Dialectics of Finance

The Saga of Viktor Orban and Hungarian Democracy

noreply@blogger.com (Nasser Saber) — Mon, 23 Jan 2012 04:43:00 +0000

I rarely write “follows ups”. Events I discuss on this blog are driven by the irresistible hand of speculative capital, so their outcomes tend to be preordained. Still, on a snowy weekend in New York I thought to take a break from work and give you an update on Viktor Orban’s saga. The information from the Financial Times is in my fingertips and there might be an educational angle to the story. You know Viktor Orban of Hungary, don’t you, from the previous posts here and here.

Pressure mounts on Hungary (Wed, Jan 18)

A simmering battle between Brussels and Budapest intensified yesterday when the European Union’s executive branch ruled that three new Hungarian laws violate EU treaties and began legal proceedings to overturn the measures, one of which officials believe threatens the independence of Hungary’s central bank.

The heightened tensions came as the government of prime minister Viktor Orban continues to seek aid from the EU and the International Monetary Fund. Brussels has said it is unwilling to support such aid until Mr Orban revises the central bank law, which gives the prime minister increased power to appoint senior management at the bank.

Who, then, should appoint the senior management at the central bank of a country?

Orban fights shy of battle with EU critics (Thu, Jan 19)

In a hastily arranged visit to Strasbourg, Viktor Orban sought to reassure critics that the sweeping reforms by his government since its landslide election victory in 2010 were in line with European principles... The EU’s executive arm on Tuesday announced it was taking legal actions against Hungary to reverse measures it believed could compromise the independence of the central bank and judiciary among others.

Landslide victory. Reversing local law. Central bank independence. European values.

European values!

Hungary’s leader ready to back down in EU dispute (Fri, Jan 20)

Viktor Orban, Hungary’s prime minister, appeared to back down on a key issue in the country’s dispute with the European Union, increasing market optimism that talks could soon start on a financial support package. Mr Orban told a radio station he was prepared to drop a planned merger of the country’s central bank and financial markets regulator, which had raised concerns over the independence of the central bank... “It is important to accept that there appears to have been a complete turnaround, even a U-turn, in terms of the attitude of the Hungarian administration – and right to the top,” said Tim Ash, head of emerging markets research at RBS.

Game, set, match, then, you say?

Not at all.

Game, perhaps. But set and match are yet to be played. Therein lies the educational aspect of the story that I mentioned.

Yesterday, after the prime minister’s U-turn, Paul Krugman of the New York Times had a guest post titled Hungary, Misunderstood? If you click on it here, you will see it is quite a post, dense with data, graphs, text and obscure references that, unless you are a student of Hungarian history, you would neither know or care about.

What is more, if you search Krugman’s blog for “Hungary”, you will find 10 posts. Here is the page in question. One relatively sympathetic article is from August 10, 2011. The rest, progressively critical, including Hungary’s “hair raising” march towards dictatorship, begin in December 2011.

Why is this man who cannot properly pronounce the name of the capital city of Hungary so suddenly interested in that relatively small country? What gives?

A partial answer is that Krugman is the attack dog of neo-liberalism. He hears the whistle and off he goes. The attacks he leveled on the opponents of NAFTA who said that the treaty would result in destruction of jobs in the US would make Rush Limbaugh blush.

But it is not a matter of one attack dog only. Today, two days after the matter seemed all but settled, came the editorial in the New York Times. Titled Hungary’s Lurch Backward it went for the jugular from the opening sentence: “The soothing words of Hungary’s prime minister, Viktor Orban, do little to counter his government’s assault on the independence of Hungary’s press, judiciary and central bank”.

It ended by saying:

Unimpressed by Mr. Orban’s facile promises, the majority parties in the European Parliament now want governmental leaders to consider invoking a clause of the E.U. treaty that would strip Hungary of some voting rights if Mr. Orban continued to flout European law. Europe’s powers to nudge Hungary back from authoritarianism are limited. But to its credit, it has begun wielding them.

If you are not Hungarian and ordinarily do not follow the affairs of the country, I say keep Viktor Orban’s name in the back of your mind. My guess is that you will see it again – and never in a positive light. In fact, that is how you will only hear of his name – until you hear of it no more.

And as a tribute to Hungarians everywhere, get a copy of Marai’s Casanova in Bolzano. Whether you read it on a gloomy winter day in New York or under sunshine in Sao Paulo, you will see it is the most adult, and therefore the most touching, love story ever written!

On the Theory of Knowledge

noreply@blogger.com (Nasser Saber) — Tue, 17 Jan 2012 08:15:00 +0000

In yesterday’s post on the EU, I mentioned en passant the Hungarian prime minister Viktor Orban and his demonization in the west after he got between capital and its quest for high rate of returns.

Today, the New York Times had a front page article in the business section on Hungary. Hungary, Once a Star, Loses Its Shine, was the heading. If you can, read the whole piece here. If you read yesterday’s post, you will smile in many places and can even anticipate what is coming next. I was not kidding about the tiresome predictability of the news. Look at this paragraph:

To some critics, the biggest problem with the Hungarian economy is Mr. Orban himself …Backed by a two-thirds majority in Parliament, Mr. Orban has passed a flurry of laws that have concentrated power in his hands, weakened competing institutions like the central bank and alienated international lenders as well as an increasing number of Hungarians.

No doubt one of those alienated Hungarians is George Soros.

Note also the reference to “competing institutions”. The Times considers Hungary’s central bank as a competing institution with the government. I could not have said it better myself.

I have a soft spot for Hungarians because of Sandor Marai. His Casanova in Bolzano is the most adult and thus, the most touching, love story I have read. But this is not about Hungary. Rather, I want to make a point about what you know and how you know.

From the short Times paragraph above, we see that Orban has two-thirds majority in the parliament. That is more than you could say for Cameron, Merkel or Sarkozy. Yet, try as you might, you will not find a single article in English anywhere – newspapers or otherwise – explaining Orban’s point of view and his rationale for submitting those laws to the parliament. Nada. Zilch.

There is no centralized command and control center for these media outlets. How could it be that they all say the same thing as if on cue?

Which brings me to Michael Burleigh.

I don’t know who Michael Burleigh is. He must be a piece of shit, judging from where he writes and what he writes. I stumbled upon his writing following news links in relation with the assassination of the Iranian nuclear scientist. Here is what he wrote:

They [Iranian nuclear scientists] work for a regime that has explicitly threatened Israel (and by implication many ambient Palestinians) with such a weapon. I shall not shed any tears whenever one of these scientists encounters the unforgiving men on motorbikes, men who live in the real world rather than a laboratory or philosophy seminar

I am not concerned with the lie about Iran having nuclear weapons or threatening others with them. Nor do I care about his use of the word "unforgiving". Unless he knows the assassins, he could not possibly know their motive.

What fired me up, though, was his put-down of men studying philosophy. I am one such man, constantly brushing up on my Rumi, Kant and Hegel to use in the upcoming Vol. 4.

The above mentioned shit thinks philosophy has no relation to real life. He is right so far as what he has in mind is philosophy as taught at Harvard and Yale. But real philosophy is real, sufficiently real, in fact, as to be unsettling. You will see.

Epilogue: The Origin of the [Crisis in the] European Union

noreply@blogger.com (Nasser Saber) — Mon, 16 Jan 2012 03:07:00 +0000

The idea of a man-made machine escaping his control and becoming a menace is familiar to modern men. It is the fantastic, subjective reflection in his mind of his real-life condition of being subjugated to the unrelenting rhythm of the factory system. The system was firmly in place in Western Europe by the beginning of the 19th century. Shelly published her Frankenstein in 1818.

The rise of large-scale industrialization in the next century and the introduction of the assembly line further intensified the subjugation. Assembly lines break down the manufacturing process into simple, repetitive tasks. Simplicity, as they say, is the killer. It allows for the replacement of skilled labor by the unskilled cheaper labor. In this way, it makes the individual differences irrelevant, reducing men to interchangeable cogs in a mechanical process that dictates the speed and intensity of their work and over which they have no control.

An out-of-control monster lends itself nicely to story-telling and visual presentation, which is why the new medium of film in the 20th century repeatedly visited the subject. Chaplin’s The Modern Times, Kubrik’s 2001 with its homicidal computer, The Blade Runner and The Terminator are perhaps among the better known examples of the genre. Movies exploited the menace of machinery at the same time that they kept it alive in the popular psyche.

But the mechanical aspect was always unconvincing. A physical monster is limited in size, proportion and reach. So its capacity to harm is limited. More to the point, a machine, no matter how intelligent, powerful or sinister, could always be brought under control – or just destroyed – possibilities that all film makers, as well as Shelly herself, had to acknowledge.

If we wanted to make a real menace, we would have to do away with such limitations.

Think of a menace that you could not see!

The invisibility I am talking about here is not a matter of stealthiness. Stealthiness is a property of physical objects and has the same limitations: it could be defeated and destroyed. Think, rather, of a menace that you cannot see because it is per se invisible. Such a menace could not be something physical. It would have to be something conceptual.

Conceptual is different from subjective. A subjective thing is purely mental, with no independent existence outside the mind of the person who is thinking it. Fear is subjective. It exists in a person’s mind only. Even when it arises from something real in the outside world, it can be driven out of thought. That is what Roosevelt was advising with his “the only thing we have to fear is fear itself” pronouncement. One could stop fearing.

Force, by contrast, is conceptual and real. It exists in the material world independent of our imagination. Whether we think of gravity or not, whether we are conscious of it or not, it exists and will continue to exist. It cannot be wished away or dispelled by determination and mental prowess.

How do we know that the invisible gravity exists? We know that from its manifestations: because objects fall; because there are two high tides a day; because the moon stays in its orbit around the earth; because the earth stays in its orbit around the sun.

Each manifestation, however, is individual and thus, limited. It cannot make known the full extent of the force because the force is more than – broader than – any of its individual manifestations. No amount of mere observation would lead one to suspect that there was a commonality between an apple falling from a tree, the daily high tides and the structure of the solar system. It is impossible to understand these phenomena and thus, impossible to establish a link between them, unless we understand the force of gravity in its fullness. To understand gravity in its fullness is to understand it as concept.

As a concept, gravity has no physical or temporal boundaries. Hence, the universality of its effects. Because it is nowhere and nowhen, it is invisible.

Capital, too, is a conceptual force, only that it is social. Being social, it is historical: There was a time in the course of the development of societies when capital did not exist. This historical-vs-natural distinction between capital and gravity is no idle erudition. I bring it up because it goes to the heart of understanding capital and our subject of the EU crisis. For, unlike gravity which is a blind force, capital is a live and a conscious force.

In his Doctrine of Notion, Hegel deduces the category of life as “unity in plurality”. Life is a “conception of unity whose whole nature consists solely in its differentiation into the plurality which is subsumed under it, and a plurality whose whole nature consists solely in its forming that unity.”

The “life” in Hegel is not the organic life as we know and understand it. Life’s multitude of dimensions goes beyond the unity-in-plurality attribute. Hegel merely names an abstract category he is deriving after a well-known concept.

Still, the plurality-in-unity is an important distinguishing characteristic of organic life. An arm and a leg are what they are by virtue of coming together in an organic unity that is the body. Cut off from the body, they cease to be what they were. They become dead meat. The organism, likewise, has no meaning except as the plurality of its parts.

If capital is a living concept, then it must contain the defining plurality-in-unity attribute. Since as a concept, capital cannot be seen, we must first identify the “body” through which it operates, its sensuous manifestation, so to speak. Only such embodiment will lend itself to our inspection. We thus ask: Life to the human body is like capital is to what?

The answer is: corporation.

Legally, corporation, too, is a concept. But we must focus on the economic angle. Economically, a corporation could be large or small; industrial or financial, domestic or international. How could we tell such varieties from each other? The answer is: balance sheets. Corporations’ balance sheets are where the type of corporation and, with that, the composition of the capital in them, is registered.

Here is a sample balance sheet:

Look at the entries under Assets at the top. They include cash, inventory, plant and machinery, office equipment, etc. What is in common between these disparate items that allow them to be added as “assets”? (In large corporations, where the composition of capital is more complex, the asset items are even more extensive. Look, for example, at IBM’s balance sheet).

You know the “apples with apples, oranges with oranges” adage. Adding presupposes grouping. Grouping presupposes a commonality among the group members. What is the commonality between building, inventory, office furniture and cash?

The answer is that they are the constituting parts of capital the way arms, legs and organs are the constituting parts of the body. This point needs elaborating; the analogy might not be obvious without some background accounting. To that end, let us build a balance sheet from “scratch”. We follow an entrepreneur who believes he can make a good profit producing and selling some “widget”, say, a toy, a pen or a particularly cheap wristwatch. So, he takes out $10 million that he had stashed in a safe place, incorporates a corporation and begins work.

Let us assume that he spends $5,000,000 to build the plant, $1,000,000 for an office from which to run his enterprise and $1,000,000 for the office furniture, supplies, systems,etc. We further assume that he pays $1,500,000 for raw materials and $500,000 in wages to workers to produce 100,000 widgets. The final $1,000,000 he keeps as cash for the day-to-day operation of the plant. The entrepreneur has set the widget price at $25. Since 100,000 widgets are produced, their total price is $2,500,000. In accounting parlance, that is the inventory.

At that point, the company’s assets will look as follows:

Cash $1,000,000
Plant/Equipment $5,000,000
Office/Supplies $1,000,000
Building $1,000,000
Inventory $2,500,000

Note that the assets add up to $10,500,000; $500,000 more than the money our entrepreneur advanced. How this magic is performed does not at present concern us. Our focus is on the conversion of money to capital and its unity-in-plurality.

Beginning with the conversion, note that cash – money – is not capital. Stashed in a mattress or kept in a safe deposit box, it would not multiply; it would not increase by a penny. Our entrepreneur knew that, which is why he took $10 million out of a safe and invested it in the widget venture.

In a like manner, the $1 million cash on the balance sheet is considered “working capital” precisely because it stands with the other components of the widget-producing capital. Taken out of that relationship, it becomes money again. It could be spent as money, but it will never increase in size.

The same reasoning applies to other asset items. The plant, for example, is a component of capital by virtue of being a place where widgets are produced – but only if there is an office from which to manage the production: dispenses cash, hire workers, raw materials, etc. Taken out of that relation, the plant becomes a storage for idle machinery. It eventually crumbles and dies, which is how the decommissioned plants are literally referred to in English. The town such plants once operated become, taking another word that is meaningful with reference to once alive bodies only, ghost towns.

The concept of capital, we see, then, can only be understood as the coming-together of various qualitatively different parts in such a way that the integrated whole is capable of internal growth. That’s how $10,000,000 became $10,500,000. That is the characteristic of an organic entity.

But, as in all organic bodies, it is not all quantity. There is a quantitative relation as well between the parts. A man’s head or heart can grow larger or smaller only so much before the distortion becomes fatal.

The relation between the various asset parts, likewise, must remain within certain quantitative limits. We intuitively grasp that point with regards to the plant or the office space. It would be madness for a small company to build a high-rise headquarter in an expensive downtown lot or a car manufacturer to try to squeeze its assembly line into an area one-half the size of what is necessary.

The relation of cash and inventory to other asset components is less intuitively apparent – because there is a supposition that “more money” can never hurt – but that is precisely when the abnormality in the body capital begins.

Look at the assets above. The company’s inventory is its lifeline. It was produced by workers who were paid $500,000 in wages and used $1,500,000 worth of raw material in the production process. The value of inventory is $2.5 million; $500,000 more than what went for its production. For that profit to be realized and for the process to continue – for which the entrepreneur must order $1,500,000 worth of raw materials set aside $500,000 in wages – the inventory must first be sold. The workers and raw material suppliers do not want widgets. They want money. Selling, converting inventory to money, is vital to the survival of capital. Hence, the pressure on the sales force and the resulting psychosis.

If the widgets cannot be sold at $25 each, they would have to be discounted; offered at say, $20. In that case, the entrepreneur would have advanced $2 million in wages and raw material to withdraw the same $2 million. That would be an absurd and pointless exercise and very discouraging to our entrepreneur. (We ignore depreciation and other such technical considerations that have no effect on our discussion).

If there are still no takers, the discount would have to be deeper; the widgets would have to be offered at say, $15. In that case, the capital would fall below its original $10 million. That would be the destruction of capital.

No sane entrepreneur would tolerate the condition of throwing money into the production circuit only to see it diminish in size. The logical step would be to curtail the production. If the demand for widgets is soft, in the next cycle our entrepreneur will produce only half as many widgets. Consequently, he will need half as much labor and raw material. In that case, two things would happen. First, the demand for labor would fall, with the result that unemployment would rise. That story you know. Second, the cash on the balance sheet would rise.

If our entrepreneur gets $2.5 million from the sale of his inventory but produces half as many widgets as before, he would only need to spend $1 million on labor and raw material, one-half of what he would normally spend on these items. In that case, even if he pockets $500,000 as before, $1 million surplus cash will be added to the balance sheet.

That is what has been happening in the US and the EU. Look, for example, at the “short term investment” in the IBM balance sheet (3rd from top) which is where the company has parked its unused cash. Or check out the balance sheet of GE under “cash only” (2nd from top).

The development is widely reported in the press as “cash hoarding” by corporations. But the labeling itself shows how little the problem is understood.

Look at this Yahoo analysis, for example, under the heading Largest Public Companies Continue to Hoard Cash at Record Levels. The writer complains that companies have “unnecessarily” tied up cash in inventory.

The men and a few women in charge of finances of large corporations are high ranking executives who oversee thousands of staff and billions of dollars of budget. They have bankers, advisers, consultants, traders and portfolio managers who keep them abreast of any change in the market. It is laughable to suggest that they might “unnecessarily” tie-up cash – and do so all at the same time.

Or look at this Associated Press story which begins this way:

Americans’ wealth last summer suffered its biggest quarterly loss in more than two years as stocks, pension funds and home values lost value.

At the same time, corporations raised their cash stockpiles to record levels.

There is a relation between the decrease in the wealth of the Americans and stockpiling of cash by corporations, but not because of corporate wickedness, which is what the writer implies. Here is how I would rewrite the opening sentences to make the cause-and-effect relation clear: It is precisely because corporations were forced to raise their cash stockpiles that the wealth of Americans suffered its biggest loss.

Corporations’ cash stockpile has been increasing because they have been curtailing production. They have been curtailing production because their rate of profit has fallen. And this phenomenon has taken place across all industries. Imagine not being able to sell the widgets at $25 and having to reduce the price to $23, $21, $20 and then $17 and $15.

Under that condition, there would be no need for the same number of workers as before, and for the same office space and plant as before. They all must be reduced. The destruction of capital is thus set in motion. Depending on the severity and magnitude of destruction, the result is called a recession or a depression. From the Financial Times of January 9, 2012, under the heading Earnings growth falters for S&P 500:

US corporate earnings grew in the fourth quarter of 2011 at their slowest pace for more than two years … and are expected to slow even more in the first quarter of this year as profits are hit by global economic turbulence.

The US earnings season begins today with Alcoa, one of the world’s largest aluminum producers, reporting fourth-quarter results after the stock market closes. Expectations of Aloca’s profits have been scaled back sharply in recent months … Alcoa said last week that it would take a charge of $155-$160m in the quarter for the cost of shutting down temporarily or permanently 12 per cent of its smelting capacity as it attempts to cut costs and respond to a weaker aluminum price.

(How about Alcoa’s cash position, you might ask – Alcoa, too? Alcoa, too. Click here and check out the first two asset items.)

Destruction of capital and what follows from it – the rise in unemployment, the rise in corporate cash holding, the fall in interest rates, the rise in the number of unemployed, the factory closings, the savage cuts to government spending, lowering of wages – are all effects of the same cause, namely, the fall in the rate of profit across the industries.

This fall is a “macro”, socio-economic phenomenon. It could not be remedied by the actions of individual governments or corporations. It required a socio-economic solution. The solution was the EU, whose raison d’être is increasing the labor productivity principally through lowering its costs. That is what the EU is fundamentally all about. Everything else about it is incidental.

Why the profit across industries fall is a subject of Vol. 4 of Speculative Capital.

But I took a long detour to touch upon the composition of capital and corporate asset structure to highlight a point that I have made above only implicitly.

Capital is a social, living concept. Its components – workers and communities clearly, but also plants and buildings – are likewise social. They are the parts of body capital.

As long as capital is “alive”, as long as it is humming along and producing an agreeable rate of profit, there is prosperity. Men are employed, there is money to go around, cities are booming and everyone is happy.

When capital is destroyed, when it dies, the components die as well. Plants become idle, corporations go bankrupt, ships rust, towns become ghost towns and men become unemployed, poor and desperate.

To prevent such outcome, one must keep capital alive.

But capital is inherently self-destructive.

Now how do you deal with this menace?

Chekhov’s experience points the way. In his trip to the hellish Siberian penal colony, the perceptive author of Sakhalin Island learned that one must be extremely careful in taking on evil – careful not in the sense of being timid, but in the sense of knowing what to do and how to act. Not infrequently, the solutions which seem obvious on moral or social grounds make matters worse because they flow from the wrong diagnosis of the ills. If you believe, for example, that greed and corruption of bankers and financiers caused the current crisis, your solution would be to put God-fearing Christians and men of good moral standing in charge – men like Gingrich and Santorum.

Hence, the critical role of the theory which helps us see the cause. Theory delivers us from the passive acceptance of events just because they are and allows us to influence them by anticipating where they are heading.

Which brings me to our main subject.

There is a tremendous amount of noise around the EU. If you are following the goings on in your local paper, it is impossible to make head or tail of it. Some of the issues, like the imposition of austerity budgets, pertain to individual countries and local governments. Others, like the possibility of the EU members issuing eurobonds, are technical subjects of concern to only a small minority.Then there is the rumor of Greece going bankrupt. Then, Portugal. Spain, too, perhaps. The euro will survive. Strike in Hungary. The euro will not survive. France downgraded. Cameron blew it. Merkel is resolute. Sarkozy says the point is moot. ECB, Ireland, Draghi, England, Finland, the European Commission, the European Council. (Do you know the difference?)

It is truly confusing, even without the constant stream of nonsense that poltroons in the media and academia produce on the subject.

But, relax, I say! This undulated European phantasmagoria arises from a falling rate of profit and the efforts of capital to check and reverse it. When you see that, the chaos disappears. And that, our theory, has been made easy to see. Substitute the PR approved positive words “growth” and “productivity” for it and you will see it everywhere. From the Financial Times of January 9 under the heading Berlin and Paris move growth to top of agenda:

Germany and France are set to propose measures to revive economic growth in Europe and reduce youth unemployment, including actions to increase cross-border labour mobility, to complement budget discipline and debt reduction in the eurozone…. France wants measures to make it easier for workers to move between countries, for example from Spain, with 40 per cent youth unemployment, to Germany, with falling unemployment and a skills shortage.

(Why is France concerned about Spanish youth finding employment in Germany, you ask, and why youth, when the adult heads of household are unemployed in millions? Because young workers, especially foreign, emigrant, young workers, could be hired at lower wages. In this way, they help reduce the general labor costs, just like women do.)

You want more? Headline from the Financial Times of January 6:

Sarkozy seeks to cut labour costs before election

More, still? Google “labor productivity in the EU” or “labor productivity” in general. You will see!

If you do not know this driving force behind the events, you will get in its way and get crushed. Just ask Viktor Orban, the Hungarian prime minister.

Dimly aware that under the EU mandates the country was losing its sovereignty, he introduced several mild measures to the country’s constitution which included supervision of the central bank by the government. That was a red line. Central bank “independence” is the primary control tool of finance capital as I explained in Vol. 1 of Speculative Capital. The quote from a New York Times editorial which I provided then, with the comment about the audacity of the government thinking of controlling the supply of money captured the gist of the issue. Here it is. For “investors in financial markets” read finance capital.

In May 1997 ... under a descriptive heading, “Divorcing Central Banks and Politics: Independence Helps in Inflation Fight,” [the New York Times] wrote:

In granting more independence to the Bank of England, the new British Government is a later entrant in a trend that has seen nations give increasing autonomy to their central banks, distancing monetary policy from direct political control. The practice has spread across the globe in response to demands from investors in financial markets for proof that governments will remain committed to inflation fighting … The trend toward independence is rapidly eroding the practice, common only a few years ago in nearly all nations except the United States and Germany, of regarding monetary policy as the responsibility and right of the government of the day.

So controlling the supply of money and rate of interest is no longer deemed to be the responsibility of governments!

But how would a Hungarian know that, fresh from behind the Iron Curtain? He thought he had arrived because Hungary was a NATO member. He thought he had endeared himself to Sarkozy by preventing the plane carrying the Iranian foreign minister to land in Hungary for refueling. See Nicolas, we’re on the same side!

He must not have been prepared for what followed. From the Financial Times of December 21, 2011:

The International Monetary Fund and European Union have warned Hungary that they will not return to the country to negotiate a new credit facility unless Budapest commits to modifying two draft laws.

EU and IMF officials broke off preparatory talks with Budapest a day early last week, after Hungary’s government moved to push the laws on central bank reform and fiscal stability through parliament despite negotiators’ concerns.

One person familiar with the situation told the FT that negotiators had been “explicitly clear to the government” before the talks about their concern...

In a letter sent to Viktor Orban, Hungary’s prime minister, by Jose Manuel Barroso, European Commission president, and described to the FT, Mr Barroso “strongly advised” Hungary to withdraw the two draft laws. In unusually blunt language, the commission president observed that Hungary’s domestic policy, and not the broader European debt crisis, were the origin of the country’s financial and economic difficulties.

Look at the message: How dare you enact laws without our permission?

Look at the tone: The unusually blunt language, of the kind one uses to train dogs, to make sure that the Balkan understands the seriousness of the issue.

Look at the attitude: You people are the cause of your own misfortune.

Then the name calling began: Orban the Stalin, Orban the Mao. Orban the tyrant.

Then people came out to warn against the erosion of democracy.

Prime Minster Orban should have known that bargaining with George Soros is a two-way street.

Naturally, he gave in. He had the good sense to realize that fighting against the Soviet tanks in 1956 must have been easier. At least then there was a target one could throw a molotov cocktail at. How do you fight finance capital?

That is why I am nonchalant about events in the EU, which explains why this series has taken 6 months to complete! The almost daily crisis alerts and headlines are not for me. They are for traders to exploit the situation and net a basis point here and there. Or for telegraphing one’s position in upcoming negotiations. Or sending a message to politicians. In all events, they are a sideshow, which is why they leave me unmoved.

The real event is the march of capital towards the higher rate of profit which will continue resolutely, unabatedly and without regards for consequences.

What happens if in the process Greece defaults? Well, what happens if a Sanchez or a Brown dies in a war somewhere in the Middle East? Nothing happens. Life would go on.

What happens if Spain defaults? The same, meaning that nothing happens to the march of capital towards higher rates of return. People will not doubt get hurt but to make omelet you have to break a few eggs.

What if Hungary breaks away from the EU? Let them. They are begging to be made an example of. They will see what it means to pay back euro and Swiss franc debt in worthless forints.

And if euro does not survive? So it won’t. People lived for centuries without the euro.

But surely there is a concern for the EU breaking apart?

No, there is not. There is a fall back plan. We’d go back to the “Anglo-Saxon Model”.

The “Anglo-Saxon” model which the U.S. has adopted is, in a nutshell, based on the principle of refusing to pay for the cow when you could have the milk for free. In practice, that translates to bilateral agreements with individual countries, enabling the US to take advantage of low labors costs there without the hassle of integration. The North American Free Trade Agreement is Exhibit-A in that regard. NAFTA guarantees the free movement of capital across US-Mexico border but actual Mexicans are prevented from coming into the US. A combination of walls, thugs with guns and immigration offices see to that.

That is also the UK’s ideal. Hence its general displeasure with the EU, especially as it puts British manufacturing at a disadvantage compared to Germany’s. Under the circumstances, see how a total Mr. Establishment, in the person of Derek Scott, economic adviser to Tony Blair and the vice-chairman of “Open Europe” writes like a member of Occupy the Wall Street. He wrote in the FT, under the heading Germany is the loser from Greece’s wriggle:

More than 20 years ago, Nicholas Ridley was forced to resign from the British cabinet for describing economic and monetary union as a “German racket” … In so far as Mr Ridley’s “racket” had substance, it reflected the implicit collusion between German manufacturers, bankers and politicians.

At least I do not believe in conspiracies! Hell hath no fury like an Englishman left out of a racket.

So, is the EU a fait accompli?

Yes, it is.

But there is more.

In a scientific experiment, we disturb the natural state of an object and force it to react to new, specifically created conditions. In so reacting, the object reveals new properties and thus, enhances our knowledge of it.

As with objects, so with societies. The EU is an economic end in itself. But it is also a complex project in social engineering, not so much by design but because of the consequence. Like objects, social organisms, too, when disturbed, react to new conditions in ways that were not known, anticipated or contemplated.

We have not heard the last word on the subject.

Stay with me.

Analysis of Psychosis

noreply@blogger.com (Nasser Saber) — Fri, 02 Dec 2011 05:04:00 +0000

On the quiet Friday following Thanksgiving, I read the “business life” of Sue Raby in the Financial Times, an Avon saleswoman slugging it out on the outskirts of Liverpool.

Sue Raby, coiffed shoulder-length brown hair, a grey shawl-collar coat, sets off down the road with a wheelie shopping bag full of Avon catalogues. The 52-year old single mother of two girls (22 and 11), sweeps her arm theatrically in the air. “This is one of my streets, this estate is my territory,” she says. This “territory” is a small patch of Formby, an affluent dormitory town for Liverpool, in the northwest of England.

This opening paragraph is not dissimilar to the interview scene in the opening of The Shining. Everything seems good and in order – even slightly uplifting. Sure, the main character calls a small patch of a bedroom community her “territory”, but who among us has not exaggerated the importance of his or her job/role/blog? What matters – the take away as they call it in the corporate parlance, the thing that one has to learn from the story – is that she has options, unlike those women in Afghanistan. A single mother of two driving to work in “her territory”: what was empowering women all about if not this?

If you cut Ms Raby, a former physics teacher, in half, she says, you would find Avon in the middle. The ringtone on her mobile is the sound of a doorbell, a reference to the 1960s advertising campaign catchphrase “Ding Dong, Avon calling.” When driving her silver Vauxhall, which has a pink sign advertising her website on the side, she plays motivational CDs to gee her along. Back at her suburban home, Avon boxes and catalogues are strewn around the sitting room, piled up in the hallway.

If we cut Sue Raby in half, we’d find Avon. Avon the company? Avon’s products? Avon’s certificate of incorporation?

Okay, so the former physics teacher is using poor imagery to say that she has “internalized” Avon. But that, too, does not square with what follows. “Boxes and catalogues strewn around the sitting room and piled up in the hallway” are more like an external intrusion; she, an outstanding example of a worker forced to take her job home.

This morning she is knocking on doors, selling silky-wear lipsticks and face-lifting creams while also on the lookout to recruit new sales reps. She earns 25 per cent commission on direct sales and a percentage of those clinched by reps in her team. The hardest bit, she says, is getting people to the door – “they might think I’m a Jehovah’s Witness, or the council or bailiffs”. If she is working a estate, she says, she wears jeans rather than a skirt, which looks more official. She also tends to steer clear of houses with dogs, although others push catalogues through the letterboxes with a spatula to fend off canine bites.

The “location”, like the Overlook Hotel in The Shining, is beginning to reveal things that we did not originally know.

The affluent bedroom community has turned out to be a place where, if you knocked on a door, they would think you were a bailiff or the council; the coiffed Ms Raby has to dress down to even have her knock answered. And her territory, far from being hers, is an open field for an assortment of aggressive and enterprising competitors who brave dogs and who want to eat her lunch. No wonder she listens to motivational speakers: she needs some stimulus to carry her through the day. Before she could sell, she had to buy into the confidence game of the confidence men selling confidence. It’s a mighty hard time, but I’m on my way, they have no doubt told her to constantly mutter to herself.

Suddenly she sprints off towards a blonde woman pushing a pram with one hand, grasping a toddler’s arm with the other. Ms Raby is – in the parlance – “buggy bashing”, stopping a young woman in the hope of recruiting her to her sales team. “Would you like to earn some extra money?” Ms Raby enquires tantalizingly.

Why would Ms Raby want to give her own customers to someone who has confessed to being incapable of making a sale? She insists she has spotted a potential “gem”. “You need confidence. I could get Kate up and running.” She knows this from personal experience. “When I first did sales I would go around houses with my one-year old with the catalogues under the buggy. I ran away from the door before anyone saw me. I was that under-confident”.

Forget the recruitment system that is modeled on degenerate cell mutation. I recruit you and you recruit another person who then recruits someone else and before you know it, the entire population of the earth has turned into Avon reps.

Look at buggy bashing, which is in the “parlance”. The FT writer, one Emma Jacobs, defines it as “stopping a young woman”, but she is being intuitively evasive and dishonest. She ignores the word buggy, which is central to the expression. Buggy bashing is recruiting a young woman with an infant. The infant is where the focus is because children elicit sympathy. Ask any beggar in Bangladesh. Better yet, read Oliver Twist, which is culturally closer to Ms Raby. Why, she herself was one such recruit, in her salad days when she was “under-confident”.

And that word: under-confident!

What a word! To know what it really means, you have to know the mentality of the people who have created it, their orientation and angle of vision to life. Both are adequately explained by Alec Baldwin’s character in this clip from Glengarry Glen Ross:

https://www.youtube.com/watch?v=elrnAl6ygeM

How effective is this kind of talk? It is effective enough to have come to use and stay in use. You saw a variation of it in terms of framing the issues in Part IV of the EU crisis. But it works on any scale. After being pumped up by Ms Raby’s faux can-do and you-need-confidence speech, even Emma Jacobs of the FT chimes in to describe a young nurse as having “confessed” to be “incapable of making a sale”.

She is already talking like Baldwin's character!

The psychosis in the title of this post is not about Ms Raby alone.

(And did you recognize the ABC – Always Be Closing? It is the “ding dong” ringtone of Sue Raby’s cell phone. When her phone rings, it is Avon Calling. But Avon is calling her. It is a reminder that she should always be closing!)

“If I can get Kate up to speed she’ll be doing me a favour. If not, she’ll be off my Christmas card list, and I’ll take my old customers back.”

Here, Sue is creating a “win-win situation”, as she is taught to do in her sales classes. Everything must be framed as a win-win situation.

If Sue Raby can get the under-confident nurse “up to speed”, then she – Sue Raby – will win: she would get a percent of her recruit’s 25% share of a £3 lipstick. Else, she will have one less name on her Christmas card list.

This latter expression – one less name on the Christmas list – Sue Raby has learned in the sales classes. The expression is on one hand allegorical. But at the same time it is very real in the sense that that concept of friendship (and Christmas cards) as means towards closing a sale are the Alpha and Omega of the salesmanship as spelled out by the grand daddy of all salesmen, Dale Carnegie. The Avon Lady is following him to a “t”. I quote from the upcoming Vol. 4:

Given this centrality of sales and its practically limitless sub-specialties in a Capitalist society– in the U.S., one could find hiring ads for “nuclear waste salesman” – it is natural that the subject is deeply embedded – intertwined, really – with culture. Often, it is the driver and creator of the culture, especially in the “Anglo-Saxon” U.S. and U.K., where the influence of businessmen goes further than other nations. The culture in these countries is the culture of a salesman, as it is shaped by the habits, sensibilities, tastes and priorities of salesmen. The influence is in plain view in Dale Carnegie’s How to Win Friends and Influence People.

The book’s title is precise. It telegraphs the content, so attention must be paid. Carnegie wants to win friends. Why? Because he wants to influence them. But the purpose of this influence is not bringing the newly acquired friends to the righteous path. Carnegie is not an Islamic zealot practicing the Prevention of Vice and the Propagation of Virtues. He wants to influence people in order to sell to them. Friendship is a mere strategy, a means, towards that end. Note the word “win” – not finding friends or making friends but “winning” friends. The purpose is exploitation, after which “friends” become what they always were: people. It is a singularly calculating and cynical title.

But Baldwin’s character in the above clip does not fit the bill of a congenial salesman in search of friends. What gives?

The answer is what links Ms Raby to the EU crisis: the falling rate of profit. From Vol. 4:

When the “conduct” of the salesman changes in a fundamental way, the effects reverberate across the social and cultural spectrum.

One such fundamental change took place after the collapse of the Bretton Woods system in 1973. The change which began gradually and continues to date was the intensification of competition due to the falling rates of profit. Coupled with the gradual desensitization and resistance of the population to the advertising pitches, the increased competition made selling a more stressful occupation than it was in the heydays of the U.S. industrial power.

This gradual, but persistent and grinding trend, forced the salesman be more “productive”; he had to sell more than before in less time than before. But other salesmen faced the same conditions, so it became tough for everyone to make a living. The ensuing stress darkened the salesman’s mood, with the result that passive Willy Loman gave way to the obscenities spewing, conniving and downright criminal salesmen of Mamet’s Glengarry Glen Ross. How much can a man take!

We continue.

Cars and phones are dangled in front of them as incentives. Gatherings at countrywide Avon events are said to induce cult-like fervor. Worshiped are the gurus – the high earners. In Britain, there are no bigger stars than Debbie Davis and her partner Dave Carter. Ms Davis turned to Avon after being made redundant from a printing firm. Within three weeks, she had sold almost £19,000 of products and recruited her partner. Now the two have an 8,000-strong team and have turned over £13m in the past seven years.

You probably smiled reading about cars and phones being dangled in front of sales reps as incentives. Alec Baldwin’s character offered a Cadillac Eldorado and steak knives!

The ultimate incentive, though, are the high earners. They are real flesh and blood, people like just us, and they show that it can be done. It is only a matter of confidence and pushing forward and being steadfast in the face of adversity.

But then, there is the math.

Avon now operates in more than 100 countries with more than 6.5 million sales reps around the world (just over half the company’s earnings are from emerging markets). Last year, the company’s revenues were $10bn. Sales in North America account for about 20 per cent of this, while the UK is one of its top five markets.

$10bn in revenues divided by 6.5m sales reps works out to about $1,500 per rep, of which they get 25% commission. So a rep, probably a young mother with a child, can expect to make just under $400 a year.

With that, we go to the final scene in the FT story where Sue Raby has “put on” a “Christmas Party” in her mother’s house, no doubt because her own has no room thanks to Avon catalogues and products.

That afternoon Ms Raby puts on a Christmas party in her mother’s house, down the street from her own. Plastic holly garlands hang around the fireplace, gold tinsel wraps the light shades and Merry Christmas signs are on the wall. Purple, orange-and-green packaged creams and perfumes are arranged in pyramids on tables. Mini-vanilla slices and bite-size doughnuts defrost in the kitchen. Cups of tea are handed out to the nine female guests who arrive, some with young children, some with their free old-age bus pass, to browse the catalogue.

Ms Raby is on top form, showing off creams and fixing appointments to visit the guests in their homes. “You get out of it what you put into it,” she comments.

What does she want to get out of it? “I don’t want to get myself a target as that would limit me. But maybe £80K a year. No, let’s say £100K.

How do you write a modern Gothic story?

I could begin with a Christmas party:

Plastic holly garlands hung around the fireplace, gold tinsel wrapped the light shades and Merry Christmas signs were on the wall. Purple, orange-and-green packaged creams and perfumes were arranged in pyramids on tables. Mini-vanilla slices and bite-size doughnuts defrosted in the kitchen. Nine female guests, some with young children, some with their free old-age bus pass, had arrived to browse the catalogue.

You say that this is not per se Gothic, that it could be an O’Henry story about the warm hearts of the poor during Christmas? Perhaps. Try now:

The host, a single mother of two who was made redundant from her job teaching physics one supposes because all the knife wielding Liverpool students had mastered Newtonian mechanics, was taking down guests' name to later visit them in their homes for a sales pitch for lipsticks and facial creams.

Psychosis is, to use a term favored by Sartre, situational. Its dictionary definition is "profound disorganization of mind, personality, or behavior that results from an individual’s inability to tolerate the demands of his social environment whether because of the enormity of the imposed stress or because of primary inadequacy or acquired debility of his organism especially in regard to the central nervous system or because of combinations of these factors and that may be manifested by disorders of perception, thinking, or affect symptoms of neurosis, by criminality, or by any combination of these".

Those weasels at the American Psychiatric Society! How conveniently and cynically they shift the blame from the situational, which is always at least partially social, to individual.

Inability [of the individual] to tolerate the demands of his social environment either because of the enormity of the imposed stress [on him] or because of primary inadequacy or “acquired debility” of his organism.

Let us define psychosis properly, for what it is:

Psychosis is the breakdown of the individual who, persistently and as a matter of his working condition, is put in a situation where he must perform at levels that the general, controlling conditions, will not allow.

The twin drugs of sermon and motivational speech that are commonly prescribed might at short term delay the onset of the disease – which is why they are commonly prescribed – but in the long run they exacerbate the tension and make its flare-up more violent.

The impossibility of reconciling the contradiction between an individual’s particular situation and the general conditions surrounding him is the trigger for the breakdown.

In The Shining, Jack goes mad because he cannot write. The Shining, according to Stephen King, is about writer’s block.

Writer’s block is a modern phenomenon. Billions of people throughout centuries could not write, in the sense that they were bad writers. That was perfectly alright.

Then, modern economic conditions forced some people who could not write into the craft. Here, force is social. People are forced into writing for the same reason that they are forced into sales: because they need money and that is the only option. That is the social element in “writer’s block”. In the absence of social force, only those who could would take up writing. Can you imagine a Tolstoy struggling to tell a story or a Hemingway having trouble with a sentence?

What is one to do if he has to write but cannot? His particular situation could offer an escape route. If he has to take care of a young child, for example, or there was an extended illness in the family, he could point to them as circumstances beyond his control standing in the way of completing the work. Everyone would understand and the psychosis might be avoided or at not least not intensified.

But when the situation eliminates all the excuses – think of the quiet setting of a remote hotel for a writer, cut off from any distraction – the tension from the inability to perform finds no outward outlet and turns inward. If the situation persists, the result is psychosis and madness.

Look, now, at the position of Sue Raby. She expects to make £80K a year – no, make it £100k – from selling £3 lipsticks on which she collects 25% commission. The average rep makes about $400 a year. But some reps make millions, so her goal is not really overly ambitious, is it?

If she cannot reach her goal, it could only be that she was under-confident and incapable of doing what others have done.

“You get out of it what you put into it,” says she, blissfully unaware of what she is saying, for what she has put in, beside some mini-vanilla slices and a few bite-size frozen doughnuts, is her time and labor, which is all but worthless as per educational authorities in Liverpool.

In Cameron’s England, for a 52-year old single mother of two, conditioned to believe in she-believed-she-could-so-she-did bullshit, if that is not the set-up for potential horror to come, I don’t know what is.

The Origin of the [crisis in the] European Union – 4: A Refresher on Finance Capital

noreply@blogger.com (Nasser Saber) — Tue, 22 Nov 2011 04:20:00 +0000

THE FOLLOWING PART IV OF THE EU CRISIS WAS POSTED ON SEPTEMBER 8, 2011, AT 12:08AM. FOR WHATEVER REASON, IT IS NO LONGER THERE. I AM POSTING IT AGAIN. THE PART TITLED "Capital, as the Union's Main Driver", HAS BEEN DULY CORRECTED TO PART V.

***

Force is a vector. That is physicists’ way of referring to a phenomenon that requires more than one characteristic to be fully and adequately described. A force must have magnitude and direction. With either of these attributes missing, a force is inconceivable.

When Macbeth asks: “Is this a dagger that I see before me?”, we do not know whether he has found a dagger in the street or a mugger is threatening him. Then we get the clue: “its handle towards my hand.” So, there is no threat and the dagger is being “presented” to Macbeth. That is the direction of the force.

As for its magnitude, we intuitively know it. “Just a little”, if we want to scratch our back with a dagger; “a lot”, if we want to stab someone.

The direction of force is singular. It is always one specific direction. It follows, then, that force is incompatible with freedom and negates it, freedom being defined precisely in terms of existence of alternatives. Force is the absence of alternatives. Conversely – and the proposition is convertible – we could say that if there is no alternative, a force must be present.

Now, observe, these sample quotes from the EU crisis:

Mr. Barroso [the president of the European Commission] also reinforced calls for Greek politicians to endorse the austerity measures. “If anyone thinks that without the program agreed with the E.U. and the I.M.F. we can still get by somehow, there’s an alternative program, that’s not true. There is no alternative.”
In words that recall former Prime Minister Margaret Thatcher of Britain, Mrs. Merkel says there is no alternative to trimming Europe’s entitlement programs.
This [Portugal returning to growth] will involve “a very rigorous programme of austerity and structural reforms” covering everything from slashing public deficits and extensive privatizations to shake-ups of justice and education. “There is no alternative,” [the country’s new prime minister] says.
Constrained by the unpopularity of bailouts at home, political leaders appear able to act only at the 11th hour, when they have no alternative.

So, a force is acting “on” Europe; there has to be, with so many leaders telling us that there is “no alternative”.

I have showed elsewhere that the force in question is finance capital. The upcoming Vol. 4 of Speculative Capital will explore this point in further detail. I merely note here that acting alongside finance capital is its latest, most advanced form, speculative capital. The two are not different forces but two movements of the same phenomenon; the latter can be explained by the former but cannot be reduced to it.

Finance capital is a force because it causes change. And it is a social force because it changes the social systems and relations. But unlike natural forces whose “purpose” is unknown – no one really knows why electromagnetic force exists –the purpose of finance capital is clear: It wants to maximize its profit. Its direction follows from that purpose. Finance capital pushes in the direction of maximizing its rate of return.

As for the magnitude, it is a function of the resistance it encounters.

In places where finance capital has managed to be an insider and there is little or no resistance, its magnitude is barely perceptible, as when gently scratching one’s back with a dagger. Then finance capital could be said to be “polite”. Like in Cameron’s silly Big Society, it speaks in terms of “initiatives”.

When there is the need to put the impertinent representative of a periphery country in his place, the force magnitude increases, as reported in the Financial Times of June 29:

Olli Rehn is nobody’s idea of hothead. A mild-mannered Finnish economist, he is regarded even by his countrymen as unassuming – verging on dull.

But twice in recent days Mr Rehn, who is the European Union’s senior economic official, has been forced to get angry.

At an emergency meeting of finance ministers a week ago Mr Rehn came down like a ton of bricks on Greece’s Evangelos Venizelos, who had the temerity to suggest reopening talks on the €28bn ($40bn) austerity package that Athens must pass this week to avoid sovereign default.

Those present were taken aback by Mr Rehn’s ferocity, and Mr Venizelos backed down.

It was smart of Venizelos to back down. Otherwise the mild mannered economists might had pulled a knife on him – or threatened his wife. The dull Finn is a trained dolphin at the service of finance capital and performs on its behalf, however much he might be unaware of that role.

Finally, for the rabble that disturbs the peace, the magnitude is ratchet up to crack the skulls.

But where does the magnitude of the force come from? How and where, exactly, does finance capital muster the ability to cow politicians, intimidate ministers and beat the populace in broad daylight, even though it operates in democracies where the majority of the population opposes its diktat? Recall Le Monde Diplomatique’s editorial which I quoted in an earlier part:

How is it that in a democratic system, the people are forced to accept cuts and austerity simply replace one failed government with another just as dedicated to the same shock treatment?

Think about it. People go to the ballot and vote for political leaders who then turn against them and their interests. How could that be?

It is simplistic to assume “corruption” explains everything. Corruption of politicians and the political process, while very real, does not explain this:

Mr. Papandreou went into the historic vote with a five-vote parliamentary majority. But the outcome was not certain, as the austerity plan strikes at the heart of the Socialist Party base.

Why does a party enact austerity measures that strike at its base? One can easily accept that Social Democrats of Papandreou ilk are unprincipled boors who will do everything to stay in power. But then why would they weaken the machinery that is the means of their assuming political power?

The common forms of the corruption of politicians – cheating on expenses, illicit affairs, accepting kickbacks and expensive gifts – are all illegal. They can only take place beneath the surface. When exposed, they must stop.

But the Greek legislators who voted for the crippling cuts and the drastic social re- engineering of the country did so with their heads held high and patriotic tears in their eye:

Most Socialist legislators said they would back the measure, in some cases only grudgingly, and with most stressing that patriotic duty must go before party ideals.

Elsa Papadimitriou, broke ranks with her New Democracy party and voted for the measure. “There is only one act of patriotism: consensus and cooperation,” she said. “Fiscal suicide is not an alternative. “

Nor is the unapologetic, in-your-face short-changing of the citizenry limited to Greece or Europe. Across the Atlantic, the U.S. political landscape offers a treasure trove of Exhibit A's in that regard in every bent.

Everyone knows, for example, that the cost of health care in the US is increasing in double digits year on year.

Everyone knows that a major component of that increase is the rise in the price of prescription drugs.

Everyone knows that the U.S. government is the largest purchaser of the prescription drugs through Medicaid and Medicare.

Everyone knows that wholesales prices are cheaper than retail prices.

Yet, by the act of the same Congress that is obsessed with reducing government spending, the US government is expressly prohibited from negotiating price discounts for prescription drugs.

This is not corruption in the usual sense. Yes, pharmaceutical and insurance companies pay the US legislators and buy their votes. But those are all legal campaign contributions. So the practice goes on in the open view of the public.

Perversion of democracy, you say? No, democracy manifest, I say; the government of the people by the people for the people. The only catch is people, which people misunderstand, because the strong biological/anthropological connotation of the word obfuscates its social/political context. But social/political is precisely what we deal with in talking about people and democracy.

This change in connotation is subtle, the resulting disconnect between the anthropological and political man easy to miss. Even some of the great minds who wrote on the subject fell prey to it.

Consider Socrates, Plato and Aristotle. All three had contempt for democracy; they considered the rabble unfit for the affairs of governing. More to the point, reading them, you will never know that they lived in a slave owning society. There is no mention of salves. People and democracy pertain to free citizens only. Slaves are mere objects.

More than 2000 years later, we run into the same suggestive mentality in the U.S. Constitution. Again, the authors of the document were among the most outstanding citizens the US ever produced. To take Benjamin Franklin as one example, legend has it that he never wasted a minute of his life, which must have been true on the evidence of the astounding body of works that he produced alongside his many activities – and first rate works in that. At merely 23, in A Modest Enquiry Into the Nature and Necessity of a Paper Currency, he espoused ideas about the role of money and the nature of value that half a century later Adam Smith used in his magnum opus. (Even the full title of Smith’s book, An Inquiry Into the Nature and Causes of the Wealth of Nations seems to have been inspired by Franklin.)

Yet, a man with such obvious intelligence and experience saw no irony in signing his name to a document that starts with “We the People” and excludes blacks. Nor did any of his compatriots.

The explanation lies in the anthropological/political dichotomy. The Founding Fathers did not doubt that slaves were human. Surely George Washington who fathered a child with a slave servant must have known that.

But they were writing a document in governance and not in biology or anthropology. It is in that sense – with respect to having a say in the running of a republic – that blacks were left out of the Constitution; they were excluded from the political process. So were women, who did not gain the right to vote until 1920. (In Switzerland, it was 1971!) “Not being counted as people” is an inference that followed from that exclusion. But the issue was always political.

The U.S. Constitution is about the rights of property owners. Those rights arise from ownership and not a person’s biological or anthropological attributes. In that context, it did not occur to its authors to recognize slaves and women. That would be absurd, akin to recognizing pets or trees as people.

This calculus of power was on display at the Philadelphia Convention of 1787. The Convention elevated blacks to 3/5 of a person for the purpose of distribution of taxes and the apportionment of delegates to the House of Representatives. The arithmetic gerrymandering was a concession to the Southern plantation owners who were demanding more representation and thus, more power, on account of their property which also included slaves. Otherwise, it had nothing to do with the liberty of the black population whose fight for civil rights continues to date. (The Voting Rights Act – notice the name – was not passed until 1965.)

Fast forward to 2011 and we see the same practice in Murdoch’s News Corporation, where one Murdoch family member is counted as 4 regular types. From the Financial Times of July 21, under the heading US fund attacks New Corp’s share structure:

The two-tiered structure that gives the Murdoch family almost 40 per cent of the voting rights in a company where in owns about 12 per cent of the equity was a “corruption of the governance system”, said Anne Simpson, senior portfolio manager, of Calpers Global Equity and its corporate governance chief. “Power should reflect capital at risk”.

Power should reflect capital at risk.

Thank you, Anne Simpson. I could not have said it better myself!

Because at the age of self-destructive speculative capital, capital is everywhere at risk, to reflect that risk, capital moves to assume the position of power everywhere. The power commensurate with global risk is global power. That power is available only at the state and supra-state level.

In this way, finance capital assumes a new, more potent form. It is no longer the petty interests of a neighborhood “boss” enforced by physical violence or the diktat of a strongman enforced by more organized thuggery, but the international and state law, enforced by the machinery of state and international organizations. In this way, we arrive at democracy.

The Origin of the [crisis in the] European Union – 5: Capital as the Union’s Main Driver

noreply@blogger.com (Nasser Saber) — Sun, 20 Nov 2011 19:37:00 +0000

If you are following the crisis in Europe, you know how complicated the whole thing is. You see the stressed looks on the faces of politicians, central bankers and the heads of places like the World Bank, the IMF, the European Commission, read or listen to their often contradictory comments and wonder that if they are at a loss for an explanation/solution, what chance do ordinary mortals have of making head or tail of the situation? Look.

If that is what you think, you have been had; chalk off one “mission accomplished” for your local papers and international news media.

What is taking place is Europe is quite simple to understand.

The EU was created as the answer to the problem of falling rate of profit in the industrially advanced European countries. Reversing the falling rate of profit is the objective. The EU is the vehicle for realizing that objective, the means of getting there.

Creating a vehicle such as the EU which must stand over the heads of the European nations and governments is no easy task; the very idea points to the audacity of the force behind it. The force is capital, with the “democratic government” being its immediate manifestation. The size or intensity of the force – that would be the governments’ agenda, vision and modus operandi – is a function of the local conditions and varies from country to country and situation to situation. The direction of force, toward a homogenous social system conducive to capital, is fixed and remains unchanged throughout; it is “remorseless”, in the words of a British official.

Let us look at these points in the case of Greece. It should suffice for illustration.

When the Greeks were invited to join the EU, they were jubilant. Here at last was the confirmation that Greece had “arrived”. With the military dictatorship gone, the country could take its rightful place among the advanced, civilized countries.

As the Iranian proverb has it, they went for the smell of kebab, only to discover that donkeys were being branded. But by the time that realization came, when the draconian cuts hit every aspect of social life in the country, there was no going back, short of a violent overthrow of the government, which was not going to happen because Greece was now a democracy.

This latter point needs elaboration.

Look at this sentence from a New York Times article this summer after the Greek parliament had approved the first in a series of slash and burn measures:

Markets rallied globally, and European leaders welcomed the passage of one of the most radical overhauls of the Greek economy since democracy was restored in 1974.

The sentence is written like an advertising copy. Nay, it is an advertising copy, a style of writing designed to create an association between a product and “positive” words – and thus, feelings– in the absence of any logical association. You know the routine: Selling a car? Then say power, beauty, freedom.

The Times uses the formula to a “t”. "Positive" terms – Markets rallied, European leaders welcomed, overhaul of the Greek economy, democracy was restored – are tightly packed into a sentence to “soften up” the reader. The racket is quite sinister and demands the picture of the street riots to work, which is happily supplied.

Now, reading the jubilant account of the reaction to cuts in Greece and seeing the bloody faces of demonstrators confuses the readers. They are presented a contradiction that they cannot resolve with the limited information provided. They cannot make sense of the events. Confused, they become ignorant spectators of events, accepting whatever is thrown their way and passively waiting for leadership – of both thought and political kind – to show them the way. Murdoch provides the former. Cameron, Berlusconi, Sarkozy, Merkel, Obama and Papandreou provide the latter.

But facts are not isolated events. Their relation, arising from the compulsion of reason, remains indestructible and comes through even from behind a confused text. We only need to rearrange the words and put the emphasis where it belongs.

Here is the logical rewrite of the Times sentence that eliminates all the internal and contextual contradictions of the text:

It was precisely because democracy was restored that the most radical overhaul of the Greek economy became possible, after which finance capital everywhere celebrated as it saw its grand design for increasing its rate of return one step closer to realization.

Democracy is the name of the form of the government created by capital. One does not have to be a supporter of the Greek Junta to note that the undemocratic colonels would not dare to subject the Greek society to so violent a shock therapy. More to the point, they would not accept or allow it.

Establishing democracy in Greece was the necessary condition for, and the harbinger of, a social order mandated by the EU whose sole objective is making the member societies an agreeable stomping ground for capital. That’s what the EU’s 100,000-page rulebook is all about.

Now, Europe is a divided entity, with the political and social divisions at times following the change in landscape. Belgium, for example, only recently managed to have its first government in one and a half years because the northern Flanders and relatively poorer southern Wallonia could not agree on the division of the country’s wealth. (The compromise government, far from being a unifying power, reflects the institutionalization of the separation of North and South.) Or take the equally small Switzerland, in which the culture and social concerns in Canton Ticino are more Italian than any part of the country north of Gotthard.

Only a fanatic doctrinaire, then, will seek to explain everything that has been happening in Europe in terms of capital and finance capital. I devoted Part II of this series to “defining” Europe precisely to highlight the political, cultural and economic differences among the European countries and even within them. There is a historical rivalry between France, Germany and England, for example, and Silvio Berlusconi would have had his rivals and enemies even without the EU.

But the falling rate of profit and the need for cheaper labor is the grand narrative of the EU. All other events take shape and play out within it, in the same manner that all events in War and Peace take place within the context of Napoleon’s invasion of Russia. No detail of the EU crisis (or War and Peace) contradicts that main storyline. That is another way of saying that all the contradictions of the EU, which have manifested themselves in a laundry list of banking crises, market instability and political gridlock, could be explained and resolved by that narrative.

Let us wrap up then.

The idea of the EU rose from the need of capital in the industrially advanced West European countries for lower labor costs and new markets, the one-two punch that the industrialist in those countries correctly calculated would solve the problem of the falling rate of profit.

Germany and France were the leaders of the movement. Italy, Nordic countries, Belgium and Luxembourg with the relatively small, less export-oriented economies, assumed a secondary, supporting role.

The so-called “periphery” countries – the Greece and Cyprus and the Ireland of the Union – were the mark. So were the German and French workers. And the workers in Italy, the Nordic countries, Belgium and Luxembourg.

In an integrated EU, the German industrialist could produce machinery with the Greek wages, which is why and how, in a double whammy, and using the threat of cheap labor in the newly freed East Germany and the southern flanks of the EU, they were able to push down the German wages by about 20%. That, in turn, allowed them to set the euro rate against the USD at a relatively low level, which helped boost the exports and thus, profits. That is the story behind Germany’s “strength”, its “EU leadership” or much admired “competitiveness”. I quoted earlier:

Helmut Kohl, the chancellor of Germany in the early 1990s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.

Now you know the story behind the conviction and determination of politicians. (The 80% opposition, by the way, was coming from the workers and ordinary citizens who, despite massive selling of the the EU idea, had not bought into its promises. In North America, NAFTA was sold using the same exact play book. It was supposed to bring jobs to the U.S. and Mexico.)

The periphery countries proved problematic. Their problem, in a nutshell, was – and remains – the historical problem of training a peasant workforce for industrial labor.

Peasants, because their life tempo generally follows that of nature, have large margins in their daily lives. The cows need not leave their stable at 5:10am sharp, the way a train leaves the station. Approximate “sunrise” will suffice. For coming home, in like manner, “sunset” will do just fine. No need for precise arrival time, as there are no connecting herds.

This margin is precisely what the industrial capital could not permit. An assembly line is nothing but the precise quantity of work performed in an exact interval of time. When peasants are brought into the factory environment, they must be trained to shed the old ways and become robots.

Robot is precisely the word. The sole condition for working in an industrial setting is performing the prescribed steps repetitively in the given time to the exclusion of thinking and individual initiatives. That is why assembly lines naturally lend themselves to automation: in them, workers are automaton.

(The robotization/dehumanization is enforced through a training regimen whose structure and content demands a post of its own. In the training classes of FoxConn’s Chinese plants, for example, peasant/workers are instructed to go from one corner of the room to the opposite corner. When they naturally walk across the room – even donkeys would do that to reach a stack of hay on the opposite side, proving that the hypotenuse is shorter than the sum of the two sides – they are fined. The point is conditioning them to shed their instinct and initiative lest they seek shortcuts. They must at all times follow the walls, like blind men do.)

At the technical level, the inability of the peasant/workers to perform at high levels of precision translates itself to inability of the emerging countries to manufacture high quality and high precision products. So we see that even in today’s competitive markets, the members of Germany’s Mittelstnad are thriving because the highly specialized machinery they produce cannot currently be manufactured by the Chinese workers.

At the social level, the absence of industrial discipline manifests itself in a more relaxed life style which itself arises from the looser and less formal documentation of property rights and legal/commercial relations. It is not uncommon for a property’s boundary to be defined by non-stationary reference points, say, a river. Over time, then, as the boundaries change, the land disputes begin and go on seemingly forever, paralyzing the legal system. And, of course, no one beside the government workers pays much tax because the government has no way of tracking people’s income. In that regard, the racist and ignorant Prof. Hans-Joachim Voth whom I quoted in Part I of this post was right to complain about Greece’s land registry and tax system:

A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity. The economic evidence is unambiguous – the larger and more effective a country’s state apparatus, the higher output per capita. Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.

When a less industrial country such as Greece is forced into a union with an industrially developed country such as Germany under conditions that are defined for the benefit of capital only, its life style must change accordingly. Dinner starting at 9 and lasting till midnight – and that on a week night? Inconceivable! Retirement before 60? You must be kidding.

These habits and conventions, however much their roots might be economical, pertain to the old ways of doing things, i.e., they are cultural. So, as the mouthpieces of capital are quick to remind everyone, the cultural in these countries must change:

As a British taxpayer and therefore (via IMF), a contributor to the Greek budget, I was irritated to discover that all Greek students still have a constitutional right to a free, university education – and spend an average of more than seven years over their degrees. British students will be charged up to £9,000 ($15,000) a year in tuition from next year … Greece has been promised new money. Now it needs a cultural change. Otherwise the country really is going to the dogs.

And it is not Greece only. The Spaniards, Portuguese and even Italians had it too good for too long. But the party is over now and it is time to "grow up", time to pay the piper. The “piper” is the “democratic government”, which, as per Prof. Voth, must be strengthened so it could deliver the populace to the capital – lock, stock and barrel – until such time that its even minimal regulation gets in the way of capital’s expansion, at which time it should be dismantled through whatever means necessary, say a “big society” racket here or the installation of some mad man as president there.

That is it, then, all one needs to know about the EU. As for the roving sovereign/banking crisis which has been hitting the EU member states in the past couple of years, in one sense, the crisis is real. As the rate of profit across the EU members has fallen, the government expenditures that corresponded to the pre-fall era have become “unsustainable”, to use a word now in vogue. So expenditures must be cut, especially in the euro zone where government can no longer print money.

In the private sector, the main expenditure is the labor cost; hence the mass layoffs and refusal of the businesses to hire which has resulted in record unemployment.

In the public sector, in addition to labor costs, the retirees’ pension is a large expenditure. Naturally, then, it is the main focus of the “pension reform”, which aims to simultaneously cut off the pension payments and increase the retirement age so that the payments will start later.

But believing that no crisis should be allowed to go to waste, the architects of the EU are using the governments’ revenue shortfall as a bogeyman for further weakening the power of labor unions and pushing down the wages. The case of Italy shows us how the game works. FT’s political/financial commentator on October 12:

While [Italy’s] public sector debt is high at 119 per cent of gross domestic product, the private sector balance sheet is remarkably strong and the government budget is in primary surplus – that is, before interest payments. The surplus is forecast to increase significantly.

The short term position is thus comfortable and in ordinary times markets would be relaxed about default risk here.

So, Italy’s finances are in order. The country’s surplus is “forecast to increase significantly”.

But that is not the point and certainly no excuse. The commentator goes on:

In common with much of the rest of southern Europe it has a huge competitiveness problem, with unit labor costs reckoned to be 30-40 per cent too high relative to Germany. Even if we charitably assume that Italy’s underlying trend growth rate is 1 per cent, it is hard to see how the trajectory of public sector debt can be pulled back.

You see the sudden shift to the labor costs. Either Italy – now a “south European” country, and we know how those people are – increases the rate of profit by bringing down the labor costs or else. In the “else” scenario, the “markets” will discover that the Italians have been living beyond their means, the country’s bonds will tumble and the spreads on its credit default swaps will rise to the stratosphere. The country will no longer be able to borrow on capital markets and might be forced to default, with all the consequences that follow. To avoid all that, the draconian reforms must be implemented, including the “labor market reform” and pension reform.

Berlusconi could not play along so he was pushed out – for that reason alone and not for any of his long list of transgressions.

Now the “technocrat” Monti has been brought in with much hoopla to save Italy. The ignorant consumers of news are jubilant:

“We finally have a competent government, not one of dwarfs and ballerinas,” said Antonio di Pietro, the former anti-graft magistrate and head of the Italy of Values party.

Perhaps Berlusconi’s government was a circus. But alas, the joke is on the ex-magistrate and the technocrat Monti will do exactly, precisely what capital demands of him – and not an iota more or less. The Financial Times of November 15:

Mr Monti has plenty of ideas to promote in the long term through liberalising the labour market, weakening the powers of fiefdom of professional services and making it easier for public and private sectors to hire and fire.

At the end it makes no difference who is in charge because capital is ultimately in charge.

I will return with the concluding part.

I'm Still Around

noreply@blogger.com (Nasser Saber) — Sun, 30 Oct 2011 13:26:00 +0000

When Rumi finally completes the long-delayed Vol. 3 of Masnavi, his explanation in the opening verse of the book is the most compelling: It takes time for blood to turn into milk! His excuse/reason is doubly profound if you know the background story which had to do with his son's prolonged illness from which he happily recovered.

I have no such exquisite reason but reasons good enough. I had several commitments, some quite time-consuming, that came due one after another in September and October. Then I began a long-planned month-long trip to areas with spotty, slow and blocked internet access which made writing very difficult and posting impossible. Let us say that all was a Black Swan. That should explain everything.

My apologies and thanks for the kind inquiries. I am not back to my base yet but getting there. Will return shortly.

The Morality of a Liberal

noreply@blogger.com (Nasser Saber) — Mon, 19 Sep 2011 05:51:00 +0000

This past Thursday, Paul Krugman, the Nobel prize winning liberal economic columnist of the New York Times, was outraged. He was outraged because he had discovered that the U.S. was losing its moral heading.

The event that set him on the discovery was an exchange about death and freedom during the Republican presidential debate. According to Krugman:

CNN’s Wolf Blitzer asked Representative Ron Paul what we should do if a 30-year-old man who chose not to purchase health insurance suddenly found himself in need of six months of intensive care. Mr. Paul replied, “That’s what freedom is all about — taking your own risks.” Mr. Blitzer pressed him again, asking whether “society should just let him die.”

And the crowd erupted with cheers and shouts of “Yeah!”

Krugman singled out Milton Friedman and his Free to Choose TV series for this supposed breakdown of morality and the loss of compassion in the country. (The title of his column was Free to Die. Got it?) He wrote:

The incident highlighted something that I don’t think most political commentators have fully absorbed: at this point, American politics is fundamentally about different moral visions.

How can one make this fool realize that he himself is in the “other” camp?

He blames Friedman for lowering the country's moral standards, but his own mentor at MIT, Paul Samuelson, was every bit as instrumental in emptying the mind of students of moral considerations.

As for Krugman himself, google his defense of NAFTA in the 1990s – the same NAFTA that was supposed to bring in jobs to the U.S. – and see that he can be as vicious as the most vicious Tea Party member or neocon thug.

Three years ago, I touched upon the relation between morality and economics in the The Descent of Man.

For an even deeper insight to the subject, let me quote Jean Paul Sartre from his Critique of Dialectical Reasoning.

According to Sartre, a society consciously chooses its dead, “whether it be the raft of the Medusa, an Italian city under siege, or a modern society (which, of course, discretely selects its dead by simply distributing items of expenditure in a particular way, and which, at its deepest foundation, is already in itself a choice of who is well provided for and who is to go hungry.)”

So, you see, Mr. Krugman, you do not have to wait for the next election. The selection has already been made – and made with your full and energetic participation. It is all there. It is just a matter of willingness to see.

What Is Behind the Critical Shortage of Prescription Drugs?

noreply@blogger.com (Nasser Saber) — Sat, 27 Aug 2011 03:52:00 +0000

Today, the critical shortage of prescription drugs reached the editorial page of the New York Times. Under the heading The Shortage of Vital Drugs, the paper said:

A widespread shortage of prescription drugs is hampering the treatment of patients who have cancer, severe infections and other serious illnesses.

The Food and Drug Administration says that some 180 medically important drugs have been in short supply, many of which are older, cheaper generic drugs administered by injection that have to be kept sterile from contamination.

A survey of 820 hospitals in June … found that almost all of them had experienced a shortage of at least one drug in the previous six months … As a result, more than 80 percent of the hospitals delayed needed treatments, almost 70 percent gave patients a less effective drug, and almost 80 percent rationed or restricted access to drugs.

The cause of this shortage? According to the editorial:

Nobody is sure just what is causing the shortages ... But several factors are likely to be involved: contamination problems at some manufacturing plants, forcing unexpected production shutdowns; difficulties in getting pharmaceutical ingredients from suppliers, especially those abroad; reluctance to invest in production-line improvement for low-profit generics when high-priced brand-name drugs bring in far higher profits. Sweeping consolidation in the generic drug industry means that fewer companies are left in that market to make up for a shortage.

The Times has become a trashy paper, more in the league of The New York Post than its previous self. Its stories are old, the opinions in its pages downright embarrassing. That is why I rarely quote it now.

Here, it blames “contamination” and the difficulties with the supply lines. The drug companies in question are some of the largest, most advanced industrial corporations in the world. They are the “Big Pharma”, some with over a century of experience in drug manufacturing; we are not talking about the chicken processing plants in Alabama and Georgia. The idea that they will allow contamination or suppliers to impact their output is laughable.

More than 3 months ago, the Financial Times had covered the same story in a greater depth. On May 4, in a news story titled Drug takeovers spark shortages it said:

Pricing pressures and takeovers in the US pharmaceuticals sectors have contributed to record medicine shortage and could put lives at risk, sparking calls for wide-ranging reform.

The American Society of Health-System Pharmacists said last year its members could not obtain an unprecedented 211 prescription drugs through the usual channels ...

Cynthia Reilly, director of the ASHP’s practice development division, said: “There has been a lot of consolidation among manufacturers, with fewer producing any given product, and more quality inspection by regulators. “For older, off-patent drugs, some companies are disengaging because it’s not where the profit is.”

Cynthia Reilly is barely touching upon the subject. The background of the drug shortage, in a nutshell, is that the century-old business model of pharmaceutical companies – doing research and bringing new drugs to market under the protection of the patent law – is no longer working. The problem is structural.

In the 1980s, the Big Three auto companies also faced a structural problem: they could no longer afford the social function of supporting their retirees. At one point, GM claimed $1,100 in the price of each car was earmarked for retirees' pension and insurance. With a nod from the company, the stories spread about GM being a retirement fund that also happened to make cars. In the face of stiff competition from then Japanese car makers, that could not be done. The rest is history, with bankruptcies, pension losses and layoffs.

The problem of the big pharma is likewise structural albeit of a different nature. “Structural” is the key word, though. It means that there is no cure. The business model is dying and, naturally, the vultures have descended on the scene.

Here is one, as per The New York Times of January 26, 2005, under the heading Making a Fortune by Wagering That Drug Prices Tend to Rise. As you can see, the problem has been in the making for some time.

Over the last 20 years, the packing and shipping of drugs evolved into a game of arbitrage, called speculative buying, with distributors like Mr. Rahr (who paid $45 million cash for an East Hampton estate) wagering on drug price increases.

This common industry practice seems more fitting to a casino than a distribution warehouse. And in the 1990’s and the early years of this decade, with prices far outstripping inflation, it was a sure bet…..

Mr. Rahr would not disclose exactly how much he made through speculative buying. Goldman Sachs estimated that the distribution industry, which is dominated by three large public companies, made 60 percent of its profit, or $980 million, from speculative buying in 2001, when the practice was at its peak. More recently, Goldman Sachs estimated speculative buying’s contribution at 40 percent of profits.
….
In some ways, the practice helped drug manufacturers, who relied on speculative buying in lieu of paying distributors to get drugs to pharmacies. In effect, it was a form of hidden compensation that never showed up as a cost to manufacturers. But speculative buying fostered many problems, industry analysts and economists said. Some said it played a role in drug cost inflation by adding an incentive for manufacturers to raise prices repeatedly. It also gave sometimes gave drug makers false signals that products were in demand, prompting them to turn out excess product.

By encouraging distributor stockpiling, the system also led to shortages in some regions of the country, a situation known as a “stock out” and one that the industry does not like to discuss. Last year, Bristol Myers Squibb paid $150 million to settle allegations … that it misled investors by aggressively encouraging wholesalers to flood their warehouses, thus artificially inflating its sales.

That’s all. Unless you want to know about Mr. Rahr, the sophisticated Brooklynite with his “trademark yellow ray ban glasses”. Then google him. Interesting character, he.

The Origin of the [crisis in the] European Union – 3: To Serve Europeans or 2 or 3 Things I know About Force

noreply@blogger.com (Nasser Saber) — Sun, 14 Aug 2011 05:24:00 +0000

In one of the episodes of the old US TV series, The Twilight Zone, an alien ship lands on earth and a heated discussion ensues among the earthlings as to the aliens’ intentions: are they friends or foes?

Some say the aliens are friendly. Others are skeptical. How is one to judge?

The aliens have a book that they frequently consult. It is agreed that if the book is deciphered, it could provide a clue to their intentions. So cryptographers go to work and finally get the books’ title: To Serve Man.

Everyone is jubilant. The aliens have come to earth to serve the people. Friendly aliens, these.

People drop their guards. They begin mingling with the aliens and even accept their invitation to visit the alien ship and travel with them.

In the final scene, as the ship is taking off with its human cargo, the code breaker who had been working on the translation finishes her job and frantically runs to inform the human passengers. To Serve Man was a cookbook.

***

At that point, if the humans wanted to get off the space ship, they would have been stopped by force.

Force comes in when the “free choice” of the subjects will not do the trick.

Democracies count on that free choice to function.

***

The EU is the spaceship. Its member states are the humans. Finance capital, and its most recent offshoot, speculative capital, are the aliens. I am one of the code breakers. And force is, well, force.

***

To talk about force, you have to know your stuff.

Take Newton’s F = ma.

Now, stay with me.

The equation says that force equals mass times acceleration.

This is the most profound relation in physics; the much touted E=MC2 is derived from it. (And don’t be fooled by its simplicty. It is a vector differential equation, if you know your math and physics).

What is force in this equation, I ask you.

Well, Nasser, it is force.

But what is force? Acceleration has a precise definition: it is the change in speed per unit of time. If your car’s speed increases from 30 to 40 miles in 4 seconds, its acceleration is 2.5 miles/hr per second. Do we have a definition like that for force?

Nasser! Force is force – like gravity. Like the weak and strong nuclear force. Like electromagnetism. Just like pornography, we know force when we see it.

Pornography has a precise definition. It is the depiction of sex for the purpose of commerce. It was this commerce angle that the pedestrian intellect of that Supreme Court judge could not see. But, force?

At this point, you might try defining it from the equation: from F=ma, force is that thing which, applied to mass m, gives it a given acceleration.

But, then, what is mass?

Alas, that too is a tricky thing to define. All we can say at this level is that mass is the property of matter.

In twin ambiguities of force and mass lies the profundity of F=ma. The equation defines physics. What is force and what is matter: these are the twin subjects of the discipline.

The four type of forces in the universe I mentioned above must somehow be related. To date, no one knows how. The Grand Unification Theory is the suitably descriptive name for the line of research to answer that question.

***

As in nature, so in social life: there are different types of social forces. But unlike in nature, we know their commonality thanks to Karl Marx. “Force”, he wrote, “is an economic factor”.

The statement lends itself to being read in a way that does not sufficiently highlight the role of force. Any “non-personal” force is an economic factor. The famous line in The Godfather movies – “it is business; it is not personal” – repeated several times throughout, succinctly captured that truth.

Except for acts of passion and mad men, force is always used in furtherance of economic interests. The “business” is always the end. Force – manifested in violence and thuggery – is always the means. It is an aspect of doing business, like meeting and negotiation. That few people got that central theme of The Godfather is a testimony to the visual and aesthetic underdevelopment of the general population; the message was there throughout, loud and clear.

The meeting of the heads of the 5 families in which they agree to get into narcotics is a board meeting – and the most authentic representation of a board meeting in the movies that I know of; it stretches into the night as the members argue over an important strategic move.

Or take the famous scene in the Bronx restaurant where Michael Corleone, played by Al Pacino, shoots the corrupt cop and a rival gangster, Sollozzo.

It is a business meal that would be tax deductible – had Sollozzo stayed alive to report it as an expense.

Paul Carlucci no doubt did. He is a thug by virtue of being a Murdoch minion and the “publisher” of the New York Post. He is also a consigliere who sets the News Corp's corporate philosophy. From the New York Times:

News America was led by Paul V. Carlucci, who, according to Forbes, used to show the sales staff the scene in “The Untouchables” in which Al Capone beats a man to death with a baseball bat. Mr. Emmel testified that Mr. Carlucci was clear about the guiding corporate philosophy.

Observe this encounter he had with a businessman whom Murdoch wanted to force out of business, as reported in the New York Times:

George Rebh, who founded Floorgraphics along with his brother Richard, met with Paul V. Carlucci, head of News America, in 1999 at a Manhattan restaurant, and the News Corporation executive got right to the point.

“I will destroy you,” Mr. Carlucci said, according to his deposition in the Floorgraphics suit against News America, adding, “I work for a man who wants it all, and doesn’t understand anybody telling him he can’t have it all.” (Mr. Carlucci is now the publisher of the News Corporation-owned New York Post.)

Just in case the Rebh brothers did not get the point, court records indicate that beginning in October 2003, someone working out of the Connecticut headquarters of News America Marketing gained access to the Floorgraphics computer network, which included a collection of advertisements the company had created for its customers.

Don Corleone did not want it all. Rupert Murdoch wants it all, as befitting a man bent on creating a global media empire.

But if you want it all, something has to give: all the people around you have to get to work, including your wife; we all know that wife has to work if the family wants a better car or a bigger house.

If the work involves paying cops, eavesdropping on unsuspecting victims and hacking dead schoolgirls’ cell phones, the working wife must fit in. The disengaged wives of yesteryears who, by their admonishing silence and disapproving looks mitigated the violence in however a small way, are gone.

In their stead, we have Wendi Murdoch.

According to the New York Times, “although she occupies no formal position in Mr. Murdoch’s companies, she acts as counselor to her husband and by all accounts has asserted influence in his global media empire.”

So, she, too, is the consigliere, just like Tom in The Godfather. Only in those bygone days, Tom could stay a consigliere and out of direct thuggery; everyone knew he was not a “soldier”.

That comfortable division of duties is no longer possible. In the modern business word, everyone has to join the battle on all fronts. Consiglieri cannot sit on their asses and intellectualize. Carlucci who sets the corporate policy also quotes Al Capone and threatens people. Consigliere Wendi must likewise multitask.

You no doubt know that during the parliamentary hearing to Murdoch’s criminality, a protester hit him in the face with a plate of foam and Murdoch’s wife rose to her husband’s defense.

Watch these pictures taken from the live recording of the event.

The protester in the checkered shirt is on the left side. Wendi Murdoch stands out in the pink jacket. She is sitting behind her husband, Rupert, the bald man sitting at “7 o’clock”.

There are many things we can learn from these shots. But I don’t want to digress too much. Merely compare the first and the last frame and observe the speed and the angle of the wife’s reaction.

She is surprisingly quick. The woman in the grey suit has reacted first but only because she is closer to the protester and has seen him first.

Then Wendi moves in and immediately overwhelms everyone around her.

The important point is that she completely ignores her husband.

A woman’s first instinct – her maternal instinct – would be to shield her husband from an attack. Or rush to see if he was hurt.Wendi Murdoch displays no such weakness. She jumps straight at the attacker, but even in that move, the point is not to “neutralize the threat”, as a trained bodyguard would do, but to beat the man. The incident is an excuse for unleashing violence. He made her day.

The pictures do not show, but after the man was subdued, Wendi Murdoch kept pummeling away the man in the face and head and then she went further. According to the same article:

Some reports in the British press suggested that after the thwarted attack she even picked up the paper plate from the witness table and shoved it into the protester’s face, screaming as she did so. The protester ... was later led away by the police with his face covered in white cream.

“Mr. Murdoch, your wife has a very good left hook,” said Tom Watson, a Labour member of Parliament.

You have to imagine the mentality and disposition of a woman who lands repeated blows to a subdued man’s face and then takes a plate of foam and shoves it in his face.

And she does that in front of Members of the Parliament of the United Kingdom with TV cameras rolling and hundreds of reporters present, in a meeting convened to investigate the criminal conduct of an organization of which she is a consigliere.

Imagine what this woman could do in private with a vulnerable rival or underling. We are dealing with a Sonny Corleone here, however unlikely the physical resemblances might be. But Jean-Luc Besson showed us that slender women in evening dresses are perfectly capable of doing what men do.

That is the stuff a modern-day media empire is made of.

All this was the good news, in the sense that these thugs are small time players. Their use of force is limited in scope – threatening Peter here, whacking Paul there – and plain for everyone to see. They merely aim to “engineer” the individuals, if you will.

Even when thuggery becomes grand scale in the form of war, most people can see it for the racket it is. War is costly and at some point, it has to end.

It is different with finance capital. Like a well-trained boxer who punches not merely with his arm but with the full weight of his body, finance capital hits with the full weight of “the system”. Nay, it hits with the system. So it never has to stop.

What enables it to do so is democracy.

A Brief Commentary on the U.S. Rating Downgrade

noreply@blogger.com (Nasser Saber) — Sun, 07 Aug 2011 17:26:00 +0000

S&P downgrading the U.S. “credit” was a publicity stunt by the company for the company. The stunt had its share of bit players and company politics, but it took place within, and was ultimately driven by, a larger narrative that is slow growth in the U.S. and the finance-capital driven mandate of slashing public spending. Let us take them one by one.

One bit player was John Chambers of S&P, with the transparently fraudulent title of head of the company’s “sovereign rating committee”. He no doubt sees no absurdity in rating countries; his job title discourages coherent thinking, which is why he says drivel like this in a news conference:

“The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S.& P.’s sovereign ratings committee [by way of defending the downgrade].

Never mind that a debacle, by definition, cannot continue. But suppose it could and did. What of it? Was it at that last hour that the Chairman of S&P’s Sovereign Rating Committee realized there was a gridlock in Washington?

In truth, the “debacle” was an excuse as minds were already made up. Observe:

Officials at the White House and Treasury criticized S.& P.’s move as based on faulty budget accounting that did not factor in the just-enacted deal for increasing the debt limit.

In its analysis, S.& P. had projected the nation’s debt as a share of gross domestic product to reach 93 percent by 2021. That was around 8 percentage points higher than the figure administration officials believed the rating agency should have used — what they now call a $2.1 trillion error.

Gene Sperling, the director of the White House national economic council, called the difference, totaling over $2 trillion, “breathtaking” and said that “the amateurism it displayed” suggested “an institution starting with a conclusion and shaping any arguments to fit it.”

Around 5:30 p.m. [the day the downgrade was announced), S.& P. officials called the group of Treasury officials. “You were right,” Mr. Chambers told them, but said he was prepared to proceed because the revisions didn’t meaningfully affect S.& P.’s conclusion.

So the boys at S&P miss more than $2 trillion. The error is pointed out to them, but they still go ahead with the downgrade.

Why? Why such resoluteness to do something so controversial, especially when the other two big raters, Moody’s and the historically more strict Fitch, did not agree?

Enter another bit player, one Barry Rosenstein, a hedgie by day and human rights fighter by night.

He and other “activist investors” have accumulated large blocks of shares in McGraw Hill, the parent company of S&P. The plan is to break up the company, sell the valuable parts for profit and discard the rest.

When that time comes, the image of S&P as an independent and objective rating agency that took on the U.S. government could boost its value – or so the thinking must have been inside the company. Hence, the downgrade stunt.

Beyond the narrow company politics is the larger narrative of the downgrade as an instrument of coercion to force the government to cut their spending. In the upcoming Part III of the EU crisis, I examine this coercion mechanism in some length. It has implications that go far beyond the bit and two-bit players in the corporate, hedge fund and the takeover world.

The Origin of the [crisis in the] European Union – 2: Where is Europe?

noreply@blogger.com (Nasser Saber) — Sat, 23 Jul 2011 20:06:00 +0000

Sometimes you can tell a book by its cover – or what’s written on it.

Early this year, I got the 2011 edition of Best European Fiction. The idea of the best European fiction is inherently idiotic, like the best city, the best university or the best food.

A few stories I read were sophomoric and just plain bad. So out went the book. But I remember the struggle of the editor to define Europe in the introductory chapter; I suppose you have to do it if you are editing a book of European fiction.

He got nowhere. Anyone setting out to define Europe through the commonality of themes in fiction is setting himself up for failure because there is no such commonality.

Europe, first and foremost, is an economic entity and must be understood as such. Even in the midst of an economic crisis which points to that fact – can you imagine a linguistic crisis in Europe, or a moral or cultural crisis? – that obvious fact is overlooked – or not understood at all.

Hegel showed that we think in names. “Given the name lion, we need neither the actual vision of the animal, nor its image even. The name alone, if we understand it, is the unimaged simple representation. We think in names“, he wrote in Philosophy of Mind.

What do we think of when we think Europe?

We think of Beethoven’s symphonies, Newton’s mechanics, Italian architecture, French cuisine, the Dutch masters. We think Mozart, Hegel, Faraday, French Revolution.

These names resonate with us because our lives in some way are impacted by them. The nature of that impact does not concern us here. But note that all the names are clustered in a region that is geographically Western Europe. That is no coincidence. The countries in Western Europe were the first to emerge from a feudal society into a capitalist state. It is that socio-economic transformation that defines Europe and its place in the world. Europe is the Capitalist Europe; note how the names are also clustered around a specific time – roughly the 18th century – which corresponds to the rise of Capitalism.

The degree of the Europeanness of the countries in the continent is measured with that yardstick. Unsurprisingly, that measure correlates with the geography and the physical proximity of the countries to the Western European center. Using the parlance of the current crisis, we can say that there are “core” and “periphery” countries in Europe.

Correlation, though, is not causation. It does not contain the element of necessity. We cannot always infer a country’s stage of economic development from its position on the map. Art and literature are better indicators. They more accurately reflect the economic and social relations in a country because they are born out of those relations.

Take Spain and Portugal which both began the road to Capitalism early but then fell behind their northern rivals.

To date, they are less Europe. If you do not live in Portugal, you would be hard pressed to think of a universally recognized European icon that is Portuguese.

As for Spain, the example of Picasso will suffice. His success is precisely due to the fact that he is Spanish, a lifetime spent in France notwithstanding. John Berger, in his masterly exposition of Picasso in The Success and Failure of Picasso hits on this very point: Picasso being a “vertical invader” of the European stage from the trapdoor that was Barcelona:

Poverty is not surprising to any Spaniard. But the poverty Picasso witnessed in Paris was of a different kind. In the Paris self-portrait of 1901 we see the face of a man who not only is cold and hasn’t eaten much, but who is also silent and to whom nobody talks.

Nor is this loneliness just a question of being a foreigner. It is fundamental to the poverty of outcasts in a modern city. It is the subjective feeling in the victim that corresponds exactly to the objective and absolute ruthlessness that surrounds him. This is not poverty as a result of primitive conditions. This is poverty as the result of man-made laws; poverty which, legally accepted, must be dismissed from the mind as unworthy of any consideration.

Many peasants in Andalusia must have been hungrier than the couple at the table in the etching of The Frugal Meal. But no couple would have been so demonized, no couple would have felt themselves to be so worthless.

Hungary is not Europe. As a part of the Austro-Hungarian Empire, it came in touch with the European core and was set on its way to Capitalism. It is all there in Musil’s masterpiece, The Man Without Qualities. He describes a country in which “there was some show of luxury, but by no means as in such overrefined ways as the French. People went in for sport, but not as fanatically as the English. Ruinous sums of money were spent on the army, but only just enough to secure its position as the second-weakest among the great powers.”

WWI aborted the transformation and later, under socialism, semi-feudal relations survived. Socialism did not destroy them with the vehemence that capitalism would have. You can see that in the beautiful novels of Sandor Marai, in Casanova in Bolzano or Embers.

In Embers, a man’s sense of honor prevents him from opening the diary of his long-dead wife, although it would answer a question which has been tormenting him for 40 years.

Imagine Rupert Murdoch – the hacker of dead schoolgirls’ cell phones – being restrained by a sense of honor. Or Tony ‘Yo’ Blair. Or David Cameron. Sarkozy. Berlusconi.

Berlusconi!

I am not talking about the leaders and outstanding citizens only. Western European writers in general could not think of the idea of leaving a dead wife’s diary unopened. Nor would their readers believe such a plot; it would make no sense to them. That is because sense of honor is not only internal, but also external: it springs from a concern and respect for the others. It is ultimately the recognition of others as one’s equals. A “rational” Western man who is conditioned to view maximizing one’s profit at the expense of others as the natural order of the universe would reject that equality even if his life depended on it.

It is in that sense that Hungary is not Europe: a strong sense of honor is still conceivable there.

And Greece is not Europe. Greece most definitely is not Europe.

Geographically, Greece is attached to Turkey. It was a part of Turkey for 400 years. But it is not geography alone; if Turkey could qualify as a North Atlantic country in NATO, then Greece could qualify as a European country. I am talking about economic and social relations.

In both respects, Greece is closer to Turkey and Iran than France and Germany. The commonality goes beyond baklava and stuffed grape leaves. It pertains to the balance of power between business and the government from which, ultimately, the country’s social relations and the tempo of its daily life originates. You can see that in the disorganization of the social institutions perfectly reflected in traffic. It is the hallmark of a society which has not internalized the discipline of the assembly line – or the call centers, as the case may be.

Because business – Capitalism – in Greece is relatively underdeveloped, the government has assumed the economic functions that in more developed economies are left to the businesses. That further accentuates the relaxed mood of the country and acts as a brake against the “entrepreneurial drive” that is so evident in the West and, especially, in the U.S.

Until the new reforms kicked in, for example, the Greek government paid the full pension of deceased pensioners to the surviving spouse. And if the couple had children under 18, they too, were paid until they turned 18. Turkey and Iran have similar laws.

To the advocates of family values in the West, that is a scandal, a paternalistic restraining of the free people’s spirit which had to change if Greece was going to join the ranks of civilized nations.

That is precisely what the EU and euro are all about. The issue is not the core countries. They are already European. The plan is make the periphery core. Why? Because in less developed periphery countries labor is cheap. Given a common currency, the core countries can exploit that advantage to raise the rate of return of capital.

For that to happen, the government in the periphery countries must get out of the way and make room for business – after making the conditions right for the business to come in.

That is what the racist professor whom I quoted in Part I was saying about Greece. Let us hear him one more time:

A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity ... Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.

Exactly. The Greek government must establish a land registry so that property rights could be unquestionably asserted. It must establish proper tax collection to enforce tax payment from small businesses and the middle class and, most important of all, reign in the spending. What a scandal, paying for the living expenses of a child just because his parents are dead.

This is what has been happening in all periphery countries.

As for the governments getting out of the way, they have no alternatives. Just listen to Jacob Funk Kierkegaard, at the Peterson Institute of International Economics in Washington. He was quoted in the Financial Times of July 22:

Absent a dramatic improvement in the business climate or Greece raising money by selling off its islands, I still think it is going to be a struggle to get investors to have confidence in Greece with such a high level of debt burden.

Greece raising money by selling its islands!

But I am getting ahead of myself.

... And Conforms to the Theory

noreply@blogger.com (Nasser Saber) — Fri, 15 Jul 2011 06:53:00 +0000

In the same article, there was this:

Increasingly, they [HFT firms] are investing in technology that enables them to to try to predict where markets will move. Cameron Smith, general counsel at Quantlab, a proprietary trading firm says: “The reality is you need to have some sort of model that sees something that other don't”.

You have heard ad nauseam how technology revolutionized finance. The statement is repeated so often that it is now an article of faith.

But that is getting the cause and effect exactly backwards. It was finance, in the form of speculative capital that, in search of profits, revolutionized technology. I had a front row seat to the revolution in the early 1980s, being paid exorbitant sums to develop trading systems. Cause and effect was there for everyone willing to look.

Capital has no reason to move from one place to another without the possibility of realizing a profit. Long before there was any trading system, there was Western Union. In the U.S., you could send money anywhere in the country in 15 minutes. If you are over 40, you probably remember the ads.

But there must a be a reason for sending $10,000,000 from New York to say, Boston. Without it, the exercise borders on madness.

When speculative capital rises and discovers the arbitrage opportunities in different locations then — and only then — does the need arise for “getting there” fast before the others. Hence, capital is poured in and technology is revolutionized.

In Critique of Dialectical Reasoning, Jean Paul Sartre asks: “Are there regions of reality where [dialectics] is the norm?”. He does not answer the question. My answer is, Yes Mr. Sartre, the realm of economics/finance is one such region. Observe:

Having destroyed the arbitrage opportunities on sight, speculative capital fancies that it can somehow “replace” them with sheer speed; it moves to substitute the speed for arbitrage opportunities. Hence the rise of HFT.

But that is a fantasy. It is the finance equivalent of fancying that you can generate profits without production. So, back to square one and the need for something that could detect a profit opportunity.

But the point that we are in now, looking for a model, is not the same point we were in during the 1980s, looking for a model. That phase created the quants, hedge funds and derivatives.

Today, quants are discredited, hedge funds are institutionalized and derivatives are the indispensable part of the capital markets landscape.

That is dialectics par excellence. A better example of “immediate” going out of itself, becoming “intermediate” and returning to become “immediate” again, but on a qualitatively different level, could not be found.

Come to think of it, I know things about options and options trading that are not common knowledge; if you have read Vol. 3 you know what I mean. Maybe I should take up again what I left decades ago. Imagine a predictive engine for the HFT guys. Imagine the potential. Imagine the riches!

The Contour Becomes Visible ...

noreply@blogger.com (Nasser Saber) — Fri, 15 Jul 2011 05:29:00 +0000

I formulated the Theory of Speculative Capital in 1998. An Internet search — I think even Google was around then — registered zero hits for the phrase “speculative capital”. There were several “speculative capital flows”, in which the flows were described as speculative, but nothing for speculative capital as a noun.

The gist of the theory is that speculative capital is a self-destructive force which rises to dominate the financial markets and, in doing so, sows the seeds of their destruction. If you get that, you too, could be a man with a crystal ball.

Like all forces, speculative capital assumes many forms; hedge funds (organizational/legal form), derivatives(functional form) and, lately, capital engaged in high-frequency trading, are its various manifestations. If you read the 9-part series on the subject, you know how this latest form came about.

Each new form of speculative capital is more aggressive and thus, more intense and extreme than the previous forms. It has to be: with the low hanging fruits taken, only the progressively more difficult-to-spot-and-exploit opportunities remain. Gradually, the tension and the prevalence of tension gets noticed, noticed being a different matter from understood.

Today, the Financial Times had a relatively long article on how HFT is “hitting headwinds”. The article’s “pull quote”, presumably the most insightful thought in it, was the comment of a Karim Taleb that: “HFT is cannibalizing itself, since it is driving out the very traders it needs to feed off”.

Exactly. But then, either Karim or the paper added that “In response, most traders are already turning to other strategies less dependent on speed.”

I am afraid that will not work. Even in strategies less dependent on speed, it is important to get there first. Being first counts for something!

What will happen, I think, is that the strategies less dependent on speed will gradually become more dependent on it until they all become totally dependent on speed, just like the equities markets are now. That is how speculative capital changes the markets and sets them up for destruction: by radically altering their structure, i.e., the way they operate.

A system’s modus operandi, the way it works, is designed around its purpose - what it is for. The two are inseparable. Destroying one destroys the other.

When speculative capital destroys, there is no malice or conspiracy. It is just the way it works, the way it is, which is why the destruction goes not only unrecognized but is applauded as continued advancement towards some financial/economic promised land.

The Origin of the [crisis in the] European Union – 1: When Tendency Becomes Actuality

noreply@blogger.com (Nasser Saber) — Sat, 09 Jul 2011 22:33:00 +0000

A comprehensive analysis of what is taking place in the EU requires a book-length treatise; a blog is not a suitable venue for it. What is more, in Vol. 4, I discuss the subject in some detail. That is why except for a few relatively short posts here and there, I have not written about the events in Europe. Then, last night I read Serge Halimi’s editorial in the July issue of Le Monde Diplomatique.

Halimi is a journalist in the best sense of the word and a competent writer, as befitting the editor of LMD. Let me quote excerpts from the editorial, but I urge you to read the piece in its entirety here:

The economic, and democratic, crisis in Europe raises questions. Why were policies that were bound to fail adopted and applied with exceptional ferocity in Ireland, Spain, Portugal and Greece? Are those responsible for pursuing these policies mad, doubling the dose every time their medicine predictably fails to work? How is it that in a democratic system, the people are forced to accept cuts and austerity simply replace one failed government with another just as dedicated to the same shock treatment? Is there any alternative?

The answer to the first two questions is clear, once we forget the propaganda about the “public interest”, Europe’s “shared values” and being “all in this together”. The policies are rational and on the whole are achieving their objective. But that objective is not to end the economic and financial crisis but to reap its rich rewards.

Halimi correctly observes that what we face is not a “technical and financial debate but a political and social battle”. (Dialectics of finance is dialectics of politics, and vice versa.) He then goes on to explain the reason for the policies that seem to be at once insane and rational, because “indignation is powerless without some understanding of the mechanisms that caused it.”

But he does not go to the heart of the matter, which is the intellectual equivalent of asking for the moon. That is a problem, because some understanding would not do. It could not answer, for example, why draconian policies were applied with “exceptional ferocity” in “Ireland, Spain, Portugal and Greece”?

In fairness, the heart of the matter is technical and can hardly be discussed in an editorial. But it must at least be laid down, because it alone can answer the questions, resolve the contradictions and show the way. That is the power and the empowering effect of theory that I have written about in several place – here and here, for example, which delivers us from the submissive acceptance of events just because they occur. Without it, the powerlessness that Halimi mentions is bound to reign. The “market place” of ideas in democracies sees to that.

In democracies, you see, what often stands in the way of people’s grasp of the issues and renders them powerless is not the death of information but its stupefying plenty. The Greek pensioners, French union organizers, British “Open Europers”, the World Bank bureaucrats, the IMF experts, traders, politicians, college professors, think tankers and ordinary citizens have all opined about the crisis in EU. The opinions are often contradictory; how could traders and union organizers not disagree? That creates the “messiness” of the democracy that Rumsfeld himself cautioned us about.

Messiness muddies the waters. Who is one to believe, especially as everyone seems to be at least partially right? Since everybody is partially right – and thus, partially wrong – maybe what afflicts us transcends the individuals and touches upon something more fundamental like human nature. Yessir, that must be it. Surely it is man who is wicked, as the Good Book says. Just look at the Greeks. They do not work hard, do not pay taxes and retire early. No wonder they are broke. As for the larger crisis in the EU? It is the fault of the European “elites” who came up with the idea.

In this way, the degradation of the life styles of 500 million people in the EU is blamed on themselves.

Examples abound.

Here is one Hans-Joachim Voth, Professor of Economics, Universitat Pompeu Fabra, Barcelona, Spain, writing to the editor of the Financial Times on June 24 to opine about Greece:

A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity. The economic evidence is unambiguous – the larger and more effective a country’s state apparatus, the higher output per capita. Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.

And here is Gideon Rachman, an FT commentator, explaining the cause of the EU crisis in his June 21 column:

It is important to understand that the origins of the current crisis lie precisely in the dream of political union in Europe. For the true believers, currency union was always just a means to that greater end ... Helmut Kohl, the chancellor of Germany in the early 1990s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.

At a seminar in London last week, Joschka Fischer, a former German foreign minister ... was unrepentant in defending this elitist model of politics. He insisted that most important foreign policy decisions in postwar Germany had been made in the teeth of public opposition. “It’s called leadership,” he explained.

Yet, does any of this make sense?

If the economic evidence were “unambiguous” that the larger a country’s state apparatus, the higher its output per capita, would the Republicans in the U.S. and the Tories in the UK consistently, insistently and vehemently push for shrinking the government?

More fundamentally, who are the European elites? What is their common interest? Why would they be interested in uniting a country without a land registry or tax enforcement or a “responsible political process” [sic] with an industrial country like Germany? How could they influence the government to carry out unpopular decision, even in the face of 80% opposition?

As all the issues and controversies pertaining to the crisis in the EU stem from the crisis, they reflect the heart of it and, to that extent, contain an element of truth, no matter how contradictory and even nonsensical. If we reach the heart of the crisis, the contradictions will disappear. Newtonian mechanics offers a good analogy. It shows that the same force that makes an apple fall from a tree is the same force that keeps the moon in orbit. There is no contradiction. It also explains the apparent movement of the heavenly bodies as seen from the earth.

At the heart of the EU crisis is the fall in the rate of profit of capital in Western Europe and the U.S.

Why and how does the rate of profit fall is beyond the subject of this post. You could research it yourself or await the publication of Vol. 4. There, I delve into the subject in some depth.

The point to emphasize is that the fall is real – what philosophers call objective reality. And as the rate of profit is the source of the newly created wealth, its fall means that the amount of the total wealth created in the “developed world” is reduced.

This fall and reduction is the result of a process that originally exists as a mere tendency. In the mid 1970s, after the breakdown of the Bretton Woods regime of fixed exchange rates, the tendency exerted itself forcefully and gradually became a real phenomenon. The process continues to date and is behind all the stories about the U.S. losing its preeminence and economic might that you have been hearing for some time.

The “total wealth” is defined expansively, what is crudely and inaccurately captured in GDP. I will return to this subject later. Here I merely note that total wealth is an altogether different concept from the profit of an individual firm, or even a group of firms, say the ones comprising Fortune 500. Likewise, it has nothing to do with the distribution of wealth. The total wealth created in a country could decrease, but the absolute size of the share of that wealth that goes to a particular segment of society could rise. It is a simple matter of ratios. The overall size of a pizza pie could shrink but the amount of pizza you eat could actually increase if you raid others’ shares.

So, there is no inconsistency in saying that the rate of profit and, with that, the absolute value of the total wealth in the U.S., has fallen and yet, at the same time, the number of the billionaires in the country and their total wealth has increased. This state of affairs can come about if billionaires, when they were mere millionaires, could appropriate proportionately more share of the country’s newly created wealth.

There are many ways that an economic class could appropriate proportionally larger share of the newly created wealth. But they all boil down to paying less and thus, keeping more. In the U.S., this was done at both the public and private level, by pushing for tax cuts and reducing wages.

If you live in the U.S., both are familiar stories. The push for tax cuts led the Proposition 13 in California, which limited property taxes and set the stage for subsequent crises, from the 1994 bankruptcy of Orange County to the current, ongoing one. It also created Ronald Reagan and his “philosophy” which was adopted by both Republican and Democratic parties: constant tax cuts, tax breaks and tax loopholes for businesses and the wealthy, “small government” and “starving the beast”, the latter being code for destroying government agencies by cutting their budget on the grounds of lack of funds because the government revenues were reduced due to tax cuts.

In the U.K., Margaret Thatcher played a similar role.

In the private arena, the wages were reduced – either directly or by not keeping up with inflation. Wage reduction is a twofer. First, you pay less for labor. That is one saving/appropriation. Second, because of low wages, the labors’ productivity rises which further increases your profit. The follows from the definition of productivity, which is the value of output (wealth) created by unit labor (measured by the wages).

Here is not so much the proof – as proof only belittles the obvious – but everything you need to know on the subject, from the Financial Times of April 21, 2010, under the heading Biden urges actions on stagnant wages:

Mr Biden, who is in charge of Barack Obama’s “middle class task force” said the last US economic cycle, which began in 2001 and ended in 2007, was the first in history that left median incomes where they were at the start.

Yet, over the same period, the growth in productivity, which had traditionally fed through into wage growth, hit record levels … Mr Biden admitted that the administration did not yet have clear answers on how to address what many economists believe is a long-term structural problem in the US economy.

Note the “long-term structural problems in the US economy” which economists concede and for which Vice President Biden admits he has no clear answer. It is the diminished rate of profit and thus, wealth. It could only be remedied at the expense of sacrificing efficiency, which is another way of saying that it would not happen.

Also, Biden’s reference to 2001-07 period is strictly contextual; he happened to be talking about that specific period. The wage stagnation goes back to the mid 1970s. Financial Times, June 28, 2011:

Fork-lift truck drivers in Britain could expect to earn £19,068 in 2010, about 5 per cent lower than in 1978, after adjusting for inflation. Median male real US earnings have not risen since 1975.

The wage cuts in the U.S. were especially savage. They could not be replicated in Europe with its tradition of strong labor unions. What would you do if you were “European” capital and wanted to increase your share of wealth in the face of falling rate of profit?

What would you do if you had to build a riverfront property and there was no more land?

Why, you would “claim” land from the river. You would dig the mud and sand from the river bed and add to the river bank to create new riverfront land. Ask any major New York developer.

Similarly, if you wanted to bring wages down in Germany, for example, you would bring in cheap labor, non-union labor, Turkish labor.

But there was always a limit to that importation. Not all Germans could be replaced by Turks in German factories.

Could something more fundamental be done, then?

Yes, one could create the European Union. Its main purpose? To inject cheap labor from less developed countries into the Union so that the wealth of the more developed ones could somewhat be maintained.

That’s the EU in a nutshell.

A Late Epilogue to an Earlier Post on Greenbergs and Zuckerbergs

noreply@blogger.com (Nasser Saber) — Wed, 29 Jun 2011 03:23:00 +0000

Last month, while reacting to a New York Times article, I wrote about the Greenbergs and Zuckerbers dropping out of college and following each other to entrepreneurship.

As I saw it, the story had two morals, not entirely unrelated. One was the corrput culture at Stanford – and, by extension, U.S. universities – which belittled education and encouraged students to drop out in pursuit of the money.

The other was the long-term effect of this phenomenon. I said imagine the kind of citizens the illiterate rich brats would make and the kind of society they would help build using their wealth.

Meanwhile, I had an exchange with a reader who questioned – or rather, wanted more elaboration on – my comments that finance capital shapes people’s conduct.

Here is the follow up to the story from this weekend’s Financial Times, under the heading Rising college drop-outs hope to learn a lesson from Zuckerberg and Gates:

Professors at MIT, Stanford and UC Berkeley, three universities with a strong tradition in as IT powerhouses, confirm an uptick in entrepreneurial dropouts as students seek to emulate the example of famously successful non-graduates such as Bill Gates at Microsoft, Steve Jobs at Apple and Mark Zuckerberg at Facebook.

About a dozen college dropouts interviewed by the Financial Times said that they knew others who had made a similar choice. All confirmed investor willingness to fund them. “They want to see you believe your story enough to risk everything for it,” said Julia Hu, who left MIT when she got funding to build her sleeping device company. “They don’t like to fund non-committed entrepreneurs.”

You want money? Then prove that you’re committed by dropping out of the school. That is the logical demand from an entity such as finance capital that at all times strives to protect itself. It even turns dropping out into a badge of honor, just like the way serving jail time is made into a badge of honor in the ghettos.

“The environment encourages students to leave,” said Andre Marquis, UC Berkeley’s director of the entrepreneurship center, who had three students drop out of his program last semester. “In Silicon Valley, it’s almost a badge of honour to have left school for your start-up,” Ms Hu said.

Then, in the the very same issue of the FT, on page 2, was this report:

Peter Thiel, a prominent Silicon Valley investor, said the emphasis in US society on having a college degree has created “a bubble in education,” in which the professional value doesn’t match the $200,000 price tag. He is countering that by giving $100,000 each to 24 people under 20, to pursue an entrepreneurial idea in Silicon Valley instead of going to college.”

“We need more innovation,” he said. “There’s a tremendous cost to have the most talented people in society take on enormous debt, then take well-paying but deal-end jobs to service those loans for the next 15 to 20 years of their lives.”

Look beyond Peter Thiel spreading $2,400,000 amongst 24 people in the expectation that one of them would strike gold; that is the standard venture capital model. Ignore his lie that he recruits “the most talented people in society” only to have them develop Facebook applications like Hug Me, Kiss Me and Pillow Fight.

The central point here is this: when a 4-year education costs $200,000, which you have to borrow and after which you’d have no guarantee or even a good prospect of landing a good job, then the appearance of Peter Thiels is natural, necessary and inevitable.

Martin Luther King often said that he knew people's [racist] behavior could not be legislated. But he pushed for anti-discriminatory laws because he wanted to control the conduct. Finance capital bridges that chasm. It shapes the law and the conduct in ways that those unaware of its dynamics could hardly notice or imagine.

Europeans Not Being Europeans: Now It Is Official

noreply@blogger.com (Nasser Saber) — Sun, 12 Jun 2011 17:43:00 +0000

Last year, reading between the lines, I wrote that Europeans will be Europeans no more.

This past Tuesday, the European Commission agreed. Its “reform recommendations” for the 27-member union said pretty much the same thing. The Financial Times succintly capture the spirit of the report under the heading “EU sees vision of new Europe which is rather less European” :

The Europe recommended by the European Commission, the European Union’s executive branch … would look very different to the Europe of only a few years ago.

Pension system would see their retirement ages raised. Long-protected industries would be deregulated. Guaranteed wage increases negotiated long and hard by trade unions would be renegotiated.

In other words, the European economic model or models would look far less European.

I have said many times that just about any thing that is coming your way is reported in your local paper. All you need is to pay attention, which includes reading between the lines.

When a Nobel Prize Isn’t Enough

noreply@blogger.com (Nasser Saber) — Sun, 12 Jun 2011 17:35:00 +0000

Last October I wrote about the three stooges who were given the Nobel Prize in economics for their “work” on labor and employment.

I did not mention it then, but one of those stooges was an MIT professor by the name of Peter Diamond. Before he became a Nobel laureate, President Obama had nominated him for a seat on the board of governors of the Federal Reserve. But his nomination got bogged down in the senate; for whatever reason, the Republicans, led by Shelby of Alabama, opposed him. This past Sunday, the professor wrote an Op-Ed piece in the New York Times to announce that he was withdrawing; he’d had it with Beltway politics. The title was When a Noble Prize Isn’t Enough. Take that, Southern hicks.

But I say we owe Shelby one. If nothing else, he provoked Diamond to write the Times piece. It is a document that can teach us a lot.

In Peter Diamond, you see, we have a man who has spent his entire adult life studying labor and employment; I traced one of his papers to 1966. He is a full time professor of economics at MIT, one of the premier institutions of higher learning in the West. And he received a Nobel Prize in recognition of his work and discoveries.

Wouldn’t you be curious to know what this man has learned/discovered in a half century of scholarly work? I would be, for sure. But there is more than one man’s knowledge involved here. According to the Financial Times which blasted Republications for torpedoing his nomination, “Mr Diamond is widely regarded as among the most brilliant economists of his time.”

And according to Paul Krugman, the New York Times columnist who called the Republicans stupid, Diamond “wrote the seminal paper on the whole subject” – the whole subject being the “hot topic” of “whether the apparent shift in the Beveridge curve signals a rise in structural unemployment.”

These are the Establishment voices. Their approval of, and admiration for, Peter Diamond is what got him nominated to the Federal Reserve Board in the first place. He is, in other words, “one of them”. So in learning about his ideas, we would learn about the mainstream views on joblessness in America – “mainstream” being precisely what is espoused by outlets such as the Financial Times and the New York Times which is now also the official view because they have a friend at the White House.

Let us go then, you and I, and see what this brilliant economist of our time has to offer by way of solution to the economic ills that have befallen his country:

“In reality, we need more spending on some programs and less spending on others, and we need more good regulations and fewer bad ones,” he wrote in the Times.

All articles in the opinion pages of the New York Times are edited by the professional editors, which is another way of saying that the thoughts in them are presented in the best possible light. So when you read drivel, it is not the writing but the thought.

Who would write “we need more good regulations and fewer bad regulations” or “we need more spending on some programs and less spending on others”?

Why, any 12-year old who had to meet the 500-word minimum requirement in his composition assignment knows the answer: someone who had nothing to say.

But how could a seventy-something Nobel laureate with a lifetime of research not have enough material of substance to fill a newspaper column?

The answer is that his lifelong research is junk, as exemplified by his “seminal paper on Beveridge curve”.

Formally, i.e., in terms of form (which is always mathematical), a Beveridge curve can sustain a university career. It lends itself to being studied in depth for its shape, equation, slope, upward and downward shift, rotation, tangents – you name it. Imagine the papers you could publish, seminars you could attend and prizes you could win.

But conceptually, there is nothing there; where the content ought to be, there is a vacuum. Look at what it is about the labor market that the man has been trying to understand:

“Understanding the labor market – and the process by which workers and jobs come together and separate – is critical to devising an effective monetary policy.”

The process by which workers and jobs come together. I mentioned in the Stooges post that these labor economists of our time think of employment as a dating game where jobs and workers “come together” and then this one – say, the worker – dumps the other for a better, higher paying relation. Or that one – the job – dumps the worker in favor of a cheaper worker in China. Just like couples do in real life.

How does one think such nonsense, you ask? How could a logical adult mind take the goings on in the dating scene and apply them to the labor market? Are these people fools?

Knaves?

While they might be either or both, the immediate cause of this nonsense is desperation rooted in the breakdown of one’s knowledge base; Greenspan called it the "the collapse of the whole intellectual edifice". When the theory you have spent your lifetime building and studying fails to explain the events taking place around you, you must either go back on what you have done and implicitly admit that you have wasted you life – or resort to drivel.

The latter is an easier option, especially if the people around you take the drivel as the sign of your brilliance and bestow prizes on you.

Observe:

“If much of the unemployment is related to business cycles – caused by a lack of adequate demand – the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural – caused by mismatch between the skills that companies need and the skills that workers have – aggressive Fed action to reduce it could be misguided”.

Our Nobel laureate thinks that there are two causes for unemployment. One is “business cycles”; the other, “structural”.

By business cycles, he means booms and busts; the fat years followed by the lean years. He thinks that they are caused by “inadequate demand”, which is correct in the same way that all the world’s problems could be said to be due to “human folly” and all plane crashes due to the gravity.

Why has housing collapsed in much of the West?

No adequate demand.

Why is the spread on the Greek sovereign debt rising?

No adequate demand.

Why are the sand dunes in the Sahara not expensive – in fact, worthless?

No adequate demand.

Why is the world annual passenger car production 60 million and not 60 billion?

Why, no adequate demand. If all the fishes drove cars, there would be no unemployed auto or steel workers. The tire companies around Akron would go on hiring binge.

This is the stuff Diamond teaches at MIT.

Why does demand drop – why does demand drop across all sectors at the same time, which is what recessions are all about and as a result of which the joblessness in the nation as a whole rises – does not interest him.

In the past several decades, though, something strange began to happen in the U.S. Corporations produced record profits. Demand across all the sectors seemed to be strong. Stock market boomed. And unemployment went up. A new expression entered the lexicon: jobless recovery. Commenting on it, I wrote here:

In the phrase “jobless recovery”, the news pertaining to the people is grim; there are no jobs to be had. Yet it contains “recovery”. So, what is it that is being recovered? The answer is: the agreeable rate of return of capital. The “data” measures the pulse and performance of capital, which the university professors study and comment about without ever understanding the larger issue surrounding it.

What was an unemployment expert to do? How could one explain that?

Enter the “structural” explanation, which Diamond defines as the “mismatch between the skills that companies need and the skills that workers have.” Any matchmaker would shake her head in agreement.

Where did the idea come from?

Here is the businessman of our time and a human lodestar to the American economists, opining in the Wall Street Journal last year:

If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms. For example, we have a gross mismatch of available skills and demonstrable needs. Businesses struggle to find the skills and talents that are needed to compete in this new world. Millions drawing the dole to sit around should be in training for the jobs of the future that require higher educational skills.

That is the foundation of Prof. Diamond’s “structuralism”.

He does not ask himself, Peter, you horse’s behind, how exactly does the word structural explain persistent joblessness? The word is an adjective. Its dictionary definition is “of, or relating to, structure”. What structure are you talking about when you say that the unemployment is structural? Are you talking about the structure of workers’ brain? The structure of the U.S. economy? If so, what does that mean?

A mind is a terrible thing to waste.

But no matter. Wasted minds have their uses. They make good stooges, a stooge being “a subordinate participant in a comic act”. They must only be presented as profound thinkers.

Peter Diamond would make a Fed governor.

High Frequency Trading and Flash Crash - Part 9: Concluding Remarks

noreply@blogger.com (Nasser Saber) — Mon, 30 May 2011 19:16:00 +0000

Since this series began last October, we have established that:

HFT is the latest mode, i.e., the form of movement, of speculative capital in markets. Like the previous forms such as derivatives and day trading, this form first appears in the most developed markets and then, having grazed the profit opportunities there, simultaneously creates, and migrates into, new, “emerging” markets. That is signature form of the expansion of speculative capital which I described in Vol. 1:
After arbitrage opportunities in the home market have been grazed, speculative capital sets out to find virgin markets outside the original national boundaries. This excursion begins with more developed markets. That is partly because they can more easily accommodate the large size of speculative capital. Also, the primary tools of speculative capital–derivatives–are more likely to be found in these markets. Gradually, even in these markets, the profit opportunities are arbitraged away. So speculative capital sets out to seek even more virgin territories outside the developed markets and economies. When these markets are found, they become the “emerging markets.”
From the Financial Times of April 13:
Low market volumes and stiff competition have led to a sharp fall in “high frequency” trading as industry experts warn that the past two years of rapid growth may be coming to a halt. Instead, high-frequency traders are flocking to emerging markets such as Russia, Brazil and Mexico where exchanges are beginning to revamp their systems to attract such players.

Because speculative capital dominates the markets in terms of tempo and trading volume, its modus operandi is the modus vivendi of markets. That means how markets functionally are, i.e., the way securities are traded in them. This state – how markets functionally are or the way securities are traded in them – is the result of a dialectical process and irreversible. There is no going back to the “quiet days” or “rational days” of yesteryears. The cogwheel that in practice prevents this process from going back is “efficiency”.

HFT eliminates the specialist and market makers system from the U.S. equities market, as it must. Speculative capital is antithetical to regulation, having been born out of a legal/regulatory vacuum in the aftermath of the Bretton Woods regime. The result?:
With the demise of old-fashioned floor broker and traditional market makers, new so-called high-frequency equity players, which include proprietary trading desks at investment banks, have become the main providers of liquidity for the overall US equity market.

Only that the “main providers of liquidity” have no obligation whatsoever to do so. There is, in other words, no one “in charge”.

HFT mode of speculative capital is unstable. It constantly simulates the crash conditions and occasionally, as all simulations do, finds it. Hence, the progressively more frequent flash crashes, as the speed and the domain of the operation of speculative capital increase.

That is the situation we are currently in.

It is impossible to understand this situation without the Theory of Speculative Capital and the force that is speculative capital. In his doctrine of essence, Hegel reaches the concept of “force and manifestation of force”, as described by Stace in his Philosophy of Hegel:

Force not only does, but must, manifest itself. For it is nothing but its manifestation, and without its manifestation, it is nothing, merely non-existent. Force is not one thing and its manifestation another. They are the same thing. The force is unthinkable without its manifestation. And for this reason, too, it is absurd to say, as it is often said, that we can only know the manifestation of force but that what force is in itself must remain unknowable. It is only unknowable because there is nothing to know.

And naturally, see.

That is why various groups which investigated the flash crash of last May came out empty handed. The physicist who led the forensic study of the crash for the SEC told the New York Times that his report would “zero in on a specific sequence of events that preceded the crash and will tell a clear story about what happened in the markets on that stomach-churning day.” His report did all that but got no closer to understanding the cause of flash crash than the fellow investigation the hanging chad got to understanding Gore v. Bush presidential election controversy. “In the analysis of economic forms ... neither microscopes nor chemical reagents are of use. The force of abstraction must replace both.”

Naturally, then, in the same way that superstition grows out of ignorance of nature, Ms. O’Leary’s Cow’s school of explanation grows out of ignorance of finance: there was this broker somewhere in the Midwest and then it bought 71,000 E-Minis contracts and then kaboom – the market went bust. (To be fair, the official investigation exonerated Mrs. O’Learly’s cow in the Chicago Fire. The official flash crash investigation, by contrast, pointed the finger.)

The ignorance of theory also creates malaise. You “feel” or “sense” that there is something wrong but cannot put your finger on it, much less come up with a solution. “Theory delivers us from submissive acceptance of events just because they occur and allows us to interpret them within the body of a logically constructed system and, if need be, take action to influence them,” I wrote in Vol. 1

See this malaise in the writing of two influential U.S. senators in the New York Times of May 6, 2011:

America’s capital markets, once the envy of the world, have been transformed in the name of competition that was said to benefit investors. Instead, this has produced an almost lawless high-speed maze where prices can spiral out of control, spooking average investors and start-up entrepreneurs alike.

The flash crash should have sounded an alarm. Unfortunately, the regulators are still asleep.

Levin and Kaufman sense that something is wrong, as most people have. They refer to the “lawless high-speed maze where prices can spiral out of control”; we know exactly what they mean. They even take a potshot at the cherished American word, competition, which I said is one guise under which speculative capital self-destructs. But they do not know or understand what is happening. So they turn to regulators: regulators must have been asleep if all these terrible things happened.

But regulators are not asleep. They are in fact quite vigilant. That’s the good news. The bad news is that there is nothing they could do. They, too, must operate within the parameters set by speculative capital. All that the SEC chairwoman can do about last May’s flash crash is to express dismay:

Securities and Exchange Commission chairwoman Mary Schapiro has expressed dismay that active traders fled the stock market during the May 6 “flash crash.” … “The issue … is whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” Ms. Schapiro said in a speech earlier this month.

But there is no issue. It is rather the SEC chairwoman, missing the entire point of the specialist system being destroyed precisely in order for others to flee the market in tough times.

As for the destruction of “price discovery” or equities not being what they used to be?:

Mary Schaprio, SEC chairman, says: “This transformation of market structure has raised serious questions and concerns.”

She questions whether the quality of “price discovery” has deteriorated as a result of fragmentation and whether these changes to market structure could “undermine the fair and level playing field essential to investor protection, capital formation and vibrant capital markets generally”.

Well, yes, Ms. Schapiro, the quality of “price discovery” has deteriorated, and that undermines fair and level playing fields, etc., etc. What, exactly, are you going to do about it?

By way of answer, I know she does not have a word to throw at a dog.

That is where we stand now with high frequency trading and flash crash.

But where is it, this “where” we have arrived at, you might ask. Is there a way to grasp it or remember it without long concluding remarks?

I say there is. It is Kurosawa’s Ran. If you have not seen this masterpiece, I suggest you get it – buy it, rent it, download it, whatever – and watch it today. For the U.S. readers, it is a specially fitting movie in this patriotic weekend. Pay attention to the last few minutes. That is where “we” and the “markets” are in the age of HFT. The analogy is not exact – no analogy is – but I think the point will be made.

If you write back with comments, we will discuss them.

When Greenberg Does a Zuckerberg and Both Do (well in) America – or the Values That Stanford Business School Imbues

noreply@blogger.com (Nasser Saber) — Mon, 23 May 2011 05:39:00 +0000

You must have heard of Charlie Wilson’s comment that what is good for GM is good for America. Wilson was the CEO of GM in the mid 1950s and there is some question as to what he actually said. But regardless, the statement caught on because it summed up a relation that defined a system. It was a goose-gander type relation with a bit of dark undertone. It implied that the U.S. government had to adopt policies favoring GM – which it did.

Dark undertone or not, the fact remained that you could go to work for GM after high school, like your father and uncle had done before you, and retire after 30 years with a decent pension and medical insurance. In the intervening years, you bought a house, several cars and supported your stay-at-home wife and three kids through high school and at times, college.

And it was not only the jobs. The modern American management system that conquered the world was a GM creation. MIT’s Sloan School of Management is named after Alfred Sloan, a long time GM chairman and CEO. The school was housed in a science and engineering university because GM thought of management as a scientific discipline; it could not be otherwise with an industrial conglomerate whose products manifested scientific and engineering principles.

That was then.

A couple of weeks ago, the New York Times ran an article on how the Stanford Business School became the hotbed of application development for Facebook. If you are a Times subscriber or have not yet exhausted your 20 articles per month ration, you can read the article here .

For the rest, I am quoting selective passages, starting with the “lesson” that students learned. I suppose you could call it the moral of the story:

By teaching students to build no-frills apps, distribute them quickly and worry about perfecting them later, the Facebook Class stumbled upon what has become standard operating procedure for a new generation of entrepreneurs and investors in Silicon Valley and beyond. For many, the long trek from idea to product to company has turned into a sprint.

So the message from the Stanford Business School which has now become the guideline in Silicon Valley and beyond is this: put together a crappy doodad – it doesn’t matter what, as long as you are first out of the gate. There is a lip service to “perfecting it later” but that merely shows what is really important. To wit:

“The students did an amazing job of getting stuff into the market very quickly,” says Michael Dearing, a consulting associate professor at the Institute of Design at Stanford, who now teaches a class based on similar, rapid prototyping ideas. “It was a huge success.”

Note the “stuff” – not software, not even app, but stuff. What the stuff is does not matter. And when the stuff itself does not matter, its quality cannot possibly be of any serious concern, as Johnny Hwin discovered for himself:

Johnny Hwin and his Stanford class team set out to build an app ... It never took off.

Seeing his classmates strike gold with simpler ideas proved to be a valuable lesson. In 2009, he began working on Damntheradio.com, a Facebook marketing tool that helped bands and musicians connect with fans online.

It opened last June and was acquired in January by FanBridge, where Mr. Hwin is now a vice president, for a few million dollars, he say ... “[Previously] we wanted to be perfect,” he says. With Damntheradio, he found his first clients by showing mockups of the product. “We were able to launch within weeks,” he says.

Seeing his classmates strike gold with simpler ideas, Johnny learned a valuable lesson at Stanford. “We wanted to be perfect,” says twenty-something Johnny with the air of a man recalling foolish youthful idealism. But Stanford made him grow up, wise up. He is now rich.

With America’s best and brightest simultaneously creating and being thrown into this entrepreneurial pressure-cooker, the school itself could not help but change:

“It really felt like an incubator,” says David Fetterman, a Facebook engineer who helped develop the applications platform.

“Incubator”, in case you are not in-the-know, is a facility that houses a group of start-up businesses which share the resources in order to minimize the expense. The incubator the Facebook engineer is talking about is the Stanford Business School.

Now, if your school is a business incubator and you felt you could survive on your own, you would have no reason to stay in it, would you now? For App-happy Danny and his daddy this was a no-brainer:

DAN GREENBERG was sitting at the kitchen table one night when he and another teaching assistant decided to get into the app game. Mr. Greenberg … hadn’t planned to get app-happy. But the students’ success whetted his appetite.

Four weeks into the quarter, he and his colleague, Rob Fan, set out to create an app that would let Facebook users send “hugs” to one another.

It took them all of five hours.

The app took off. So they moved on to apps for “kisses,” “pillow fights” and other digital interactions — 70 in all.

Their apps caught on with millions of people and were soon bringing in nearly $100,000 a month in ads. After the class ended, the two started a company, 750 Industries, named after the 750 Pub at Stanford where Mr. Greenberg and Mr. Fan where drinking when they decided to become business partners.

But juggling the business and schoolwork was too much for Mr. Greenberg, then 22. So he called his father.

“I said, ‘Dad, it is 10 p.m., and I’ve got so much stuff to do,’ ” Mr. Greenberg recalls. “ ‘We’re running this business, and I’ve got customers, and we are earning money, and we got financing and we have people to hire. But I have to write a paper tonight, and I just don’t have time for it.’”

His father advised him to pull a Mark Zuckerberg and drop out. The next day, Mr. Greenberg did just that.

Note the dialectical irony of an elite school teaching, fostering and imbuing values that negate school and education. In the age of speculative capital, speculative capital is not the only self-destructive entity around.

But, Nasser, aren’t you overreacting to the story? As long as there have been schools, there were students who dropped out. Bill Gates famously dropped out of Harvard more than 30 years go. Was that, too, a dialectical irony?! And isn’t the entire point of going to a business school making money? If so, what is wrong with a bit of early start? In fact, isn’t that what an elite business school supposed to do?

The answer is that Stanford’s “Facebook Class” is an institutionalized creation. It did not begin as an individual initiative. Nor did it spring in an ad hoc manner from the school’s Entrepreneurial Club. It was rather, funded, supported and nurtured as part of the formal curriculum of the Business School:

The Facebook Class was the brainchild of B. J. Fogg, who runs the Persuasive Technology Lab at Stanford. An energetic academic and an innovation guru, he focuses on how to harness technology and human psychology to influence people’s behavior.

Prof. Fogg no doubt thinks of himself as being on the cutting edge of “behavioral science”. But no matter how fancy his methods are, they are old hat; every Phoenician peddler of maritime goods would recognize his gig. Dale Carnegie would have smiled at his “harnessing technology and human psychology to influence people”. From the upcoming Vol. 4 of Speculative Capital:

[Selling] is the driver and creator of the culture, especially in the “Anglo-Saxon” U.S. and U.K., where the businessmen’s influence goes further than other nations. The culture in these countries is the salesmen’s culture, as it is shaped by the salesmen’s habits, sensibilities, tastes and priorities. The influence is in plain view in Dale Carnegie’s How to Win Friends and Influence People.

The book’s title is precise. Carnegie wants to win friends. Why? Because he wants to influence them. But he is not interested in showing people the righteous path and saving them. Carnegie is no religious zealot. He wants to influence people in order to sell to them. Friendship is a strategy, a means, towards that end. Note the word “win” – not finding friends or making friends but “winning” friends. The aim is to use them, after which “friends” become what they always were: people. It is a singularly cold-blooded and cynical title.

Dale Carnegie did not invent the ways of salesmanship. But he categorized them. His is the authentic voice of a salesman the way braying is the voice of a donkey.

What is being taught at Stanford is naked “pushing the product”, naked in the sense that intermediary steps of product development cycle, from the idea to production to marketing and sales, have been relegated to the back seat. The end result alone, conversion of product to money, has been made supreme, with the added benefit that there is not much of product to speak of; only junk Facebook apps. Give credit to Stanford B-School for truly cutting down to the chase in search of money, the way only speculative capital could.

But the intermediate steps, the means of getting money, are precisely the steps that require imagination and thinking. In doing away with them, the school has done away with teaching abstract thinking to its students. And that is precisely what sets apart a university from a vocational school. Abstract thinking is what “dissemination and assimilation of knowledge” is all about. Absent that, the destruction of the university that I spoke of.

The first victims of this academic retrogression are the students.

From the tone of the passages quoted here – and more clearly still if you read the entire article –you notice a remarkable absence of thinking on the part of the “Class”. The “attitudes” such as “curiosity, originality and integrity” that Webster defines as the essential in relation with the word “scholar” are just not there. Like rats looking for cheese in a maze, the students move and “stumble” – stumbling here, stumbling there – until they find money:

Three days before a presentation was due, Mr. De Lombaert accidentally deleted the computer code he was tinkering with. “We kind of freaked out,” he recalls.

Rebuilding the app would take too long. So, working around the clock over a weekend, they built another version, with a more rudimentary algorithm.

The stripped-down app took off. In five weeks, five million people signed up. When the team began placing ads on the app, the money poured in.

They had stumbled upon one of the themes of the class: make things simple, and perfect them later.

We kind of freaked out.

Here is a man in what is arguably one of the most competitive universities in the world. He no doubt had a perfect SAT score. He no doubt attended a good school and graduated with honors. He must be a reasonably intelligent fellow. Under the right circumstances and in a true institution of higher learning, he could have become a contender. He could have class. As is, he has become a moron, undisciplined, unorganized and with a thought process reflected in his speech that is indistinguishable from a Paris Hilton or Kim Kardashian. We kind of freaked out. He would not last a day in a GM assembly line.

They are all morons. Look at the name and function of their apps: hug me, kiss me, pillow fight. And you thought you could not get lower than Hollywood in producing “content” that could be fully telegraphed in a one or two-word name. They give the word low a bad name, these best and brightest of America. Maybe the love of money is the root of all evil.

My concern is with these morons’ value system. I know from Hegel that the thesis – their value system in question here – goes out of itself into its opposite and returns into itself in the synthesis. What is their value system and how does the dialectical process work in that regard?

Change the names in the article – Danny, Mark, Johnny – to Jamal, Lamont and Angel, change the location from Stanford Business School to any inner city ghetto of your choice, change the product from Facebook apps to drugs and change the role model and mentor from Prof. Fogg to neighborhood wholesale distributor and you will at once see the similarities of values in two camps.

The analogy is not exact.

Jamal, Lamont and Angel have no choice.

And “we” are “protected” from them by a flange of social and physical barriers. As I write in the upcoming Vol. 4:

The right-wing politicians blame “the rap singers” for the spread of profanities. But rap singers, mostly young black men in the ghettos, could have never had a cultural impact on suburban whites if the groundwork had not been prepared by the salesman – many of them suburban white men. The rappers simply followed a road that was paved for them by the real cultural trend setters.

Not so with the “Facebook millionaires”. By virtue of being rich, they become cultural trend setters and social movers and shakers. The media constantly promote them, reinforcing the message that wealth is wisdom. Think of Sage of Omaha; he is the man behind the Geico business model. Or the way a petulant fool like Mark Zuckerberg, a blind hen having stumbled on a kernel of corn if there ever was one, being constantly promoted as a visionary entrepreneur. (His business card read: “I am the CEO, bitch”.)

I returned to this two-week old article about Stanford app developers because in today's New York Times there was an article about how, through a maze of foundations, Bill Gates influences the education policy in the U.S. I have already written about the plans to privatize the public education in the U.S. It turns out that Bill Gates is one of main forces behind the initiative. A man who, at the tender age of 55, uses gee and gosh in his speech, sees himself fit to re-engineer the U.S. educational system. Here is a brief passage:

For years, Bill Gates focused his education philanthropy on overhauling large schools and opening small ones. His new strategy is more ambitious: overhauling the nation’s education policies. To that end, the foundation is financing educators to pose alternatives to union orthodoxies on issues like the seniority system and the use of student test scores to evaluate teachers.

Given the scale and scope of the largess, some worry that the foundation’s assertive philanthropy is squelching independent thought, while others express concerns about transparency. Few policy makers, reporters or members of the public who encounter advocates like Teach Plus or pundits like Frederick M. Hess of the American Enterprise Institute realize they are underwritten by the foundation.

“It’s Orwellian in the sense that through this vast funding they start to control even how we tacitly think about the problems facing public education,” said Bruce Fuller, an education professor at the University of California, Berkeley.

The Times also reported the happy news that in his endeavor, Bill Gates is receiving help from Eli Broad. Imagine: Bill Gate the engineer of the country's education system; Eli Broad, the arbiter of its culture.

That’s the good news.

The bad news is that Bill Gates is the grand daddy of successful college dropouts. Thanks to passage of time perhaps, he manages at times to be coherent.

Imagine now the near future with the Facebook millionaires. Imagine their view on social services, the country’s direction, value of education (they know from personal experience it is a bunk) and the lesson they have learned: that one has to aim low, not worry about perfection and money comes to people who get there first.

Imagine these people setting the country’s social agenda and having the means to push it through.

Imagine.

High Frequency Trading and Flash Crash - Part 8: How Does Flash Crash Come About?

noreply@blogger.com (Nasser Saber) — Wed, 11 May 2011 01:40:00 +0000

Consider this game. You are given $20 to take part in a game of 3 consecutive coin tosses. In each toss, you win $5 if you guess right and lose $5 if you do not. You must leave the game with at least $10.

Here is the lattice of the game’s possible outcomes:

If your first call is right, starting with $20 at S, you will win $5 and end up with $25 at A. In the second toss, if you win, you will have $30 (B); else your money will be reduced to $20 (E). After the third and last toss, depending on whether you start from B or E, you will end the game with $35, $25 or $15. In all cases, the condition of having at least $10 would be satisfied.

If your first call is wrong, you will end up with $15 (point D). If your second call is also wrong, you will be at X with only $10. That is the end of the line for you. Technically, the game is not over yet. One more toss is left. And if you guess right, you might end up with $15 at point G. But you cannot take that chance, because if you lose, you would violate the condition of leaving the game with at least $10. So there is no going forward from X, which is why it is no longer connected to the mesh “going forward”.

Taking the outcome of the coin toss as the proxy for change in the stock price, this game is the principle of portfolio insurance, which, as you can surmise from the name, aims to prevent the value of a portfolio from dropping below a prescribed amount. Virtually all portfolio managers employ a variation of this strategy to ensure that they would not suffer catastrophic losses.

There are a couple of differences between coin tossing and real life portfolio insurance, though.

One is that coin tossing is a discrete game; we “jump” from point to point – S to D to X – based on the outcome of coin toss.

Portfolio insurance is closer to continuous-time. A portfolio insurer arrives at his exit-from-market point only gradually and through piecemeal actions.

“Action” is the clue to the other difference between coin tossing and portfolio insurance.

In tossing coins, we were passive. There was nothing to do but wait for the outcome.

Portfolio insurers, by contrast, are active. They must constantly adjust the composition of their portfolio – sometimes daily, sometimes several times a day – in response to market conditions. As prices fall, they sell, in anticipation of markets moving towards point X. As prices rise, they buy, in anticipation of more profit.

This trading pattern is “pro-cyclical”. It creates a self-reinforcing, self-perpetuating process that exacerbates the market trend.

As for the mechanics of the portfolio adjustment – how much of which security to buy and sell – it is formulaic and algorithmic. A machine could be programmed to do it and, as a matter of fact, that is how it is done. Hence, the other name for portfolio insurance: program trading.

We now have the cause of speculative capital-driven market crash before us. It is a state when many portfolio managers simultaneously exit the market. When that happens, the bid side disappears. With few active buyers left, prices collapse. It is as if the synchronized withdrawal creates a resonance in the form of a market crash. From Vol. 2:

If the market falls [to point X), there is the chance that it could fall still further to [to point H.) That eventuality is unacceptable to the [portfolio] insurer. The only way to eliminate it is to leave the game, to stop playing. That is precisely what he does at that point. When the market falls [to X], he sells all his [shares] ... and stays on the sidelines ... We now have the meaning of the “riskless portfolio”. It is not a portfolio that earns a riskless rate of return but, rather, a portfolio that is kept out of the market. Risk [arises from] the presence in the market.

To be capital, in other words, is to have an inherent risk of diminution of size. The only way to eliminate the risk is not to be capital. And the way to do that is to leave the markets.

None of the luminaries of quantitative finance who devised portfolio insurance understood this point, but their methodologies nevertheless led to it, in the same way that the medieval irrigation methods of the European peasants conformed to the laws of fluid mechanics without the peasants being aware of the discipline or its laws.

Recall that we were able to take the coin toss game as a model for stock price movement because in short time intervals, stocks prices could also be assumed to be binary; they either go “up” or “down” by a “tick”.

Coin toss problems, as some of you may know from the example of a wheat grains on a chess board, begin simply but “branch” rapidly and multiply exponentially. As a result, the outcome of one particular sequence rapidly decreases.

To give you an indication of the magnitude, imagine the number of times you have to throw a coin to get 500 consecutive heads! That is a very crude approximation of the possible “up” and “down” scenarios a portfolio manager tracking S&P 500 index would have.

Now imagine the odd that a group of people doing the same would get the same result at about the same time!

The odd borders on impossible, which is why we do not have crashes every day. But when HFT is the dominant form of trading, the sheer number of “tosses” – trades – brings the near zero probability into life, so to speak. It turns a near zero probability not expected to be encountered in 100s of years – the so-called 100-year flood – into a not-so-insignificant probability with some chance of materialization every now and then, which is why we are beginning to have crashes every now and then.

This dynamic, if you know your probability and statistics, is the basis of simulation: a rapid sampling of random data to explore the size of the improbable areas. That’s how the so-called value-at-risk of trading portfolios is calculated. So, what is taking place every day in equities markets is the simulation of trading conditions that is meant to collapse hundreds of years into a single trading day.

As the purpose of simulation is to find the crash conditions (as well as unlikely sharp market surges), it eventually finds them, only that such findings are not virtual but very real. That’s how markets crash.

Crashes of this sort are purely technical. They are not driven by any underlying fundamental condition because stocks subject to such trading no longer reflect any fundamental underlying conditions; Recall the lament of Financial Times about the loss of the purpose of equities: What are the equities market for these days?

Unsurprisingly, then, the damage from the crash does not reach the general economy. A short while later, the markets recover because “simulation” takes them to the price rise path. The recovery in Oct 87, for example, came the next day. On May 6, the last day, it took 20 minutes. That’s an indication of how much the speed of execution has “collapsed” the time: the old 24 hours is now a mere 20 minutes.

We now have all the pieces of the puzzle. I will return with concluding remarks.

The Supreme Court Rules Out Class Actions

noreply@blogger.com (Nasser Saber) — Mon, 02 May 2011 02:33:00 +0000

Last November I wrote how some unscrupulous companies – many of them quite large – had expropriated Apple's business model in a perverse way.

Apple charges a small amount, say $2, for an app but sells it to millions of users. Both the company and the app developer benefit.

In the perverse version of this business model, a company, say, a telecom or a bank, defrauds millions of customers out of a small sum, say, 99 cents. Even if you, as an individual customer, notice the fraud, what are your options – sue a telecom for 99 cents?

The only remedy for such fraud in the U.S. was a class action suit, a legal mechanism that dealt with cases when a company had set out to “deliberately cheat large numbers of consumers out of individually small amounts of money,” in the words of the California State Supreme Court.

This past Wednesday, in a 5-4 ruling, the Supreme Court banned consumers from coming together in a class action suit to fight such fraud. According to Brian T. Fitzpartick, a law professor at Vanderbilt University who was quoted in the New York Times:

“The decision basically lets companies escape class actions ... This is a game-changer for businesses. It's one of the most important and favorable cases for business in a very long time”.

The majority decision was written by Antonin Scalia, the justice who, in a formal legal meeting, opined that the fictional TV character Jack Bauer of “24” who tortured people should go free because he “saved Los Angeles”.

AT&T Mobility, the defendant in the case, said in the statement that the decision was “a victory for consumers”.

So it goes. If you read my earlier post, Functionaries Passed off as Revolutionaries, you would see that I was expecting the decision.

Someone like Antonin Scalia is nothing if not predictable.

Epilogue: Lost in Conversation

noreply@blogger.com (Nasser Saber) — Sun, 01 May 2011 21:27:00 +0000

Why would you stay up all night to see the sunrise? Every day, sun rises at an exact moment. You only have to get up a minute before the designated time to see it; no need for staying up all night.

Why would you then strain yourself to analyze the utterances of a central banker for clues to his future actions? Those, too, have an almost mechanical predictability. The old joker of the economics officialdom, Milton Friedman, gave away the game when he suggested replacing the Fed with a computer.

Yet, the “Fed watchers” – Fed watchers! What asses they must be! – come running whenever a Fed chairman opens his mouth. Alan Greenspan played them, constantly casting fake pearls before the real swines in market, media and academia and letting them munch on the drivel he had just delivered.

All this is by way of saying that Bernanke’s comments require no analysis. What he would/could say is scripted. All the time. Let me take you to the highlights of his Wednesday news conference to show what I mean. It neatly ties in with what I said in Lost in Conversation.

The New York Times tried to frame the central issue confronting the Fed as the question of balance between unemployment and inflation.

The questions reflected the difficulty of the choices the Fed now faces. Some reporters pressed Mr. Bernanke to explain why he was not more concerned about inflation. Others asked why he was not more concerned about unemployment

But there has never being a question of a choice, as the Chairman made clear:

“While it is very, very important to help the economy create jobs and help to support the recovery, I think every central banker understands that keeping inflation low is absolutely essential to a successful economy, and we will do what we can to make sure that happens,” he [Bernanke] said.

So no matter how many times Ben Bernanke modifies very with very, his job is nipping inflation in the bud.

But why this pre-occupation – obsession, really – with inflation; and obsession is the word:

Mr. Bernanke cautioned that if the economy did falter, it could prove difficult for the central bank to provide fresh support because of growing inflationary pressure ... “Inflation is getting higher. It’s not clear that we can get substantial improvement in payrolls” without creating a considerable risk of a dangerous rise in inflation.

Read the last sentence one more time, that begins with “inflation is getting higher”. Bernanke can substantially improve the payrolls if he so chooses, but he is not sure he can do that without the risk of dangerous rise in the inflation. So he would not do that, because he earlier said that his main mission is fighting inflation.

This inflation thing must be a real scrooge then. How else to explain that its containment trumps fighting joblessness. Right?

If you are like the blue collar residents of Queens, you probably half-agree with that statement and the Fed chairman, seeing the price of gas at about $4.20 and food prices up almost 20%. Yeah, someone has to do something about that. It's crazy.

But as we saw in the previous post, food and energy prices are not of concern to Bernanke. He does not even consider them in calculating the "core inflation". Better yet, his actions are the very cause of food and energy price rises. (Oil is heavily taxed in Europe, and food has its complex politics so a direct comparison is difficult. But the rise in the price of oil in Europe has been less than half of the U.S. A better, “unadulterated” measure is gold, which has risen by almost 35% in the U.S. in the past year but actually fallen by 2.5% when expressed in euro.) So in dealing with that inflation, you are on your own. Here is the proof from the newspaper of the record:

Critics of the Fed’s position on inflation argue that higher commodity prices will push up the price of other goods and services. But Mr. Bernanke and his allies consider it more likely that the higher prices will force Americans to reduce consumption, because wages are not rising and therefore Americans do not have more money to spend. As demand drops, they say, the price of food, oil and other commodities will also fall.

Got that?

The “critics” want the Fed to inflict pain on the populace immediately. The Fed argues that there is no need to rush and the pain will come in due time. That is what the contention is all about, a matter of when and not if.

Then what is Bernanke talking about when he talks about the inflation?

As I said, the “inflation” for him is the measure of the industrial capacity. Go back to the quote above, starting with "inflation is getting higher" and you will see this. He talks about “improvement in payrolls”. By that, he means improvement in employment, i.e., a decrease in unemployment or joblessness. Who calls improvement in employment the improvement in payrolls? Why, those who have payrolls, i.e., hired workers. Bernanke is talking from their viewpoint. That's the only viewpoint he has.

Let me explain.

Suppose traffic in a highway is 50% of its capacity. Under this condition, there is no “traffic”. Should a car develop a mechanical difficulty or brake to avoid a pothole, the traffic will flow unimpeded.

If the traffic flow rises to the 90%, the cars would still move freely. But now, if a car develops a mechanical problem, it would create a traffic jam. With 90% of the capacity full, there is no avoiding backlog when one lane is substantially slowed down.

If the highway is full to 100% capacity, braking by one car for a few seconds will crated miles-long backups, the familiar situation in roads leading to beaches during the summer.

Replace highway capacity with the industrial capacity and traffic jam/slowdown with the increase in labor wages and you have the function of the Fed as an entity which is designated to keep the traffic flowing smoothly.

If you have a plan that can employ 100 workers and you currently employ only 50 – because there is not sufficient demand for all you can produce – your payroll can “improve”. That is, you have room to hire more workers.

If your payroll goes up to 95 workers – “improves”, in Bernanke’s parlance – you are operating at close to capacity. After that, any demand for hiring more workers would translate to demand by workers for higher wages. The Fed’s “core inflation” measures that condition; its main function is to prevent that situation from developing.

The Fed does other things too. We cannot childishly view it as a one-trick pony. But what I just said ultimately trumps all other considerations.

The Fed cannot, in the sense of not being allowed to, slowdown economic activity by raising interest rates. That nonsense is for college textbooks and the “Fed watchers”. If Bernanke did anything that remotely affected the bottom line of corporations, his head would be handed over to him. The Fed would go the way of the American buffalo – or Fannie and Freddie.

Lost in Conversation

noreply@blogger.com (Nasser Saber) — Thu, 28 Apr 2011 03:13:00 +0000

The Financial Times headline (April 25) spoke of “PepsiCo anger over Fed inflation guide”.

Wonder what possible beef a cola maker would have with the Fed?

Let’s read:

PepsiCo’s chief financial officer has criticized US policymakers’ focus on “core” inflation, arguing that it overlooks the impact of rising prices on consumer spending power.

The Federal Reserve’s preference for the core price measure that excludes food and energy has stirred controversy as commodity price rises have accelerated and companies have had to judge how much they can pass on costs to hard pressed consumers ... Food prices have climbed nearly 3 per cent in the past year and petrol prices have increased nearly 30 per cent, according to the labour department’s latest consumer price index.

During the same period, “core” prices rose 1.2 per cent.

So, food prices in the U.S. have gone up 3% in the last year; gasoline, 30%. But the Fed does not count them towards the overall price rise. Rather, it measures the price of some “core” items that have gone up only 1.2%. That is the official inflation of the country according to the Fed – 1.2% – the 30% fuel price and 3% food prices rise notwithstanding.

O.K, nice summary, you say. But it does not explain the anger of PepsiCo's CFO.

The explanation is that he wants to raise the price of his snacks and beverages but without the official fig leaf of the high inflation index, cannot do that.

But Nasser, if that is so, shouldn’t the CFO of Coca-Cola also be angry?

Good question. For the answer, let's go to today’s FT, under “Coca-Cola sales up despite rise in costs”:

Coca-Cola, the world’s largest soft drinks company by revenues, said on Tuesday that its sales had grown around the world during the first quarter, in spite of rising commodity prices and political turmoil in several of its markets.

The company added that it was carefully navigating an environment of rising food and energy prices, and said it would look to raise the price of some of its brands by 3 to 4 per cent later this year. Coca-Cola said it would begin selling smaller bottles in more markets for the same prices.

“We have a very flexible model in terms of managing revenue effectively,” Muhtar Kent, Coca-Cola’s chief executive told the Financial Times. “You will not see us making blanket price increases across all packages.”

The CEO of Coca-Cola also confirms the price hikes in the food and energy sectors. But because his company is large, he has other tools for offsetting the costs; no “blanket prices increase” for them. All large companies that dominate the consumer goods market enjoy this privilege. From the FT of April 4, in an interview with the CEO of Nestlé:

Q: How are you coping with it [input price rise]?

A: You don’t do it with pricing. Consumers don’t like that. You have to see the trend and work your organization on that line which is more stable, and that’s where our procurement, and how we are linked with so many farms, helps us.

Do not be put off by his words which seem to have no meaning. He sounds vague precisely because the methods through which his company passes the price rise to consumers are subtle and cannot be explained in simple sentences. But the entire production process – starting from the cows – will be squeezed. That's the how-we-are-linked-with-so-many-farms part.

The moral of the story is that size matters. Large companies have more way of absorbing the rising costs and stealthily passing them onto the consumer than smaller companies.

Meanwhile returning to the Fed, we are not clear about the controversy over the “core” inflation. What is it all about? The FT story explains:

The Fed argues that core prices are a better guide to underlying price pressures in the economy and therefore to future inflation – if it responded to headline prices, then it would have been forced to raise interest rates sharply in 2008 just as the economy was going into recession. But it has struggled to communicate this argument.

I like “headline prices”. The "headline" adjective is the handy device of rogue politicians whenever they make unpopular decisions to benefit their handlers. Going against the popular will is supposed to show their firmness of conviction. In this way, they think that they turn their obedience to power into a positive trait. Think Tony Blair and George Bush.

“Headline prices” is used in the same vein. It implants in the readers' mind the belief that the Fed has higher standards, above and beyond what is reported in the headlines. Never mind that the 30% price rise of gasoline is real and the result of the Fed's own policies.

But that is the excuse that the public hears. What is the real reason that the Fed does not include food and energy prices in its calculation of inflation?

For starters, the Fed's policies are behind the price rise in these sectors, as we have already seen.

But seriously, I hear you asking, What is the “core” inflation stuff? How is it constructed? How did it come to be what it is?

The April 25th article gave the answer in the form of a comical exchange:

During an event in Queens, New York, last month, William Dudley, president of the Federal Reserve Bank of New York, was heckled when trying to explain the disconnect between food prices and other prices.

One member of his audience questioned when he last visited a grocery store and another asked if an iPad – which he argued was getting more powerful for the same price – was edible.

The let-them-eat-iPad exchange is quite telling. (I wonder if any one of the hecklers was knitting intensely!) The rabble talk of food prices, Dudley talks of the iPad. Recalling the incident, he must have had a good laugh with his colleagues. Those ignorant Archie Bunkers, uncouth and unkind; what do they know about measuring the inflation?

Food items are generally commodities. The iPad is a manufactured product, produced by labor. With the labor costs constantly being pushed lower by advancing technology and increase in labor efficiency, iPad prices have remained constant, or even declined. That is what the Fed’s “core” inflation measures. Inflation, as used by the Fed, measures the excess manufacturing capacity. It has a totally different meaning and purpose than the one used by commoners in their everyday lives.

Therein lies the disconnect between the detached central banker and the rabble – and the businesses like PepsiCo which make money off of them.

A Philosophical Note on an Inauspicious Anniversary

noreply@blogger.com (Nasser Saber) — Sun, 24 Apr 2011 18:46:00 +0000

The expression something “catching up” with you or “creeping up on you” are the people’s way of referring to a phenomenon that you notice not because you are particularly perceptive but because the phenomenon forces itself upon you; you could be dumb as a mule and yet, you will notice it because, like the impact of a whip, there is no escaping it. Old age, for example, creeps up on you. It eventually catches up with you.

Nothing creeps up on you and catches up with you like dialectics, if you live in an advanced Western society.

In his Critique of Dialectical Reason, Jean Paul Sartre has a relatively lengthy passage about the Chinese peasant destroying the forests in search of arable land. He writes:

But above all, deforestation as the elimination of the obstacles becomes negatively a lack of protection: since the loess of the mountain and peneplains is no longer retained by the trees, it congests the rivers, raising them higher than the plains and bottling them up in their lower reaches, and forcing them to overflow their banks. Thus, the whole history of the terrible Chinese floods appears as an intentionally constructed mechanism ... The peasant becomes his own material fatality; he produces the flood which destroy him.

Here, Sartre is exploring the broader relation of man and nature, but you see his point about the peasant becoming his own “material fatality”.

It is amusing that a mere 50 years ago, the perceptive author of a book on dialectics had to reach to a far away land in search of a suitable example of self-destructive conduct.

Every page of Speculative Capital, like every movement of speculative capital, contains one such example.

The comparison is not totally accurate because Sartre is talking about the relation of man and nature, you say?

That brings me to the inauspicious anniversary of the destruction of the Gulf of Mexico. I am thinking of course of British Petroleum.

BP is the old Anglo-Iranian Oil Co. If you are a student of history or Middle East politics, that would say it all. Long before the protection of the environment and workers' safety had impressed themselves upon the general consciousness, the British expatriates in Iran wrote of the callous and criminal disregard of the company for the environment and human life alike.

In the British way, the tradition continued. At the time of the explosion of the Deepwater Horizon in April 20 last year, BP had 760 “egregious, willful” violations of safety and environmental rules and regulations. ExxonMobil had 1. In all, 97% of all violations handed out by the Occupational Safety and Health Administration in the U.S. were for BP.

Let me now give you another astounding statistic: 1 out of every 6 pound of pension money paid in the UK – about 15% – comes from BP.

With Cameron’s Great Society scheme, in which the private corporations are to take over the government function, and with the inevitable pension privatization that will follow, how do you restrict, never mind punish, BP?

The answer is that you cannot. BP's destruction of the environment and its handing out handsome dividends go hand in hand. They are two sides of the same coin. Only by having 760 “willful” violations, by totally disregarding all environmental concerns, could BP produce sufficient profits to keep the UK pensioners in relative comfort.

And it is not only the British people or the government. Cash-strapped U.S. consumers have the same attitude. Financial Times, Apr 20:

New polls show a majority of voters disapprove of his [Obama’s] handling of the economy. They also increasingly believe the US ought to increase drilling for oil and natural gas in US waters, a sign of their concern at skyrocketing petrol prices and, analysts say, the belief that the White House is dragging its heels on the issue.

Drill baby, drill!

If you can read this, Monsieur Sartre, I say forget the Chinese peasants. They did not know what they were doing. And when their error was pointed out to them, they stopped. They could afford to stop. What would you say about this situation?

In the same book, Sartre wrote:

The dialectic reveals itself only to an observer situated in interiority, that is to say, to an investigator who lives his investigation as a possible contribution to the ideology of the entire epoch and as the particular praxis of an individual defined by his historical and personal career within the wider history which conditions it.

Nice words, these. What Sartre did not tell us – it probably did not occur to him – was how uncomfortable the dialectic could be when it breathes down your neck when you are in the position of interiority!