Sunday, April 18, 2010
Life in the Ant Farm
Dear reader, is all of this Goldman Sachs securitization and interest rate swap business making your head spin? SPVs, SIVs, SPEs, PPPs, PPIs, PFIs, SPCs, CDOs, CDSs, ABSs, MBSs... whew! I know it's making me dizzy. And I find that when my head starts to spin it is useful to fire up the old hooch still and cook it down into something more easily consumable.
We all like animal analogies, right? I probably should have gone with rats in a rat race or hamsters on a treadmill, but instead I chose ants in an ant farm. Not very glamorous, I know, but let me explain why selected these robust yet delicate creatures.
Did you ever have an ant farm when you were little? An ant farm makes the ants' behavior easily visible and controllable. They are imprisoned in a two-dimensional world in which their decisions are limited and their needs are met by you! They can only go side to side and up and down. And up usually leads them to the leaf you dropped into the ant farm for their lunch! But in the wild...
Ants form highly organized colonies which may occupy large territories and consist of millions of individuals. These large colonies consist mostly of sterile wingless females forming castes of "workers", "soldiers", or other specialized groups. Nearly all ant colonies also have some fertile males called "drones" and one or more fertile females called "queens". The colonies are sometimes described as superorganisms because the ants appear to operate as a unified entity, collectively working together to support the colony. (Wikipedia: Ant)
A superorganism is an organism consisting of many organisms. This is usually meant to be a social unit of eusocial animals, where division of labor is highly specialized and where individuals are not able to survive by themselves for extended periods of time. Ants are the best-known example. The technical definition of a superorganism is "a collection of agents which can act in concert to produce phenomena governed by the collective," phenomena being any activity "the hive wants" such as ants collecting food or bees choosing a new nest site.
Superorganisms exhibit a form of "distributed intelligence," a system in which many individual agents with limited intelligence and information are able to pool resources to accomplish a goal beyond the capabilities of the individuals.
Nineteenth century thinker Herbert Spencer coined the term super-organic to focus on social organization... Similarly, economist Carl Menger expanded upon the evolutionary nature of much social growth, but without ever abandoning methodological individualism. Many social institutions arose, Menger argued, not as "the result of socially teleological causes, but the unintended result of innumerable efforts of economic subjects pursuing 'individual' interests." (Wikipedia: Superorganism)
Methodological individualism does not imply political individualism, although methodological individualists like Friedrich Hayek and Karl Popper were opponents of collectivism. Detaching methodological individualism from political individualism... if a properly-functioning communist regime were to arise, it too would have to be sociologically understood on methodological individualist principles. (Wikipedia: Methodological Individualism)
Hopefully I didn't lose you yet. I know, I'm supposed to be distilling not mixing, but I needed to draw the connection between ants and economics. Did you get it? Ants are dumb little creatures by themselves. But even as dumb as they are, some are more skilled at smelling and finding food while others are better at fighting, and some others are really strong, for carrying food back to the colony for lunch.
And in a wild colony of ants these individuals end up specializing in what they do best which leads to a collective intelligence far greater than the intelligence of any individual ant.
In this way, humans are similar to ants! A normal IQ distribution among humans ranges from 60 to 140. To me as an average human this seems like a very wide distribution. The dumb seem very dumb, and the smart seem really smart. But in the big scheme of things the human intelligence distribution is not so far off from the ant "intelligence" distribution. In other words, the smartest ant in existence doesn't even come close to the "distributed intelligence" of a wild colony. And the same goes for humans!
But when we put ants into a two-dimensional, controlled environment, the distributed intelligence of the superorganism is stifled and nearly snuffed out. As a confined group they end up no smarter than an individual ant.
Throughout human history the division of labor, or economic specialization, has brought fantastic growth in total human output and led to the astonishing complexity of modern computers and industrialization. These vast leaps were truly the accomplishment of the distributed intelligence of the human superorganism, with a relative IQ perhaps in the thousands.
And behind each great leap of mankind was a string of important decisions made by methodological individuals. This is true capitalism. In order for the human superorganism to display its "IQ in the thousands", certain specialized individuals must be free to make the most important decision. The individuals I'm talking about are the savers, or as I sometimes call them, the "super-producers".
They are the people whose contribution to society exceeds their own daily needs, creating an excess of wealth. And the most important decision for the human superorganism is the savers' choice between hoarding their wealth, or deploying it into the economy!
It is this decision process, made millions of times at the individual level, that lends the superorganism its superior IQ. There is no single human that possesses an intelligence high enough to compete with the human superorganism, just as there is no single ant that is smart enough to make better decisions for the colony than the colony itself. In fact, there is not a single human that could do a better job running the ant colony, although man has written many complex algorithms trying to mimic and even improve upon the collective intelligence of ants.
Debt and Specialization
As it turns out, the people that contribute the greatest leaps for mankind often don't have the wealth to realize their dreams on their own. They must engage other people with wealth, who on their own don't possess the knowledge and ability to make great leaps for mankind. It is this "working together" that made things like electricity possible.
I said earlier that the most important individual decision is between hoarding and deploying one's wealth. Modern socialist thinkers will all tell you that hoarding is always bad for the economy. That the key to a thriving economy is the free (read: forced) deployment of all wealth back into the economy immediately once it is saved. But the problem is that removing the decision process from the savers changes the behavior of both the savers (lenders) and the debtors.
Debt becomes cheap and easy to get, therefore debtors no longer need great ideas like "electricity" to get a loan. And for the savers, the choice becomes as simple as a multiple choice test for a government job. The lowest common denominator rules the collective as those with a 60 IQ face the same choices as those with a 140: low yield (supposedly safe) or high yield (more risky). What is missing is the option to hoard, without losing purchasing power, which forces lenders to look at debtor's "proposals" more closely.
Debt is the most fundamental cause of this Global Financial Crisis (GFC). More specifically, it is the modern method of usury that compels large pools of savings into the service of new debt. Savers must have a way to hoard outside of the economy for the economy to be efficient. It is the selection process of when and how to deploy one's savings that keeps both debt in check, and the economy efficient and productive. And it is the coerced loaning of all savings, with the lenders and borrowers segregated by a "Chinese wall" of bankers interested only in fees and bonuses, that has led to the massive malinvestment and explosive debt of today.
This GFC is the final stretch in the long evolution of money, spanning centuries, that led to a global monetary system in 1944, a purely symbolic fiat system in 1971, an electronic computer-assisted system in the 80's and 90's and today's insurmountably complex system of derivatives. With each step adding new layers of complexity and distancing finance from reality, the savers and the debtors have now become so disconnected from each other that our human superorganism is now literally dumber than the lowest functioning human. The collective IQ is now probably well below 50, thanks in large part to the "geniuses" on Wall Street who created SPVs, SIVs, SPEs, PPPs, PPIs, PFIs, SPCs, CDOs, CDSs, ABSs, MBSs... We are truly ants in an ant farm!
As Paper Burns
In Sultans of Swap - Explaining $605 Trillion of Derivatives, Gordon Long writes "The cheaper money is, the more borrowing will occur. Everyone is happy except the unwitting lender."
This line really gets to why all these "genius" Wall Street creations are such an explosive problem today. "Everyone is happy except the unwitting lender." The "unwitting lender" is all the savers and "super-producers" of the world. It is everyone you know who has a pension or a pension fund. It is everyone you know who has a 401K or an IRA. The "unwitting lender" is anyone and everyone who relies on the $IMFS and its network of specially trained and licensed financial advisors with official titles like RIA, CFP, CFA, CPA, ChFC, CRPC, RFC, MSFS, all of whom are practically bound by law and fiduciary duty to NOT tell you the true nature of the risk you are facing.
On the other hand we have the writings of one with remarkable wisdom, relegated to pseudonymous postings on an Internet forum, warning us more than 12 years ago of things like this...
Much paper value will burn before this fire is done!
If you owned an oilwell in your back yard and no-one could take control of it, then oil is the best investment. But, most people use various forms of western paper to trade oil and that paper will burn in a currency fire.
Metals have not shown their true worth for many years as the world has done very well. This is very good. But, all things do change! As it is our time and place to live this change, our thoughts must view the future as it must be. Who can know the minds of men and countries as paper burns?
Remember, "when the currencies go to nuclear war, all paper and paper markets will burn"! Many hard assets will lose in the public mind as confusion will rule. In the thoughts of many, gold will perform!
In that day, debts will burn and currencies will war, and you sir will, with honor, raise your standard of living with Gold!
Your profits from such trade, will, on the last day, in the heat of fire, burn as paper does! Sir, the world is going to change, and the rules of engagement will also change. Gold will be repriced, once! It will be enough for your time of life.
Sir, The history of "Hot" paper money does show it to "burn easily" from "much heat"! If you read my Thoughts in today's replies, we see much "fuel" in dollar derivatives trading in foreign markets.
During this result, all paper will burn and the world economy will start over. However, the BIS is buying gold for customer governments as they begin to lower the dollar. This action, began some months ago will bring gold up, perhaps to the middle $360 range. If the world paper markets do not destroy themselves, gold stocks may rise for a time. But, physical gold is the good hold for this time. Source
This kind of advice is all but illegal within the $IMFS! If it's ever even spoken, it is whispered and "off the record". But I guess that's why you're here, reading "voluminous posts" by a pseudonymous blogger, eh?
At the top of this section I mentioned Gordon Long. I recommend his recent articles for an in-depth yet digestible view of the head-spinning, mind-numbing world of "genius" Wall Street contributions to mankind, like SPVs, SIVs, SPEs, PPPs, PPIs, PFIs, SPCs, CDOs, CDSs, ABSs, MBSs...
One of the things Gordon writes about is probably the most catastrophic aspect of this mountain of debt: the maturity wall. This is the hurdle of old debt rollover that is facing us collectively right now, where all of the world's present saving must be compelled into the interest payments alone on the old debt. Talk about the unproductive and inefficient use of savings! What I can tell you is it ain't gonna happen. The system cannot be saved at this point.
I received an email from a reader, Lars Olsson, with a nice article he wrote about exponential growth and debt. Here is an excerpt from his piece with an exercise you can try at home to wrap your mind around what happens when savings are compelled into indiscriminate debt:
If you believe that 2+2=4, then you should believe the following. Compound interest at 2% is a miniscule interest charge measured by today's standards. Compounding the interest charged on a single unit of money can be written as follows: money-amount * 1.02 * 1.02 * 1.02 .... (adding another term for each year) .... and on and on. That is, if you can place your faith in mathematics and calculations and really "believe" that the calculator will return a correct result when you punch the buttons. We reckon our current time since the long ago birth of a civilization some 2000 years ago. History tells us they had money then. A functioning economy of sorts. Mediterranean trade. Payments for goods. Money of gold and silver. If any man would have placed only a fraction of his purse at interest, his descendants would be wealthy beyond imagination, and the world have been hollowed out.
Let me show you. Open the calculator function under Windows. If you run Apple you are smart enough to figure out a substitute on your own. You'll find the calculator under Accessories. Set the "View" to Scientific. Got that! If not, that's ok too, but you probably shouldn't be reading this. On the keypad, punch in 1.02, then hit the "x^y" button, then on the keypad punch in 2000, then hit "=". The display now shows you a large number. This is the multiplier for some amount placed at 2% interest for 2000 years compounded annually. On the keypad hit the "*", then punch in 0.01, then hit "=". Now the display shows you what one cent ($0.01) would have turned into. To make this a little easier to view, hit the "/" key, the on the keypad punch in "1","Exp","12","=" to get the answer in trillions of dollars. Yes. The calculator really does say that $0.01 placed at 2% interest for 2000 years turns in to $1,586 trillion, or $1.586 quadrillion, or a hundred year of US GDP. If you don't like 2%, change it. If you don't like 2000 years, change it.
What the previous exercise shows is that a purse of silver was certainly not placed at interest anywhere in the world 2000 years ago, and allowed to compound at 2% interest, since that numerical representation of wealth would today dwarf all known hoards of "money", electronic or otherwise. So compound interest is not a sustainable operation spanning millennia. Compound interest applied to any finite system will grow out of bounds, which is what we are experiencing today. The current "money" system, which is engineered with "debt/credit" as its foundation has breached its sustainable limit. Stimulating the economy without addressing the fundamentals of the "money system" decay will not restore economic prosperity. Money at interest, does not price risk in venture. A functional society requires an efficient "money system", but "money" can be made available through means other than extending fractional reserve privilege to the banking class and putting a price on the existence of money.
Lars' piece may seem simplistic, but I like it. I'll even take it a step further and say that a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price.
We are all like ants in an ant farm when we patronize Wall Street. Our contributions to society, should they exceed our day-to-day needs, are deployed by a system that does not care how they are deployed, just that they are deployed ASAP. If you would like to make a real contribution to the future of civilization then please buy physical gold and find a way to keep it close. Hoard your efforts outside of the system and watch as they receive a tremendous power boost just in time for deployment. You will be rewarded with the freedom to choose when and how your saved effort will be deployed and in so doing, you will help shape the future.