Mark Blyth is a Scottish professor of international political economy at the university of Brown (Rhode Island).  He published “Great Transformation: Economic ideas and institutional change in the 20th century”.  A new book is to be released “Austerity: The history of a dangerous idea”

Note 3: Black Swan is a term coined after discovering a black swan a couple of years ago.  People firmly believed that all swans were white:  A few might have observed a black swan but refused to identify it as a swan; or black swans are common sight in particular regions and people had no idea that black swans are considered rarity all over the world and might be purchased for their weight in gold to be raised in zoos!

Counter shock upheaval: the earlier the better (Greece)

            A developing State deciding to default on external debts should default on all its debt; then, it can rest appeased and contented for several reasons: first, defaulting does not occur frequently in any single State; second, the bad credit rating is the same whether a State default on all or partial debts; and third, the State will generate immediate cash flow on unpaid interests that covers its budget deficit.   

            Before Greece, Lithuania, Hungary, and Spain suffered the same fate of a prematurely imposed Euro on States of weak economies. There are many articles analyzing the financial crisis in Greece. I thought that I can make sense in a short post for readers eager to know but would refrain reading lengthy erudite articles.

            There are two main factors for Greece financial problems; there are two resolutions available, equally painful, but one is far better in shortening the pain and healing faster. First, the common currency Euro forced weaker economies to relinquish their sovereignty over issuing money (printing money) in time of shrinking economy to re-launch the inner trade.  Second, the US financial multinationals before the crash infused too much credit in a small economy that did not correspond to normal credit rating behaviors; this quick infusion of money inflated the sense of economic boom and generated laxity in financial control and management.  Greece is awakening to new demands for harsher financial control and imposition of higher taxes to straighten the budget balance sheet.

            The first remedy is inviting the International Monetary Fund (IMF) to intervene and infuse $1.7 billions in the Greek coffer to pay the debts due this spring. This would be a bad decision. It is worse because even the EU is encouraging Greece toward that option. For example:

            Lithuania GNP shrank 18% in the first year the IMF intervened with its draconian conditions: jobless rate climbed to 20%, the high level in health, education, and retirement suffered greatly. Actually, retired persons are bleeding and the socialist political parties lost ground.

            In Hungary, the IMF intervention made sure that the people suffer and the socialist government be replaced by like minded anti-socialist government headed by the former minister of economy. If Greece ends up asking the “help” of the IMF, as the EU wishes too, then the socialist George Papandreou will start packing; a decision that will please Merkle PM of Germany.

            Greece with budget deficit reaching 13% of GNP and growing has a reasonable solution out of this mess if it wants to avoid 10 years of suffering and humiliation. Until the EU comes up with a financial recovery plan then Greece should revert to its national currency the drachma. Greece should regain its sovereignty issuing money in this difficult period: Internal and external trades should not be hampered for lack of liquidity.

            Since Greece imports amount to only 20% of its GNP then better competitive drachma should enhance exports and reduce the loan deficit. With the already strict financial control in place, Greece will be able to shorten the period of its pain.  The EU will accept Greece currency to revert to the Euro in due time in order not to let other Euro member States following Greece decision.

            Greece should learn how Argentina recovered.  After four years insisting of keeping the currency linked to the dollar the economy faltered entirely.  Argentina decided to float its currency and it devalued accordingly. Argentina was able to default on $100 billion of foreign loans. The government insured that bank deposits of consumers keep the same purchasing power by regular re-evaluation and re-fixing of the national currency.  People living in their own properties enjoyed the same financial facility at the rate of pre-devaluation.  Within a single semester, Argentina economy was back to normal and going strong.

            Greece has choices: either the MIF intervention accompanied by ten years of suffering or reverting to the drachma until the economy is back to normal within a semester. If Greece default on all its external debts then, suppose the interest rate on debts is 8% and the debt amount to 140% its GNP, defaulting will generate fresh cash of 9% of Greece GNP which is over its annual current budget deficit. What developing State would decline such solution?  Obviously, the US, Japan, China, Germany, France, and England would refuse to default on the ground that they are actually running world economy.

            Defaulting on bad credits that financial multinational encouraged developing States to taking does not hurt badly or disturb the multinational creditors: they were not supposed to pay taxes on interests as long as debtor governments did not restitute the original entire capital; the financial multinationals have then to pay taxes on the previous 20 years of lending the same capital, minus what they submit as expenses of doing businesses.

            The neoliberal financial ideology and “The Economist” are back on the offensive after the shameful financial crash: they are ordering indebted States to reducing public employment by 10%, reducing salaries, reducing retirement benefit, and elongating the age for retirement.  The financial institutions claim that all these hassles are none of its business, even if they caused the miseries.

            Unless people revolt now with a counter shock to what they are being submitted to then any delay to the next financial crash will hurt them more than the rich classes.  People should demand that taxes be raised and increased to all capitalist transactions, financial administrators and bonuses be taxed high, and dividends to shareholders be delayed until the economy is stabilized.  Waiting for another financial crash to get in action is tantamount to increasing social injustices with a maddening upheaval that runs amuck.

Circulating premium Gold-paper currencies (Jan. 24, 2010)

            Classical economists would like you to believe that the crux to overcoming the latest global financial crash is to restitute “confidence” in the monetary system.  If that is the case then let us start by issuing worthy paper currencies.  I suggest printing a category of premium “gold paper currencies” that can be exchanged in any State without undergoing any devaluation because of the intrinsic value of gold it contains.

In these uncertain financial crisis and economical deflation I suggest a psychological incentive for people to recover some sense of value to their currencies.  My idea is to issue hard currencies that are an alloy containing the quantity of gold commensurate to the large denominations.  This currency would be almost as thin as paper money and could not be forged unless the amount of gold is the same as the officially issued currencies. It should be feasible because gold can be made as thin as needed; then if we find a cheap metal or plastic that can add resistance and flexibility to the currency to be folded and handled as paper money then everybody would be satisfied.

            At first, the gold paper-like money could be distributed at a rate of say 1% increase over its real value to recover the upfront expenses in addition to the increase in market value of gold, averaged once a week; these extra expenses would not discourage the use of paper money for those who could not afford the extra cost of gold currencies.  The higher denomination currencies would be larger to keep the same thinness as the other smaller denominations. 

As the value of gold would certainly keep increasing then the government would at interval retrieve the older currencies from the market and replace them, at no further extra cost, with smaller size currencies containing the market value of the amount of gold in the alloy; this is logical because the gold-paper currencies would require less gold as its value increases.  Travelers could then exchange their State own gold-paper money abroad and register them at any bank for Interpol investigations in case of thefts and get exactly the same money value of the respective States. Obviously, all governments that signed in to this system would have to submit to international control when issuing gold-paper money for credibility and quality reasons.

            I believe that with real gold-paper money then the businesses of currency speculations and rate of exchanges should wane and quickly disappear.  Sovereign funds and Central Banks would accumulate gold to satisfy circulation among the favored clients.  The governments would quickly learn to issue enough gold-paper currency to satisfy internal commerce. The superpowers and regional powers would exercise political and military “incentives” on weaker and unstable States to issue more gold-paper currency than needed for inner commerce but then they would have to deliver real gold and good value products to retrieve the surpluses.  The US Administrations do not have real value money or real value economy to horde gold and will not be able to do so for many decades to come; only China, India and the rich oil producing States with small populations would be the major players in currency trade of gold-paper money.

            There are several policies that governments would revisit to manage this new system.  Governments might issues a composite weight of the amount of gold-paper and regular paper money that should satisfy internal commerce.  Either the gold-paper money would concentrate in the hands of the rich and thus reducing commerce to regular money with industries specialized in high quality and luxury products for the rich and industries focusing on lower quality and basic products for the masses; or the little people would not desist from the gold-paper and use them as personal saving account in their homes and thus deflation would hit the economy due to the lack of currency circulation.  Consequently, governments would have choices to either limit the amount of gold-paper in circulation to encourage circulation of regular traditional money or eliminate regular paper currencies to force the masses into liberating their horded gold-paper. 

The same pitfalls and recurrences of the present monetary system would be exhibited but the remedies would be more straightforward to comprehend by the common people. Furthermore, an interesting phenomenon will emerge: cultures where mostly little people horde the gold-papers and cultures where gold-papers are concentrated in the class of the rich.  Well, if there is civilization clashes then this division between the two types of cultures would set the foundations for a new sociology science where the manipulation of hard money is the first principle.

            This system would require many fine tuning but the advantages must far exceed the disadvantages for smaller and weaker States.  Countries with real value-added economies would not be affected by any mischievous financial embezzlement schemes in destabilizing their financial status: the middle classes would have re-learned the value of hard money and desist from speculative schemes for some times.  This re-learning process of the value of real hard money is the fundamental benefit of the new system so that financial history would repeat its cycle of development into this century.  In any case a genuine International Monetary Control and Management Fund would be instituted to focus on the circulation of money within and among States and help in the synchronization of real commerce.

            The crux of this gold-paper currency system is to stabilize growth to a sustainable level for human kind.  Since gold is limited on Earth and its production has reached a limit then wild GNP rate of increases would slow down; redundant and irrelevant consumer products would make room for basic products essentials for the survival of mankind.  The new economical strategies would focus on cutting cost, cutting waste, re-cycling, and vigorously researching for substitute renewable energies for the benefit of all States.

Note: I hope Lebanon will be the first State to initiate gold paper currencies: Lebanon has a sound Central bank with plenty of gold in reserve.  Lebanon will get an unexpected boost as an inventive State.

The Bible of Global Problems: Global Resolutions; (June 23, 2009)

 

Note:  This essay was inspired by the manuscript “A World Adrift” by Amine Maalouf. I added and developed on more global problems.  The style is Levantine; Bible style because the problems are established and need urgent global resolutions.  I will mentions the facts separately and then undertake the analyses of the interactions of the global problems before considering viable global resolutions.  This post wil focus on the problem. The follow up post will consider viable global resolutions.

 

Fact one:  Climate and environment quickly deteriorating.

Fact two:  Birth control is not efficient in the mostly under-developed States

Fact three:  Potable water and water for irrigation are dwindling fast.

Fact four:  The middle classes in China and India are expanding alarmingly.

Fact five:  The world economy is experiencing serious deflationary period.

Fact six:  The world is going through deep financial crisis and recession.

Fact seven:  Effective military spending should decrease but it didn’t.

Fact eight:  The identity crisis around the world is destabilizing order and security.

 

Fact One:  Climate and environment are quickly deteriorating.  The ten signs of alert are proven in the following evidences.

 

            Oceans are turning more acid.  At 8 kilometers of the Californian coasts shells and corals are being dissolved. In the Pacific Ocean, 30% of mussel has disappeared.  Planktons, the basic food chain for fishes, small and large, are no longer abundant; 30% has depleted since the industrial age.

 

            The Arctic is changing drastically. Ice field has melted by 27% in the last two decades. Temperature increased by 3 degrees in the last 5 years.  Thus, the more ice melt the larger the surface is exposed to direct sun rays and consequently the more the rate of ice melting increases. The level of oceans is increasing and covering more dry lands.

 

            The Amazone and tropical forests regions are drying up and liberating higher quantites of carbon dioxide.  This equatorial forest is liberating more CO2 than absorbing; absorbing CO2 was their primary function.  More trees are dying and thus liberating more CO2 by decomposition. The higher the concentration of CO2 the lesser trees “perspire” and the more reduced are rains in quantity and frequency.

 

            The climate in Antarctica, the main source of future potable water, is milder; temperature has increased by one degree since the fifties. Salinity of sea water in the southern globe is decreasing.  The Antarctic must be melting faster than observed.

 

            Seasons are in advance of schedule and migratory birds are suffering.  Spring is one week earlier in Europe: 75% of birds studied in Europe have declined in number and migrating further north and seek higher altitudes.

 

            Dry seasons are extending. Monsoons are rarefied; precipitations are decreasing and the desert in North Africa is expanding southward western Africa.  Deforestration might still be the main culprit but the warming up of the environment is catching up fast as the main factor.

 

            Methane gas, present as methane hydrate in maritime sediment, is escaping from oceans. The under layer of pergelisol used to act as a lid but more abundant hot water is being ejected in the Arctic seas; the concentration along the Russian coast is 200 times superior to normal.  Methane gas is far worse than CO2 (20 times more powerful in retaining heat) for the warming up of the environment.     

 

            Glaciers such as the Himalaya and the Quelccaya (Perou) are losing 0.85 meters in their thickness every year. Around 40 frozen lakes in Nepal and Bhoutan are breaking up.

            Sea levels are climing 3 mm every year on average; the levels in the Pacific Ocean and Mediterranean Sea are reaching the alarming climb of 20 mm a year.

 

            The warming up of the climate is accelerating dangerously. Temperature increased 0.6 degrees just in the last 30 years while it took a century to increase 0.2 degrees before then.  The concentration in CO2 has increased to about 400 molecules per million; it was just 270 before the industrial age.

 

The liberation of methane gas and the drought of tropical forests are the two major factors that show evidence in the acceleration of environmental degradation.  The fast degradation has overtaken current research data that are no longer suitable for predicting the approaching calamity.

 

Fact Two:  Birth control is not efficient in the mostly under-developed States.

 

            China and India are supposed to have gotten birth rate under control but it is not because of higher educational level and better standards of living.  There are evidence of massive euthanasia practices on females and minorities camouflaged within laws interpreted very loosely and selectively. In the under-developed States political instability, poor security for law and order, unsustainable social institutions, and lack of financial and technical supports are exacerbating an already dangerous trend.  The UN is short on money and manpower in its specialized sections to counter this scourge. Over 50% of the population in Indonesia, Egypt, Nigeria, Pakistan, Sudan, and Iran for example are under 15 years of age. (Global viable and alternative resolutions wil be developed in a follow up article)

            In Japan and many European States the trend is reversed; over 30% of the population are elderly (above 65 years) and draing the health budgets.

             

Fact Three:  Potable water and water for irrigation are dwindling fast.

 

            Climatic changes, heavy river pollution, accelerated urban centers, high rate of birth, and the early melting of mountain tops are depleting potable resources faster than expected.  Many States rich in rivers, especially those witnessing drough seven months per year, have not be aided in erecting dams for emergency seasons.  More States conflicts are centering on equitable potable water sharing.  The criticality of water supply is one of the main problems facing people in the coming decade.

 

Fact Four:  The middle classes in China and India are at least three times larger than the combined numbers in the USA and Europe and growing quickly.

            China and India are experience much better increases in their GNP than the USA and Europe during this downturn.  Consequently, China and India will focus on their internal markets to grow their economies in the same manner as the USA has been benefiting for over three centuries.  Middle classes demand to have consumer goods available since they have the money to purchase them.  They certainly have this right.  The problem is that purchasing cars is the first priority for middle class citizens with investment in infrastructures and facilities to abuse of these vehicles.  China has already surpassed the USA in the number of purchased car this year. India is making available unexpensive cars marketed at $2,000 in India. The kinds of energy sources that will drive these cars will have great consequences.  Consumerism can drive economies but depletion of natural resources requires a cultural change to accommodate a sustainable earth.

 

Fact Five:  The world economy is experiencing serious deflationary period.

            The world economy is struggling and the downturn is expected to last for at least 5 years.  This might be the best excellent news for a sustainable world production. There is the need for drastic diminishing of redundant and irrelevant consumer goods that can be substituted easily for human survival. Globalization created economic blocks with objective of exercising political pressures on the established developed nations.  The economic or trade blocks such as South-East Asian States, the Southern Latin American States, the Gulf Arab/Iranian States, and soon a few African States are struggling to stay above water and keep up with the fast moving globalization trend.

            The International Monetary Fund extended three quarter of its resources on the already industrialized states since its inception in 1944.  The G20 decided to triple the IMF fund to $750 billions.  The G20 will extended 44% of the funds, the other developed State a third and the over 55 poorer States will cover 17%.  It was hoped the restrictions and conditions for funding projects will be reduced from 17 conditions to 5 but nothing has been materializing so far.

 

Fact Six:  The world is going through deep financial crisis.

            Millions of workers and employees lost their jobs in a few months and that trend is increasing faster than expected.  The infusion of trillions of dollars into banks in order to facilitate the flow of trade transactions did not save banks from declaring bankruptcy.  The meeting of the biggest 20 financial markets that produce over 85% of the world economical transactions has not reached any consensus as to the financial basket reference for money fluctuation or the control of paper money issuing rights of individual power States. Consequently, the financial crisis is opened to dangerous more frequent reversals on a downward trend.  The USA is heavily relying on China for covering its increasing debt by purchasing US Treasury Bills.  China will be facing enormous capital investment inside because of the consequences of rapid economical strategies.  The rivers in China are over polluted, drough seasons are more frequent, and over 30 millions working in urban centers have been forced to relocate to rural areas where no job opportunities are available.  The moment China decides to cut down on financing US debt the the dollars will be devalued (for printing more paper money than the economy can support) and another financial crisis will loom on the horizon.

 

Fact Seven:  Effective military spending at the increase.

 

            People expected a rational decision by States in this economic and financial troubled times; people were hopeful that military budgets should decrease to balance other more needy budgets such as health, the environment, creating productive jobs, and education.  The reverse happened:  every major State that exported military hardware increased its military budget and it skyrocketed. The USA expenditure is more than double China and Russia combined and the fields of military operations expanding around the world. Societies are far more unstable and experiencing high unemployment rates and lower quality jobs for the qualified graduates. 

 

Fact Eight:  The identity crisis around the world is destabilizing order and security.

 

            After the fall of the Berlin Wall in 1989, Europe had to face up to the identity and ethnic crisis in East Europe such as ethnic and religious “cleansing” and the drive for independence of tiny States within the disintegrating Yugoslavia and the Soviet Union. The European Union (EU) is the best representative for projects of unification among States with identity crisis.  The EU is clearly the most advanced union in matter of forging ahead with ethical issues. 

            Gorbachev has declared recently that Europe squandered 20 years of potential opportunities for stabilizing the European continent after the fall of the Berlin Wall and the defeat of communist Soviet Union.  If we revisit the problems that Europe had to deal with in priority then Europe had plenty of excuses.  First, West Germany had to absorb the cost of the re-unification of the crumbling economy of East Germany; then the EU had to battle the consequences of the disaster of 9/11 of 2001 and the frantic pressures of the Bush Jr. Administration to rally Europe to the invasion of Iraq; then the pronouncement of the Christian Conservatives alliance of the US administration of the binary dicta “either you are with us or against us”; then the declaration of an old senile Defense Minister Rumsfield lambasting “old and senile Europe” and getting hold of the European oil investments in Iraq.  The EU has now to come with a plan for the increased illegal immigration as the ideal destination location.  It must be that Europe was in a rejuvenation phase to have forged ahead in short time to a successful unification program.

 

A follow up article will attempt to ofer viable global resolution and will tackle the troubles with religious extremism and state ideologies.

For regaining confidence in Capitalism: What is “Gold-paper currencies”?

For a sustainable growth: Gold-paper currencies? (October 28, 2008)

I have this gut feeling that, if one major superpower does not adopt for a period gold currency, then confidence in paper money or investment gimmicks is not going to fly.

 In these uncertain financial crisis and economical deflation, I suggest a psychological incentive for people to recover some sense of value to their currencies.  My idea is to issue hard currencies that are an alloy containing the quantity of gold commensurate to the large denominations.  This currency would be almost as thin as paper money and could not be forged, unless the amount of gold is the same as the officially issued currencies.

This project should be feasible: Gold can be made as thin as needed, and if we find a cheap metal or plastic that can add resistance and flexibility to the currency to be folded, and handled as paper money then everybody would be satisfied.

At first, the gold paper-like money could be distributed at a rate of say 1% higher over its real value to recover the upfront expenses, in addition to the increase in market value of gold, averaged once a week. These extra expenses would not discourage the use of paper money for those who could not afford the extra cost of gold currencies.

The higher denomination currencies would be larger to keep the same thinness as the other smaller denominations.  As the value of gold would certainly keep increasing, the government would, at interval, retrieve the older currencies from the market and replace them with smaller size currencies containing the market value of the amount of gold in the alloy.  This idea is logical because the gold-paper currencies would require less gold as its value increases.

Travelers could then exchange their State own gold-paper money abroad and register them at any bank for Interpol investigations in case of thefts and get exactly the same money value of the respective States. Obviously, all governments that signed in to this system would have to submit to international control when issuing gold-paper money for credibility and quality reasons.

I believe that with real gold-paper money then the businesses of currency speculations and rate of exchanges should wane and quickly disappear.  What might remain is currency trade or the accumulation of gold in rich sovereign funds.

The governments would quickly learn to issue enough gold-paper currency to satisfy internal commerce. The superpowers and regional powers would exercise political and military “incentives” on weaker and unstable States to issue more gold-paper currency than needed for inner commerce but then they would have to deliver real gold and good value products to retrieve the surpluses.

The US Administrations do not have real value money or real value economy to hoard gold and will not be able to do so for many decades to come; only China, India and the rich oil-producing States with small populations would be the major players in currency trade of gold-paper money.

There are several policies that governments would revisit to manage this new system.  Governments might issues a composite weight of the amount of gold-paper and regular paper money that should satisfy internal commerce.  Either the gold-paper money would concentrate in the hands of the rich and thus reducing commerce to regular money with industries specialized in high quality and luxury products for the rich and industries focusing on lower quality and basic products for the masses; or the little people would not desist from the gold-paper and use them as personal saving account in their homes and thus deflation would hit the economy due to the lack of currency circulation.

Consequently, governments would have choices to either limit the amount of gold-paper in circulation to encourage circulation of money or eliminate regular paper currencies to force the masses into liberating their hoarded gold-paper.

The same pitfalls and recurrences of the present monetary system would be exhibited but the remedies would be more straightforward to comprehend by the common people. Furthermore, an interesting phenomenon will emerge: cultures where mostly little people horde the gold-papers and cultures where gold-papers are concentrated in the class of the rich.  Well, if there is civilization clashes then this division between the two types of cultures would set the foundations for a new sociology science where the manipulation of hard money is the first principle.

This system would require many fine tuning but the advantages must far exceed the disadvantages for smaller and weaker States.  Countries with real value-added economies would not be affected by any mischievous financial embezzlement schemes in destabilizing their financial status because the middle classes would have re-learned the value of hard money and desist from speculative schemes for some times.

This re-learning process of the value of real hard money is the fundamental benefit of the new system so that financial history would repeat its cycle of development for the century.  In any case a genuine International Monetary Control and Management Fund would be instituted to focus on the circulation of money within and among States and help in the synchronization of real commerce.

The crux of this gold-paper currency system is to stabilize growth to a sustainable level for human kind.  Since gold is limited on Earth and its production has reached a limit, wild GNP rate of increases would slow down; redundant and irrelevant consumer products would make room for basic products essentials for the survival of mankind.  The new economical strategies would focus on cutting cost, cutting waste, re-cycling and vigorously researching for substitute renewable energies for the benefit of all States.

 

Revised economic fundamentals for enterprises (November 29, 2008)

Revisiting the essential criteria in financial sheets for stock evaluation

Within a month of the Wall Street financial crash, major EU industries (excluding the financial, real estates, and insurance institutions) have laid off over 62, 000 jobs and the USA over 77, 000 jobs.

There is no end in the forthcoming months and the jobless rate has broken all record high.  The communication, auto, computer hardware, retail stores, airline, and chemical companies are the hardest hit so far.

As the jobless rate increases then society would drift into unstable climate of insecurity in individual health and safety and retention of their properties.

Without a climate of security no influx of investment can repair the long-term malaise in the slow moving society to recovery. It is a definite pattern that in any downturn the workers, elderly and new employees, are the first to be laid off. 

As if it is the manpower was the culprit and not the management.  Consequently, a revised understanding of what constitute the worst case impact on a society should be evaluated.

Economical models for the productivity of enterprises need to be revised to include the sustainability of enterprises under fluctuating and cyclical financial crisis that is fast becoming the norm.

The working capital should be able to remain intact for the demand cycle and the value added in manpower quality of the main industry units unaffected by the flux of capitals.  Consequently, I suggest tackling two fundamental concepts.

First, the working capital should be managed differently from the general acceptable accounting procedures to resist fluctuation in central rate and money devaluation.

It is very reasonable that the retirement funds of the manpower and the stocks purchased in the company by the manpower be within the working capital management.  The manpower should then feel highly active to evaluating and discussing how the working capital is allocated and invested.

Second, we need to start a new field for defining added-values and how to measure it concretely instead of rationalizing it as a proxy ratio.

Added values should be measured accurately because it is intrinsically related to the quality of manpower.

Added-value is what makes an industry viable economically to the workers, stakeholders, and society in general.  It would not be a piece of cake to operation value-adding parameters; otherwise I would not be suggesting a new economic field for the characterization of what we mean by value-adding economy.

Every industry would have to define its value adding element such as in the service industry, hardware products, software products, chemical, car, heavy duty machineries, tourism industry, commercial banking, and financial investment banking, and so on.

Every industry has it proper cyclical market demands and its competitors, localized or multinational, dependent or not on cyclical supplies of raw materials or manpower.

I am afraid that the first criterion that would jump to mind is for the concept of value-added economy to be represented in monetary terms, which is not the proper criterion.

Value-added economy is the investment in the manpower; for example, programs in continuing education, acquiring new skills, versatility and flexibility to fill vacancies, knowledge of the competition, the products, the tools, and the equipment.

Value-added economy is raising the quality of the manpower so that a large company would aid in subsidizing private complementary companies, from among its qualified personnel, when the tough gets going.

Value-added economy is elevating the knowledge of the personnel and assisting them to find new jobs during harsh downturns.  The only monetary value or ratio associated with added value would be the expense (value added capital) invested for manpower quality relative to working capital (VAC/ WC) for raising the quality and professionalism of the manpower.

When this ratio diminishes then a company has gotten lax and is turning away from the new fundamentals.  Obviously, an independent team should be hired to prepare, control, manage, and evaluate the effective progress in manpower quality at all levels of skills.

Quantifying the quality of workers and employees is the main task in measuring value-added industries; it is feasible and its time has finally come and it should be the optimizing factor in equations instead of rates in profit, shareholders equity, return on capital and so forth.

Inevitably most of the variables used in current optimizing model of financial and economic problems would still be effective, many with significant re-definitions, but when the re-orientation is based on the added value of manpower then a new picture would emerge and standard financial analysis re-discovered. 

The quality level of the manpower can be defined as the potential added value (PAV) in time of crisis and the working added value (WAV) in normal business cycles.

WAV is the criterion that stocks in the market are valuated in addition to other financial criteria; PAV would have critical significance in times of hardships, especially, if the company recorded the events when this potential was managed and directed in previous situations to overcome serious market or natural conditions.

As armies conduct maneuvers to test the readiness of its effective so companies have the duty to conduct maneuvering re-organizations of potentials to test and evaluate its field readiness and re-evaluate its programs for value adding quality in manpower. 

I think that the more credible and frequent the organizational maneuverings the higher the market value of the company.  The more frequent the maneuverings the more evident would be the needs for downsizing and decentralizing and retaining coherent and manageable number in work force.

Code name for the timing of the Wall Street crash: rule China (part 2, November 23, 2008)

The code name for the precise timing of the financial crisis was:

 Artificial oil price increases or (AOPI) and the messenger was the multinational financial brokerage firm Lehman Brothers.

All the members in the cartel of the financial multinationals received the order to activate the countdown for the Wall Street crash: they sold out their shares to invest in anything that has real value.  The little people who invested their life savings in stocks paid the price.

The FED, the Treasury and all the US multinational financial institutions knew the theory of Money Trade Cycle that when the trend of inflation is continuously on the rise then the outcome is a financial crisis.

The theory established that businesses and economy follow a pattern of upswings and downturns, and if the government refrains from meddling with the normal interest rates of doing business then the market economy based on real value-added economy will adjust to the changes.

The problem was that the USA was no longer producing any real value-added economy for decades: the US consumers were enjoying low priced items imported from China and the manufacturing bases were exported overseas to benefit from cheap manpower and limited legal constraints.

The world had already experienced a vivid advance taste of financial crisis in 1989 in the south-east Asian markets, Japan and Latin America.

The fundamental problem was tackled by the Asian States and they worked harder to produce value-added economy.

The successive US Administrations and politicians had no guts to tell the American people the hard facts, that a recession is as sure as the sun rises, and that getting back to work harder on producing what people need to buy is a must.  Instead, the US multinationals resorted to creative embezzlement fiduciary schemes (secondary and tertiary worthless paper money gimmicks) to resume world financial market hegemony

The FED knowingly, through political pressures, kept lowering the interest rates below the healthy level of a normal market economy which overextended credits for a decade and thus generated inflation rates that could no longer be controlled or stabilized.

The US Bush Jr. Administration decided, unilaterally and without a UN resolution, for a pre-emptive war on Iraq.  The US Administration invaded Iraq on the basis that the military expense will generate many folds in profit through the control of oil distribution and blackmailing the neighboring Arab rich sovereign funds of the potential threat of Iran.

The Arab rich States were no fouls of that strategy but they went along.  They are mere small States of oligarchies and monarchies with no national identity. If these States were nations then the citizens would have taken stands; any stand would have cost much less than the trillions of dollars injected for the US citizens to resume their lavish spending on consumerism, new gas guzzling cars, stocks, and overvalued Real Estates.

The FED, the Treasury and the cartel of multinational financial institutions knew that the normal scheme of siphoning in the sovereign funds of the oil rich States and the small stock investors had reached a plateau.

It reached a plateau because the investors realized that a crisis is in the offing and the scheme could not function normally unless the same level of increase in junk paper investment is maintained.

Since the scheme reached a plateau then it was time to decide on the appropriate timing to activate the financial crisis: it was much better for the crash to take place at the very end of an administration and then to pressure the politicians to agree on a financial rescue package.

The timing was perfect: since no more foreign financial rescue is coming in then the financial rescue will happen under duress from all rich States.

The motto was: either you caught up under duress or you will all have to suffer a global economic recession.

The world lauded the US for its timely energetic reaction of rounding up 700 billion dollars to rescue the failing commercial banks.

Wrong; the package was already decided upon before the crash and the bold figure of 700 billions dollars was psychologically marketed as covering the 60% of the unsolvable Real Estates: the US people would gladly preserve its homes and pay for it.  The trick: this package is a first installment and other packages are waiting in the queue pending the appropriate political conditions.

Well, financial rescue came from everywhere but this didn’t stop recession anyway. How can you stop recession when the USA is not producing any value that people are ready to purchase?

The worst part is that President Obama is not willing to challenge the US citizens with the hash facts, at least not for a long time to come.

The US people has preferred the lax attitude since the Reagan Administrations: most of the US citizens wanted to believe in an illusory wealth assuming that the worldwide acceptance of the dollars as the currency of choice is more than sufficient to keeping the illusion alive and kicking.

The hard facts are in; tackling decades of myopia and dependence on the hard work of the other people has to be grabbed by the horns.

The world recession is the making of the lazy, faint hearted US people who failed, in their cockiness, to recall what made them a great nation!

Only one giant Nation is winning: China.

China got the USA by the throat. The US is totally dependent on China in cheap import products and the purchase of US treasury bonds for many decades to come. China can direct the US financial policies and foreign policies. It had done it already. The US had been doing it with the Latin American States and everywhere else for decades. Rule China, rule!


adonis49

adonis49

adonis49

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