Syzygeist

Europe Scenarios - The Zone of (Negative) Expectation

In our now traditional pre-Christmas convocation of former and present Morgan Stanley bankers held last Friday at the Asia Society, we applied scenario-thinking to the challenges of Europe and the world. The result wasn't pretty.
The two most important uncertainties for markets and economies reduced to two - global growth and the outcome of Europe's financial and fiscal crisis. (Middle East unrest, North Korea, Iran, US elections and social reactions are not ignored here but play into these larger uncertainties.)
Plot these two major uncertainties as axes and you have a matrix with positive growth and positive European restructuring in the upper right quadrant, and a sharply declining world (slow/small to negative growth and European de-structuring) to the lower left. The challenge is to develop these "four worlds" as plausible, then ask how they influence your intuitions about what may occur, and how to best prepare.
Throughout the afternoon's discussion, the lower left emerged as our "zone of expectation," in which global growth is flat to down, and Europe cannot get out of its own way, slipping further into recession (or worse, in some countries) while banks and sovereigns continue to weaken. The ugly realities of European banks - highly levered and full of sovereign risk - continue to come home to roost, with knock-on effects in China and US trade, and a possible meltdown in the derivatives market.
In the negative scenario, Germany continues to refuse the "print money" option through the ECB, which one analyst in the room described as "Europe's bad bank." The EFSF is revealed as a non-solution to the problem as the debts cannot be paid either by the sovereigns nor any combination of ECB-IMF or external sources. If you speak fluent banker-ese, think of the EFSF (so described by one expert), as "a two-tranche CDO with the key difference that the "guarantors" of the structure could "opt out" of the structure and become "obligors," modifying the subordination structure and adding to the credit risk."
What that means simply is that 'I was in the deal as a guarantor, then I decided to leave and now I am guaranteed by those left behind.' Huh? (Yes, it's that bad.)
Among other ideas that surfaced to consider, these from Asia experts, is that China is not interested in saving Europe from itself as China has too many challenges of its own (and has been managing all of them successfully so far.)
Clearly possible is a world in which Europe really begins to unravel in 2012, when its banks have to raise 573,613 Billion Euros (!!). Assuming Europe's sovereign debt maturities are refinanced, they need collectively to raise 1.073 TRillion Euros, with Italy and France needing just under 500 Billion of those. For those unversed in capital markets, these are giant, daunting numbers. Despite talks of "recapitalizing" European banks, the numbers there do not add up in many cases, as numerous banks are beyond help (Dexia and Monte Dei Paschi being examples.)
The darkest pronouncement on the economic scene came from one European banker who arrived late to declare, "Depression! That's where we're headed, and the Germans are leading us there."
He went on to elaborate that he believes Germany under Merkel will fight the idea of monetization (some form of extensive bond-buying and money-creation via the ECB) and urge for liquidation, a policy error in his view that could victimize much of Europe, and in the worst case spill over to the rest of the world.
As with all scenario deliberations, the insights and "aha's!" varied for participants, who would draw their own conclusions about what actions seem prudent and necessary for them in the face of these uncertainties. It was hard to see how Europe in the near or medium term could overcome the the financial realities or politics as demonstrated so far. How could Europe find an answer without further volatility and declines?
The only plausible positive scenario, one old hand suggested, was a world that will go sideways (as Europe goes down) for another 5-6 years, and then the US (somehow magically resolving its own fiscal crisis) would come out the other side advantaged (presumably by its diversity, dynamism and willingness/capability to take action.) Europe as a region would simply become less relevant in a more globalized world.
Well, that's a scenario to consider, and perhaps it smacks of local bias. In any event, a lot has to be addressed in Europe and the US between here and there, and the numbers are not forgiving.
In the near term, Merry Christmas and Happy New Year.

Listen to the (Not Very Honorable) John Corzine!!

"I never intended anyone at MF Global to misuse customer funds."
The gist of MF Global CEO John Corzine's testimony is "deny, deny, deny" before the Senate Committee today. It bears watching for a lesson in elusive and dodgy answers to sometimes fuzzy questions.
Oh, and "I do not know where the (missing $1.2 billion?) money is," as Corzine and his COO Bradley Abelow and CFO Henri Steenkamp uttered in sequential chorus - three monkeys who apparently saw no evil, heard no evil and are speaking no - evil? Well, no sense, certainly, and perhaps little truth. To suggest that they are outright lying would not seem to stretch the apparent facts.
What I want the senators to ask is:
What exactly were you getting paid for, Mr. Corzine, if not to oversee the proper functioning of your firm?
What form would this oversight take in a firm whose sole purpose is to invest money - your own and others - making various long and short trades in various securities to (hopefully) make more money?
You might as the CEO be expected to know at any given moment how much money your firm had, how much you were putting at risk and whether you were ahead or behind. Whether your clients were winning or losing would be among the most important facts for you to have at any given moment under any market conditions. And keeping funds appropriately separate would be among your most important daily operational functions.
In a business where the law specifically prohibits the commingling of client with proprietary funds, whether you were misusing client funds - or how exactly you know that you are NOT misusing client funds - would appear to be in the top three facts the CEO is paid to know and to which his human and technology systems should be dedicated.
This testimony from Corzine & Co is reminiscent of an old New Yorker cartoon, which shows a young adolescent staring at a pile of something dark on his plate and saying, apparently to parents who want him to eat his vegetables, "I say it's spinach and I say the hell with it."
In this case it is not spinach, but something worse. Corzine should be - like Sandusky at Penn State - at least under house arrest and perhaps a $5 million bond until it can be proven that his firm - still unable to "find the funds" - did not steal the money and defraud his clients. This is case where missing money should mean the man has to prove his innocence.

Joe Paterno, Greece and OWS

What do Joe Paterno's firing, the state of things in Greece and Occupy Wall Street have in common?

Paterno (in whose name we find the Latin word for "father") failed to respond adequately to personal corruption in his immediate environment. More than that, it was taking place within his specific area of direct responsibility. In the family, you might say. (If you are reacting in a way to defend Paterno, please read the Grand Jury report before making any final judgment on his innocence here.)

Greece has in not so recent years fallen into a state of personal and political corruption best characterized by the failure of a tax and judicial system that holds almost no one accountable for failure to pay, flagrant lying, misrepresentation and virtually all other known forms of evasion. Basically the country is crawling with cheats who are seeking their own advantage and colluding in the advantage-taking of others by turning a blind eye. Why anyone would buy a Greece-backed bond at any interest rate is beyond me - unless you think the Germans will make it good.

Greece has no reliable public book-keeping system nor a functional tax regime nor mechanisms (or will) to enforce laws, which are therefore routinely ignored. For more color and detail here read Michael Lewis' latest book "Boomerang," in which he devotes a very entertaining chapter to the Greece he found when he visited recently. He reports that his sensibility as a journalist seeking illustrative anecdotes was dulled by the sheer repetition of one horrifying example after another.

Occupy Wall Street (or Oakland or Denver or San Francisco or any of the other cities expressing inchoate outrage) is a movement against corruption of these types - the failure of people in high places to do the right thing when it is obvious what needs to be done, or failing to establish and enforce a set of reasonable rules and mechanisms to protect against the darker side of human nature.

That side of human nature is the self-gratification-seeking side that believes the self comes first, and anyone who doesn't play that way is a fool.

At the most grotesque level we have a coach at Penn State sexually exploiting boys as young as 10 years old and not being held accountable by people in a position to intervene once the behavior was known. This story you can find in the Grand Jury report, which should make any reasonable person furious.

At the cultural or state/social level of Greece, we have a kind of moral rot in which citizens of all kinds exploit a system designed by citizens to be exploited. Everyone is in on it, and anyone trying to address it is punished, frozen out, vilified - maybe even scared into shutting up.

Occupy Wall Street and its associated movements are propelled in part by a reaction against corruption at the top, the self-seeking and exploitive behaviors that require collaboration among the elite, but also require participation among those who want to get on or stay on the gravy train, and who don't want to upset their own apple cart (Pardon the mixed food metaphor here.) Congress is fueled by money that pays them to support laws that are not good for the whole but serve the campaign-contributing part.

Years ago at a Harvard seminar I listened to a high-level lawyer experienced in business and government who was asked what was the most important challenge or weakness in the United States? At the time (1983) the country was coming out of 1970s stagflation and worried about the rise of Japan. 

His answer was unexpected, at least by me.

"Intellectual dishonesty," he said, "From the highest levels on down." He went on to say that this weakness was often accompanied by collusion and moral cowardice.

Please count me among those who believe Joe Paterno absolutely deserved to be fired, notwithstanding his years of service on the football field and being beloved by many. He failed to uphold the father's first duty - to protect his children - and also to clean house when it was evident that rot had set in. And we might call this rot of the very first order because it violated every child's right to feel safe - and be kept safe - from adults who would exploit them.

Greece will not easily be able to un-corrupt itself because the social/political rot is too pervasive, deep and broad. The country is feeding at the trough of its own making and they have run out of slops.

The corruptions that have insinuated themselves into the US system may be in some ways as difficult to address, as we try to undo some of the self-dealing practices in the financial service and other big-money regulated industries. Let's start by bringing back the Glass Steagall Act, which should never have been repealed. Those in authority knew that well well enough.

To take another example we should also start undoing some of the most extreme retirement packages granted US Senators or other public servants (check your local police retirement package for some scary examples), just as Greece will have to address its "retire-at-50" program. Oh, and all those Californians enjoying absurd property taxes made possible by Proposition 13 will have to give some of that up.

It might seem overwhelming to tackle the breadth and depth of corruptions of these kinds because they take so many forms. So just look around for simple examples close to home, stand up for what you think is right and speak against what you know is wrong.

That might be called government by the people. It should occupy us.

Acting Amid Europe's Uncertainties

Having conducted three recent scenario sessions (in Switzerland and Germany) in the last month to consider the current European debt crisis, I find most notable that the range of futures conceived by deeply experienced European and global business people all turned up bleak in the near to medium term.

It is rare not to imagine in any thorough set of scenarios one that is relatively positive. The theory and the practice of scenario thinking suggest that there should be an upside where the most important uncertainties resolve in a constructive and positive fashion, even in ways that will surprise you.

In this case, however, positive scenario construction was frustrated by some obvious obstacles and the negatives seem to logically feed on themselves.

Could you imagine European leadership converging to solve the problem in time? Could you see a super financial institution (IMF or ECB on steroids) emerging in time with the relevant power and legal frameworks in place to satisfy the investing world?

If the ECB really could “print money,” would that solve the problem?

Could you imagine that the Greek populace would move quickly to accept austerity and then change entrenched cultural and political behaviors to deliver on it? Would a populace vote for a decade of lower living standards to remedy past excesses (a question the US may have to face at some point)?

As uncertainties mount and assets continue to flee the danger zone, can you imagine a European recession being avoided? Would the south be much worse off than the north, or would all suffer equally together?

These were some of the issues that made a near-term positive outcome hard to construct. And negative implications are then difficult to explain away. If Greece cannot be “saved,” then what about Italy? Would Berlusconi get out ofthe way in time, or fashion a solution that was not in his own (problematic) image?

As some banks become more troubled, will they all be rescued or will some be allowed to fail? (Not Dexia, apparently.) What would be the results of that, either way?

Little wonder that markets remain roiled as these questions continue to rankle. Of real significance for the client involved was the sense of urgency around asset decisions to be taken in the Euro-zone regarding real estate and other business interests. These decisions are of course proprietary but the overarching implication was to act sooner than later and not in the vain hope of a magic bullet. Kicking the can down the road stops working when you run out of road, and Europe is already there.

One source of insight and perhaps comfort is that in Japan in 1997 - a similar strategic moment in a country's history where internal reform was required that the country could not actually manage - a scenario process for Morgan Stanley revealed a similar dilemma. It was not in the nature of the country to get out of its own way and markets would not be kind.

It turned out that money could be made in the anticipated “bad scenario” if the firm developed a robust approach to it and followed through on it.  (They did, and saved themselves from a costly ($1.2B) acquisition that a competitor dove into, much to its later chagrin.)

Taking action at such points in time requires nerve in the face of uncertainty, conviction about the course to set and resolution to follow it. We shall see as Europe's sovereign debt crisis continues to play out whether the early pessimists fare better than those who are still hoping for a solution to emerge and who continue to believe Europe can get there from here.

Uncertainty continues to dominate the news but the need to act resolutely remains.

Moving Against Massive Mis-Allocators

In 1983 I took a fellowship year as the journalist I was then to address my own ignorance about economics, both the theory and the practice of the "dismal science." I thought I would understand capital allocation (what do you do with the money you have?) by studying banks.
Prof. Bill White, who taught at the Harvard Business School and had written their textbook on capital markets, disabused me of the notion that banks themselves allocate capital. 
"No,' he explained, "Capital is allocated through a host of other agents and agencies - consumers, businesses, governments, military spending policy, waging war, etc."
Years later came the crash of 2008. With it dawned the realization that banks - mostly investment banks, allowed by Congress to do what the post-depression Glass Steagall Act had forbidden them to do - had engineered the single largest mis-allocation of capital in human history. Let's use the number $2 Trillion. True, others were involved, but it could not have been accomplished without banks acting outside the public interest for the private gain of the few.
Now the United States stands on the brink of collapsing its own economy in the face of global competition, unsustainable domestic and public debt and with a leadership paralyzed by ideological conflict. Little wonder that a movement called "Occupy Wall Street" has sprung up and spread as people who lost life savings, homes and the prospect of continued employment - or getting their first job in an activity worthy of human energy - have sought to express their discontent.
Private economist Andy Xie, based in Shanghai, has written about the "grim statistics":
 - nearly 10per cent of US households have lost homes to foreclosure since 2008; 
 - 28 per cent of homeowners with mortgages have negative equity; 
 - 25 million people who want to work are unemployed or underemployed; 
 - real median household income has fallen by 10 per cent since 2007. 
  -the average premium for the household of employer-sponsored health insurance has risen by 9 per cent this year - about 28 per cent of median household income. 
I am currently running a scenario exercise in Germany for a European-based global company that wants to better understand the risks and potential reverberations of the sovereign debt crisis. What has emerged in two days is a strong view that recovery is NOT just around the corner, and the rest of the world is likely to be involved in the recession or deflation or even depression that could unfold. All this because governments have borrowed too much, consumers have overspent and banks have been more than willing to play and to promote the debt game, often through sophisticated financial engineering that is arguably unproductive, and possibly counterproductive in the extreme.
An economist here has laid out the alternative policy responses to massive indebtedness, and what history suggests. Germany tried to money-print its way out of debt in the 30s and hyperinflation ensued. The US followed an Austrian model and tried to let the "bad companies" fail so the "good companies" could be rewarded, but the failure of too many "bad" companies led to depression. Since 1990, Japan has pursued a "buying time" model in which the can is kicked down the road (as long as there is road) by government support. Japan, unlike the US, began its crisis with massive domestic savings (12 trillion yen at the time). Its economy languishes now in part because institutions that should fail are not allowed to.
President Obama has unveiled a tax-funded plan for infrastructure maintenance (necessary roads, bridges, school) as an economic stimulus that leaves something productive in its wake. Funded by taxes rather than debt, such efforts are shown historically to contribute a dollar to the economy for every dollar spent, and they do not leave higher levels of debt in their wake. (It should not require much economic training to understand that debt cannot be solved simply by more debt.)
It appears the increasingly rapid Republican ideologues, who would rather damage Obama than address the economic problems now, may get their way. This will be another form of "misallocating capital" because it will mean we are doing nothing to address our crisis except failing to act in one of the few ways that history and economic theory/practice suggest we should. 
I so fondly remember the late Professor White, a brilliant and kindly man who devoted his life to teaching students about how capital can and should work - only to learn that it is easily mismanaged by the relatively few humans who are in a position to allocate it intelligently - for the good of the many.

"Walking Papers" by Sandra Hochman

Take this as a slice of New York Life, where just about everything interesting that happens is unexpected. 
I am in an East Side Hospital, waiting for my turn with the physical therapist to work over my recently operated-on arm. They have reattached a detached bicep tendon (thank you, Little League, for your demands on aging fathers) without which you have no working bicep muscle. 
Overheard down the hall is an ever-so-New-York-kinda-voice of an elderly(?) and possibly Jewish woman complaining of pain in her foot and imminent steps to be taken with a podiatrist to make shoe inserts that will alleviate the agony of her Plantar Fasciitis.
Wanting to help the world - one painful step at a time - I intervene to confess that I have had that condition, tried the useless podiatrist and inserts, then benefited from counsel from an internist I met sailing in Maine who said Forget the Podiatrist. The answer to your condition is Birkenstocks. 
I wear them almost all the time now to occasional odd looks which I ignore because my foot is no longer killing me, thank you. In fact the bad foot in Birkenstocks now works as it once did. Birkenstocks work!
I deliver this news to the woman in the hallway and soon discover she is not just any random woman of New York but a highly accomplished writer - Sandra Hochman, Pulitzer nominee for poetry, author of "Walking Papers" (Viking, 1971), the first of six novels, several books of avant-garde poems (Earthworks, Love Letters from Asia), Year of the Woman ((1973), an early and controversial documentary about the early women's movement, and most recently author of an imminent Broadway production based on her children's story, "Timmy the Great."
Some weeks later Sandra invites me to her 75th birthday party in a towering but small apartment on East 79th Street. By then she has read "Into My Father's Wake," the book that I sent her as sort of a get-to-know-me present between writers (and hoping she might offer some helpful advice). She responded like the teacher and mentor she has often been to others (she started the "You're an Artist Too" foundation at the Metropolitan Museum of Art to teach poetry and song writing to children aged 7-12 and ran it for 15 years) generously saying she admires my book and wants to help me get it published.
I do not make a point then of saying that it has been published (Amazon) because she comes from a world where only real publishers (Viking et al) count. "Self" cannot be a valid publisher in the world in which she came of age - despite the advent of the New Economy. 
And as I will learn over our first lunch together, she has been very close with poet Robert Lowell and novelist Saul Bellow and other prodigious writers (including Philip Roth) of the officially published world. I am coming to believe that this rare literary woman's life should be made into a movie (what about a musical?) about women who have lived three-quarters of a century but seem to have had half a millennium of experience in that time, and remain far, far from dead. 
By now I have secured a copy of "Walking Papers" from the New York Society Library and what do I discover? A tour-de-force of language and imagery and a highly independent woman's consciousness, often delivered in poetry-as-prose, lyrical commentary on ideas and feelings that spill out as vivid experience. This is a wonderful, rare and often very funny book that was way ahead of her time. 
"Walking Papers" should be dusted off and read by any woman who thinks her own deeper feelings of post-divorce rage and fear and scars of a lonely custody-fight childhood and frustration and despair regarding the ways of men, lovable and treacherous as they can be, or the elusiveness of enduring love are unique to themselves. And men should read it to learn that yes, women think about those things too.

Moreover, "Walking Papers" stirred me to remember break-through writers who moved me when I was a much younger student - Alain Robbe-Grillet comes to mind, whose rule-breaking style made his work uniquely modern and changed the way many people thought about fiction. 
So I marvel at this chance encounter in a hospital hallway that brought me to a breakthrough novel of its time that still has the power to inspire after all these years. How did I miss "Walking Papers" the first time around? Why weren't students of fiction like me forced to read it? (Some issues of feminism might be at work here.) 
Thanks to a couple of sore feet, New York life gave me a second chance.

9/11 Threat? Looking back, not ahead!

Despite the attention being paid to the 10th anniversary of 9/11, the past may well be beside the point. What is in front of us is much more important than what is behind us. 

The Twin-Towers attack, notwithstanding its individual tragedy and economic and political impacts, both domestic and international, distracted us from the future that we wish to create and put us at risk of not being able to create it. "It" is, broadly speaking, a better world than we found when we got here - inside and outside our borders.

Nations, like communities and families, must decide how to allocate resources to sustain the present and build for the future. Getting the enemy to mis-allocate resources to a fatal degree is an old and clever strategy. Many in the military and elsewhere believe we caused the Soviet Communist system to collapse by forcing them to overspend on defense when they could least afford it. 

Al Qaeda has effectively done that to the US. Under the Bush-Cheney regime, we overreacted at a time when we could not afford to devote so many resources outside our own domestic challenges. (Defense spending under Bush jumped from 3.6 to 6 percent of GDP). We launched a war into Iraq on a false pretext. Homeland security exploded. And Obama has held to that overall trajectory, upping the ante in Afghanistan against the informed counsel of his own Vice President. (And we continue to fire drone missiles into countries against whom we have not declared war, killing innocents along the way.)

According to the National Priorities Project, the United States has spent more than $7.6 trillion on defense and homeland security since the attacks of September 11, 2001. Of that, homeland security spending alone has cost $635.9 billion. Funding for homeland security has risen from $16 billion in FY2001 to $71.6 billion requested for FY2012. Defense spending for 2012, much of it predicated on the terrorist threat, is projected to reach $703 billion, or roughly 5% percent of current projected Gross Domestic Product. That's also a little more than half of the $1.3 trillion deficit.

If even one trillion seems unfathomable, that's because it is. How big is one trillion? Maybe this will help:

If you had started spending a million dollars every single day since Jesus was born, you still wouldn't have spend a trillion dollars (CNN reports). Actually, you would have spent roughly the equivalent amount the US plans to spend on defense this coming year. A mathematician puts it like this: "1 million seconds is about 11.5 days. 1 billion seconds is about 32 years. A trillion seconds is equal to 32,000 years."

So $7.6 trillion on defense and homeland security in one decade represents an allocation of capital that is unprecedented in human history (the entire US economy in one year is worth about $12 trillion).

Could the US afford $7.6 trillion on defense and homeland security over the last decade? It would appear not, on the face of it.

It's not that nothing should have been spent, but the focus outward on the terrorist threat that might arrive here has managed to ignore the inward needs of the US, which are beginning to play out now with greater force. 

Thomas Friedman recently noted the convergence of four negative conditions in the world today: power arrangements radically changing in the Middle East; Europe struggling to save its financial house; China teetering for reasons of its own; and the US in a political stalemate as its currency weakens, its economy grows less competitive and its fiscal order resembles that of an early developing country.

Presently the President and Congress are fiddling, unable to agree on spending or cuts or taxes - the CBO currently estimates a $1.3 trillion deficit for 2011, the third largest in 65 years - or priorities that should guide our actions for a stronger future. 

The US simply has to get its act together if it is to serve as a linchpin of healthy democracy, an engine of growth and a purveyor of freedom in the world. Freedom in this case would mean an environment where individuals are free to pursue and to realize their dreams. And that would mean we are investing wisely and well in our future, not squandering resources out of fear, imprisoned by the force of memories better left behind.

Global Groundswell - "Mad as Hell?"

In Israel a social movement aimed at income inequality and housing prices has sprung up from a youth Facebook protest. Benjamin Netanyahu canceled a trip hoping to nip the protest in the bud. Speculation arises that Israel's Left, long neutralized amid concerns for security first, may be in resurgence.
In Japan a woman on a farm confronts the lackadaisical government response to radiation by conducting tests of her own - to discover that some levels are as high as those surrounding Chernobyl. She is joined by an expert who has quit the official government effort in which he has lost faith to get his own answers and help those willing to help themselves.
In Syria a protestor observing government's murderous crackdown on dissidents dismisses the latest brutal violence as "stupid" and points out that government forces, already suffering desertions, "cannot occupy the entire country." 
These are just a few examples of grass-roots reactions around the world to governments that appear out of touch with or indifferent to the lives of the people - and the people are not standing for it anymore. They are standing up. And in so doing they are able to leverage the internet to discover important truths, publicize their efforts, reveal the tyranny or venality of the opposition and draw those of like mind into efforts of resistance and change.
Much is being written about "Arab Spring" and now "China Spring," as populist protests arise in the face of determined state controls. At one time it was axiomatic that certain regimes - Saudi Arabia notable among them - were impervious to disruption from underneath. But here the notion of possible futures is limited by metaphor. If you think about existing government structures as a pyramid, a small top is supported by an enormous bottom and the weight of the structure from the top down seems to keep it inevitably in place.
In the world of the Internet, however, information becomes a universal solvent able to dissolve organizational power structures. We now are hearing more and more about "the cloud." This is the state of things changing from solid through liquid to gas. The internet has come from things that were solid in the past (bricks and mortar and wire) and gone through fluid - the mediated flow of ideas - into thin air (wireless). A rapidly increasing number of free hotspots for wireless internet signals only one element in the shifting power arrangements in the world. The spread of smart phones into ever lower echelons of society will bring new waves of awareness and reactions to the conditions that exist - and pose new challenges to those responsible. 
An intellectual property expert at a film festival I attended not long ago in Nassau noted that, "The good news about the New Information Economy is that you can do it all. The bad news is that you have to do it all." He meant that technology and networks now allow an individual to create, produce, publicize and market a product or an idea, but this also requires direct involvement in every stage of the effort. And it does not replace the bricks-and-mortar necessity of being physically present in the right place in the right way at the right time, and integrating those realities with the virtual. It also suggests a world in which rapid collaboration can occur around an idea faster than at any time in history. And this will make for volatile politics. This should be contemplated by regimes that have lasted this long without attending to the fundamental needs of people - jobs, education, health, opportunity.
Where the governments are failing to "do it all" - and it seems increasingly that all governments are - people are rising up with unprecedented power to do more - if not all - for themselves. As Beersheba Mayor Ruvik Danilovich was quoted saying about Israel's nascent movement, "This was a landmark event. The norms that have been accepted in the past will not be in the future." 
If he is right, the world is still in the early days of a fundamental power shift - toward the bottom of the pyramid - and the turbulence to come in the next decade will be a subject of surprise, if not "shock and awe" to many who thought their positions secure. It is not too much to imagine this will involve the United States, where many are now fed up with its intransigent if not incompetent government.

Figures Don't Lie, But Liars Figure

Recent events including a ruptured bicep tendon and a large research effort put me temporarily underwater - in the non-blogosphere - but an item in the Sunday NY Times forced me to resurface. It appeared as an essay by John Schwartz under the title "Not So Representative Investors," and it caught my eye because I had been thinking about not so representative Representatives.
In an interview I conducted to prepare for a West Coast scenario seminar on Asia and the future, a woman investor - portfolio manager for a certain western state - remarked that since 1975 the US has changed from a democracy to a plutocracy, but has anyone noticed?
She noted that the top 1 percent of the population makes 25 percent of the income and controls 40 percent of the wealth. And, she observed, the US Senate is almost entirely in that top one percent while most of the members of the House of Representatives are as well.
"Do you think that a democracy would have voted to prohibit Congress from regulating derivatives?" she asked (and I was quick to recognize this as a rhetorical question.) "Do you think a democracy would have voted to protect its Big Pharma industry from outside competition? Is that what a democracy would do?"
By now I was fully engaged with her line of reasoning and all I could do was concede her logic.
Her questions (or rather the point behind them) jumped up out of Schwartz's essay as he cited a recent study that found House members earning "statistically significant positive returns" on their portfolios, outperforming that market by 6 percentage points. Senators do even better, according to the research, showing "some of the highest excess returns ever recorded over a long period of time," beating the market by 10 percentage points a year.
One of the study's authors, Georgia State University's Alan Ziobrowski, an associate professor of business, is quoted saying that these returns are "abnormal" in the sense that they cannot be explained by good fortune or dumb luck.
It is interesting to consider how the Congress manages to outperform the markets in this category of finance as they have driven the country into its fiscal morass and appear unable or unwilling (or both) to get us out. Meanwhile the dollar continues to weaken, the Treasury market is faltering and global markets are skittish at the prospect that the US, manager of the global reserve currency, has lost its way.
Having just read "Exhorbitant Privilege," by UC Berkeley Professor Barry Eichengreen, who lays out prospects for the decline and fall of the dollar, I have reason to think that talk of a dollar collapse is not too extreme, particularly as Congress fiddles while Washington burns. It is little comfort and no compensation to realize that meanwhile they have been on the inside earning outsized returns.

Is This the Way the World Ends?

The purported end of the world came and went last Saturday, and to the surprise of few, "the Rapture" did not come to pass.

The world is not, however, out of the woods if you read Peter Nolan's superb Crossroads - the End of Wild Capitalism and the Future of Humanity. Nolan's thesis is that unrestrained capitalism, its extremes and its contradictions have put China, the US and the world of Islam on a collision course that gives the world "the choice of no choice." Either these three models of culture and capitalism will find constructive engagement or the world as we know it is in extreme peril - either from economic instability and social reaction, military conflict or environmental destruction, or all of the above.

Students of economics and geopolitics will find much that is familiar here in theory but Nolan's formulation of the world's current dynamics, risks to the system and limited options going forward - engage cooperatively or unhinge the world - are elegantly reasoned and argued. As holder of the Sinyi Chair at the Judge Business School, University of Cambridge, Nolan demonstrates great knowledge of and passion for China and its potential to find a harmonious route through capitalism's contradictions, although success here is by no means a given. He also argues convincingly that global capitalism requires global regulation in order not to run amok and roughshod over most of the world's population. 

In this part of his thesis is the intriguing notion that the major oligopolistic global corporations have an insurmountable advantage in the world and are increasingly stateless in their ambitions and interests. Developing economy companies are starting from so far back in some areas that they cannot hope to compete. And then, what?

Readers will also find fascinating economic and political history to suggest that the underlying approaches to capitalism pursued by China, the US and the Islamic world are far more importantly similar than they are different. Property rights, individual pursuit of profits, taxation and a drive to serve the common good all have a place in these systems (and Islam has found a way to embrace interest on capital by another name.) Their differences with regard to capitalism are more perceived and exacerbated by nationalisms and cultural bias than substantive.  But can these systems find ways to constructively coexist before it's too late?

Nolan reaches back as far as Biblical times to report the early histories of China, the Middle East, Europe and the infant United States, which has risen in the post WWII period to dominate the global system (and now spends $2 billion a day on military expenditures!). Moreover, the US, motivated by its thirst for oil, has alienated Islam with its unquestioning support of Israel and tends to view China as a rising threat rather than a potential and natural collaborator in meeting the challenges of global modernization. China's labor advantages will continue to depress advanced economy wages, and we shall have to deal with that.

In the last 30 years, progress has been made on many fronts. Millions have been lifted out of poverty as finance and technology have spread into the developing world. But wealth disparity has grown significantly (Egypt, by no means alone, is one example where one percent of the population controls nearly all the country's wealth); the environment has been severely degraded (decertification growing by great leaps in China, whose organic water pollutants equal those of American, India, Russia and Japan combined); and, global warming has emerged as man's unique threat to the world in which we live. In this the US has been slowest to recognize the threat, let alone take significant steps to address it, Nolan notes. 

The US has fomented an unregulated form of global finance capitalism that led to the great unwinding of 2008, which has not yet played out. This is one factor, along with US dependence on autos and oil, military power and a jaundiced view of the Middle east, that leads Nolan to conclude - quoting former US defense Secretary Robert McNamara, that there has never been a more dangerous moment in human history.

This book is riddled with fascinating facts and also broad arguments to challenge any conventional American view about the legitimacy of our approach to global finance capitalism and to others who may challenge us or require a different political approach on the world's playing field. You may finish reading this book as I did, convinced that if the US is not prepared to change some of our political and economic approaches to China and Islam, we may bring Judgment Day upon the world sooner than we think and in ways not yet imagined. That said, Nolan will help persuade you that nuclear Armageddon, as one way to end the world, is by no means out of the question.