The debts will not be paid

The debts will not be paid.  Not the sovereign debts, the corporate debts, the municipal debts or the personal debts.

This is not a question of moral hazard nor is it a slogan on a piece of cardboard or line out of an Internet manifesto.  It is simply a systemic reality.  It is not possible to “balance the budget” by reducing the quality of life.  There are not enough teachers, firemen and police officers to fire.  There are not enough government agencies to close. 

We cannot solve this problem through deprivation.  Aside from the human misery, the math doesn’t work.  Certainly we can create a balance sheet that makes it look like we can get to a zero debt position but the problem is that our currency is based on debt.  When we put people out of work they can’t pay their own debts or their taxes.  That puts more pressure on a system that is already in collapse.

But there are many sources that analyze the decline of debt based monetary systems; that’s not the purpose here.  The underlying question that we need to begin to address is the purpose of money.  

Many of us still believe that we can put our money “to work”.  We have 401k’s.  We have investment portfolios.  We buy gold and silver.  We want to see the value of those accounts go up.   

Money doesn’t “work”.   Originally it was an abstract concept created to allow a more efficient exchange between human beings.  This idea that you can make money from money has been derived essentially from the concept of gambling – something for nothing.  But what has been deceiving about our accounting standards and financial markets is the fantasy behind it all.  This money does not only not “work”, it doesn’t really exist.  It can disappear in an instant. 

Here’s what’s interesting.  What we are discovering is that the exchange between human beings seems to rely less and less on this abstract concept. 

We exchange all sorts of ideas without the involvement of money.  There are many websites, perhaps the one that you are reading this on, that provide information without charging money.  We can download operating systems and applications without the use of money.  The use of those tools can add tremendous value to the lives of those who use them. The exchange seems to be based on the desire to share and the need to make a contribution.  For some time the business community has viewed the individuals who develop these tools and share them without the use of money as whack jobs who just don’t understand how economic systems work.  It’s beginning to dawn on some of us that it may be the other way around.

A world without money seems like lunacy.  But we need to become more aware that money is really an idea and that its utility is based on a belief system.  Belief systems do not change over night but they can shift quickly.  Often ideas that still can be useful are subsumed into larger ideas – much like the understanding of gravity in Newtonian physics is subsumed under the idea of entanglement in Quantum physics.  So one way to think about this issue is that money will not go away completely, it will just become increasingly less relevant.

One of the first steps in the transition toward a more sane process for human beings to exchange goods, services and creativity is to understand the futility of our current system.  But it’s important to get past being right about what is going wrong.  The next step is to take a chance, perhaps fail and then take another chance.

The Certainty of Uncertainty

Over the past year we have heard intermittent calls for the restoration of confidence, usually by those who would relax all manner of regulation and oversight of commercial and financial ventures.  The past, it would seem, adds credibility to their argument.  Regulation in the financial markets and the internal financial operations of publically held companies has done absolutely nothing to prevent the ongoing crisis that we find ourselves in.

But this clamor for confidence tells us that despite all the calculations, projections and efforts by central banks to keep the flow of money moving it all comes down to how we feel.  If we felt confident, we are told, then we would behave differently.  The pathway to that better feeling varies from deficit spending to balanced budgets with the advocates of either position passionate about the correctness of their remedy.

But no matter what we do our feelings are only buoyed for a few days and then they once again sink.  We feel uncertain that we were right to feel better. 

There are many analogies to this situation; Einstein’s definition of insanity comes to mind.   Another would be the problem of transitioning from a moral society in which we apply a known set of rules to every situation to an ethical one where we begin to understand that solutions are intuitive and not measured solely by numbers on a balance sheet.

We are discovering that our set of rules is no longer relevant to the problem.  Laurie Hyland, in a set of papers that can be found at www.thenewmoneyreality.com provides us with a pathway to understand the new context that we are all living in, regardless of whether we choose to acknowledge it.  The following example is borrowed from her work although its application may be of my own interpretation.

Take a bowl and let a marble slide down its side.  Eventually the marble comes to rest.  In classic physics we say that the marble has reached equilibrium.  In classic economic terms this is equivalent to the certainty that we allegedly crave.  Now take the same bowl and fill it with fruit suspended in Jell-O.  If you take a fork and attempt to remove one of the pieces of fruit, everything moves.  In Quantum physics that’s called entanglement.  In what Hyland calls Quantum economics that’s Lehman Brothers.  The idea of “we are all connected” has transitioned from an esoteric mystical concept to an increasingly robust scientific theory to an economic reality.

It would almost seem that the current efforts for budgetary unity in the Eurozone would reflect this new reality but I would suggest that in fact it is a continuation of attempting to apply a moralistic set of rules to an ethical challenge.  Economics is a discipline devoted to understanding how we relate to each other, what it is that we think has value and how we interact with each other to enhance the human experience.  Tragic as it may appear to those who have elevated the left brain to the highest form of human endeavor the rational mind is not up to the current task. Kahneman and Tversky’s Prospect Theory has been telling us for some time that the rational mind does not determine how we behave; Taleb’s Black Swan tells us that the rational mind is really only useful in describing retrospectively what has caught us completely by surprise.  Our insistence on stability he says simply creates greater instability.

So, let us begin to expand this new thinking.  We will find much ridicule and certainly some blind alleys but that experience will serve to refine the new approach.  Ultimately it is and will be much more satisfying than trying to convince ourselves that there is such a thing called certainty.

Truth in America

Truth is an emotion applied to a set of facts.  President Obama stated early in his State of the Union speech:  

“Two years after the worst recession most of us have ever known, the stock market has come roaring back.  Corporate profits are up.  The economy is growing again”.

He went on to lament the current state of unemployment and the economic pain that many Americans are suffering.  It is hard to reconcile the two statements.  If the economy is growing and profits are up then why the pain?  Consider the following:

• ·         The Federal Reserve is printing $75 billion a month in its ongoing QE2 effort.

• ·         The latest housing report tells us that we will have more foreclosures in 2011 than we did in 2010.

• ·         There are reports that states are exploring the legality of bankruptcy as an avenue to void public employee pension obligations.

We could apply a truth to that set of facts and come to a completely different conclusion about whether or not the recession is over.  It is a schizophrenia that affects nearly every public conversation these days – from gun control to the national debt.  Pick your set of facts and you will have a truth that others will insist is a lie.  Some would say that that is standard operating procedure for our political process.

But I would suggest that there is a different dynamic emerging that separates our current situation from the economic and political cycles of the recent past.  The truths that we are being presented with have been recycled to the point where they are ossified.  Positions are hardened.  Despite the tremor of Tucson the best we can realistically expect is a more polite expression of the sentiment that the other guy is dead wrong and will likely burn in hell.

Several months ago David Brooks made the following observation on the PBS News Hour television program.  Change, he suggested, sometimes was the result of the actions of leaders and sometimes the result of an attitudinal shift on the part of the people.  He felt that we are in a time when the latter idea is in effect and I would agree with him.  Things change when people change their minds, when they develop a truth based on a set of facts that come from their own experience rather than the ideas of their leaders.

The recent events in Tunisia would seem to demonstrate this concept.  Is this just the replacement of one repressive regime with another?  Perhaps, but it would seem that there is a decent chance that we are seeing the kind of shift that occurred in parts of Eastern Europe after the fall of the Soviet Union.  For those in the West who see this as a strictly Middle Eastern and North African phenomena I would suggest keeping an eye on the Irish as we move into the spring. 

It’s hard to disagree with the goals that President Obama laid out in his State of the Union.  Yes, we want our children to have better educations, yes we want a modern infrastructure with bridges that don’t fall down and high speed railroads, yes, we want our energy to come from non-polluting sources (although how natural gas and uranium got into that mix is a mystery) but it’s hard to imagine how we get there from here with a political system that seems devoid of any plan that entails confronting the very substantial problems that face us.

In a way, the political process is a head fake.  What we are looking for isn’t going to come from there.  What we are looking for will come from innovative thought and action.  Some of it will be half-baked and fail, some of it already exists on a small scale and is growing (like local currencies and the move by Washington State to emulate the state bank of North Dakota) and some of it will seem like it is coming out of the blue.  The only thing that seems clear is where it won’t come from.

The Risk of War in Korea

Regardless of your opinion about the existence and intent of Wikileaks perhaps the most surprising thing about the internal diplomatic cables that have been revealed to date is that they are not very surprising.  The Karzai brothers are corrupt and/or ineffectual, Ahmadinejad is unstable, Al Qaeda gets significant funding from the Saudis, Syria is still arming Hezbollah and so on.  While perhaps no one says these things for public attribution they are reasonably well known to most people who follow foreign affairs and read something other than the official communiqués of sovereign governments.

But there was something new conveyed by a conversation that an American diplomat had with a South Korean diplomat about a conversation he had with a Chinese diplomat.  China is said to be supportive of a unified Korea even if it was run by the existing South Korean government with its alliance with the United States.  As Americans hear this, their Cold War view of the Korean peninsula takes a big hit.  For the last 50 years most Americans think of the DMZ as a dividing line between democracy and communism.  This made sense in the days when we all imagined Mao sending the screaming hordes of Chinese and North Koreans to destroy the South.  After all, it actually happened once before.

But unlike Mao, Wen Jiabao is more focused on property bubbles and currency fluctuations than spreading the Great Leader’s dogma.  Korea has to be a headache.  The Kim family, with its obsessive and singular goal of retaining power is a distraction from the very real problems that China must manage as it continues to emerge as a global economic power.  The prospect of trading the mercurial (and apparently dying) Kim Jong Il for the 25 year old four star general Kim Jon Un can’t be a very happy one.

So the fact that reunification is being contemplated by the Chinese is news indeed.  The last time we all had this experience was in the fall of 1989 when the Berlin Wall was breached.  That seemingly spontaneous event was preceded by fits and starts; East Germans were leaving by the thousands initially through Hungary and then through the former Czechoslovakia.  The final breach in the Wall resulted from a politburo spokesman adlibbing in a press conference.  But all these events were preceded by Reagan’s strategy of economically bleeding the Soviet bloc via the arms race.  Spending money they didn’t have on the military and ignoring social needs and physical infrastructure is what brought the communist house down.  If that strategy sends a chill down your spine it probably should.

South Korea has just belatedly completed a trade agreement with the United States (just a few weeks after embarrassing President Obama on the world stage at the G20 meeting).  We can debate who came out on top in that deal but what can’t be debated is that China has replaced the US as the major trading partner of South Korea.  Having kept the peace for over 50 years through diplomacy and the threat of force the United States now finds itself in a situation that is clearly in transition.

North Korea is not East Germany.  The fact that they have atomic bombs changes the equation dramatically.  More importantly, they have a dynastic family that wants to hold on to power and they seem to have put together a succession plan in a very hasty manner.  One has to wonder about the calculation to choose the youngest son – one whose experience would have to be called into question by the coterie of generals and party officials whose survival depends on the absolute authority of the ruler.  If the leadership transition happens sooner rather than later the risk of a calamity becomes greater.

There is an expectation that the North Korean regime will unravel slowly over three years after the leadership transition.  That would be nice, but unlikely.  The demise of totalitarian systems is rarely graceful.  Add to that the recent provocation on the part of the North and the ongoing war games on the part of the South and the United States and it certainly begins to feel like a broader conflict is in the works.

But there is also another possibility.  When we look at potential conflicts we often limit our observations to the military, political and economic information that is available.  We tend to ignore the underlying cultural history and beliefs.  That has come back to bite us in Iraq and Afghanistan.  It might just be the key to a solution in this situation.  Korea is the home of Tae Kwon Do.  Most of us believe that the martial arts are about fighting but Tae Kwon Do is as much at art of peace as it is of self-defense.  It has to do with loyalty, faith and respect.  Will that tradition become more powerful than the drive towards conflict?  Will the underlying cultural values of a people trump the push towards war?  It will be instructive as we all find out.

Separation of Bank and State

There is currently a series of commercials on American television promoting an operating system used in many of the new smart phones.  In one version of the ad there is a man standing at a urinal, relieving himself using one hand and texting with the other.  He drops the phone.  As he bends down to pick it up and presumably resume his one handed typing a man a few positions down looks over, wrinkles his brown and says “Really?!”.  The message is that we all have better things to do than stare at what comes over our electronic devices. The world full of people is worth our attention.  Interesting idea.

Perhaps the most ominous part of Ireland’s proposed austerity plan is the decrease by €1 in the minimum wage.  When you first read that number is doesn’t seem so bad – it’s only a 1/one.  That’s until you remember that the minimum wage is expressed in compensation per hour.  Then the 1/one becomes much larger.  It is equivalent to an 11.5% decrease in gross income.  Take a moment and think about what a reduction of that amount would mean to you.  Think of the conversations that would happen between you and those you care about, between you and those who depend on you.

The somewhat better off, those earning the equivalent of $67,000 would experience a $5,700 reduction in gross income according to John Burn’s article in the New York Times or slightly under 9%.  Those conversations don’t seem any more appealing.  The Irish are stunned.  What happened to the Celtic Tiger?  What happened to the economy that for the first time in memory reversed the trend from emigrating elsewhere to returning home to share in the revitalized economy?  Is Ireland the same as Greece?

Actually, Ireland is not the same as Greece.  The Greek government had a very large Ponzi scheme going on.  By all accounts, the Irish government was, from a financial perspective, well run.  It is the Irish banks and their disastrous balance sheets that are the source of the problem.  The banks made loans and investments that went south and the conventional wisdom is that the government should bail them out.  It is similar thinking to what lead to the infamous TARP legislation in the United States.

The problem that we are facing is that the conventional wisdom is looking less wise with every passing day.  The first crack in the idea that banks should be bailed out by governments came with the expression “privatizing profits and socializing losses” that began appearing in the media several years ago.  In the United States, members of Congress who voted for the TARP funds were ripe targets for those who thought that lending money to failed institutions ran afoul of free market principles.

The western banking system is a private system.  The Federal Reserve, the central bank in the United States, is owned by the chartered banks of the United States.  The Federal government has no equity stake, no ownership of the Fed.  With some nuance, the same situation exists within the European Central Bank and the countries in the EU.  It is not just the management of monetary policy that is in private hands (and therefore allegedly immune to political influence); it is the creation of money itself. 

That this structure is just now being understood by more and more people is the subject that leads us down all sorts of unpleasant paths.  I have friends who are conspiracy theorists.  Their views range from the fantastic to the fatalistic.  To the degree that they get people interested in what is going on they have a positive influence.  To the degree that they convince us that we are victims of forces more powerful than we can conceive they are destructive.

It might make more sense for the central banks to bypass sovereign governments and recapitalize their member banks directly.  As a matter of fact, that’s what occurs for the most part anyway.  The Federal Reserve has been funneling money into the US banks in amounts that dwarf the TARP funds.  But taking that approach would shatter the myth that governments have much of anything to do with monetary systems.  The problem in these situations is that the people most invested in the myth continue to believe it long after they are in a tiny minority.

As the ink barely dries on the proposed Irish debt agreement with the IMF and the ECB we are hearing that Portugal and Spain are next up.  We watch the finance ministers of both countries try to respond to questions equivalent to “when did you stop beating your wife?”  Many of us could actually write the stories that will appear in the financial newspapers about the collapse of Portugal and Spain right now.  They are predictable.  What is not predictable is how people will respond. 

It’s always been my experience that it is just when you think there can’t be any alternative to what you expect to happen – an alternative appears.  So will the three countries subject themselves to draconian cuts in their budgets and standards of living one after another?  Will we see a few street demonstrations, some smashed cars and then a close vote in the government to implement an austerity plan?  Perhaps.  But if my father’s side of the family is any indication, the Irish can be a difficult lot.  They might surprise us and do something worth paying attention to – Really!

The French and the Fat Lady

Every American school child learns of the exploits of the Marquis de Lafayette during the Revolutionary War.  Some go on to read Alexis de Tocqueville’s Democracy in America and learn of the author’s admiration for the establishment of our democratic state.  In these early days it seemed that there was a love affair between the two countries.  But as we all know, those feelings changed and until quite recently there had been bad blood for some time.

If you look at the history of currencies backed by precious metals you find that countries who employed them usually printed more money than they had gold in their vaults during wartime.  The imbalance was usually quickly corrected once the conflict was over.  But the Vietnam War went on for a long time, much longer than any previous US war and the imbalance became exacerbated.  In 1971 the French, alarmed by the discrepancy and concerned about the value of the dollars they were holding decided to demand the metal instead of hanging on to the increasingly worthless paper.  The result was Nixon’s famous act of slamming shut the “gold window” and turning the dollar into a fiat currency.  He blamed it on speculators but those in the know saw the French position as an act of betrayal.  Coming on the heels of the French withdrawal from NATO several years earlier, the relationship became very frosty

More recently, French opposition to the Iraq War brought the disenchantment into the public arena.  Some believed that France was trying to protect its trading relationship with Iraq; others thought it was a calculated move to diminish the clout of the world’s only remaining superpower.  The animus became heated.  People who seemed to have a lot of time on their hands began a campaign to rename the French fry although one doubts that the French were overly concerned about being disassociated with potato slices boiled in oil.

Despite the cordial relations that have developed between Sarkozy and Obama it is clear that the French have made a habit out of disagreeing with the United States and lots of people here don’t like it.  They are doing it again although not at the governmental level and out of sight of most media outlets.  If they are successful the impact will be dramatic.

Enter Frenchman Eric Cantona – dubbed “King Eric” and wearing the famous number 7 for Manchester United, he became an actor following his retirement from football.  In recent days he has appeared in a YouTube video that is achieving viral status (you can find it here).  In this short clip with English sub-titles Mr. Cantona makes some very clear and, in some quarters, very frightening statements.

First, he points out that public demonstrations are fundamentally a waste of time.  Back in the days of the Nixon administration they had a dramatic effect.  Now the only news item that is generated from them is a debate about the number of attendees.  So he is certainly right on that account.

Second, he dismisses violence as an effective tool in changing the status quo.  Again, he states what has become sadly obvious.  The world has become inured to the savagery that occurs daily.  Stalin, it seems was right – “One death is a tragedy; one million is a statistic”.  Violence, for those who are not its immediate target, changes nothing.

But Mr. Cantona’s third point, while not a new idea, may be one whose impact could be profound.  He encourages people to withdraw their money from banks on a specific date.  An organized run on the banks he believes will have the effect of causing them to collapse.  What occurs when that happens is left to the imagination.

Whether or not this effort will be successful it marks a distinct departure from the current conversations about the economic crisis.  It is a tactic that comes from the traditions of Gandhi and King.  It is an act of withdrawing (literally) from the system.  It worked in the Salt March to Dandi and the Montgomery Bus Boycott.  It is almost impossible to defend against.

But there are differences between what Mr. Cantona advocates and what Gandhi and King wanted to achieve.  The latter two had a goal; a vision of what the world could look like absent a clearly identified oppression.  Mr. Cantona and others who wish the collapse of the banking system don’t seem to have articulated much of a vision aside from not wanting what currently exists.  While that would be a very big concern in normal times we may want to consider the thinking of David Brooks, the conservative columnist from the New York Times.  In his weekly appearance on the PBS News Hour several weeks ago Mr. Brooks suggested that change can come from two different areas – leaders and societies.  While most of the time we look to leaders he thought this was a time when societies would actually be the source of new ways of thinking. 

Societies are somewhat amorphous masses.  It’s hard to figure out what is going on until something happens and then we go back and look for influences.  Mr. Cantona and company may be one of those influences – or not.  What does seem to be emerging is a wide range of ideas about what new economic models might look like.  What finally emerges will likely be the result of different groups trying different things; that’s not a very sanguine thought for those who prize stability.

It is hard to find anyone (aside from the jabbering heads on cable news) who is optimistic about our global monetary system.  It’s true that it ain’t over until the fat lady sings, but she is warming up her vocal chords backstage in her dressing room.  We can hear her.

Fear, Rage and Bad Decisions

I spent the first ten years of my adult life working in psychiatric facilities – in those days called mental institutions or even “loony bins” by my insensitive friends.  I got the job right out of college.  I simply showed up at the administration building at Manhattan State Hospital and announced that I was reporting for work.  There was a bit of a kerfuffle (that’s Scottish meaning “disorder”).  I hadn’t really been hired at all.  After about fifteen minutes of toing and froing I was given a job as a teacher in the children’s unit that consisted of pre-adolescent boys aged 5 - 12.  In retrospect it seemed like the only way an Episcopalian lad from Connecticut could have gotten himself into a psychiatric hospital in those days.  It also taught me something about the fragility of bureaucracies in the face of determination.

I had no training.  I did have a BA in English and I had read Kesey’s One Flew Over the Cuckoo’s Nest so I thought I had a vague idea of what I was getting into.  I didn’t.  Instead of classic disorders identified in the DSM (Diagnostic and Statistical Manual of Mental Disorders) what I found was a colossal amount of rage – and not just on the part of the patients.  They were angry because they couldn’t communicate in a manner that could be understood by the adults in their lives but there was also rage on the part of the staff who wrapped themselves in the idea that professionalism required detachment. 

And there were, of course, worse things going on.  If you tried to run away the Director of the unit took one of your shoes away for a week.  If you were unlucky enough to merit therapy the resident psychiatrist/pedophile made you wear a dress.  It was worse than Kesey’s imagination.

But those were the days of social protest and some of us got together and put up a fight.  People were fired.  A new children’s hospital was built.  I got a job running the new adolescent unit (still with no formal training – which should have been a hint).  Instead of beatings and unspeakable humiliations there was a shift to what at the time were very primitive psychotropic drugs.  After a confrontation with a doctor who wanted to give a 12 year old a liver destroying injection of Thorazine I was taken aside and told that psychiatric facilities were agencies of social control and that if I didn’t like it I should get out.  And so I did.

But my experiences in those days taught me that rage is born of fear and fear is a very dangerous emotion for human beings in complex societies.  The fight or flight response to fear is tactical and immediate.  The forces in our global society are subtle and interconnected.  Human fear always results in what prosecutors call the SODDI defense (some other dude did it).  Assigning blame is like comfort food and we’ve been eating a lot of it.

At this writing our monetary system appears to be teetering on the edge of collapse.  We are being told that our lack of jobs here in the US has to do with the value of the Chinese currency.  Governments throughout the Western world are telling their citizens that social programs must be cut to balance budgets sometime in the future.  Ireland has joined Greece as a basket case.   

We all seem to have forgotten Fannie and Freddie.  They are still in business and still hemorrhaging money.  Those credit agencies – Moody’s, Standard and Poor’s and Fitch?  Yup, still in business and no sign of reforming the process of banks paying their fees.  Too big to fail is bigger.  The G20 meeting that just concluded had the singular achievement of communicating its inability to do something about anything.

The recent elections in the US indicate that people are angry.  But they have precious few outlets for expressing that anger.  Voting once every several years is hardly an effective release.  Venting in the blogosphere, on talk radio and cable television has lost its cathartic value.  Blaming someone else seems to be what’s left.

And that is very dangerous on many levels.  The potential for war or rather, more wars, increases.  Our ability to think clearly is diminished.  Quick fixes, simple answers become more appealing.  But if we go down that path we will simply be making a decision equivalent to exchanging the loss of a shoe for the loss of a liver.