Economics

Ahamed, Liaquat. Lords of Finance. New York: Penguin Press, 2009. ISBN 978-0-14-311680-6.
I have become increasingly persuaded that World War I was the singular event of the twentieth century in that it was not only an unprecedented human tragedy in its own right (and utterly unnecessary), it set in motion the forces which would bring about the calamities which would dominate the balance of the century and which still cast dark shadows on our world as it approaches one century after that fateful August. When the time comes to write the epitaph of the entire project of the Enlightenment (assuming its successor culture permits it to even be remembered, which is not the way to bet), I believe World War I will be seen as the moment when it all began to go wrong.

This is my own view, not the author's thesis in this book, but it is a conclusion I believe is strongly reinforced by the events chronicled here. The present volume is a history of central banking in Europe and the U.S. from the years prior to World War I through the institution of the Bretton Woods system of fixed exchange rates based on U.S. dollar reserves backed by gold. The story is told through the careers of the four central bankers who dominated the era: Montagu Norman of the Bank of England, Émile Moreau of la Banque de France, Hjalmar Schact of the German Reichsbank, and Benjamin Strong of the U.S. Federal Reserve Bank of New York.

Prior to World War I, central banking, to the extent it existed at all in anything like the modern sense, was a relatively dull field of endeavour performed by correspondingly dull people, most aristocrats or scions of wealthy families who lacked the entrepreneurial bent to try things more risky and interesting. Apart from keeping the system from seizing up in the occasional financial panic (which was done pretty much according to the playbook prescribed in Walter Bagehot's Lombard Street, published in 1873), there really wasn't a lot to do. All of the major trading nations were on a hard gold standard, where their paper currency was exchangeable on demand for gold coin or bullion at a fixed rate. This imposed rigid discipline upon national governments and their treasuries, since any attempt to inflate the money supply ran the risk of inciting a run on their gold reserves. Trade imbalances would cause a transfer of gold which would force partners to adjust their interest rates, automatically cooling off overheated economies and boosting those suffering slowdowns.

World War I changed everything. After the guns fell silent and the exhausted nations on both sides signed the peace treaties, the financial landscape of the world was altered beyond recognition. Germany was obliged to pay reparations amounting to a substantial fraction of its GDP for generations into the future, while both Britain and France had run up debts with the United States which essentially cleaned out their treasuries. The U.S. had amassed a hoard of most of the gold in the world, and was the only country still fully on the gold standard. As a result of the contortions done by all combatants to fund their war efforts, central banks, which had been more or less independent before the war, became increasingly politicised and the instruments of government policy.

The people running these institutions, however, were the same as before: essentially amateurs without any theoretical foundation for the policies this unprecedented situation forced them to formulate. Germany veered off into hyperinflation, Britain rejoined the gold standard at the prewar peg of the pound, resulting in disastrous deflation and unemployment, while France revalued the franc against gold at a rate which caused the French economy to boom and gold to start flowing into its coffers. Predictably, this led to crisis after crisis in the 1920s, to which the central bankers tried to respond with Band-Aid after Band-Aid without any attempt to fix the structural problems in the system they had cobbled together. As just one example, an elaborate scheme was crafted where the U.S. would loan money to Germany which was used to make reparation payments to Britain and France, who then used the proceeds to repay their war debts to the U.S. Got it? (It was much like the “petrodollar recycling” of the 1970s where the West went into debt to purchase oil from OPEC producers, who would invest the money back in the banks and treasury securities of the consumer countries.) Of course, the problem with such schemes is there's always that mountain of debt piling up somewhere, in this case in Germany, which can't be repaid unless the economy that's straining under it remains prosperous. But until the day arrives when the credit card is maxed out and the bill comes due, things are glorious. After that, not so much—not just bad, but Hitler bad.

This is a fascinating exploration of a little-known epoch in monetary history, and will give you a different view of the causes of the U.S. stock market bubble of the 1920s, the crash of 1929, and the onset of the First Great Depression. I found the coverage of the period a bit uneven: the author skips over much of the financial machinations of World War I and almost all of World War II, concentrating on events of the 1920s which are now all but forgotten (not that there isn't a great deal we can learn from them). The author writes from a completely conventional wisdom Keynesian perspective—indeed Keynes is a hero of the story, offstage for most of it, arguing that flawed monetary policy was setting the stage for disaster. The cause of the monetary disruptions in the 1920s and the Depression is attributed to the gold standard, and yet even the most cursory examination of the facts, as documented in the book itself, gives lie to this. After World War I, there was a gold standard in name only, as currencies were manipulated at the behest of politicians for their own ends without the discipline of the prewar gold standard. Further, if the gold standard caused the Depression, why didn't the Depression end when all of the major economies were forced off the gold standard by 1933? With these caveats, there is a great deal to be learned from this recounting of the era of the first modern experiment in political control of money. We are still enduring its consequences. One fears the “maestros” trying to sort out the current mess have no more clue what they're doing than the protagonists in this account.

In the Kindle edition the table of contents and end notes are properly linked to the text, but source citations, which are by page number in the print edition, are not linked. However, locations in the book are given both by print page number and Kindle “location”, so you can follow them, albeit a bit tediously, if you wish to. The index is just a list of terms without links to their appearances in the text.

August 2011 Permalink

Beck, Glenn and Harriet Parke. Agenda 21. New York: Threshold Editions, 2012. ISBN 978-1-4767-1669-5.
In 1992, at the United Nations Conference on Environment and Development (“Earth Summit”) in Rio de Janeiro, an action plan for “sustainable development” titled “Agenda 21” was adopted. It has since been endorsed by the governments of 178 countries, including the United States, where it was signed by president George H. W. Bush (not being a formal treaty, it was not submitted to the Senate for ratification). An organisation called Local Governments for Sustainability currently has more than 1200 member towns, cities, and counties in 70 countries, including more than 500 in the United States signed on to the program. Whenever you hear a politician talking about environmental “sustainability” or the “precautionary principle”, it's a good bet the ideas they're promoting can be traced back to Agenda 21 or its progenitors.

When you read the U.N. Agenda 21 document (which I highly encourage you to do—it is very likely your own national government has endorsed it), it comes across as the usual gassy international bureaucratese you expect from a U.N. commission, but if you read between the lines and project the goals and mechanisms advocated to their logical conclusions, the implications are very great indeed. What is envisioned is nothing less than the extinction of the developed world and the roll-back of the entire project of the enlightenment. While speaking of the lofty goal of lifting the standard of living of developing nations to that of the developed world in a manner that does not damage the environment, it is an inevitable consequence of the report's assumption of finite resources and an environment already stressed beyond the point of sustainability that the inevitable outcome of achieving “equity” will be a global levelling of the standard of living to one well below the present-day mean, necessitating a catastrophic decrease in the quality of life in developed nations, which will almost certainly eliminate their ability to invest in the research and technological development which have been the engine of human advancement since the Renaissance. The implications of this are so dire that somebody ought to write a dystopian novel about the ultimate consequences of heading down this road.

Somebody has. Glenn Beck and Harriet Parke (it's pretty clear from the acknowledgements that Parke is the principal author, while Beck contributed the afterword and lent his high-profile name to the project) have written a dark and claustrophobic view of what awaits at the end of The Road to Serfdom (May 2002). Here, as opposed to an incremental shift over decades, the United States experiences a cataclysmic socio-economic collapse which is exploited to supplant it with the Republic, ruled by the Central Authority, in which all Citizens are equal. The goals of Agenda 21 have been achieved by depopulating much of the land, letting it return to nature, packing the humans who survived the crises and conflict as the Republic consolidated its power into identical densely-packed Living Spaces, where they live their lives according to the will of the Authority and its Enforcers. Citizens are divided into castes by job category; reproductive age Citizens are “paired” by the Republic, and babies are taken from mothers at birth to be raised in Children's Villages, where they are indoctrinated to serve the Republic. Unsustainable energy sources are replaced by humans who have to do their quota of walking on “energy board” treadmills or riding “energy bicycles” everywhere, and public transportation consists of bus boxes, pulled by teams of six strong men.

Emmeline has grown up in this grim and grey world which, to her, is way things are, have always been, and always will be. Just old enough at the establishment of Republic to escape the Children's Village, she is among the final cohort of Citizens to have been raised by their parents, who told her very little of the before-time; speaking of that could imperil both parents and child. After she loses both parents (people vanishing, being “killed in industrial accidents”, or led away by Enforcers never to be seen again is common in the Republic), she discovers a legacy from her mother which provides a tenuous link to the before-time. Slowly and painfully she begins to piece together the history of the society in which she lives and what life was like before it descended to crush the human spirit. And then she must decide what to do about it.

I am sure many reviewers will dismiss this novel as a cartoon-like portrayal of ideas taken to an absurd extreme. But much the same could have been said of We, Anthem, or 1984. But the thing about dystopian novels based upon trends already in place is that they have a disturbing tendency to get things right. As I observed in my review of Atlas Shrugged (April 2010), when I first read it in 1968, it seemed to evoke a dismal future entirely different from what I expected. When I read it the third time in 2010, my estimation was that real-world events had taken us about 500 pages into the 1168 page tome. I'd probably up that number today. What is particularly disturbing about the scenario in this novel, as opposed to the works cited above, is that it describes what may be a very strong attractor for human society once rejection of progress becomes the doctrine and the population stratifies into a small ruling class and subjects entirely dependent upon the state. After all, that's how things have more or less been over most of human history and around the globe, and the brief flash of liberty, innovation, and prosperity we assume to be the normal state of affairs may simply be an ephemeral consequence of the opening of a frontier which, now having closed, concludes that aberrant chapter of history, soon to be expunged and forgotten.

This is a book which begs for one or more sequels. While the story is satisfying by itself, you put it down wondering what happens next, and what is going on outside the confines of the human hive its characters inhabit. Who are the members of the Central Authority? How do they live? How do they groom their successors? What is happening on other continents? Is there any hope the torch of liberty might be reignited?

While doubtless many will take fierce exception to the entire premise of the story, I found only one factual error. In chapter 14 Emmeline discovers a photograph which provides a link to the before-time. On it is the word “KODACHROME”. But Kodachrome was a colour slide (reversal) film, not a colour print film. Even if the print that Emmeline found had been made from a Kodachrome slide, the print wouldn't say “KODACHROME”. I did not spot a single typographical error, and if you're a regular reader of this chronicle, you'll know how rare that is. In the Kindle edition, links to documents and resources cited in the factual afterword are live and will take you directly to the cited page.

November 2012 Permalink

Bernstein, Peter L. Against the Gods. New York: John Wiley & Sons, [1996] 1998. ISBN 978-0-471-29563-1.
I do not use the work “masterpiece” lightly, but this is what we have here. What distinguishes the modern epoch from all of the centuries during which humans identical to us trod this Earth? The author, a distinguished and erudite analyst and participant in the securities markets over his long career, argues that one essential invention of the modern era, enabling the vast expansion of economic activity and production of wealth in Western civilisation, is the ability to comprehend, quantify, and ultimately mitigate risk, either by commingling independent risks (as does insurance), or by laying risk off from those who would otherwise bear it onto speculators willing to assume it in the interest of financial gains (for example, futures, options, and other financial derivatives). If, as in the classical world, everyone bears the entire risk of any undertaking, then all market players will be risk-averse for fear of ruin. But if risk can be shared, then the society as a whole will be willing to run more risks, and it is risks voluntarily assumed which ultimately lead (after the inevitable losses) to net gain for all.

So curious and counterintuitive are the notions associated with risk that understanding them took centuries. The ancients, who made such progress in geometry and other difficult fields of mathematics, were, while avid players of games of chance, inclined to attribute the outcome to the will of the Gods. It was not until the Enlightenment that thinkers such as Pascal, Cardano, the many Bernoullis, and others worked out the laws of probability, bringing the inherent randomness of games of chance into a framework which predicted the outcome, not of any given event—that was unknowable in principle, but the result of a large number of plays with arbitrary precision as the number of trials increased. Next was the understanding of the importance of uncertainty in decision making. It's one thing not to know whether a coin will come up heads or tails. It's entirely another to invest in a stock and realise that however accurate your estimation of the probabilistic unknowns affecting its future (for example, the cost of raw materials), it's the “unknown unknowns” (say, overnight bankruptcy due to a rogue trader in an office half way around the world) that can really sink your investment. Finally, classical economics always assumed that participants in the market behave rationally, but they don't. Anybody who thinks their fellow humans are rational need only visit a casino or watch them purchasing lottery tickets; they are sure in the long term to lose, and yet they still line up to make the sucker bet.

Somehow, I'd gotten it into my head that this was a “history of insurance”, and as a result this book sat on my shelf quite some time before I read it. It is much, much more than that. If you have any interest at all in investing, risk management in business ventures, or in the history of probability, statistics, game theory, and investigations of human behaviour in decision making, this is an essential book. Chapter 18 is one of the clearest expositions for its length that I've read of financial derivatives and both the benefits they have for prudent investors as well as the risks they pose to the global financial system. The writing is delightful, and sources are well documented in end notes and an extensive bibliography.

August 2008 Permalink

Bonner, William with Addison Wiggin. Financial Reckoning Day. Hoboken, NJ: John Wiley & Sons, 2003. ISBN 0-471-44973-3.
William Bonner's Daily Reckoning newsletter was, along with a few others like Downside, a voice of sanity in the bubble markets of the turn of millennium. I've always found that the best investment analysis looks well beyond the markets to the historical, social, political, moral, technological, and demographic trends which market action ultimately reflects. Bonner and Wiggin provide a global, multi-century tour d'horizon here, and make a convincing case that the boom, bust, and decade-plus “soft depression” which Japan suffered from the 1990s to the present is the prototype of what's in store for the U.S. as the inevitable de-leveraging of the mountain of corporate and consumer debt on which the recent boom was built occurs, with the difference that Japan has the advantage of a high savings rate and large trade surplus, while the U.S. saves nothing and runs enormous trade deficits. The analysis of how Alan Greenspan's evolution from supreme goldbug in Ayn Rand's inner circle to maestro of paper money is completely consistent with his youthful belief in Objectivism is simply delightful. The authors readily admit that markets can do anything, but believe that in the long run, markets generally do what they “ought to”, and suggest an investment strategy for the next decade on that basis.

November 2004 Permalink

Bonner, William and Addison Wiggin. Empire of Debt. Hoboken, NJ: John Wiley & Sons, 2006. ISBN 0-471-73902-2.
To make any sense in the long term, an investment strategy needs to be informed by a “macro macro” view of the global economic landscape and the grand-scale trends which shape it, as well as a fine sense for nonsense: the bubbles, manias, and unsustainable situations which seduce otherwise sane investors into doing crazy things which will inevitably end badly, although nobody can ever be sure precisely when. This is the perspective the authors provide in this wise, entertaining, and often laugh-out-loud funny book. If you're looking for tips on what stocks or funds to buy or sell, look elsewhere; the focus here is on the emergence in the twentieth century of the United States as a global economic and military hegemon, and the bizarre economic foundations of this most curious empire. The analysis of the current scene is grounded in a historical survey of empires and a recounting of how the United States became one.

The business of empire has been conducted more or less the same way all around the globe over millennia. An imperial power provides a more or less peaceful zone to vassal states, a large, reasonably open market in which they can buy and sell their goods, safe transport for goods and people within the imperial limes, and a common currency, system of weights and measures, and other lubricants of efficient commerce. In return, vassal states finance the empire through tribute: either explicit, or indirectly through taxes, tariffs, troop levies, and other imperial exactions. Now, history is littered with the wreckage of empires (more than fifty are listed on p. 49), which have failed in the time-proven ways, but this kind of traditional empire at least has the advantage that it is profitable—the imperial power is compensated for its services (whether welcome or appreciated by the subjects or not) by the tribute it collects from them, which may be invested in further expanding the empire.

The American empire, however, is unique in all of human history for being funded not by tribute but by debt. The emergence of the U.S. dollar as the global reserve currency, severed from the gold standard or any other measure of actual value, has permitted the U.S. to build a global military presence and domestic consumer society by borrowing the funds from other countries (notably, at the present time, China and Japan), who benefit (at least in the commercial sense) from the empire. Unlike tribute, the debt remains on the balance sheet as an exponentially growing liability which must eventually either be repaid or repudiated. In this environment, international trade has become a system in which (p. 221) “One nation buys things that it cannot afford and doesn't need with money it doesn't have. Another sells on credit to people who already cannot pay and then builds more factories to increase output.” Nobody knows how long the game can go on, but when it ends, it is certain to end badly.

An empire which has largely ceased to produce stuff for its citizens, whose principal export has become paper money (to the tune of about two billion dollars per day at this writing), will inevitably succumb to speculative binges. No sooner had the dot.com mania of the late 1990s collapsed than the residential real estate bubble began to inflate, with houses bought with interest-only mortgages considered “investments” which are “flipped” in a matter of months, and equity extracted by further assumption of debt used to fund current consumption. This contemporary collective delusion is well documented, with perspectives on how it may end.

The entire book is written in an “always on” ironic style, with a fine sense for the absurdities which are taken for wisdom and the charlatans and nincompoops who peddle them to the general public in the legacy media. Some may consider the authors' approach as insufficiently serious for a discussion of an oncoming global financial train wreck but, as they note on p. 76, “There is nothing quite so amusing as watching another man make a fool of himself. That is what makes history so entertaining.” Once you get your head out of the 24 hour news cycle and the political blogs and take the long view, the economic and geopolitical folly chronicled here is intensely entertaining, and the understanding of it imparted in this book is valuable in developing a strategy to avoid its inevitable tragic consequences.

May 2006 Permalink

Caplan, Bryan. The Myth of the Rational Voter. Princeton: Princeton University Press, 2007. ISBN 978-0-691-13873-2.
Every survey of the electorate in Western democracies shows it to be woefully uninformed: few can name their elected representatives or identify their party affiliation, nor answer the most basic questions about the political system under which they live. Economists and political scientists attribute this to “rational ignorance”: since there is a vanishingly small probability that the vote of a single person will be decisive, it is rational for that individual to ignore the complexities of the issues and candidates and embrace the cluelessness which these polls make manifest.

But, the experts contend, there's no problem—even if a large majority of the electorate is ignorant knuckle-walkers, it doesn't matter because they'll essentially vote at random. Their uninformed choices will cancel out, and the small informed minority will be decisive. Hence the “miracle of aggregation”: stir in millions of ignoramuses and thousands of political junkies and diligent citizens and out pops true wisdom.

Or maybe not—this book looks beyond the miracle of aggregation, which assumes that the errors of the uninformed are random, to examine whether there are systematic errors (or biases) among the general population which cause democracies to choose policies which are ultimately detrimental to the well-being of the electorate. The author identifies four specific biases in the field of economics, and documents, by a detailed analysis of the Survey of Americans and Economists on the Economy , that while economists, reputed to always disagree amongst themselves, are in fact, on issues which Thomas Sowell terms Basic Economics (September 2008), almost unanimous in their opinions, yet widely at variance from the views of the general public and the representatives they elect.

Many economists assume that the electorate votes what economists call its “rational choice”, yet empirical data presented here shows that democratic electorates behave very differently. The key insight is that choice in an election is not a preference in a market, where the choice directly affects the purchaser, but rather an allocation in a commons, where the consequences of an individual vote have negligible results upon the voter who casts it. And we all know how commons inevitably end.

The individual voter in a large democratic polity bears a vanishingly small cost in voting their ideology or beliefs, even if they are ultimately damaging to their own well-being, because the probability their own single vote will decide the election is infinitesimal. As a result, the voter is liberated to vote based upon totally irrational beliefs, based upon biases shared by a large portion of the electorate, insulated by the thought, “At least my vote won't decide the election, and I can feel good for having cast it this way”.

You might think that voters would be restrained from indulging their feel-good inclinations by considering their self interest, but studies of voter behaviour and the preferences of subgroups of voters demonstrate that in most circumstances voters support policies and candidates they believe are best for the polity as a whole, not their narrow self interest. Now, this would be a good thing if their beliefs were correct, but at least in the field of economics, they aren't, as defined by the near-unanimous consensus of professional economists. This means that there is a large, consistent, systematic bias in policies preferred by the uninformed electorate, whose numbers dwarf the small fraction who comprehend the issues in contention. And since, once again, there is no cost to an individual voter in expressing his or her erroneous beliefs, the voter can be “rationally irrational”: the possibility of one vote being decisive vanishes next to the cost of becoming informed on the issues, so it is rational to unknowingly vote irrationally. The reason democracies so often pursue irrational policies such as protectionism is not unresponsive politicians or influence of special interests, but instead politicians giving the electorate what it votes for, which is regrettably ultimately detrimental to its own self-interest.

Although the discussion here is largely confined to economic issues, there is no reason to believe that this inherent failure of democratic governance is confined to that arena. Indeed, one need only peruse the daily news to see abundant evidence of democracies committing folly with the broad approbation of their citizenry. (Run off a cliff? Yes, we can!) The author contends that rational irrationality among the electorate is an argument for restricting the scope of government and devolving responsibilities it presently undertakes to market mechanisms. In doing so, the citizen becomes a consumer in a competitive market and now has an individual incentive to make an informed choice because the consequences of that choice will be felt directly by the person making it. Naturally, as you'd expect with an irrational electorate, things seem to have been going in precisely the opposite direction for much of the last century.

This is an excellently argued and exhaustively documented book (The ratio of pages of source citations and end notes to main text may be as great as anything I've read) which will make you look at democracy in a different way and begin to comprehend that in many cases where politicians do stupid things, they are simply carrying out the will of an irrational electorate. For a different perspective on the shortcomings of democracy, also with a primary focus on economics, see Hans-Hermann Hoppe's superb Democracy: The God that Failed (June 2002), which approaches the topic from a hard libertarian perspective.

June 2009 Permalink

Fergusson, Adam. When Money Dies. New York: PublicAffairs, [1975] 2010. ISBN 978-1-58648-994-6.

This classic work, originally published in 1975, is the definitive history of the great inflation in Weimar Germany, culminating in the archetypal paroxysm of hyperinflation in the Fall of 1923, when Reichsbank printing presses were cranking out 100 trillion (1012) mark banknotes as fast as paper could be fed to them, and government expenditures were 6 quintillion (1018) marks while, in perhaps the greatest achievement in deficit spending of all time, revenues in all forms accounted for only 6 quadrillion (1015) marks. The book has long been out of print and much in demand by students of monetary madness, driving the price of used copies into the hundreds of dollars (although, to date, not trillions and quadrillions—patience). Fortunately for readers interested in the content and not collectibility, the book has been re-issued in a new paperback and electronic edition, just as inflation has come back onto the radar in the over-leveraged economies of the developed world. The main text is unchanged, and continues to use mid-1970s British nomenclature for large numbers (“millard” for 109, “billion” for 1012 and so on) and pre-decimalisation pounds, shillings, and pence for Sterling values. A new note to this edition explains how to convert the 1975 values used in the text to their approximate present-day equivalents.

The Weimar hyperinflation is an oft-cited turning point in twentieth century, but like many events of that century, much of the popular perception and portrayal of it in the legacy media is incorrect. This work is an in-depth antidote to such nonsense, concentrating almost entirely upon the inflation itself, and discussing other historical events and personalities only when relevant to the main topic. To the extent people are aware of the German hyperinflation at all, they'll usually describe it as a deliberate and cynical ploy by the Weimar Republic to escape the reparations for World War I exacted under the Treaty of Versailles by inflating away the debt owed to the Allies by debasing the German mark. This led to a cataclysmic episode of hyperinflation where people had to take a wheelbarrow of banknotes to the bakery to buy a loaf of bread and burning money would heat a house better than the firewood or coal it would buy. The great inflation and the social disruption it engendered led directly to the rise of Hitler.

What's wrong with this picture? Well, just about everything…. Inflation of the German mark actually began with the outbreak of World War I in 1914 when the German Imperial government, expecting a short war, decided to finance the war effort by deficit spending and printing money rather than raising taxes. As the war dragged on, this policy continued and was reinforced, since it was decided that adding heavy taxes on top of the horrific human cost and economic privations of the war would be disastrous to morale. As a result, over the war years of 1914–1918 the value of the mark against other currencies fell by a factor of two and was halved again in the first year of peace, 1919. While Germany was committed to making heavy reparation payments, these payments were denominated in gold, not marks, so inflating the mark did nothing to reduce the reparation obligations to the Allies, and thus provided no means of escaping them. What inflation and the resulting cheap mark did, however, was to make German exports cheap on the world market. Since export earnings were the only way Germany could fund reparations, promoting exports through inflation was both a way to accomplish this and to promote social peace through full employment, which was in fact achieved through most of the early period of inflation. By early 1920 (well before the hyperinflationary phase is considered to have kicked in), the mark had fallen to one fortieth of its prewar value against the British pound and U.S. dollar, but the cost of living in Germany had risen only by a factor of nine. This meant that German industrialists and their workers were receiving a flood of marks for the products they exported which could be spent advantageously on the domestic market. Since most of Germany's exports at the time relied little on imported raw materials and products, this put Germany at a substantial advantage in the world market, which was much remarked upon by British and French industrialists at the time, who were prone to ask, “Who won the war, anyway?”.

While initially beneficial to large industry and its organised labour force which was in a position to negotiate wages that kept up with the cost of living, and a boon to those with mortgaged property, who saw their principal and payments shrink in real terms as the currency in which they were denominated declined in value, the inflation was disastrous to pensioners and others on fixed incomes denominated in marks, as their standard of living inexorably eroded.

The response of the nominally independent Reichsbank under its President since 1908, Dr. Rudolf Havenstein, and the German government to these events was almost surreally clueless. As the originally mild inflation accelerated into dire inflation and then headed vertically on the exponential curve into hyperinflation they universally diagnosed the problem as “depreciation of the mark on the foreign exchange market” occurring for some inexplicable reason, which resulted in a “shortage of currency in the domestic market”, which could only be ameliorated by the central bank's revving up its printing presses to an ever-faster pace and issuing notes of larger and larger denomination. The concept that this tsunami of paper money might be the cause of the “depreciation of the mark” both at home and abroad, never seemed to enter the minds of the masters of the printing presses.

It's not like this hadn't happened before. All of the sequelæ of monetary inflation have been well documented over forty centuries of human history, from coin clipping and debasement in antiquity through the demise of every single unbacked paper currency ever created. Lord D'Abernon, the British ambassador in Berlin and British consular staff in cities across Germany precisely diagnosed the cause of the inflation and reported upon it in detail in their dispatches to the Foreign Office, but their attempts to explain these fundamentals to German officials were in vain. The Germans did not even need to look back in history at episodes such as the assignat hyperinflation in revolutionary France: just across the border in Austria, a near-identical hyperinflation had erupted just a few years earlier, and had eventually been stabilised in a manner similar to that eventually employed in Germany.

The final stages of inflation induce a state resembling delirium, where people seek to exchange paper money for anything at all which might keep its value even momentarily, farmers with abundant harvests withhold them from the market rather than exchange them for worthless paper, foreigners bearing sound currency descend upon the country and buy up everything for sale at absurdly low prices, employers and towns, unable to obtain currency to pay their workers, print their own scrip, further accelerating the inflation, and the professional and middle classes are reduced to penury or liquidated entirely, while the wealthy, industrialists, and unionised workers do reasonably well by comparison.

One of the principal problems in coping with inflation, whether as a policy maker or a citizen or business owner attempting to survive it, is inherent in its exponential growth. At any moment along the path, the situation is perceived as a “crisis” and the current circumstances “unsustainable”. But an exponential curve is self-similar: when you're living through one, however absurd the present situation may appear to be based on recent experience, it can continue to get exponentially more bizarre in the future by the inexorable continuation of the dynamic driving the curve. Since human beings have evolved to cope with mostly linear processes, we are ill-adapted to deal with exponential growth in anything. For example, we run out of adjectives: after you've used up “crisis”, “disaster”, “calamity”, “catastrophe”, “collapse”, “crash”, “debacle”, “ruin”, “cataclysm”, “fiasco”, and a few more, what do you call it the next time they tack on three more digits to all the money?

This very phenomenon makes it difficult to bring inflation to an end before it completely undoes the social fabric. The longer inflation persists, the more painful wringing it out of an economy will be, and consequently the greater the temptation to simply continue to endure the ruinous exponential. Throughout the period of hyperinflation in Germany, the fragile government was painfully aware that any attempt to stabilise the currency would result in severe unemployment, which radical parties of both the Left and Right were poised to exploit. In fact, the hyperinflation was ended only by the elected government essentially ceding its powers to an authoritarian dictatorship empowered to put down social unrest as the costs of its policies were felt. At the time the stabilisation policies were put into effect in November 1923, the mark was quoted at six trillion to the British pound, and the paper marks printed and awaiting distribution to banks filled 300 ten-ton railway boxcars.

What lessons does this remote historical episode have for us today? A great many, it seems to me. First and foremost, when you hear pundits holding forth about the Weimar inflation, it's valuable to know that much of what they're talking about is folklore and conventional wisdom which has little to do with events as they actually happened. Second, this chronicle serves to remind the reader of the one simple fact about inflation that politicians, bankers, collectivist media, organised labour, and rent-seeking crony capitalists deploy an entire demagogic vocabulary to conceal: that inflation is caused by an increase in the money supply, not by “greed”, “shortages”, “speculation”, or any of the other scapegoats trotted out to divert attention from where blame really lies: governments and their subservient central banks printing money (or, in current euphemism, “quantitative easing”) to stealthily default upon their obligations to creditors. Third, wherever and whenever inflation occurs, its ultimate effect is the destruction of the middle class, which has neither the political power of organised labour nor the connections and financial resources of the wealthy. Since liberal democracy is, in essence, rule by the middle class, its destruction is the precursor to establishment of authoritarian rule, which will be welcomed after the once-prosperous and self-reliant bourgeoisie has been expropriated by inflation and reduced to dependence upon the state.

The Weimar inflation did not bring Hitler to power—for one thing the dates just don't work. The inflation came to an end in 1923, the year Hitler's beer hall putsch in Munich failed ignominiously and resulted in his imprisonment. The stabilisation of the economy in the following years was widely considered the death knell for radical parties on both the Left and Right, including Hitler's. It was not until the onset of the Great Depression following the 1929 crash that rising unemployment, falling wages, and a collapsing industrial economy as world trade contracted provided an opening for Hitler, and he did not become chancellor until 1933, almost a decade after the inflation ended. And yet, while there was no direct causal connection between the inflation and Hitler's coming to power, the erosion of civil society and the rule of law, the destruction of the middle class, and the lingering effects of the blame for these events being placed on “speculators” all set the stage for the eventual Nazi takeover.

The technology and complexity of financial markets have come a long way from “Railway Rudy” Havenstein and his 300 boxcars of banknotes to “Helicopter BenBernanke. While it used to take years of incompetence and mismanagement, leveling of vast forests, and acres of steam powered printing presses to destroy an industrial and commercial republic and impoverish those who sustain its polity, today a mere fat-finger on a keyboard will suffice. And yet the dynamic of inflation, once unleashed, proceeds on its own timetable, often taking longer than expected to corrode the institutions of an economy, and with ups and downs which tempt investors back into the market right before the next sickening slide. The endpoint is always the same: destruction of the middle class and pensioners who have provided for themselves and the creation of a dependent class of serfs at the mercy of an authoritarian regime. In past inflations, including the one documented in this book, this was an unintended consequence of ill-advised monetary policy. I suspect the crowd presently running things views this as a feature, not a bug.

A Kindle edition is available, in which the table of contents and notes are properly linked to the text, but the index is simply a list of terms, not linked to their occurrences in the text.

May 2011 Permalink

Galt, John [pseud.]. The Day the Dollar Died. Florida: Self-published, 2011.
I have often remarked in this venue how fragile the infrastructure of the developed world is, and how what might seem to be a small disruption could cascade into a black swan event which could potentially result in the end of the world as we know it. It is not only physical events such as EMP attacks, cyber attacks on critical infrastructure, or natural disasters such as hurricanes and earthquakes which can set off the downspiral, but also loss of confidence in the financial system in which all of the myriad transactions which make up the global division of labour on which our contemporary society depends. In a fiat money system, where currency has no intrinsic value and is accepted only on the confidence that it will be subsequently redeemable for other goods without massive depreciation, loss of that confidence can bring the system down almost overnight, and this has happened again and again in the sorry millennia-long history of paper money. As economist Herbert Stein observed, “If something cannot go on forever, it will stop”. But, when pondering the many “unsustainable” trends we see all around us today, it's important to bear in mind that they can often go on for much longer, diverging more into the world of weird than you ever imagined before stopping, and that when they finally do stop the débâcle can be more sudden and breathtaking in its consequences than even excitable forecasters conceived.

In this gripping thriller, the author envisions the sudden loss in confidence of the purchasing power of the U.S. dollar and the ability of the U.S. government to make good on its obligations catalysing a meltdown of the international financial system and triggering dire consequences within the United States as an administration which believes “you never want a serious crisis to go to waste” exploits the calamity to begin “fundamentally transforming the United States of America”. The story is told in a curious way: by one first-person narrator and from the viewpoint of other people around the country recounted in third-person omniscient style. This is unusual, but I didn't find it jarring, and the story works.

The recounting of the aftermath of sudden economic collapse is compelling, and will probably make you rethink your own preparations for such a dire (yet, I believe, increasingly probable) event. The whole post-collapse scenario is a little too black helicopter for my taste: we're asked to simultaneously believe that a government which has bungled its way into an apocalyptic collapse of the international economic system (entirely plausible in my view) will be ruthlessly efficient in imposing its new order (nonsense—it will be as mindlessly incompetent as in everything else it attempts). But the picture painted of how citizens can be intimidated or co-opted into becoming collaborators rings true, and will give you pause as you think about your friends and neighbours as potential snitches working for the Man. I found it particularly delightful that the author envisions a concept similar to my 1994 dystopian piece, Unicard, as playing a part in the story.

At present, this book is available only in PDF format. I read it with Stanza on my iPad, which provides a reading experience equivalent to the Kindle and iBooks applications. The author says other electronic editions of this book will be forthcoming in the near future; when they're released they should be linked to the page cited above. The PDF edition is perfectly readable, however, so if this book interests you, there's no reason to wait. And, hey, it's free! As a self-published work, it's not surprising there are a number of typographical errors, although very few factual errors I noticed. That said, I've read novels published by major houses with substantially more copy editing goofs, and the errors here never confuse the reader nor get in the way of the narrative. For the author's other writings and audio podcasts, visit his Web site.

August 2011 Permalink

Gilder, George. The Scandal of Money. Washington: Regnery Publishing, 2016. ISBN 978-1-62157-575-7.
There is something seriously wrong with the global economy and the financial system upon which it is founded. The nature of the problem may not be apparent to the average person (and indeed, many so-called “experts” fail to grasp what is going on), but the symptoms are obvious. Real (after inflation) income for the majority of working people has stagnated for decades. The economy is built upon a pyramid of debt: sovereign (government), corporate, and personal, which nobody really believes is ever going to be repaid. The young, who once worked their way through college in entry-level jobs, now graduate with crushing student debts which amount to indentured servitude for the most productive years of their lives. Financial markets, once a place where productive enterprises could raise capital for their businesses by selling shares in the company or interest-bearing debt, now seem to have become a vast global casino, where gambling on the relative values of paper money issued by various countries dwarfs genuine economic activity: in 2013, the Bank for International Settlements estimated these “foreign exchange” transactions to be around US$ 5.3 trillion per day, more than a third of U.S. annual Gross Domestic Product every twenty-four hours. Unlike a legitimate casino where gamblers must make good on their losses, the big banks engaged in this game have been declared “too big to fail”, with taxpayers' pockets picked when they suffer a big loss. If, despite stagnant earnings, rising prices, and confiscatory taxes, an individual or family manages to set some money aside, they find that the return from depositing it in a bank or placing it in a low-risk investment is less than the real rate of inflation, rendering saving a sucker's bet because interest rates have been artificially repressed by central banks to allow them to service the mountain of debt they are carrying.

It is easy to understand why the millions of ordinary people on the short end of this deal have come to believe “the system is rigged” and that “the rich are ripping us off”, and listen attentively to demagogues confirming these observations, even if the solutions they advocate are nostrums which have failed every time and place they have been tried.

What, then, is wrong? George Gilder, author of the classic Wealth and Poverty, the supply side Bible of the Reagan years, argues that what all of the dysfunctional aspects of the economy have in common is money, and that since 1971 we have been using a flawed definition of money which has led to all of the pathologies we observe today. We have come to denominate money in dollars, euros, yen, or other currencies which mean only what the central banks that issue them claim they mean, and whose relative value is set by trading in the foreign exchange markets and can fluctuate on a second-by-second basis. The author argues that the proper definition of money is as a unit of time: the time required for technological innovation and productivity increases to create real wealth. This wealth (or value) comes from information or knowledge. In chapter 1, he writes:

In an information economy, growth springs not from power but from knowledge. Crucial to the growth of knowledge is learning, conducted across an economy through the falsifiable testing of entrepreneurial ideas in companies that can fail. The economy is a test and measurement system, and it requires reliable learning guided by an accurate meter of monetary value.

Money, then, is the means by which information is transmitted within the economy. It allows comparing the value of completely disparate things: for example the services of a neurosurgeon and a ton of pork bellies, even though it is implausible anybody has ever bartered one for the other.

When money is stable (its supply is fixed or grows at a constant rate which is small compared to the existing money supply), it is possible for participants in the economy to evaluate various goods and services on offer and, more importantly, make long term plans to create new goods and services which will improve productivity. When money is manipulated by governments and their central banks, such planning becomes, in part, a speculation on the value of currency in the future. It's like you were operating a textile factory and sold your products by the metre, and every morning you had to pick up the Wall Street Journal to see how long a metre was today. Should you invest in a new weaving machine? Who knows how long the metre will be by the time it's installed and producing?

I'll illustrate the information theory of value in the following way. Compare the price of the pile of raw materials used in making a BMW (iron, copper, glass, aluminium, plastic, leather, etc.) with the finished automobile. The difference in price is the information embodied in the finished product—not just the transformation of the raw materials into the car, but the knowledge gained over the decades which contributed to that transformation and the features of the car which make it attractive to the customer. Now take that BMW and crash it into a bridge abutment on the autobahn at 200 km/h. How much is it worth now? Probably less than the raw materials (since it's harder to extract them from a jumbled-up wreck). Every atom which existed before the wreck is still there. What has been lost is the information (what electrical engineers call the “magic smoke”) which organised them into something people valued.

When the value of money is unpredictable, any investment is in part speculative, and it is inevitable that the most lucrative speculations will be those in money itself. This diverts investment from improving productivity into financial speculation on foreign exchange rates, interest rates, and financial derivatives based upon them: a completely unproductive zero-sum sector of the economy which didn't exist prior to the abandonment of fixed exchange rates in 1971.

What happened in 1971? On August 15th of that year, President Richard Nixon unilaterally suspended the convertibility of the U.S. dollar into gold, setting into motion a process which would ultimately destroy the Bretton Woods system of fixed exchange rates which had been created as a pillar of the world financial and trade system after World War II. Under Bretton Woods, the dollar was fixed to gold, with sovereign holders of dollar reserves (but not individuals) able to exchange dollars and gold in unlimited quantities at the fixed rate of US$ 35/troy ounce. Other currencies in the system maintained fixed exchange rates with the dollar, and were backed by reserves, which could be held in either dollars or gold.

Fixed exchange rates promoted international trade by eliminating currency risk in cross-border transactions. For example, a German manufacturer could import raw materials priced in British pounds, incorporate them into machine tools assembled by workers paid in German marks, and export the tools to the United States, being paid in dollars, all without the risk that a fluctuation by one or more of these currencies against another would wipe out the profit from the transaction. The fixed rates imposed discipline on the central banks issuing currencies and the governments to whom they were responsible. Running large trade deficits or surpluses, or accumulating too much public debt was deterred because doing so could force a costly official change in the exchange rate of the currency against the dollar. Currencies could, in extreme circumstances, be devalued or revalued upward, but this was painful to the issuer and rare.

With the collapse of Bretton Woods, no longer was there a link to gold, either direct or indirect through the dollar. Instead, the relative values of currencies against one another were set purely by the market: what traders were willing to pay to buy one with another. This pushed the currency risk back onto anybody engaged in international trade, and forced them to “hedge” the currency risk (by foreign exchange transactions with the big banks) or else bear the risk themselves. None of this contributed in any way to productivity, although it generated revenue for the banks engaged in the game.

At the time, the idea of freely floating currencies, with their exchange rates set by the marketplace, seemed like a free market alternative to the top-down government-imposed system of fixed exchange rates it supplanted, and it was supported by champions of free enterprise such as Milton Friedman. The author contends that, based upon almost half a century of experience with floating currencies and the consequent chaotic changes in exchange rates, bouts of inflation and deflation, monetary induced recessions, asset bubbles and crashes, and interest rates on low-risk investments which ranged from 20% to less than zero, this was one occasion Prof. Friedman got it wrong. Like the ever-changing metre in the fable of the textile factory, incessantly varying money makes long term planning difficult to impossible and sends the wrong signals to investors and businesses. In particular, when interest rates are forced to near zero, productive investment which creates new assets at a rate greater than the interest rate on the borrowed funds is neglected in favour of bidding up the price of existing assets, creating bubbles like those in real estate and stocks in recent memory. Further, since free money will not be allocated by the market, those who receive it are the privileged or connected who are first in line; this contributes to the justified perception of inequality in the financial system.

Having judged the system of paper money with floating exchange rates a failure, Gilder does not advocate a return to either the classical gold standard of the 19th century or the Bretton Woods system of fixed exchange rates with a dollar pegged to gold. Preferring to rely upon the innovation of entrepreneurs and the selection of the free market, he urges governments to remove all impediments to the introduction of multiple, competitive currencies. In particular, the capital gains tax would be abolished for purchases and sales regardless of the currency used. (For example, today you can obtain a credit card denominated in euros and use it freely in the U.S. to make purchases in dollars. Every time you use the card, the dollar amount is converted to euros and added to the balance on your bill. But, strictly speaking, you have sold euros and bought dollars, so you must report the transaction and any gain or loss from change in the dollar value of the euros in your account and the value of the ones you spent. This is so cumbersome it's a powerful deterrent to using any currency other than dollars in the U.S. Many people ignore the requirement to report such transactions, but they're breaking the law by doing so.)

With multiple currencies and no tax or transaction reporting requirements, all will be free to compete in the market, where we can expect the best solutions to prevail. Using whichever currency you wish will be as seamless as buying something with a debit or credit card denominated in a currency different than the one of the seller. Existing card payment systems have a transaction cost which is so high they are impractical for “micropayment” on the Internet or for fully replacing cash in everyday transactions. Gilder suggests that Bitcoin or other cryptocurrencies based on blockchain technology will probably be the means by which a successful currency backed 100% with physical gold or another hard asset will be used in transactions.

This is a thoughtful examination of the problems of the contemporary financial system from a perspective you'll rarely encounter in the legacy financial media. The root cause of our money problems is the money: we have allowed governments to inflict upon us a monopoly of government-managed money, which, unsurprisingly, works about as well as anything else provided by a government monopoly. Our experience with this flawed system over more than four decades makes its shortcomings apparent, once you cease accepting the heavy price we pay for them as the normal state of affairs and inevitable. As with any other monopoly, all that's needed is to break the monopoly and free the market to choose which, among a variety of competing forms of money, best meet the needs of those who use them.

Here is a Bookmonger interview with the author discussing the book.

November 2016 Permalink

Gladwell, Malcolm. The Tipping Point. Boston: Little, Brown, 2000. ISBN 0-316-31696-2.

December 2002 Permalink

Hayek, Friedrich A. The Road to Serfdom. Chicago: University of Chicago Press, [1944] 1994. ISBN 0-226-32061-8.

May 2002 Permalink

Hayek, Friedrich A. The Fatal Conceit. Chicago: University of Chicago Press, 1988. ISBN 0-226-32066-9.
The idiosyncratic, if not downright eccentric, synthesis of evolutionary epistemology, spontaneous emergence of order in self-organising systems, free markets as a communication channel and feedback mechanism, and individual liberty within a non-coercive web of cultural traditions which informs my scribblings here and elsewhere is the product of several decades of pondering these matters, digesting dozens of books by almost as many authors, and discussions with brilliant and original thinkers it has been my privilege to encounter over the years.

If, however, you want it all now, here it is, in less than 160 pages of the pellucid reasoning and prose for which Hayek is famed, ready to be flashed into your brain's philosophical firmware in a few hours' pleasant reading. This book sat on my shelf for more than a decade before I picked it up a couple of days ago and devoured it, exclaiming “Yes!”, “Bingo!”, and “Precisely!” every few pages. The book is subtitled “The Errors of Socialism”, which I believe both misstates and unnecessarily restricts the scope of the actual content, for the errors of socialism are shared by a multitude of other rationalistic doctrines (including the cult of design in software development) which, either conceived before biological evolution was understood, or by those who didn't understand evolution or preferred the outlook of Aristotle and Plato for aesthetic reasons (“evolution is so messy, and there's no rational plan to it”), assume, as those before Darwin and those who reject his discoveries today, that the presence of apparent purpose implies the action of rational design. Hayek argues (and to my mind demonstrates) that the extended order of human interaction: ethics, morality, division of labour, trade, markets, diffusion of information, and a multitude of other components of civilisation fall between biological instinct and reason, poles which many philosophers consider a dichotomy.

This middle ground, the foundation of civilisation, is the product of cultural evolution, in which reason plays a part only in variation, and selection occurs just as brutally and effectively as in biological evolution. (Cultural and biological evolution are not identical, of course; in particular, the inheritance of acquired traits is central in the development of cultures, yet absent in biology.)

The “Fatal Conceit” of the title is the belief among intellectuals and social engineers, mistaking the traditions and institutions of human civilisation for products of reason instead of evolution, that they can themselves design, on a clean sheet of paper as it were, a one-size-fits-all eternal replacement which will work better than the product of an ongoing evolutionary process involving billions of individuals over millennia, exploring a myriad of alternatives to find what works best. The failure to grasp the limits of reason compared to evolution explains why the perfectly consistent and often tragic failures of utopian top-down schemes never deters intellectuals from championing new (or often old, already discredited) ones. Did I say I liked this book?

March 2005 Permalink

Hazlitt, Henry. Economics in One Lesson. New York: Three Rivers Press, [1946, 1962] 1979. ISBN 0-517-54823-2.

November 2003 Permalink

Kauffman, Stuart A. Investigations. New York: Oxford University Press, 2000. ISBN 0-19-512105-8.
Few people have thought as long and as hard about the origin of life and the emergence of complexity in a biosphere as Stuart Kauffman. Medical doctor, geneticist, professor of biochemistry and biophysics, MacArthur Fellow, and member of the faculty of the Santa Fe Institute for a decade, he has sought to discover the principles which might underlie a “general biology”—the laws which would govern any biosphere, whether terrestrial, extraterrestrial, or simulated within a computer, regardless of its physical substrate.

This book, which he describes on occasion as “protoscience”, provides an overview of the principles he suspects, but cannot prove, may underlie all forms of life, and beyond that systems in general which are far from equilibrium such as a modern technological economy and the universe itself. Most of science before the middle of the twentieth century studied complex systems at or near equilibrium; only at such states could the simplifying assumptions of statistical mechanics be applied to render the problem tractable. With computers, however, we can now begin to explore open systems (albeit far smaller than those in nature) which are far from equilibrium, have dynamic flows of energy and material, and do not necessarily evolve toward a state of maximum entropy.

Kauffman believes there may be what amounts to a fourth law of thermodynamics which applies to such systems and, although we don't know enough to state it precisely, he suspects it may be that these open, extremely nonergodic, systems evolve as rapidly as possible to expand and fill their state space and that unlike, say, a gas in a closed volume or the stars in a galaxy, where the complete state space can be specified in advance (that is, the dimensionality of the space, not the precise position and momentum values of every object within it), the state space of a non-equilibrium system cannot be prestated because its very evolution expands the state space. The presence of autonomous agents introduces another level of complexity and creativity, as evolution drives the agents to greater and greater diversity and complexity to better adapt to the ever-shifting fitness landscape.

These are complicated and deep issues, and this is a very difficult book, although appearing, at first glance, to be written for a popular audience. I seriously doubt whether somebody who was not previously acquainted with these topics and thought about them at some length will make it to the end and, even if they do, take much away from the book. Those who are comfortable with the laws of thermodynamics, the genetic code, protein chemistry, catalysis, autocatalytic networks, Carnot cycles, fitness landscapes, hill-climbing strategies, the no-go theorem, error catastrophes, self-organisation, percolation phase transitions in graphs, and other technical issues raised in the arguments must still confront the author's prose style. It seems like Kauffman aspires to be a prose stylist conveying a sense of wonder to his readers along the lines of Carl Sagan and Stephen Jay Gould. Unfortunately, he doesn't pull it off as well, and the reader must wade through numerous paragraphs like the following from pp. 97–98:

Does it always take work to construct constraints? No, as we will soon see. Does it often take work to construct constraints? Yes. In those cases, the work done to construct constraints is, in fact, another coupling of spontaneous and nonspontaneous processes. But this is just what we are suggesting must occur in autonomous agents. In the universe as a whole, exploding from the big bang into this vast diversity, are many of the constraints on the release of energy that have formed due to a linking of spontaneous and nonspontaneous processes? Yes. What might this be about? I'll say it again. The universe is full of sources of energy. Nonequilibrium processes and structures of increasing diversity and complexity arise that constitute sources of energy that measure, detect, and capture those sources of energy, build new structures that constitute constraints on the release of energy, and hence drive nonspontaneous processes to create more such diversifying and novel processes, structures, and energy sources.
I have not cherry-picked this passage; there are hundreds of others like it. Given the complexity of the technical material and the difficulty of the concepts being explained, it seems to me that the straightforward, unaffected Point A to Point B style of explanation which Isaac Asimov employed would work much better. Pardon my audacity, but allow me to rewrite the above paragraph.
Autonomous agents require energy, and the universe is full of sources of energy. But in order to do work, they require energy to be released under constraints. Some constraints are natural, but others are constructed by autonomous agents which must do work to build novel constraints. A new constraint, once built, provides access to new sources of energy, which can be exploited by new agents, contributing to an ever growing diversity and complexity of agents, constraints, and sources of energy.
Which is better? I rewrite; you decide. The tone of the prose is all over the place. In one paragraph he's talking about Tomasina the trilobite (p. 129) and Gertrude the ugly squirrel (p. 131), then the next thing you know it's “Here, the hexamer is simplified to 3'CCCGGG5', and the two complementary trimers are 5'GGG3' + 5'CCC3'. Left to its own devices, this reaction is exergonic and, in the presence of excess trimers compared to the equilibrium ratio of hexamer to trimers, will flow exergonically toward equilibrium by synthesizing the hexamer.” (p. 64). This flipping back and forth between colloquial and scholarly voices leads to a kind of comprehensional kinetosis. There are a few typographical errors, none serious, but I have to share this delightful one-sentence paragraph from p. 254 (ellipsis in the original):
By iteration, we can construct a graph connecting the founder spin network with its 1-Pachner move “descendants,” 2-Pachner move descendints…N-Pachner move descendents.
Good grief—is Oxford University Press outsourcing their copy editing to Slashdot?

For the reasons given above, I found this a difficult read. But it is an important book, bristling with ideas which will get you looking at the big questions in a different way, and speculating, along with the author, that there may be some profound scientific insights which science has overlooked to date sitting right before our eyes—in the biosphere, the economy, and this fantastically complicated universe which seems to have emerged somehow from a near-thermalised big bang. While Kauffman is the first to admit that these are hypotheses and speculations, not science, they are eminently testable by straightforward scientific investigation, and there is every reason to believe that if there are, indeed, general laws that govern these phenomena, we will begin to glimpse them in the next few decades. If you're interested in these matters, this is a book you shouldn't miss, but be aware what you're getting into when you undertake to read it.

February 2007 Permalink

Leeson, Peter T. The Invisible Hook. Princeton: Princeton University Press, 2009. ISBN 978-0-691-13747-6.
(Guest review by Iron Jack Rackham)
Avast, ye scurvy sea-dogs! Here we gentlemen of profit have crafted our swashbuckling customs to terrify those we prey upon, and now along comes a doubly-damned economist, and a landlubber at that, to explain how our curious ways can be explained by our own self-interest and lust for booty. Why do we who sail under the skull and crossbones democratically elect our captains and quartermasters: one pirate, one vote? Why do all pirates on the crew share equally in the plunder? Why do so many sailors voluntarily join pirate crews? Why do we pay “workman's compensation” to pirates wounded in battle? Why did the pirate constitutions that govern our ships embody separation of powers long before landlubber governments twigged to the idea? Why do we hoist the Jolly Roger and identify ourselves as pirates when closing with our prey? Why do we torture and/or slay those who resist, yet rarely harm crews which surrender without a fight? Why do our ships welcome buccaneers of all races as free men on an equal basis, even when “legitimate” vessels traded in and used black slaves and their governments tolerated chattel slavery?

This economist would have you believe it isn't our outlaw culture that makes us behave that way, but rather that our own rational choice, driven by our righteous thirst for treasure chests bulging with jewels, gold, and pieces of eight leads us, as if by an invisible hook, to cooperate toward our common goals. And because we're hostis humani generis, we need no foul, coercive governments to impose this governance upon us: it's our own voluntary association which imposes the order we need to achieve our highly profitable plunder—the author calls it “an-arrgh-chy”, and it works for us. What's that? A sail on the horizon? To yer' posts, me hearties, and hoist the Jolly Roger, we're off a-piratin'!

Thank you, Iron Jack—a few more remarks, if I may…there's a lot more in this slim volume (211 pages of main text): the Jolly Roger as one of the greatest brands of all time, lessons from pirates for contemporary corporate managers, debunking of several postmodern myths such as pirates having been predominately homosexual (“swishbucklers”), an examination of how pirates established the defence in case of capture that they had been compelled to join the pirate crew, and an analysis of how changes in Admiralty law shifted the incentives and brought the golden age of piracy to an end in the 1720s.

Exists there a person whose inner child is not fascinated by pirates? This book demonstrates why pirates also appeal to one's inner anarcho-libertarian, while giving pause to those who believe that market forces, unconstrained by a code of morality, always produce good outcomes.

A podcast interview with the author is available.

June 2009 Permalink

Lehrman, Lewis E. The True Gold Standard. Greenwich, CT: Lehrman Institute, 2011. ISBN 978-0-9840178-0-5.
Nothing is more obvious than that the global financial system is headed for an inevitable crack-up of epic proportions. Fiat (paper) money systems usually last about forty years before imploding in the collapse of the credit expansion bubbles they predictably create. We are now 41 years after the United States broke the link between the world's reserve currency, the U.S. dollar, and gold. Since then, every currency in the world has been “floating”—decoupled from any physical backing, and valued only by comparison with the others. Uniquely in human history, all of the world now uses paper money, and they are all interlinked in a global market where shifts in sentiment or confidence can cause trillion dollar excursions in the wealth of nations in milliseconds. The risk of “contagion”, where loss of confidence in one paper currency causes a rush to the next, followed by attempts to limit its appreciation by its issuer, and a cascading race to the bottom has never been greater. The great currency and societal collapses of the past, while seeming apocalyptic to those living through them, were local; the next one is likely to be all-encompassing, with consequences which are difficult to imagine without venturing into speculative fiction.

I believe the only way to avoid this cataclysm is to get rid of all of the debt which can never be repaid and promises which can never be met, pop the credit bubble, and replace the funny money upon which the entire delusional system is based with the one standard which has stood the test of millennia: gold. If you were designing a simulation for people to live in and wanted to provide an ideal form of money, it would be hard to come up with something better than element 79. It doesn't corrode or degrade absent exposure to substances so foul as to make even thrill-seeking chemists recoil; it's easily divisible into quantities as small as one wishes, easy to certify as genuine; and has few applications which consume it, which means that the above-ground supply is essentially constant. It is also very difficult and costly to mine, which means that the supply grows almost precisely in synchronism with that of the world's population and their wealth—consequently, as a monetary standard it supports a stable price level, incapable of manipulation by politicians, bankers, or other criminal classes, and is freely exchangeable by free people everywhere without the constraints imposed by the slavers upon users of their currencies.

Now, when one discusses the gold standard, there is a standard litany of objections from those bought in to the status quo.

  • It's a step back into the past.
  • There isn't enough gold to go around.
  • It's inflexible and unable to cope with today's dynamic economy.
  • There's no way to get from here to there.

This book dispenses with these arguments in order. If we step back from the abyss of a financial cataclysm into a past with stable prices, global free trade, and the ability to make long-term investments which benefitted everybody, what's so bad about that? It doesn't matter how much gold there is—all that matters is that the quantity doesn't change at the whim of politicians: existing currencies will have to be revalued against gold, but the process of doing so will write down unpayable debts and restore solvency to the international financial system. A gold standard is inflexible by design: that's its essential feature, not a bug. Flexibility in a modern economy is provided by the myriad means of extension of credit, all of which will be anchored to reality by a stable unit of exchange. Finally, this work provides a roadmap for getting from here to there, with a period of price discovery preceding full convertibility of paper money to gold and the possibility of the implementation of convertibility being done either by a single country (creating a competitive advantage for its currency) or by a group of issuers of currencies working together. The author assumes the first currency to link to gold will be called the dollar, but I'll give equal odds it will be called the dinar, yuan, or rouble. It is difficult to get from here to there, but one must never forget the advantage that accrues to he who gets there first.

The assumption throughout is that the transition from the present paper money system to gold-backed currencies is continuous. While this is an outcome much to be preferred, I think it is, given the profligate nature of the ruling classes and their willingness to postpone any difficult decisions even to buy a mere week or two, not the way to bet. Still, even if we find ourselves crawling from the wreckage of a profoundly corrupt international financial system, this small book provides an excellent roadmap for rebuilding a moral, equitable, and sustainable system which will last for five decades or so…until the slavers win office again.

This is a plan which assumes existing institutions more or less stay in place, and that government retains its power to mandate currency at gunpoint. A softer path to hard currency might simply be allowing competing currencies, all exempt from tax upon conversion, to be used in transactions, contracts, and financial instruments. I might choose to use grammes of gold; you may prefer Euros; my neighbour may opt for Saudi certificates redeemable in barrels of crude oil; and the newleyweds down the street may go for Iowa coins exchangeable for a bushel of corn. The more the better! They'll all be seamlessly exchangeable for one another at market rates when we beam them to one another with our mobile phones or make payments, and the best ones will endure. The only losers will be archaic institutions like central banks, governments, and their treasuries. The winners will be people who created the wealth and are empowered to store and exchange it as they wish.

July 2012 Permalink

Levinson, Marc. The Box. Princeton: Princeton University Press, [2006] 2008. ISBN 978-0-691-13640-0.
When we think of developments in science and technology which reshape the world economy, we often concentrate upon those which build on fundamental breakthroughs in our understanding of the world we live in, or technologies which employ them to do things never imagined. Examples of these are electricity and magnetism, which gave us the telegraph, electric power, the telephone, and wireless communication. Semiconductor technology, the foundation of the computer and Internet revolutions, is grounded in quantum mechanics, elaborated only in the early 20th century. The global positioning satellites which you use to get directions when you're driving or walking wouldn't work if they did not compensate for the effects of special and general relativity upon the rate at which clocks tick in moving objects and those in gravitational fields.

But sometimes a revolutionary technology doesn't require a scientific breakthrough, nor a complicated manufacturing process to build, but just the realisation that people have been looking at a problem all wrong, or have been earnestly toiling away trying to solve some problem other than the one which people are ready to pay vast sums of money to have solved, once the solution is placed on the market.

The cargo shipping container may be, physically, the one of the least impressive technological achievements of the 20th century, right up there with the inanimate carbon rod, as it required no special materials, fabrication technologies, or design tools which did not exist a century before, and yet its widespread adoption in the latter half of the 20th century was fundamental to the restructuring of the global economy which we now call “globalisation”, and changed assumptions about the relationship between capital, natural resources, labour, and markets which had existed since the start of the industrial revolution.

Ever since the start of ocean commerce, ships handled cargo in much the same way. The cargo was brought to the dock (often after waiting for an extended period in a dockside warehouse for the ship to arrive), then stevedores (or longshoremen, or dockers) would load the cargo into nets, or onto pallets hoisted by nets into the hold of the ship, where other stevedores would unload it and stow the individual items, which might consist of items as varied as bags of coffee beans, boxes containing manufactured goods, barrels of wine or oil, and preserved food items such as salted fish or meat. These individual items were stored based upon the expertise of the gangs working the ship to make the most of the irregular space of the ship's cargo hold, and if the ship was to call upon multiple ports, in an order so cargo could be unloaded with minimal shifting of that bound for subsequent destinations on the voyage. Upon arrival at a port, this process was reversed to offload cargo bound there, and then the loading began again. It was not unusual for a cargo ship to spend 6 days or more in each port, unloading and loading, before the next leg on its voyage.

Shipping is both capital- and labour-intensive. The ship has to be financed and incurs largely fixed maintenance costs, and the crew must be paid regardless of whether they're at sea or waiting in port for cargo to be unloaded and loaded. This means that what engineers call the “duty cycle” of the ship is critical to its cost of operation and, consequently, what the shipowner must charge shippers to make a profit. A ship operating coastal routes in the U.S., say between New York and a port in the Gulf, could easily spend half its time in ports, running up costs but generating no revenue. This model of ocean transport, called break bulk cargo, prevailed from the age of sail until the 1970s.

Under the break bulk model, ocean transport was very expensive. Further, with cargos sitting in warehouses waiting for ships to arrive on erratic schedules, delivery times were not just long but also unpredictable. Goods shipped from a factory in the U.S. midwest to a destination in Europe would routinely take three months to arrive end to end, with an uncertainty measured in weeks, accounting for trucking, railroads, and ocean shipping involved in getting them to their destination. This meant that any importation of time-sensitive goods required keeping a large local inventory to compensate for unpredictable delivery times, and paying the substantial shipping cost included in their price. Economists, going back to Ricardo, often modelled shipping as free, but it was nothing of the kind, and was often the dominant factor in the location and structure of firms.

When shipping is expensive, firms have an advantage in being located in proximity to both their raw materials (or component suppliers) and customers. Detroit became the Motor City in large part because its bulk inputs: iron ore and coal, could be transported at low cost from mines to factories by ships plying the Great Lakes. Industries dependent on imports and exports would tend to cluster around major ports, since otherwise the cost of transporting their inputs and outputs overland from the nearest port would be prohibitive. And many companies simply concentrated on their local market, where transportation costs were not a major consideration in their cost structure. In 1964, when break bulk shipping was the norm, 40% of exports from Britain originated within 25 miles of their port of export, and two thirds of all imports were delivered to destinations a similar distance from their port of arrival.

But all of this was based upon the cost structure of break bulk ocean cargo shipping, and a similarly archaic way of handling rail and truck cargo. A manufacturing plant in Iowa might pack its goods destined for a customer in Belgium into boxes which were loaded onto a truck, driven to a terminal in Chicago where they were unloaded and reloaded into a boxcar, then sent by train to New Jersey, where they were unloaded and put onto a small ship to take them to the port of New York, where after sitting in a warehouse they'd be put onto a ship bound for a port in Germany. After arrival, they'd be transported by train, then trucked to the destination. Three months or so later, plus or minus a few, the cargo would arrive—at least that which wasn't stolen en route.

These long delays, and the uncertainty in delivery times, required those engaging in international commerce to maintain large inventories, which further increased the cost of doing business overseas. Many firms opted for vertical integration in their own local region.

Malcom McLean started his trucking company in 1934 with one truck and one driver, himself. What he lacked in capital (he often struggled to pay bridge tolls when delivering to New York), he made up in ambition, and by 1945, his company operated 162 trucks. He was a relentless cost-cutter, and from his own experience waiting for hours on New York docks for his cargo to be unloaded onto ships, in 1953 asked why shippers couldn't simply put the entire truck trailer on a ship rather than unload its cargo into the ship's hold, then unload it piece by piece at the destination harbour and load it back onto another truck. War surplus Liberty ships were available for almost nothing, and they could carry cargo between the U.S. northeast and south at a fraction of the cost of trucks, especially in the era before expressways.

McLean immediately found himself in a tangled web of regulatory and union constraints. Shipping, trucking, and railroads were all considered completely different businesses, each of which had accreted its own, often bizarre, government regulation and union work rules. The rate a carrier could charge for hauling a ton of cargo from point A to point B depended not upon its mass or volume, but what it was, with radically different rates for say, coal as opposed to manufactured goods. McLean's genius was in seeing past all of this obstructionist clutter and realising that what the customer—the shipper—wanted was not to purchase trucking, railroad, and shipping services, but rather delivery of the shipment, however accomplished, at a specified time and cost.

The regulatory mess made it almost impossible for a trucking company to own ships, so McLean created a legal structure which would allow his company to acquire a shipping line which had fallen on hard times. He then proceeded to convert a ship to carry containers, which would not be opened from the time they were loaded on trucks at the shipper's location until they arrived at the destination, and could be transferred between trucks and ships rapidly. Working out the details of the construction of the containers, setting their size, and shepherding all of this through a regulatory gauntlet which had never heard of such concepts was daunting, but the potential payoff was enormous. Loading break bulk cargo onto a ship the size of McLean's first container vessel cost US$ 5.83 per ton. Loading freight in containers cost US$ 0.16 per ton. This reduction in cost, passed on to the shipper, made containerised freight compelling, and sparked a transformation in the global economy.

Consider Barbie. Her body is manufactured in China, using machines from Japan and Europe and moulds designed in the U.S. Her hair comes from Japan, the plastic for her body from Taiwan, dyed with U.S. pigments, and her clothes are produced in other factories in China. The final product is shipped worldwide. There are no large inventories anywhere in the supply chain: every step depends upon reliable delivery of containers of intermediate products. Managers setting up such a supply chain no longer care whether the products are transported by truck, rail, or sea, and since transportation costs for containers are so small compared to the value of their contents (and trade barriers such as customs duties have fallen), the location of suppliers and factories is based almost entirely upon cost, with proximity to resources and customers almost irrelevant. We think of the Internet as having abolished distance, but the humble ocean cargo container has done so for things as much as the Internet has for data.

This is a thoroughly researched and fascinating look at how the seemingly most humble technological innovation can have enormous consequences, and also how the greatest barriers to restructuring economies may be sclerotic government and government-enabled (union) structures which preserve obsolete models long after they have become destructive of prosperity. It also demonstrates how those who try to freeze innovation into a model fixed in the past will be bypassed by those willing to embrace a more efficient way of doing business. The container ports which handle most of the world's cargo are, for the most part, not the largest ports of the break bulk era. They are those which, unencumbered by history, were able to build the infrastructure required to shift containers at a rapid rate.

The Kindle edition has some flaws. In numerous places, spaces appear within words which don't belong there (perhaps words hyphenated across lines in the print edition and not re-joined?) and the index is just a list of searchable terms, not linked to references in the text.

October 2014 Permalink

Levitt, Steven D. and Stephen J. Dubner. Freakonomics. New York: William Morrow, 2005. ISBN 0-06-073132-X.
Finally—a book about one of my favourite pastimes: mining real-world data sets for interesting correlations and searching for evidence of causality—and it's gone and become a best-seller! Steven Levitt is a University of Chicago economics professor who excels in asking questions others never think to pose such as, “If dealing crack is so profitable, why do most drug dealers live with their mothers?” and “Why do real estate agents leave their own houses on the market longer than the houses of their clients?”, then crunches the numbers to answer them, often with fascinating results. Co-author Stephen Dubner, who has written about Levitt's work for The New York Times Magazine, explains Levitt's methodologies in plain language that won't scare away readers inclined to be intimidated by terms such as “multiple regression analysis” and “confidence level”.

Topics run the gamut from correlation between the legalisation of abortion and a drop in the crime rate, cheating in sumo wrestling in Japan, tournament dynamics in advancement to managerial positions in the crack cocaine trade, Superman versus the Ku Klux Klan, the generation-long trajectory of baby names from prestigious to down-market, and the effects of campaign spending on the outcome of elections. In each case there are surprises in store, and sufficient background to understand where the results came from and the process by which they were obtained. The Internet has been a godsend for this kind of research: a wealth of public domain data in more or less machine-readable form awaits analysis by anybody curious about how it might fit together to explain something. This book is an excellent way to get your own mind asking such questions.

My only quibble with the book is the title: “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything.” The only thing freaky about Levitt's work is that so few other professional economists are using the tools of their profession to ask and answer such interesting and important questions. And as to “rogue economist”, that's a rather odd term for somebody with degrees from Harvard and MIT, who is a full professor in one of the most prestigious departments of economics in the United States, recipient of the Clark Medal for best American economist under forty, and author of dozens of academic publications in the leading journals. But book titles, after all, are marketing tools, and the way this book is selling, I guess the title is doing its job quite well, thank you. A web site devoted to the book contains additional information and New York Times columns by the authors containing additional analyses.

April 2006 Permalink

Lynn, Richard and Tatu Vanhanen. IQ and the Wealth of Nations. Westport, CT: Praeger, 2002. ISBN 0-275-97510-X.
Kofi Annan, Secretary General of the United Nations, said in April 2000 that intelligence “is one commodity equally distributed among the world's people”. But is this actually the case? Numerous studies of the IQ of the populations of various countries have been performed from the 1930s to the present and with few exceptions, large variations have been found in the mean IQs of countries—more than two standard deviations between the extremes—while different studies of the same population show remarkable consistency, and countries with similar populations in the same region of the world tend to have roughly the same mean IQ. Many social scientists believe that these results are attributable to cultural bias in IQ tests, or argue that IQ tests measure not intelligence, but rather proficiency in taking IQ tests, which various educational systems and environments develop to different degrees. The authors of this book accept the IQ test results at face value and pose the question, “Whatever IQ measures, how accurately does the average IQ of a country's population correlate with its economic success, measured both by per capita income and rate of growth over various historical periods?” From regression studies of 81 countries whose mean population IQ is known and 185 countries where IQ is known or estimated based on neighbouring countries, they find that IQ correlates with economic development better than any other single factor advanced in prior studies. IQ, in conjunction with a market economy and, to a lesser extent, democratic governance “explains” (in the strict sense of the square of the correlation coefficient) more than 50% of the variation in GDP per capita and other measures of economic development (of course, IQ, economic freedom, and democracy may not be independent variables). Now, correlation is not causation, but the evidence that IQ stabilises early in childhood and remains largely constant afterward allows one to rule out many potential kinds of influence by economic development on IQ, strengthening the argument for causation. If this is the case, the consequences for economic assistance are profound. For example, providing adequate nutrition during pregnancy and for children, which is known to substantially increase IQ, may not only be the humanitarian thing to do but could potentially promote economic progress more than traditional forms of development assistance. Estimating IQ and economic development for a large collection of disparate countries is a formidable challenge, and this work contains more correction, normalisation, and adjustment factors than a library full of physics research—close to half the book is data tables and source documentation, and non-expert readers cannot be certain that source data might not have been selected which tend to confirm the hypothesis and others excluded. But this is a hypothesis which can be falsified by further research, which would seem well-warranted. Scientists and policy makers must live in the real world and are ill advised to ignore aspects of it which make them uncomfortable. (If these comments move you to recommend Stephen Jay Gould's The Mismeasure of Man, you needn't—I've read it twice before I started keeping this list, and found it well-argued. But you may also want to weigh the points raised in J. Philippe Rushton's critique of Gould's book.)

March 2004 Permalink

Orlov, Dmitry. Reinventing Collapse. Gabriola Island, BC, Canada: New Society Publishers, 2008. ISBN 978-0-86571-606-3.
The author was born in Leningrad and emigrated to the United States with his family in the mid-1970s at the age of 12. He experienced the collapse of the Soviet Union and the subsequent events in Russia on a series of extended visits between the late 1980s and mid 1990s. In this book he describes firsthand what happens when a continental scale superpower experiences economic and societal collapse, what it means to those living through it, and how those who survived managed to do so, in some cases prospering amid the rubble.

He then goes on to pose the question of whether the remaining superpower, the United States, is poised to experience a collapse of the same magnitude. This he answers in the affirmative, with only the timing uncertain (these events tend to happen abruptly and with little warning—in 1985 virtually every Western analyst assumed the Soviet Union was a permanent fixture on the world stage; six years later it was gone). He presents a U.S. collapse scenario in the form of the following theorem on p. 3, based upon the axioms of “Peak Oil” and the unsustainability of the debt the U.S. is assuming to finance its oil imports (as well as much of the rest of its consumer economy and public sector).

Oil powers just about everything in the US economy, from food production and distribution to shipping, construction and plastics manufacturing. When less oil becomes available, less is produced, but the amount of money in circulation remains the same, causing the prices for the now scarcer products to be bid up, causing inflation. The US relies on foreign investors to finance its purchases of oil, and foreign investors, seeing high inflation and economic turmoil, flee in droves. Result: less money with which to buy oil and, consequently, less oil with which to produce things. Lather, rinse, repeat; stop when you run out of oil. Now look around: Where did that economy disappear to?
Now if you believe in Peak Oil (as the author most certainly does, along with most of the rest of the catechism of the environmental left), this is pretty persuasive. But even if you don't, you can make the case for a purely economic collapse, especially with the unprecedented deficits and money creation as the present process of deleveraging accelerates into debt liquidation (either through inflation or outright default and bankruptcy). The ultimate trigger doesn't make a great deal of difference to the central argument: the U.S. runs on oil (and has no near-term politically and economically viable substitute) and depends upon borrowed money both to purchase oil and to service its ever-growing debt. At the moment creditors begin to doubt they're every going to be repaid (as happened with the Soviet Union in its final days), it's game over for the economy, even if the supply of oil remains constant.

Drawing upon the Soviet example, the author examines what an economic collapse on a comparable scale would mean for the U.S. Ironically, he concludes that many of the weaknesses which were perceived as hastening the fall of the Soviet system—lack of a viable cash economy, hoarding and self-sufficiency at the enterprise level, failure to produce consumer goods, lack of consumer credit, no private ownership of housing, and a huge and inefficient state agricultural sector which led many Soviet citizens to maintain their own small garden plots— resulted, along with the fact that the collapse was from a much lower level of prosperity, in mitigating the effects of collapse upon individuals. In the United States, which has outsourced much of its manufacturing capability, depends heavily upon immigrants in the technology sector, and has optimised its business models around high-velocity cash transactions and just in time delivery, the consequences post-collapse may be more dire than in the “primitive” Soviet system. If you're going to end up primitive, you may be better starting out primitive.

The author, although a U.S. resident for all of his adult life, did not seem to leave his dark Russian cynicism and pessimism back in the USSR. Indeed, on numerous occasions he mocks the U.S. and finds it falls short of the Soviet standard in areas such as education, health care, public transportation, energy production and distribution, approach to religion, strength of the family, and durability and repairability of capital and the few consumer goods produced. These are indicative of what he terms a “collapse gap”, which will leave the post-collapse U.S. in much worse shape than ex-Soviet Russia: in fact he believes it will never recover and after a die-off and civil strife, may fracture into a number of political entities, all reduced to a largely 19th century agrarian lifestyle. All of this seems a bit much, and is compounded by offhand remarks about the modern lifestyle which seem to indicate that his idea of a “sustainable” world would be one largely depopulated of humans in which the remainder lived in communities much like traditional African villages. That's what it may come to, but I find it difficult to see this as desirable. Sign me up for L. Neil Smith's “freedom, immortality, and the stars” instead.

The final chapter proffers a list of career opportunities which proved rewarding in post-collapse Russia and may be equally attractive elsewhere. Former lawyers, marketing executives, financial derivatives traders, food chemists, bank regulators, university administrators, and all the other towering overhead of drones and dross whose services will no longer be needed in post-collapse America may have a bright future in the fields of asset stripping, private security (or its mirror image, violent racketeering), herbalism and medical quackery, drugs and alcohol, and even employment in what remains of the public sector. Hit those books!

There are some valuable insights here into the Soviet collapse as seen from the perspective of citizens living through it and trying to make the best of the situation, and there are some observations about the U.S. which will make you think and question assumptions about the stability and prospects for survival of the economy and society on its present course. But there are so many extreme statements you come away from the book feeling like you've endured an “end is nigh” rant by a wild-eyed eccentric which dilutes the valuable observations the author makes.

April 2009 Permalink

Orlov, Dmitry. The Five Stages of Collapse. Gabriola Island, BC, Canada: New Society Publishers, 2013. ISBN 978-0-86571-736-7.
The author was born in Leningrad and emigrated to the United States with his family in the mid-1970s at the age of 12. He experienced the collapse of the Soviet Union and the subsequent events in Russia on a series of extended visits between the late 1980s and mid 1990s. In his 2008 book Reinventing Collapse (April 2009) he described the Soviet collapse and assessed the probability of a collapse of the United States, concluding such a collapse was inevitable.

In the present book, he steps back from the specifics of the collapse of overextended superpowers to examine the process of collapse as it has played out in a multitude of human societies since the beginning of civilisation. The author argues that collapse occurs in five stages, with each stage creating the preconditions for the next.

  1. Financial collapse. Faith in “business as usual” is lost. The future is no longer assumed to resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out and access to capital is lost.
  2. Commercial collapse. Faith that “the market shall provide” is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down and widespread shortages of survival necessities become the norm.
  3. Political collapse. Faith that “the government will take care of you” is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.
  4. Social collapse. Faith that “your people will take care of you” is lost, as social institutions, be they charities or other groups that rush in to fill the power vacuum, run out of resources or fail through internal conflict.
  5. Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for “kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity.” Families disband and compete as individuals for scarce resources, The new motto becomes “May you die today so that I can die tomorrow.”

Orlov argues that our current globalised society is the product of innovations at variance with ancestral human society which are not sustainable: in particular the exponentially growing consumption of a finite source of energy from fossil fuels and an economy based upon exponentially growing levels of debt: government, corporate, and individual. Exponential growth with finite resources cannot go on forever, and what cannot go on forever is certain to eventually end. He argues that we are already seeing the first symptoms of the end of the order which began with the industrial revolution.

While each stage of collapse sows the seeds of the next, the progression is not inevitable. In post-Soviet Russia, for example, the collapse progressed into stage 3 (political collapse), but was then arrested by the re-assertion of government authority. While the Putin regime may have many bad aspects, it may produce better outcomes for the Russian people than progression into a stage 4 or 5 collapse.

In each stage of collapse, there are societies and cultures which are resilient against the collapse around them and ride it out. In some cases, it's because they have survived many collapses before and have evolved not to buy into the fragile institutions which are tumbling down and in others it's older human forms of organisation re-asserting themselves as newfangled innovations founder. The author cites these collapse survivors:

  1. Financial collapse: Iceland
  2. Commercial collapse: The Russian Mafia
  3. Political collapse: The Pashtun
  4. Social collapse: The Roma
  5. Cultural collapse: The Ik

This is a simultaneously enlightening and infuriating book. While the author has deep insights into how fragile our societies are and how older forms of society emerge after they collapse, I think he may make the error of assuming that we are living at the end of history and that regression to the mean is the only possible outcome. People at every stage of the development of society which brought us to the present point doubtless argued the same. “When we've cut down all the forests for firewood, what shall we do?” they said, before the discovery of coal. “When the coal seams are mined out, what will happen?” they said, before petroleum was discovered to be a resource, not a nuisance seeping from the ground. I agree with Orlov that our civilisation has been founded on abundant cheap energy and resources, but there are several orders of magnitude more energy and resources available for our taking in the solar system, and we already have the technology, if not the imagination and will, to employ them to enrich all of the people of Earth and beyond.

If collapse be our destiny, I believe our epitaph will read “Lack of imagination and courage”. Sadly, this may be the way to bet. Had we not turned inward in the 1970s and squandered our wealth on a futile military competition and petroleum, Earth would now be receiving most of its energy from solar power satellites and futurists would be projecting the date at which the population off-planet exceeded the mudboots deep down in the gravity well. Collapse is an option—let's hope we do not choose it.

Here is a talk by the author, as rambling as this book, about the issues discussed therein.

December 2013 Permalink

Paul, Ron. End the Fed. New York: Grand Central, 2000. ISBN 978-0-446-54919-6.
Imagine a company whose performance, measured over almost a century by the primary metric given in its charter, looked like this:

USD Purchasing Power 1913--2009

Now, would you be likely, were your own personal prosperity and that of all of those around you on the line, to entrust your financial future to their wisdom and demonstrated track record? Well, if you live in the United States, or your finances are engaged in any way in that economy (whether as an investor, creditor, or trade partner), you are, because this is the chart of the purchasing power of the United States Dollar since it began to be managed by the Federal Reserve System in 1913. Helluva record, don't you think?

Now, if you know anything about basic economics (which puts you several rungs up the ladder from most present-day politicians and members of the chattering classes), you'll recall that inflation is not defined as rising prices but rather an increase in the supply of money. It's just as if you were at an auction and you gave all of the bidders 10% more money: the selling price of the item would be 10% greater, not because it had appreciated in value but simply because the bidders had more to spend on acquiring it. And what is, fundamentally, the function of the Federal Reserve System? Well, that would be to implement an “elastic currency”, decoupled from real-world measures of value, with the goal of smoothing out the business cycle. Looking at this shorn of all the bafflegab, the mission statement is to create paper money out of thin air in order to fund government programs which the legislature lacks the spine to fund from taxation or debt, and to permit banks to profit by extending credit well beyond the limits of prudence, knowing they're backed up by the “lender of last resort” when things go South. The Federal Reserve System is nothing other than an engine of inflation (money creation), and it's hardly a surprise that the dollars it issues have lost more than 95% of their value in the years since its foundation.

Acute observers of the economic scene have been warning about the risks of such a system for decades—it came onto my personal radar well before there was a human bootprint on the Moon. But somehow, despite dollar crises, oil shocks, gold and silver bubble markets, saving and loan collapse, dot.bomb, housing bubble, and all the rest, the wise money guys somehow kept all of the balls in the air—until they didn't. We are now in the early days of an extended period in which almost a century of bogus prosperity founded on paper (not to mention, new and improved pure zap electronic) money and debt which cannot ever be repaid will have to be unwound. This will be painful in the extreme, and the profligate borrowers who have been riding high whilst running up their credit cards will end up marked down, not only in the economic realm but in geopolitical power.

Nobody imagines today that it would be possible, as Alan Greenspan envisioned in the days he was a member of Ayn Rand's inner circle, to abolish the paper money machine and return to honest money (or, even better, as Hayek recommended, competing moneys, freely interchangeable in an open market). But then, nobody imagines that the present system could collapse, which it is in the process of doing. The US$ will continue its slide toward zero, perhaps with an inflection point in the second derivative as the consequences of “bailouts” and “stimuli” kick in. The Euro will first see risk premiums increase across sovereign debt issued by Eurozone nations, and then the weaker members drop out to avoid the collapse of their own economies. No currency union without political union has ever survived in the long term, and the Euro is no exception.

Will we finally come to our senses and abandon this statist paper in favour of the mellow glow of gold? This is devoutly to be wished, but I fear unlikely in my lifetime or even in those of the koi in my pond. As long as politicians can fiddle with the money in order to loot savers and investors to fund their patronage schemes and line their own pockets they will: it's been going on since Babylon, and it will probably go to the stars as we expand our dominion throughout the universe. One doesn't want to hope for total economic and societal collapse, but that appears to be the best bet for a return to honest and moral money. If that's your wish, I suppose you can be heartened that the present administration in the United States appears bent upon that outcome. Our other option is opting out with technology. We have the ability today to electronically implement Hayek's multiple currency system online. This has already been done by ventures such as e-gold, but The Man has, to date, effectively stomped upon them. It will probably take a prickly sovereign state player to make this work. Hello, Dubai!

Let me get back to this book. It is superb: read it and encourage all of your similarly-inclined friends to do the same. If they're coming in cold to these concepts, it may be a bit of a shock (“You mean, the government doesn't create money?”), but there's a bibliography at the end with three levels of reading lists to bring people up to speed. Long-term supporters of hard money will find this mostly a reinforcement of their views, but for those experiencing for the first time the consequences of rapidly depreciating dollars, this will be an eye-opening revelation of the ultimate cause, and the malignant institution which must be abolished to put an end to this most pernicious tax upon the most prudent of citizens.

October 2009 Permalink

Pollan, Michael. The Omnivore's Dilemma. New York: Penguin Press, 2006. ISBN 978-0-14-303858-0.
One of the delights of operating this site is the opportunity to interact with visitors, whom I am persuaded are among the most interesting and informed of any audience on the Web. The feedback messages and book recommendations they send are often thought-provoking and sometimes enlightening. I don't know who I have to thank for recommending this book, but I am very grateful they took the time to do so, as it is a thoroughly fascinating look at the modern food chain in the developed world, and exploration of alternatives to it.

The author begins with a look at the “industrial” food chain, which supplies the overwhelming majority of calories consumed on the planet today. Prior to the 20th century, agriculture was almost entirely powered by the Sun. It was sunlight that drove photosynthesis in plants, providing both plant crops and the feed for animals, including those used to pull ploughs and transport farm products to market. The invention of the Haber process in 1909 and its subsequent commercialisation on an industrial scale forever changed this. No longer were crop yields constrained by the amount of nitrogen which could be fixed from the air by bacteria symbiotic with the roots of legume crops, recycled onto fields in the manure and urine of animals, or harvested from the accumulated droppings birds in distant places, but rather able to be dramatically increased by the use of fertiliser whose origin traced back to the fossil fuel which provided the energy to create it. Further, fossil fuel insinuated itself into agriculture in other ways, with the tractor replacing the work of farm hands and draught animals; railroads, steam ships, trucks, and aircraft expanding the distance between production on a farm and consumption to the global scale; and innovations such as refrigeration increasing the time from harvest to use.

All of these factors so conspired to benefit the species Zea mays (which Americans call “corn” and everybody else calls “maize”) that one could craft a dark but plausible science fiction story in which that species of grass, highly modified by selective breeding by indigenous populations in the New World, was actually the dominant species on Earth, having first motivated its modification from the ancestral form to a food plant ideally suited to human consumption, then encouraged its human servants to spread it around the world, develop artificial nutrients and pesticides to allow it to be grown in a vast monoculture, eradicating competitors in its path, and becoming so central to modern human nutrition that trying to eliminate it (or allowing a natural threat to befall it) would condemn billions of humans to starvation. Once you start to think this way, you'll never regard that weedless field of towering corn stretching off to the horizon in precisely the same way….

As the author follows the industrial food chain from a farm in the corn belt to the “wet mill” in which commodity corn is broken down into its molecular constituents and then reassembled into the components of processed food, and to the feedlot, where corn products are used to “finish” meat animals which evolved on a different continent from Zea mays and consequently require food additives and constant medication simply to metabolise this foreign substance, it becomes clear that maize is not a food, but rather a feedstock (indeed, the maize you buy in the supermarket to eat yourself is not this industrial product, but rather “sweet corn” produced entirely separately), just as petroleum is used in the plastics industry. Or the food industry—when you take into account fertiliser, farm machinery, and transportation, more than one calorie of fossil fuel is consumed to produce a calorie of food energy in maize. If only we could make Twinkies directly from crude oil….

All of this (and many things I've elided here in the interest of brevity [Hah! you say]) may persuade you to “go organic” and pay a bit more for those funky foods with the labels showing verdant crops basking in the Sun, contented cows munching grass in expansive fields, and chickens being chickens, scratching for bugs at liberty. If you're already buying these “organic” products and verging on the sin of smugness for doing so, this is not your book—or maybe it is. The author digs into the “industrial organic” state of the art and discovers that while there are certainly benefits to products labelled “organic” (no artificial fertilisers or pesticides, for example, which certainly benefit the land if not the product you buy), the U.S. Department of Agriculture (the villain throughout) has so watered down the definition of “organic” that most products with that designation come from “organic” factory farms, feedlots, and mass poultry confinement facilities. As usual, when the government gets involved, the whole thing is pretty much an enormous scam, which is ultimately damaging to those who are actually trying to provide products with a sustainable solar-powered food chain which respects the land and the nature of the animals living on it.

In the second section of the book, the author explores this alternative by visiting Polyface Farms in Virginia, which practices “grass farming” and produces beef, pork, chickens and eggs, turkeys, rabbits, and forest products for its local market in Virginia. The Salatin family, who owns and operates the farm, views its pastures as a giant solar collector, turning incident sunlight along with water collected by the surrounding forest into calories which feed their animals. All of the animal by-products (even the viscera and blood of chickens slaughtered on site) are recycled into the land. The only outside inputs into the solar-powered cycle are purchased chicken feed, since grass, grubs, and bugs cannot supply adequate energy for the chickens. (OK, there are also inputs of fuel for farm machinery and electricity for refrigeration and processing, but since the pastures are never ploughed, these are minimal compared to a typical farm.)

Polyface performs not only intensive agriculture, but what Salatin calls “management intensive” farming—an information age strategy informed by the traditional ecological balance between grassland, ruminants, and birds. The benefit is not just to the environment, but also in the marketplace. A small holding with only about 100 acres under cultivation is able to support an extended family, produce a variety of products, and by their quality attract customers willing to drive as far as 150 miles each way to buy them at prices well above those at the local supermarket. Anybody who worries about a possible collapse of the industrial food chain and has provided for that contingency by acquiring a plot of farm land well away from population centres will find much to ponder here. Remember, it isn't just about providing for your family and others on the farm: if you're providing food for your community, they're far more likely to come to your defence when the starving urban hordes come your way to plunder.

Finally, the author seeks to shorten his personal food chain to the irreducible minimum by becoming a hunter-gatherer. Overcoming his blue state hoplophobia and handed down mycophobia, he sets out to hunt a feral pig in Sonoma County, California and gather wild mushrooms and herbs to accompany the meal. He even “harvests” cherries from a neighbour's tree overhanging a friend's property in Berkeley under the Roman doctrine of usufruct and makes bread leavened with yeast floating in the air around his house. In doing so, he discovers that there is something to what he had previously dismissed as purple prose in accounts of hunters, and that there is a special satisfaction and feeling of closing the circle in sharing a meal with friends in which every dish was directly obtained by them, individually or in collaboration.

This exploration of food: its origins, its meaning to us, and its place in our contemporary civilisation, makes clear the many stark paradoxes of our present situation. It is abundantly clear that the industrial food chain is harmful to the land, unsustainable due to dependence on finite resources, cruel to animals caught up in it, and unhealthy in many ways to those who consume its products. And yet abandoning it in favour of any of the alternatives presented here would result in a global famine which would make the Irish, Ukrainian, and Chinese famines of the past barely a blip on the curve. Further, billions of the Earth's inhabitants today can only dream of the abundance, variety, and affordability (in terms of hours worked to provide one's food needs) of the developed world diet. And yet at the same time, when one looks at the epidemic of obesity, type 2 diabetes, and other metabolic disorders among corn-fed populations, you have to wonder whether Zea mays is already looking beyond us and plotting its next conquest.

April 2012 Permalink

Postrel, Virginia. The Future and Its Enemies. New York: Touchstone Books, 1998. ISBN 0-684-86269-7.
Additional references, updates, and a worth-visiting blog related to the topics discussed in this book are available at the author's Web site, www.dynamist.com.

March 2003 Permalink

Powell, Jim. FDR's Folly. New York: Crown Forum, 2003. ISBN 0-7615-0165-7.

May 2004 Permalink

Rand, Ayn. Atlas Shrugged. New York: Dutton, [1957, 1992] 2005. ISBN 978-0-525-94892-6.
There is nothing I could possibly add by way of commentary on this novel, a classic of twentieth century popular fiction, one of the most discussed books of the epoch, and, more than fifty years after publication, still (at this writing) in the top two hundred books by sales rank at Amazon.com. Instead, I will confine my remarks to my own reactions upon reading this work for the third time and how it speaks to events of the present day.

I first read Atlas Shrugged in the summer of that most eventful year, 1968. I enjoyed it immensely, finding it not just a gripping story, but also, as Rand intended, a thorough (and in some ways, too thorough) exposition of her philosophy as glimpsed in The Fountainhead, which I'd read a few years earlier. I took it as an allegorical story about the pernicious effects and ultimate consequences of collectivism and the elevation of altruism over self-interest and need above earned rewards, but viewed the world in which it was set and the events which occurred there much as I did those of Orwell's 1984 and Heinlein's If This Goes On—: a cautionary tale showing the end point of trends visible in the contemporary world. But the world of Atlas Shrugged, like those of Orwell and Heinlein, seemed very remote from that of 1968—we were going to the Moon, and my expectations for the future were more along the lines of 2001 than Rand's dingy and decaying world. Also, it was 1968, for Heaven's sake, and I perceived the upheavals of the time (with a degree of naïveté and wrongheadedness I find breathtaking at this remove) as a sovereign antidote to the concentration of power and oppression of the individual, which would set things aright long before productive people began to heed Galt's call to shed the burden of supporting their sworn enemies.

My next traverse through Atlas Shrugged was a little before 1980. The seventies had taken a lot of the gloss off the bright and shiny 1968 vision of the future, and having run a small business for the latter part of that sorry decade, the encroachment of ever-rising taxes, regulation, and outright obstruction by governments at all levels was very much on my mind, which, along with the monetary and financial crises created by those policies plus a rising swamp of mysticism, pseudoscience, and the ascendant anti-human pagan cult of environmentalism, made it entirely plausible to me that the U.S. might tip over into the kind of accelerating decline described in the middle part of the novel. This second reading of the book left me with a very different impression than the first. This time I could see, from my own personal experience and in the daily news, precisely the kind of events foreseen in the story. It was no longer a cautionary tale but instead a kind of hitch-hiker's guide to the road to serfdom. Curiously, this reading the book caused me to shrug off the funk of demoralisation and discouragement and throw myself back into the entrepreneurial fray. I believed that the failure of collectivism was so self-evident that a turning point was at hand, and the landslide election of Reagan shortly thereafter appeared to bear this out. The U.S. was committed to a policy of lower taxes, rolling back regulations, standing up to aggressive collectivist regimes around the world, and opening the High Frontier with economical, frequent, and routine access to space (remember that?). While it was hardly the men of the mind returning from Galt's Gulch, it was good enough for me, and I decided to make the best of it and contribute what I could to what I perceived as the turnaround. As a footnote, it's entirely possible that if I hadn't reread Atlas Shrugged around this time, I would have given up on entrepreneurship and gone back to work for the Man—so in a way, this book was in the causal tree which led to Autodesk and AutoCAD. In any case, although working myself to exhaustion and observing the sapping of resources by looters and moochers after Autodesk's initial public stock offering in 1985, I still felt myself surfing on a wave of unbounded opportunity and remained unreceptive to Galt's pitch in 1987. In 1994? Well….

What with the eruption of the most recent financial crisis, the veer toward the hard left in the United States, and increasing talk of productive people opting to “go Galt”, I decided it was time for another pass through Atlas Shrugged, so I started reading it for the third time in early April 2010 and finished it in a little over two weeks, including some marathon sessions where I just didn't want to put it down, even though I knew the characters, principal events, and the ending perfectly well. What was different, and strikingly so, from the last read three decades ago, was how astonishingly prescient this book, published in 1957, was about events unfolding in the world today. As I noted above, in 1968 I viewed it as a dystopia set in an unspecified future. By 1980, many of the trends described in the book were clearly in place, but few of their ultimate dire consequences had become evident. In 2010, however, the novel is almost like reading a paraphrase of the history of the last quarter century. “Temporary crises”, “states of emergency”, “pragmatic responses”, calls to “sacrifice for the common good” and to “share the wealth” which seemed implausible then are the topics of speeches by present day politicians and news headlines. Further, the infiltration of academia and the news media by collectivists, their undermining the language and (in the guise of “postmodernism”) the foundations of rational thought and objective reality, which were entirely beneath the radar (at least to me) as late as 1980, are laid out here as clear as daylight, with the simultaneously pompous and vaporous prattling of soi-disant intellectuals which doubtless made the educated laugh when the book first appeared now having become commonplace in the classrooms of top tier universities and journals of what purport to be the humanities and social sciences. What once seemed a fantastic nightmare painted on a grand romantic canvas is in the process of becoming a shiveringly accurate prophecy.

So, where are we now? Well (if you'll allow me to use the word) objectively, I found the splice between our real-life past and present to be around the start of chapter 5 of part II, “Account Overdrawn”. This is about 500 pages into the hardback edition of 1168 pages, or around 40%. Obviously, this is the crudest of estimates—many things occur before that point which haven't yet in the real world and many afterward have already come to pass. Yet still, it's striking: who would have imagined piracy on the high seas to be a headline topic in the twenty-first century? On this reading I was also particularly struck by chapter 8 of part III, “The Egoist” (immediately following Galt's speech), which directly addresses a question I expect will soon intrude into the public consciousness: the legitimacy or lack thereof of nominally democratic governments. This is something I first wrote about in 1988, but never expected to actually see come onto the agenda. A recent Rasmussen poll, however, finds that just 21% of voters in the United States now believe that their federal government has the “consent of the governed”. At the same time, more than 40% of U.S. tax filers pay no federal income tax at all, and more than a majority receive more in federal benefits than they pay in taxes. The top 10% of taxpayers (by Adjusted Gross Income) pay more than 70% of all personal income taxes collected. This makes it increasingly evident that the government, if not already, runs the risk of becoming a racket in which the non-taxpaying majority use the coercive power of the state to shake down a shrinking taxpaying minority. This is precisely the vicious cycle which reaches its endpoint in this chapter, where the government loses all legitimacy in the eyes of not only its victims, but even its beneficiaries and participants. I forecast that should this trend continue (and that's the way to bet), within two years we will see crowds of people in the U.S. holding signs demanding “By what right?”.

In summary, I very much enjoyed revisiting this classic; given that it was the third time through and I don't consider myself to have changed all that much in the many years since the first time, this didn't come as a surprise. What I wasn't expecting was how differently the story is perceived based on events in the real world up to the time it's read. From the current perspective, it is eerily prophetic. It would be amusing to go back and read reviews at the time of its publication to see how many anticipated that happening. The ultimate lesson of Atlas Shrugged is that the looters subsist only by the sanction of their victims and through the product of their minds, which cannot be coerced. This is an eternal truth, which is why this novel, which states it so clearly, endures.

The link above is to the hardbound “Centennial Edition”. There are trade paperback, mass market paperback, and Kindle editions available as well. I'd avoid the mass market paperback, as the type is small and the spines of books this thick tend to disintegrate as you read them. At current Amazon prices, the hardcover isn't all that much more than the trade paperback and will be more durable if you plan to keep it around or pass it on to others. I haven't seen the Kindle transfer; if it's well done, it would be marvellous, as any print edition of this book is more than a handful.

April 2010 Permalink

Rickards, James. Currency Wars. New York: Portfolio / Penguin, 2011. ISBN 978-1-591-84449-5.
Debasement of currency dates from antiquity (and doubtless from prehistory—if your daughter's dowry was one cow and three goats, do you think you'd choose them from the best in your herd?), but currency war in the modern sense first emerged in the 20th century in the aftermath of World War I. When global commerce—the first era of globalisation—became established in the 19th century, most of the trading partners were either on the gold standard or settled their accounts in a currency freely convertible to gold, with the British pound dominating as the unit of account in international trade. A letter of credit financing a shipload of goods exported from Argentina to Italy could be written by a bank in London and traded by an investor in New York without any currency risk during the voyage because all parties denominated the transaction in pounds sterling, which the Bank of England would exchange for gold on demand. This system of global money was not designed by “experts” nor managed by “maestros”—it evolved organically and adapted itself to the needs of its users in the marketplace.

All of this was destroyed by World War I. As described here, and in more detail in Lords of Finance (August 2011), in the aftermath of the war all of the European powers on both sides had expended their gold and foreign exchange reserves in the war effort, and the United States had amassed a large fraction of all of the gold in the world in its vaults and was creditor in chief to the allies to whom, in turn, Germany owed enormous reparation payments for generations to come. This set the stage for what the author calls Currency War I, from 1921 through 1936, in which central bankers attempted to sort out the consequences of the war, often making disastrous though well-intentioned decisions which, arguably, contributed to a decade of pre-depression malaise in Britain, the U.S. stock market bubble and 1929 crash, the Weimar Germany hyperinflation, and its aftermath which contributed to the rise of Hitler.

At the end of World War II, the United States was in an even more commanding position than at the conclusion of the first war. With Europe devastated, it sat on an even more imposing hoard of gold, and when it convened the Bretton Woods conference in 1944, with the war still underway, despite the conference's list of attendees hailing from 44 allied nations, it was clear that the Golden Rule applied: he who has the gold makes the rules. Well, the U.S. had the gold, and the system adopted at the conference made the U.S. dollar central to the postwar monetary system. The dollar was fixed to gold at the rate of US$35/troy ounce, with the U.S. Treasury committed to exchanging dollars for gold at that rate in unlimited quantities. All other currencies were fixed to the dollar, and hence indirectly to gold, so that except in the extraordinary circumstance of a revaluation against the dollar, exchange rate risk would not exist. While the Bretton Woods system was more complex than the pre-World War I gold standard (in particular, it allowed central banks to hold reserves in other paper currencies in addition to gold), it tried to achieve the same stability in exchange rates as the pure gold standard.

Amazingly, this system, the brainchild of Soviet agent Harry Dexter White and economic charlatan John Maynard Keynes, worked surprisingly well until the late 1960s, when profligate deficit spending by the U.S. government began to cause foreign holders of an ever-increasing pile of dollars to trade them in for the yellow metal. This was the opening shot in what the author deems Currency War II, which ran from 1967 through 1987, ending in the adoption of the present system of floating exchange rates among currencies backed by nothing whatsoever.

The author believes we are now in the initial phase of Currency War III, in which a perfect storm of unsustainable sovereign debt, economic contraction, demographic pressure on social insurance schemes, and trade imbalances creates the preconditions for the kind of “beggar thy neighbour” competitive devaluations which characterised Currency War I. This is, in effect, a race to the bottom with each unanchored paper currency trying to become cheaper against the others to achieve a transitory export advantage. But, of course, as a moment's reflection will make evident, with currencies decoupled from any tangible asset, the only limit in a race to the bottom is zero, and in a world where trillions of monetary units can be created by the click of a mouse without even the need to crank up the printing press, this funny money is, in the words of Gerald Celente, “not worth the paper it isn't printed on”.

In financial crises, there is a progression from:

  1. Currency war
  2. Trade war
  3. Shooting war

Currency War I led to all three phases. Currency War II was arrested at the “trade war” step, although had the Carter administration and Paul Volcker not administered the bitter medicine to the U.S. economy to extirpate inflation, it's entirely possible a resource war to seize oil fields might have ensued. Now we're in Currency War III (this is the author's view, with which I agree): where will it go from here? Well, nobody knows, and the author is the first to acknowledge that the best a forecaster can do is to sketch a number of plausible scenarios which might play out depending upon precipitating events and the actions of decision makers in time of crisis. Chapter 11 (how appropriate!) describes the four scenarios Rickards sees as probable outcomes and what they would mean for investors and companies engaged in international trade. Some of these may be breathtaking, if not heart-stopping, but as the author points out, all of them are grounded in precedents which have already occurred in the last century.

The book begins with a chilling wargame in which the author participated. Strategic planners often remain stuck counting ships, troops, and tanks, and forget that all of these military assets are worthless without the funds to keep them operating, and that these assets are increasingly integrated into a world financial system whose complexity (and hence systemic risk, either to an accidental excursion or a deliberate disruption) is greater than ever before. Analyses of the stability of global finance often assume players are rational and therefore would not act in a way which was ultimately damaging to their own self interest. This is ominously reminiscent of those who, as late as the spring of 1914, forecast that a general conflict in Europe was unthinkable because it would be the ruin of all of the combatants. Indeed, it was, and yet still it happened.

The Kindle edition has the table of contents and notes properly linked, but the index is just a list of unlinked terms.

November 2011 Permalink

Rickards, James. The Death of Money. New York: Portfolio / Penguin, 2014. ISBN 978-1-591-84670-3.
In his 2011 book Currency Wars (November 2011), the author discusses what he sees as an inevitable conflict among fiat currencies for dominance in international trade as the dollar, debased as a result of profligate spending and assumption of debt by the government that issues it, is displaced as the world's preeminent trading and reserve currency. With all currencies backed by nothing more than promises made by those who issue them, the stage is set for a race to the bottom: one government weakens its currency to obtain short-term advantage in international trade, only to have its competitors devalue, setting off a chain of competitive devaluations which disrupt trade, cause investment to be deferred due to uncertainty, and destroy the savings of those holding the currencies in question. In 2011, Rickards wrote that it was still possible to avert an era of currency war, although that was not the way to bet. In this volume, three years later, he surveys the scene and concludes that we are now in the early stages of a collapse of the global monetary system, which will be replaced by something very different from the status quo, but whose details we cannot, at this time, confidently predict. Investors and companies involved in international commerce need to understand what is happening and take steps to protect themselves in the era of turbulence which is ahead.

We often speak of “globalisation” as if it were something new, emerging only in recent years, but in fact it is an ongoing trend which dates from the age of wooden ships and sail. Once ocean commerce became practical in the 18th century, comparative advantage caused production and processing of goods to be concentrated in locations where they could be done most efficiently, linked by the sea lanes. This commerce was enormously facilitated by a global currency—if trading partners all used their own currencies, a plantation owner in the West Indies shipping sugar to Great Britain might see his profit wiped out if the exchange rate between his currency and the British pound changed by the time the ship arrived and he was paid. From the dawn of global trade to the present there has been a global currency. Initially, it was the British pound, backed by gold in the vaults of the Bank of England. Even commerce between, say, Argentina and Italy, was usually denominated in pounds and cleared through banks in London. The impoverishment of Britain in World War I began a shift of the centre of financial power from London to New York, and after World War II the Bretton Woods conference established the U.S. dollar, backed by gold, as the world's reserve and trade currency. The world continued to have a global currency, but now it was issued in Washington, not London. (The communist bloc did not use dollars for trade within itself, but conducted its trade with nations outside the bloc in dollars.) In 1971, the U.S. suspended the convertibility of the dollar to gold, and ever since the dollar has been entirely a fiat currency, backed only by the confidence of those who hold it that they will be able to exchange it for goods in the future.

The international monetary system is now in a most unusual period. The dollar remains the nominal reserve and trade currency, but the fraction of reserves held and trade conducted in dollars continues to fall. All of the major currencies: the dollar, euro, yen, pound, yuan, rouble—are pure fiat currencies unbacked by any tangible asset, and valued only against one another in ever-shifting foreign exchange markets. Most of these currencies are issued by central banks of governments which have taken on vast amounts of debt which nobody in their right mind believes can ever be paid off, and is approaching levels at which even a modest rise in interest rates to historical mean levels would make the interest on the debt impossible to service. There is every reason for countries holding large reserves of dollars to be worried, but there isn't any other currency which looks substantially better as an alternative. The dollar is, essentially, the best horse in the glue factory.

The author argues that we are on the threshold of a collapse of the international monetary system, and that the outlines of what will replace it are not yet clear. The phrase “collapse of the international monetary system” sounds apocalyptic, but we're not talking about some kind of Mad Max societal cataclysm. As the author observes, the international monetary system collapsed three times in the last century: in 1914, 1939, and 1971, and life went on (albeit in the first two cases, with disastrous and sanguinary wars), and eventually the financial system was reconstructed. There were, in each case, winners and losers, and investors who failed to protect themselves against these turbulent changes paid dearly for their complacency.

In this book, the author surveys the evolving international financial scene. He comes to conclusions which may surprise observers from a variety of perspectives. He believes the Euro is here to stay, and that its advantages to Germany coupled with Germany's economic power will carry it through its current problems. Ultimately, the countries on the periphery will consider the Euro, whatever its costs to them in unemployment and austerity, better than the instability of their national currencies before joining the Eurozone. China is seen as the victim of its own success, with financial warlords skimming off the prosperity of its rapid growth, aided by an opaque and deeply corrupt political class. The developing world is increasingly forging bilateral agreements which bypass the dollar and trade in their own currencies.

What is an investor to do faced with such uncertainty? Well, that's far from clear. The one thing one shouldn't do is assume the present system will persist until you're ready to retire, and invest your retirement savings entirely on the assumption nothing will change. Fortunately, there are alternative investments (for example, gold and silver, farm land, fine art, funds investing in natural resources, and, yes, cash in a variety of currencies [to enable you to pick up bargains when other assets crater]) which will appreciate enormously when the monetary system collapses. You don't have to (and shouldn't) bet everything on a collapse: a relatively small hedge against it will protect you should it happen.

This is an extensively researched and deep investigation of the present state of the international monetary system. As the author notes, ever since all currencies were severed from gold in 1971 and began to float against one another, the complexity of the system has increased enormously. What were once fixed exchange rates, adjusted only when countries faced financial crisis, have been replaced by exchange rates which change in milliseconds, with a huge superstructure of futures, options, currency swaps, and other derivatives whose notional value dwarfs the actual currencies in circulation. This is an immensely fragile system which even a small perturbation can cause to collapse. Faced with a risk whose probability and consequences are impossible to quantify, the prudent investor takes steps to mitigate it. This book provides background for developing such a plan.

June 2014 Permalink

Roberts, Russell. The Invisible Heart: An Economic Romance. Cambridge, MA: MIT Press, 2001. ISBN 0-262-18210-6.

November 2001 Permalink

Shlaes, Amity. The Forgotten Man. New York: Harper Perennial, [2007] 2008. ISBN 978-0-06-093642-6.
The conventional narrative of the Great Depression and New Deal is well-defined, and generations have been taught the story of how financial hysteria and lack of regulation led to the stock market crash of October 1929, which tipped the world economy into depression. The do-nothing policies of Herbert Hoover and his Republican majority in Congress allowed the situation to deteriorate until thousands of banks had failed, unemployment rose to around a quarter of the work force, collapsing commodity prices bankrupted millions of farmers, and world trade and credit markets froze, exporting the Depression from the U.S. to developed countries around the world. Upon taking office in 1932, Franklin Roosevelt embarked on an aggressive program of government intervention in the economy, going off the gold standard, devaluing the dollar, increasing government spending and tax rates on corporations and the wealthy by breathtaking amounts, imposing comprehensive regulation on every aspect of the economy, promoting trade unions, and launching public works and job creation programs on a massive scale. Although neither financial markets nor unemployment recovered to pre-crash levels, and full recovery did not occur until war production created demand for all industry could produce, at least FDR's New Deal kept things from getting much worse, kept millions from privation and starvation, and just possibly, by interfering with the free market in ways never before imagined in America, preserved it, and democracy, from the kind of revolutionary upheaval seen in the Soviet Union, Italy, Japan, and Germany. The New Deal pitted plutocrats, big business, and Wall Street speculators against the “forgotten man”—the people who farmed their land, toiled in the factories, and strove to pay their bills and support their families and, for once, allied with the Federal Government, the little guys won.

This is a story of which almost any student having completed an introductory course in American history can recount the key points. It is a tidy story, an inspiring one, and both a justification for an activist government and demonstration that such intervention can work, even in the most dire of economic situations. But is it accurate? In this masterful book, based largely on primary and often contemporary sources, the author makes a forceful argument that is is not—she does not dispute the historical events, most of which did indeed occur as described above, but rather the causal narrative which has been erected, largely after the fact, to explain them. Looking at what actually happened and when, the tidily wrapped up package begins to unravel and discordant pieces fall out.

For example, consider the crash of 1929. Prior to the crash, unemployment was around three percent (the Federal Government did not compile unemployment figures at the time, and available sources differ in methodology and hence in the precise figures). Following the crash, unemployment began to rise steeply and had reached around 9% by the end of 1929. But then the economy began to recover and unemployment fell. President Hoover was anything but passive: the Great Engineer launched a flurry of initiatives, almost all disastrously misguided. He signed the Hawley-Smoot Tariff (over the objection of an open letter signed by 1,028 economists and published in the New York Times). He raised taxes and, diagnosing the ills of the economy as due to inflation, encouraged the Federal Reserve to contract the money supply. To counter falling wages, he jawboned industry leaders to maintain wage levels which predictably resulted in layoffs instead of reduced wages. It was only after these measures took hold that the economy, which before seemed to be headed into a 1921-like recession, nosed over and began to collapse toward the depths of the Depression.

There was a great deal of continuity between the Hoover and early Roosevelt administrations. Roosevelt did not rescind Hoover's disastrous policies, but rather piled on intrusive regulation of agriculture and industry, vastly increased Federal spending (he almost doubled the Federal budget in his first term), increased taxes to levels before unimaginable in peacetime, and directly attacked private enterprise in sectors such as electrical power generation and distribution, which he felt should be government enterprises. Investment, the author contends, is the engine of economic recovery, and Roosevelt's policies resulted in a “capital strike” (a phrase used at the time), as investors weighed their options and decided to sit on their money. Look at this way: suppose you're a plutocrat and have millions at your disposal. You can invest them in a business, knowing that if the business fails you're out your investment, but that if it generates a profit the government will tax away more than 75% of your gains. Or, you can put your money in risk- and tax-free government bonds and be guaranteed a return. Which would you choose?

The story of the Great Depression is told largely by following a group of individuals through the era. Many of the bizarre aspects of the time appear here: Father Divine; businesses and towns printing their own scrip currency; the Schechter Brothers kosher poultry butchers taking on FDR's NRA and utterly defeating it in the Supreme Court; the prosecution of Andrew Mellon, Treasury Secretary to three Presidents, for availing himself of tax deductions the government admitted were legal; and utopian “planned communities” such as Casa Grande in Arizona, where displaced farmers found themselves little more than tenants in a government operation resembling Stalin's collective farms.

From the tone of some of the reaction to the original publication of this book, you might think it a hard-line polemic longing to return to the golden days of the Coolidge administration. It is nothing of the sort. This is a fact-based re-examination of the Great Depression and the New Deal which, better than any other book I've read, re-creates the sense of those living through it, when nobody really understood what was happening and people acting with the best of intentions (and the author imputes nothing else to either Hoover or Roosevelt) could not see what the consequences of their actions would be. In fact, Roosevelt changed course so many times that it is difficult to discern a unifying philosophy from his actions—sadly, this very pragmatism created an uncertainty in the economy which quite likely lengthened and deepened the Depression. This paperback edition contains an afterword in which the author responds to the principal criticisms of the original work.

It is hard to imagine a more timely book. Since this book was published, the U.S. have experienced a debt crisis, real estate bubble collapse, sharp stock market correction, rapidly rising unemployment and economic contraction, with an activist Republican administration taking all kinds of unprecedented actions to try to avert calamity. A Democratic administration, radiating confidence in itself and the power of government to make things better, is poised to take office, having promised programs in its electoral campaign which are in many ways reminiscent of those enacted in FDR's “hundred days”. Apart from the relevance of the story to contemporary events, this book is a pure delight to read.

December 2008 Permalink

Sowell, Thomas. Basic Economics. 2nd. ed. New York: Basic Books, [2004] 2007. ISBN 978-0-465-08145-5.
Want to know what's my idea of a financial paradise? A democratic country where the electorate understands the material so lucidly explained in this superb book. Heck, I'd settle for a country where even a majority of the politicians grasped these matters. In fewer than four hundred pages, without a single graph or equation, the author explains the essentials of economics, which he defines as “the study of the use of scarce resources which have alternative uses”. While economics is a large and complex field with many different points of view, he argues that there are basic economic principles upon which virtually all economists agree, across the spectrum from libertarians to Marxists, that these fundamentals apply to all forms of economic and social organisation—feudalism, capitalism, fascism, socialism, communism, whatever—and in all times: millennia of human history provide abundant evidence for the functioning of these basic laws in every society humans have ever created.

But despite these laws being straightforward (if perhaps somewhat counterintuitive until you learn to “think like an economist”), the sad fact is that few citizens and probably even a smaller fraction of politicians comprehend them. In their ignorance, they confuse intentions and goals (however worthy) with incentives and their consequences, and the outcomes of their actions, however predictable, only serve to illustrate the cost when economic principles are ignored. As the author concludes on the last page:

Perhaps the most important distinction is between what sounds good and what works. The former may be sufficient for purposes of politics or moral preening, but not for the economic advancement of people in general or the poor in particular. For those willing to stop and think, basic economics provides some tools for evaluating policies and proposals in terms of their logical implications and empirical consequences.

And this is precisely what the intelligent citizen needs to know in these times of financial peril. I know of no better source to acquire such knowledge than this book.

I should note that due to the regrettably long bookshelf latency at Fourmilab, I read the second edition of this work after the third edition became available. Usually I wouldn't bother to mention such a detail, but while the second edition I read was 438 pages in length, the third is a 640 page ker-whump on the desktop. Now, my experience in reading the works of Thomas Sowell over the decades is that he doesn't waste words and that every paragraph encapsulates wisdom that's worth taking away, even if you need to read it four or five times over a few days to let it sink in. But still, I'm wary of books which grow to such an extent between editions. I read the second edition, and my unconditional endorsement of it as something you absolutely have to read as soon as possible is based upon the text I read. In all probability the third edition is even better—Dr. Sowell understands the importance of reputation in a market economy better than almost anybody, but I can neither evaluate nor endorse something I haven't yet read. That said, I'm confident that regardless of which edition of this book you read, you will close it as a much wiser citizen of a civil society and participant in a free economy than when you opened the volume.

September 2008 Permalink

Sowell, Thomas. The Housing Boom and Bust. 2nd. ed. New York: Basic Books, [2009] 2010. ISBN 978-0-465-01986-1.
If you rely upon the statist legacy media for information regarding the ongoing financial crisis triggered by the collapse of the real estate bubble in certain urban markets in the United States, everything you know is wrong. This book is a crystal-clear antidote to the fog of disinformation emanating from the politicians and their enablers in media and academia.

If, as five or six people still do, you pay attention to the legacy media in the United States, you'll hear that there was a nationwide crisis in the availability of affordable housing, and that government moved to enable more people to become homeowners. The lack of regulation caused lenders to make risky loans and resell them as “toxic assets” which nobody could actually value, and these flimsy pieces of paper were sold around the world as if they were really worth something.

Everything you know is wrong.

In fact, there never was a nationwide affordable housing crisis. The percentage of family income spent on housing nationwide fell in the nineties and oughties. The bubble market in real estate was largely confined to a small number of communities which had enacted severe restrictions upon development that reduced the supply of housing—in fact, of 26 urban areas rated as “severely unaffordable”, 23 had adopted “smart growth” policies. (Rule of thumb: whenever government calls something “smart”, it's a safe bet that it's dumb.)

But the bubble was concentrated in the collectivist enclaves where the chattering class swarm and multiply: New York, San Francisco, Los Angeles, Washington, Boston, and hence featured in the media, ignoring markets such as Dallas and Houston where, in the absence of limits on development, housing prices were stable.

As Eric Sevareid observed, “The chief cause of problems is solutions”, and this has never been better demonstrated than in the sorry sequence of interventions in the market documented here. Let's briefly sketch the “problems” and “solutions” which, over decades, were the proximate cause of the present calamity.

First of all, back in the New Deal, politicians decided the problem of low rates of home ownership and the moribund construction industry of the Depression could be addressed by the solution of government (or government sponsored) institutions to provide an aftermarket in mortgages by banks, which could then sell the mortgages on their books and free up the capital to make new loans. When the economy started to grow rapidly after the end of World War II, this solution caused a boom in residential construction, enabling working class families to buy new houses in the rapidly expanding suburbs. This was seen as a problem, “suburban sprawl”, to which local politicians, particularly in well-heeled communities on the East and West coasts, responded with the solution of enacting land use restrictions (open space, minimum lot sizes, etc.) to keep the “essential character” of their communities from being changed by an invasion of hoi polloi and their houses made of ticky-tacky, all the same. This restriction of the supply of housing predictably led to a rapid rise in the price of housing in these markets (while growth-oriented markets without such restrictions experienced little nor no housing price increases, even at the height of the bubble). The increase in the price of housing priced more and more people out of the market, particularly younger first-time home buyers and minorities, which politicians proclaimed as an “affordable housing crisis”, and supposed, contrary to readily-available evidence, was a national phenomenon. They enacted solutions, such as the Community Reinvestment Act, regulation which required lenders to effectively meet quotas of low-income and minority mortgage lending, which compelled lenders to make loans their usual standards of risk evaluation would have caused them to decline. Expanding the pool of potential home buyers increased the demand for housing, and with the supply fixed due to political restrictions on development, the increase in housing prices inevitably accelerated, pricing more people out of the market. Politicians responded to this problem by encouraging lenders to make loans which would have been considered unthinkably risky just a few years before: no down payment loans, loans with a low-ball “teaser” rate for the first few years which reset to the prevailing rate thereafter, and even “liar loans” where the borrower was not required to provide documentation of income or net worth. These forms of “creative financing” were, in fact, highly-leveraged bets upon the housing bubble continuing—all would lead to massive defaults in the case of declining or even stable valuations of houses.

Because any rational evaluation of the risk of securities based upon the aggregation of these risky loans would cause investors to price them accordingly, securities of Byzantine complexity were created which allowed financial derivatives based upon them, with what amounted to insurance provided by counterparty institutions, which could receive high credit ratings by the government-endorsed rating agencies (whose revenue stream depended upon granting favourable ratings to these securities). These “mortgage-backed securities” were then sold all around the world, and ended up in the portfolios of banks, pension funds, and individual investors, including this scrivener (saw it coming; sold while the selling was good).

Then, as always happens in financial bubbles, the music stopped. Back in the days of ticker tape machines, you could hear the popping of a bubble. The spasmodic buying by the greatest fools of all would suddenly cease its clatter and an ominous silence would ensue. Then, like the first raindrops which presage a great deluge, you'd hear the tick-tick-tick of sell orders being filled below the peak price. And then the machine would start to chatter in earnest as sell orders flooded into the market, stops were hit and taken out, and volume exploded to the downside. So it has always been, and so it will always be. And so it was in this case, although in the less liquid world of real estate it took a little longer to play out.

As you'll note in these comments, and also in Sowell's book, the words “politicians” and “government” appear disproportionately as the subject of sentences which describe each step in how a supposed problem became a solution which became a problem. The legacy media would have you believe that “predatory lenders”, “greedy Wall Street firms”, “speculators”, and other nefarious private actors are the causes of the present financial crisis. These players certainly exist, and they've been evident as events have been played out, but the essence of the situation is that all of them are creations and inevitable consequences of the financial environment created by politicians who are now blaming others for the mess they created and calling for more “regulation” by politicians (as if, in the long and sorry history of regulation, it has ever made anything more “regular” than the collective judgement of millions of people freely trading with one another in an open market).

There are few people as talented as Thomas Sowell when it comes to taking a complex situation spanning decades and crossing the boundary of economics and politics, and then dissecting it out into the essentials like an anatomy teacher, explaining in clear as light prose the causes and effects, and the unintended and yet entirely predictable consequences (for those acquainted with basic economics) which led to the present mess. This is a masterpiece of such work, and anybody who's interested in the facts and details behind the obfuscatory foam emerging from the legacy media will find this book an essential resource.

Dr. Sowell's books tend to be heavily footnoted, with not only source citations but also expansions upon the discussion in the main text. The present volume uses a different style, with a lengthy “Sources” section, a full 19% of the book, listing citations for items in the text in narrative form, chapter by chapter. Expressing these items in text, without the abbreviations normally used in foot- or end-notes balloons the length of this section and introduces much redundancy. Perhaps it's due to the publisher feeling a plethora of footnotes puts off the causal reader, but for me, footnotes just work a lot better than these wordy source notes.

March 2010 Permalink

Steil, Benn. The Battle of Bretton Woods. Princeton: Princeton University Press, 2013. ISBN 978-0-691-14909-7.
As the Allies advanced toward victory against the Axis powers on all fronts in 1944, in Allied capitals thoughts increasingly turned to the postwar world and the institutions which would define it. Plans were already underway to expand the “United Nations” (at the time used as a synonym for the Allied powers) into a postwar collective security organisation which would culminate in the April 1945 conference to draft the charter of that regrettable institution. Equally clamant was the need to define monetary mechanisms which would facilitate free trade.

The classical gold standard, which was not designed but evolved organically in the 19th century as international trade burgeoned, had been destroyed by World War I. Attempts by some countries to reestablish the gold standard after the end of the war led to economic dislocation (particularly in Great Britain), currency wars (competitive devaluations in an attempt to gain a competitive advantage in international trade), and trade wars (erecting tariff or other barriers to trade to protect domestic or imperial markets against foreign competition).

World War II left all of the major industrial nations with the sole exception of the United States devastated and effectively bankrupt. Despite there being respected and influential advocates for re-establishing the classical gold standard (in which national currencies were defined as a quantity of gold, with central banks issuing them willing to buy gold with their currency or exchange their currency for gold at the pegged rate), this was widely believed impossible. Although the gold standard had worked well when in effect prior to World War I, and provided negative feedback which tended to bring the balance of payments among trading partners back into equilibrium and provided a mechanism for countries in economic hard times to face reality and recover by devaluing their currencies against gold, there was one overwhelming practical difficulty in re-instituting the gold standard: the United States had almost all of the gold. In fact, by 1944 it was estimated that the U.S. Treasury held around 78% of all of the world's central bank reserve gold. It is essentially impossible to operate under a gold standard when a single creditor nation, especially one with its industry and agriculture untouched by the war and consequently sure to be the predominant exporter in the years after it ended, has almost all of the world's gold in its vaults already. Proposals to somehow reset the system by having the U.S. transfer its gold to other nations in exchange for their currencies was a non-starter in Washington, especially since many of those nations already owed large dollar-denominated debts to the U.S.

The hybrid gold-exchange standard put into place after World War I had largely collapsed by 1934, with Britain forced off the standard by 1931, followed quickly by 25 other nations. The 1930s were a period of economic depression, collapsing international trade, competitive currency devaluations, and protectionism, hardly a model for a postwar monetary system.

Also in contention as the war drew to its close was the location of the world's financial centre and which currency would dominate international trade. Before World War I, the vast majority of trade cleared through London and was denominated in sterling. In the interwar period, London and New York vied for preeminence, but while Wall Street prospered financing the booming domestic market in the 1920s, London remained dominant for trade between other nations and maintained a monopoly within the British Empire. Within the U.S., while all factions within the financial community wished for the U.S. to displace Britain as the world's financial hub, many New Dealers in Roosevelt's administration were deeply sceptical of Wall Street and “New York bankers” and wished to move decision making to Washington and keep it firmly under government control.

While ambitious plans were being drafted for a global monetary system, in reality there were effectively only two nations at the negotiating table when it came time to create one: Britain and the U.S. John Maynard Keynes, leader of the British delegation, referred to U.S. plans for a broad-based international conference on postwar monetary policy as “a major monkey-house”, with non-Anglo-Saxon delegations as the monkeys. On the U.S. side, there was a three way power struggle among the Treasury Department, the State Department, and the nominally independent Federal Reserve to take the lead in international currency policy.

All of this came to a head when delegates from 44 countries arrived at a New Hampshire resort hotel in July 1944 for the Bretton Woods Conference. The run-up to the conference had seen intensive back-and-forth negotiation between the U.S. and British delegations, both of whom arrived with their own plans, each drafted to give their side the maximum advantage.

For the U.S., Treasury secretary Henry Morgenthau, Jr. was the nominal head of the delegation, but having no head for nor interest in details, deferred almost entirely to his energetic and outspoken subordinate Harry Dexter White. The conference became a battle of wits between Keynes and White. While White was dwarfed by Keynes's intellect and reputation (even those who disagreed with his unorthodox economic theories were impressed with his wizardry in financing the British war efforts in both world wars), it was White who held all the good cards. Not only did the U.S. have most of the gold, Britain was entirely dependent upon Lend-Lease aid from the U.S., which might come to an abrupt end when the war was won, and owed huge debts which it could never repay without some concessions from the U.S. or further loans on attractive terms.

Morgenthau and White, with Roosevelt's enthusiastic backing, pressed their case relentlessly. Not only did Roosevelt concur that the world's financial centre should be Washington, he saw an opportunity to break the British Empire, which he detested. Roosevelt remarked to Morgenthau after a briefing, “I had no idea that England was broke. I will go over there and make a couple of talks and take over the British Empire.”

Keynes described an early U.S. negotiating position as a desire by the U.S. to make Britain “lose face altogether and appear to capitulate completely to dollar diplomacy.” And in the end, this is essentially what happened. Morgenthau remarked, “Now the advantage is ours here, and I personally think we should take it,” then later expanded, “If the advantage was theirs, they would take it.”

The system crafted at the conference was formidably complex: only a few delegates completely understood it, and, foreshadowing present-day politics in the U.S., most of the delegations which signed it at the conclusion of the conference had not read the final draft which was thrown together at the last minute. The Bretton Woods system which emerged prescribed fixed exchange rates, not against gold, but rather the U.S. dollar, which was, in turn, fixed to gold. Central banks would hold their reserves primarily in dollars, and could exchange excess dollars for gold upon demand. A new International Monetary Fund (IMF) would provide short-term financing to countries with trade imbalances to allow them to maintain their currency's exchange rate against the dollar, and a World Bank was created to provide loans to support reconstruction after the war and development in poor countries. Finally a General Agreement on Tariffs and Trade was adopted to reduce trade barriers and promote free trade.

The Bretton Woods system was adopted at a time when the reputation of experts and technocrats was near its peak. Keynes believed that central banking should “be regarded as a kind of beneficent technique of scientific control such as electricity and other branches of science are.” Decades of experience with the ever more centralised and intrusive administrative state has given people today a more realistic view of the capabilities of experts and intellectuals of all kinds. Thus it should be no surprise that the Bretton Woods system began to fall apart almost as soon as it was put in place. The IMF began operations in 1947, and within months a crisis broke out in the peg of sterling to the dollar. In 1949, Britain was forced to devalue the pound 30% against the dollar, and in short order thirty other countries also devalued. The Economist observed:

Not many people in this country believe the Communist thesis that it is the deliberate and conscious aim of American policy to ruin Britain and everything Britain stands for in the world. But the evidence can certainly be read that way. And if every time aid is extended, conditions are attached which make it impossible for Britain to ever escape the necessity of going back for still more aid, to be obtained with still more self-abasement and on still more crippling terms, then the result will certainly be what the Communists predict.

Dollar diplomacy had triumphed completely.

The Bretton Woods system lurched from crisis to crisis and began to unravel in the 1960s when the U.S., exploiting its position of issuing the world's reserve currency, began to flood the world with dollars to fund its budget and trade deficits. Central banks, increasingly nervous about their large dollar positions, began to exchange their dollars for gold, causing large gold outflows from the U.S. Treasury which were clearly unsustainable. In 1971, Nixon “closed the gold window”. Dollars could no longer be redeemed in gold, and the central underpinning of Bretton Woods was swept away. The U.S. dollar was soon devalued against gold (although it hardly mattered, since it was no longer convertible), and before long all of the major currencies were floating against one another, introducing uncertainty in trade and spawning the enormous global casino which is the foreign exchange markets.

A bizarre back-story to the creation of the postwar monetary system is that its principal architect, Harry Dexter White, was, during the entire period of its construction, a Soviet agent working undercover in his U.S. government positions, placing and promoting other agents in positions of influence, and providing a steady stream of confidential government documents to Soviet spies who forwarded them to Moscow. This was suspected since the 1930s, and White was identified by Communist Party USA defectors Whittaker Chambers and Elizabeth Bentley as a spy and agent of influence. While White was defended by the usual apologists, and many historical accounts try to blur the issue, mentions of White in the now-declassified Venona decrypts prove the issue beyond a shadow of a doubt. Still, it must be said that White was a fierce and effective advocate at Bretton Woods for the U.S. position as articulated by Morgenthau and Roosevelt. Whatever other damage his espionage may have done, his pro-Soviet sympathies did not detract from his forcefulness in advancing the U.S. cause.

This book provides an in-depth view of the protracted negotiations between Britain and the U.S., Lend-Lease and other war financing, and the competing visions for the postwar world which were decided at Bretton Woods. There is a tremendous amount of detail, and while some readers may find it difficult to assimilate, the economic concepts which underlie them are explained clearly and are accessible to the non-specialist. The demise of the Bretton Woods system is described, and a brief sketch of monetary history after its ultimate collapse is given.

Whenever a currency crisis erupts into the news, you can count on one or more pundits or politicians to proclaim that what we need is a “new Bretton Woods”. Before prescribing that medicine, they would be well advised to learn just how the original Bretton Woods came to be, and how the seeds of its collapse were built in from the start. U.S. advocates of such an approach might ponder the parallels between the U.S. debt situation today and Britain's in 1944 and consider that should a new conference be held, they may find themselves sitting the seats occupied by the British the last time around, with the Chinese across the table.

In the Kindle edition the table of contents, end notes, and index are all properly cross-linked to the text.

October 2013 Permalink

Stöhlker, Klaus J. Adieu la Suisse—Good Morning Switzerland. Le Mont-sur-Lausanne: Éditions LEP, 2003. ISBN 2-606-01086-8.
This is a French translation of the original German edition, which has the same French-and-English title. The French edition can be found in almost any bookshop in la Suisse romande, but I know of no online source.

March 2004 Permalink

Swanson, Gerald. The Hyperinflation Survival Guide. Lake Oswego, OR: Eric Englund, 1989. ISBN 978-0-9741180-1-7.
In the 1980s, Harry E. Figgie, founder of Figgie International, became concerned that the then-unprecedented deficits, national debt, and trade imbalance might lead to recurrence of inflation, eventual spiralling into catastrophic hyperinflation (defined in 1956 by economist Phillip Cagan as a 50% or more average rise in prices per month, equivalent to an annual inflation rate of 12,875% or above). While there are a number of books on how individuals and investors can best protect themselves during an inflationary episode, Figgie found almost no guidance for business owners and managers for strategies to enable their enterprises to survive and make the best of the chaotic situation which hyperinflation creates.

To remedy this lacuna, Figgie assembled a three person team headed by the author, an economist at the University of Arizona, and dispatched them to South America, where on four visits over two years, they interviewed eighty business leaders and managers, bankers, and accounting professionals in Argentina, Bolivia, and Brazil, all of which were in the grip of calamitous inflation at the time, to discover how they managed to survive and cope with the challenge of prices which changed on a daily or even more frequent basis. This short book (or long pamphlet—it's less than 100 pages all-up) is the result.

The inflation which Figgie feared for the 1990s did not come to pass, but the wisdom Swanson and his colleagues collect here is applicable to any epoch of runaway inflation, wherever in the world and whenever it may eventuate. With money creation and debt today surpassing anything in the human experience, and the world's reserve currency being supported only by the willingness of other nations to lend to the United States, one certainly cannot rule out hyperinflation as a possible consequence when all of this paper money works its way through the economy and starts to bid up prices. Consequently, any business owner would be well advised to invest the modest time it takes to read this book and ponder how the advice herein, not based upon academic theorising but rather the actual experience of managers in countries suffering hyperinflation and whose enterprises managed to survive it, could be applied to the circumstances of their own business.

If you didn't live through, or have forgotten, the relatively mild (by these standards) inflation of the 1970s, this book drives home how fundamentally corrupting inflation is. Inflation is, after all, nothing other than the corruption by a national government of the currency it issues, and this corruption sullies everybody who transacts in that currency. Long term business planning goes out the window: “long term” comes to mean a week or two and “short term” today. Sound business practices such as minimising inventory and just in time manufacturing become suicidal when inventory appreciates more rapidly than money placed at interest. Management controls and the chain of command evaporate as purchasing managers must be delegated the authority to make verbal deals on the spot, paid in cash, to obtain the supplies the company needs at prices that won't bankrupt it. If wage and price controls are imposed by the government (as they always are, despite forty centuries of evidence they never work), more and more management resources must be diverted to gaming the system to retain workforce and sell products at a profitable price. Previously mundane areas of the business: purchasing and treasury, become central to the firm's survival, and speculation in raw materials and financial assets may become more profitable than the actual operations of the company. Finally (and the book dances around this a bit without ever saying it quite so baldly as I shall here), there's the flat-out corruption when the only option a business has to keep its doors open and its workers employed may be to buy or sell on the black market, evade wage and price controls by off-the-books transactions, and greasing the skids of government agencies with bulging envelopes of rapidly depreciating currency passed under the table to their functionaries.

Any senior manager, from the owner of a small business to the CEO of a multinational, who deems hyperinflation a possible outcome of the current financial turbulence, would be well advised to read this book. Although published twenty years ago, the pathology of inflation is perennial, and none of the advice is dated in any way. Indeed, as businesses have downsized, outsourced, and become more dependent upon suppliers around the globe, they are increasingly vulnerable to inflation of their home country currency. I'll wager almost every CEO who spends the time to read this book will spend the money to buy copies for all of his direct reports.

When this book was originally published by Figgie International, permission to republish any part or the entire book was granted to anybody as long as the original attribution was retained. If you look around on the Web, you'll find several copies of this book in various formats, none of which I'd consider ideal, but which at least permit you to sample the contents before ordering a print edition.

July 2009 Permalink

Taleb, Nassim Nicholas. The Black Swan. New York: Random House, 2007. ISBN 978-1-4000-6351-2.
If you are interested in financial markets, investing, the philosophy of science, modelling of socioeconomic systems, theories of history and historicism, or the rôle of randomness and contingency in the unfolding of events, this is a must-read book. The author largely avoids mathematics (except in the end notes) and makes his case in quirky and often acerbic prose (there's something about the French that really gets his goat) which works effectively.

The essential message of the book, explained by example in a wide variety of contexts is (and I'll be rather more mathematical here in the interest of concision) is that while many (but certainly not all) natural phenomena can be well modelled by a Gaussian (“bell curve”) distribution, phenomena in human society (for example, the distribution of wealth, population of cities, book sales by authors, casualties in wars, performance of stocks, profitability of companies, frequency of words in language, etc.) are best described by scale-invariant power law distributions. While Gaussian processes converge rapidly upon a mean and standard deviation and rare outliers have little impact upon these measures, in a power law distribution the outliers dominate.

Consider this example. Suppose you wish to determine the mean height of adult males in the United States. If you go out and pick 1000 men at random and measure their height, then compute the average, absent sampling bias (for example, picking them from among college basketball players), you'll obtain a figure which is very close to that you'd get if you included the entire male population of the country. If you replaced one of your sample of 1000 with the tallest man in the country, or with the shortest, his inclusion would have a negligible effect upon the average, as the difference from the mean of the other 999 would be divided by 1000 when computing the average. Now repeat the experiment, but try instead to compute mean net worth. Once again, pick 1000 men at random, compute the net worth of each, and average the numbers. Then, replace one of the 1000 by Bill Gates. Suddenly Bill Gates's net worth dwarfs that of the other 999 (unless one of them randomly happened to be Warren Buffett, say)—the one single outlier dominates the result of the entire sample.

Power laws are everywhere in the human experience (heck, I even found one in AOL search queries), and yet so-called “social scientists” (Thomas Sowell once observed that almost any word is devalued by preceding it with “social”) blithely assume that the Gaussian distribution can be used to model the variability of the things they measure, and that extrapolations from past experience are predictive of the future. The entry of many people trained in physics and mathematics into the field of financial analysis has swelled the ranks of those who naïvely assume human action behaves like inanimate physical systems.

The problem with a power law is that as long as you haven't yet seen the very rare yet stupendously significant outlier, it looks pretty much like a Gaussian, and so your model based upon that (false) assumption works pretty well—until it doesn't. The author calls these unimagined and unmodelled rare events “Black Swans”—you can see a hundred, a thousand, a million white swans and consider each as confirmation of your model that “all swans are white”, but it only takes a single black swan to falsify your model, regardless of how much data you've amassed and how long it has correctly predicted things before it utterly failed.

Moving from ornithology to finance, one of the most common causes of financial calamities in the last few decades has been the appearance of Black Swans, wrecking finely crafted systems built on the assumption of Gaussian behaviour and extrapolation from the past. Much of the current calamity in hedge funds and financial derivatives comes directly from strategies for “making pennies by risking dollars” which never took into account the possibility of the outlier which would wipe out the capital at risk (not to mention that of the lenders to these highly leveraged players who thought they'd quantified and thus tamed the dire risks they were taking).

The Black Swan need not be a destructive bird: for those who truly understand it, it can point the way to investment success. The original business concept of Autodesk was a bet on a Black Swan: I didn't have any confidence in our ability to predict which product would be a success in the early PC market, but I was pretty sure that if we fielded five products or so, one of them would be a hit on which we could concentrate after the market told us which was the winner. A venture capital fund does the same thing: because the upside of a success can be vastly larger than what you lose on a dud, you can win, and win big, while writing off 90% of all of the ventures you back. Investors can fashion a similar strategy using options and option-equivalent investments (for example, resource stocks with a high cost of production), diversifying a small part of their portfolio across a number of extremely high risk investments with unbounded upside while keeping the bulk in instruments (for example sovereign debt) as immune as possible to Black Swans.

There is much more to this book than the matters upon which I have chosen to expound here. What you need to do is lay your hands on this book, read it cover to cover, think it over for a while, then read it again—it is so well written and entertaining that this will be a joy, not a chore. I find it beyond charming that this book was published by Random House.

January 2009 Permalink

Tarnoff, Ben. Moneymakers. New York: Penguin, 2011. ISBN 978-1-101-46732-9.
Many people think of early America as a time of virtuous people, hard work, and sound money, all of which have been debased in our decadent age. Well, there may have been plenty of the first two, but the fact is that from the colonial era through the War of Secession, the American economy was built upon a foundation of dodgy paper money issued by a bewildering variety of institutions. There were advocates of hard money during the epoch, but their voices went largely unheeded because there simply wasn't enough precious metal on the continent to coin or back currency in the quantity required by the burgeoning economy. Not until the discovery of gold in California and silver in Nevada and other western states in the middle of the 19th century did a metal-backed monetary system become feasible in America.

Now, whenever authorities, be they colonies, banks, states, or federal institutions, undertake the economic transubstantiation of paper into gold by printing something on it, there will always be enterprising individuals motivated to get into the business for themselves. This book tells the story of three of these “moneymakers” (as counterfeiters were called in early America).

Owen Sullivan was an Irish immigrant who, in the 1740s and '50s set up shop in a well-appointed cave on the border between New York and Connecticut and orchestrated a network of printers, distributors, and passers of bogus notes of the surrounding colonies. Sullivan was the quintessential golden-tongued confidence man, talking himself out of jam after jam, and even persuading his captors, when he was caught and sentenced to be branded with an “R” for “Rogue” to brand him above the hairline where he could comb over the mark of shame.

So painful had the colonial experience with paper money been that the U.S. Constitution forbade states to “emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”. But as the long and sordid history of “limited government” demonstrates, wherever there is a constitutional constraint, there is always a clever way for politicians to evade it, and nothing in the Constitution prevented states from chartering banks which would then proceed to print their own paper money. When the charter of Alexander Hamilton's First Bank of the United States was allowed to expire, that's exactly what the states proceeded to do. In Pennsylvania alone, in the single year of 1814, the state legislature chartered forty-one new banks in addition to the six already existing. With each of these banks entitled to print its own paper money (backed, in theory, by gold and silver coin in their vaults, with the emphasis on in theory), and each of these notes having its own unique design, this created a veritable paradise for counterfeiters, and into this paradise stepped counterfeiting entrepreneur David Lewis and master engraver Philander Noble, who set up a distributed and decentralised gang to pass their wares which could only be brought to justice by the kind of patient, bottom-up detective work which was rare in an age where law enforcement was largely the work of amateurs.

Samuel Upham, a successful Philadelphia shopkeeper in the 1860s, saw counterfeiting as a new product line for his shop, along with stationery and Upham's Hair Dye. When the Philadelphia Inquirer printed a replica of the Confederate five dollar note, the edition was much in demand at Upham's shop, and he immediately got in touch with the newspaper and arranged to purchase the printing plate for the crude replica of the note and printed three thousand copies with a strip at the bottom identifying them as replicas with the name and address of his store. At a penny a piece they sold briskly, and Upham decided to upgrade and expand his product line. Before long he offered Confederate currency “curios” in all denominations, printed from high quality plates on banknote paper, advertised widely as available in retail and wholesale quantities for those seeking a souvenir of the war (or several thousand of them, if you like). These “facsimiles” were indistinguishable from the real thing to anybody but an expert, and Union troops heading South and merchants trading across the border found Upham's counterfeits easy to pass. Allegations were made that the Union encouraged, aided, and abetted Upham's business in the interest of economic warfare against the South, but no evidence of this was ever produced. Nonetheless, Upham and his inevitable competitors were allowed to operate with impunity, and the flood of bogus money they sent to the South certainly made a major contribution to the rampant inflation experienced in the South and made it more difficult for the Confederacy to finance its war effort.

This is an illuminating and entertaining exploration of banking, finance, and monetary history in what may seem a simpler age but was, in its own way, breathtakingly complicated—at the peak there were more than ten thousand different kinds of paper money circulating in North America. Readers with a sense of justice may find themselves wondering why small-scale operators such as Sullivan and Lewis were tracked down so assiduously and punished so harshly while contemporary manufacturers of funny money on the terabuck scale such as Ben Bernanke, Tim Geithner, and Mario Draghi are treated with respect and deference instead of being dispatched to the pillory and branding iron they so richly deserve for plundering the savings and future of those from whom their salaries are extorted under threat of force. To whom I say, just wait….

A Kindle edition is available, in which the table of contents is linked to the text, but the index is simply a list of terms, not linked to their occurrences in the text. The extensive end notes are keyed to page numbers in the print edition, which are preserved in the Kindle edition, making navigation possible, albeit clumsy.

December 2011 Permalink

Turk, James and John Rubino. The Money Bubble. Unknown: DollarCollapse Press, 2013. ISBN 978-1-62217-034-0.
It is famously difficult to perceive when you're living through a financial bubble. Whenever a bubble is expanding, regardless of its nature, people with a short time horizon, particularly those riding the bubble without experience of previous boom/bust cycles, not only assume it will continue to expand forever, they will find no shortage of financial gurus to assure them that what, to an outsider appears a completely unsustainable aberration is, in fact, “the new normal”.

It used to be that bubbles would occur only around once in a human generation. This meant that those caught up in them would be experiencing one for the first time and discount the warnings of geezers who were fleeced the last time around. But in our happening world the pace of things accelerates, and in the last 20 years we have seen three successive bubbles, each segueing directly into the next:

  • The Internet/NASDAQ bubble
  • The real estate bubble
  • The bond market bubble

The last bubble is still underway, although the first cracks in its expansion have begun to appear at this writing.

The authors argue that these serial bubbles are the consequence of a grand underlying bubble which has been underway for decades: the money bubble—the creation out of thin air of currency by central banks, causing more and more money to chase whatever assets happen to be in fashion at the moment, thus resulting in bubble after bubble until the money bubble finally pops.

Although it can be psychologically difficult to diagnose a bubble from the inside, if we step back to the abstract level of charts, it isn't all that hard. Whenever you see an exponential curve climbing to the sky, it's not only a safe bet but a sure thing that it won't continue to do so forever. Now, it may go on much longer than you might imagine: as John Maynard Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent”—but not forever. Let's look at a chart of the M2 money stock (one of the measures of the supply of money denominated in U.S. dollars) from 1959 through the end of 2013 (click the chart to see data updated through the present date).

M2 money stock: 1959-2013

You will rarely see a more perfect exponential growth curve than this: if you re-plot it on a semi-log axis, the fit to a straight line is remarkable.

Ever since the creation of the Federal Reserve System in the United States in 1913, and especially since the link between the U.S. dollar and gold was severed in 1971, all of the world's principal trading currencies have been fiat money: paper or book-entry money without any intrinsic value, created by a government who enforces its use through legal tender laws. Since governments are the modern incarnation of the bands of thieves and murderers who have afflicted humans ever since our origin in Africa, it is to be expected that once such a band obtains the power to create money which it can coerce its subjects to use they will quickly abuse that power to loot their subjects and enrich themselves, as least as long as they can keep the game going. In the end, it is inevitable that people will wise up to the scam, and that the paper money will be valuable only as scratchy toilet paper. So it has been long before the advent of proper toilet paper.

In this book the authors recount the sorry history of paper money and debt-fuelled bubbles and examine possible scenarios as the present unsustainable system inevitably comes to an end. It is very difficult to forecast what will happen: we appear to be heading for what Ludwig von Mises called a “crack-up boom”. This is where, as he wrote, “the masses wake up”, and things go all nonlinear. The preconditions for this are already in place, but there is no way to know when it will dawn upon a substantial fraction of the population that their savings have been looted, their retirement deferred until death, their children indentured to a lifetime of debt, and their nation destined to become a stratified society with a small fraction of super-wealthy in their gated communities and a mass of impoverished people, disarmed, dumbed down by design, and kept in line by control of their means to communicate, travel, and organise. It is difficult to make predictions beyond that point, as many disruptive things can happen as a society approaches it. This is not an environment in which one can make investment decisions as one would have in the heady days of the 1950s.

And yet, one must—at least people who have managed to save for their retirement and to provide their children a hand up in this increasingly difficult world. The authors, drawing upon historical parallels in previous money and debt bubbles, suggest what asset classes to avoid, which are most likely to ride out the coming turbulence and, for the adventure-seeking with some money left over to take a flyer, a number of speculations which may perform well as the money bubble pops. Remember that in a financial smash-up almost everybody loses: it is difficult in a time of chaos, when assets previously thought risk-free or safe are fluctuating wildly, just to preserve your purchasing power. In such times those who lose the least are the relative winners, and are in the best position when emerging from the hard times to acquire assets at bargain basement prices which will be the foundation of their family fortune as the financial system is reconstituted upon a foundation of sound money.

This book focusses on the history of money and debt bubbles, the invariants from those experiences which can guide us as the present madness ends, and provides guidelines for making the most (or avoiding the worst) of what is to come. If you're looking for “Untold Riches from the Coming Collapse”, this isn't your book. These are very conservative recommendations about what to do and what to avoid, and a few suggestions for speculations, but the focus is on preservation of one's hard-earned capital through what promises to be a very turbulent era.

In the Kindle edition the index cites page numbers from the print edition which are useless since the Kindle edition does not include page numbers.

January 2014 Permalink

Wheen, Francis. How Mumbo-Jumbo Conquered the World. London: Fourth Estate, 2004. ISBN 0-00-714096-7.
I picked up this book in an airport bookshop, expecting a survey of contemporary lunacy along the lines of Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds or Martin Gardner's Fads and Fallacies in the Name of Science. Instead, what we have is 312 pages of hateful, sneering political rant indiscriminately sprayed at more or less every target in sight. Mr Wheen doesn't think very much of Ronald Reagan or Margaret Thatcher (who he likens repeatedly to the Ayatollah Khomeini). Well, that's to be expected, I suppose, in a columnist for the Guardian, but there's no reason they need to be clobbered over and over, for the same things and in almost the same words, every three pages or so throughout this tedious, ill-organised, and repetitive book. Neither does the author particularly fancy Tony Blair, who comes in for the same whack-a-mole treatment. A glance at the index (which is not exhaustive) shows that between them, Blair, Thatcher, and Reagan appear on 85 pages equally sprinkled throughout the text. In fact, Mr Wheen isn't very keen on almost anybody or anything dating from about 1980 to the present; one senses an all-consuming nostalgia for that resplendent utopia which was Britain in the 1970s. Now, the crusty curmudgeon is a traditional British literary figure, but masters of the genre leaven their scorn with humour and good will which are completely absent here. What comes through instead is simply hate: the world leaders who dismantled failed socialist experiments are not, as a man of the left might argue, misguided but rather Mrs Thatcher's “drooling epigones” (p. 263). For some months, I've been pondering a phenomenon in today's twenty-something generation which I call “hate kiddies.” These are people, indoctrinated in academia by ideologues of the Sixties generation to hate their country, culture, and all of its achievements—supplanting the pride which previous generations felt with an all-consuming guilt. This seems, in many otherwise gifted and productive people, to metastasise in adulthood into an all-consuming disdain and hate for everything; it's like the end point of cultural relativism is the belief that everything is evil. I asked an exemplar of this generation once whether he could name any association of five or more people anywhere on Earth which was not evil: nope. Detesting his “evil” country and government, I asked whether he could name any other country which was less evil or even somewhat good: none came to mind. (If you want to get a taste of this foul and poisonous weltanschauung, visit the Slashdot site and read the comments posted for almost any article. This site is not a parody—this is how the young technological elite really think, or rather, can't think.) In Francis Wheen, the hate kiddies have found their elder statesman.

July 2004 Permalink

White, Andrew Dickson. Fiat Money Inflation in France. Bayonne, NJ: Blackbird Books, [1876, 1896, 1912, 1914] 2011. ISBN 978-1-61053-004-0.
One of the most sure ways to destroy the economy, wealth, and morals of a society is monetary inflation: an inexorable and accelerating increase in the supply of money, which inevitably (if not always immediately) leads to ever-rising prices, collapse in saving and productive investment, and pauperisation of the working classes in favour of speculators and those with connections to the regime issuing the money.

In ancient times, debasement of the currency was accomplished by clipping coins or reducing their content of precious metal. Ever since Marco Polo returned from China with news of the tremendous innovation of paper money, unbacked paper currency (or fiat money) has been the vehicle of choice for states to loot their productive and thrifty citizens.

Between 1789 and 1796, a period encompassing the French Revolution, the French National Assembly issued assignats, paper putatively backed by the value of public lands seized from the Roman Catholic Church in the revolution. Assignats could theoretically be used to purchase these lands, and initially paid interest—they were thus a hybrid between a currency and a bond. The initial issue revived the French economy and rescued the state from bankruptcy but, as always happens, was followed by a second, third, and then a multitude of subsequent issues totally decoupled from the value of the land which was supposed to back them. This sparked an inflationary and eventually hyperinflationary spiral with savers wiped out, manufacturing and commerce grinding to a halt (due to uncertainty, inability to invest, and supply shortages) which caused wages to stagnate even as prices were running away to the upside, an enormous transfer of wealth from the general citizenry to speculators and well-connected bankers, and rampant corruption within the political class. The sequelæ of monetary debasement all played out as they always have and always will: wage and price controls, shortages, rationing, a rush to convert paper money into tangible assets as quickly as possible, capital and foreign exchange controls, prohibition on the ownership of precious metals and their confiscation, and a one-off “wealth tax” until the second, and the third, and so on. Then there was the inevitable replacement of the discredited assignats with a new paper currency, the mandats, which rapidly blew up. Then came Napoleon, who restored precious metal currency; hyperinflation so often ends up with a dictator in power.

What is remarkable about this episode is that it happened in a country which had experienced the disastrous John Law paper money bubble in 1716–1718, within the living memory of some in the assignat era and certainly in the minds of the geniuses who decided to try paper money again because “this time is different”. When it comes to paper money, this time is never different.

This short book (or long pamphlet—the 1896 edition is just 92 pages) was originally written in 1876 by the author, a president of Cornell University, as a cautionary tale against advocates of paper money and free silver in the United States. It was subsequently revised and republished on each occasion the U.S. veered further toward unbacked or “elastic” paper money. It remains one of the most straightforward accounts of a hyperinflationary episode ever written, with extensive citations of original sources. For a more detailed account of the Weimar Republic inflation in 1920s Germany, see When Money Dies (May 2011); although the circumstances were very different, the similarities will be apparent, confirming that the laws of economics manifest here are natural laws just as much as gravitation and electromagnetism, and ignoring them never ends well.

If you are looking for a Kindle edition of this book, be sure to download a free sample of the book before purchasing. As the original editions of this work are in the public domain, anybody is free to produce an electronic edition, and there are some hideous ones available; look before you buy.

April 2013 Permalink

Wright, Robert. Nonzero. New York: Pantheon Books, 2000. ISBN 0-679-44252-9.
Yuck. Four hundred plus pages of fuzzy thinking, tangled logic, and prose which manages to be simultaneously tortured and jarringly colloquial ends up concluding that globalisation and the attendant extinction of liberty and privacy are not only good things, but possibly Divine (chapter 22). Appendix 1 contains the lamest description of the iterated prisoner's dilemma I have ever read, and the key results table on 341 is wrong (top right entry, at least in the hardback). Bill Clinton loved this book. A paperback edition is now available.

June 2003 Permalink

Young, Michael. The Rise of the Meritocracy. New Brunswick, NJ: Transaction Publishers, [1958] 1994. ISBN 1-56000-704-4.
The word “meritocracy” has become so commonplace in discussions of modern competitive organisations and societies that you may be surprised to learn the word did not exist before 1958—a year after Sputnik—when the publication of this most curious book introduced the word and concept into the English language. This is one of the oddest works of serious social commentary ever written—so odd, in fact, its author despaired of its ever seeing print after the manuscript was rejected by eleven publishers before finally appearing, whereupon it was quickly republished by Penguin and has been in print ever since, selling hundreds of thousands of copies and being translated into seven different languages.

Even though the author was a quintessential “policy wonk”: he wrote the first postwar manifesto for the British Labour Party, founded the Open University and the Consumer Association, and sat in the House of Lords as Lord Young of Dartington, this is a work of…what shall we call it…utopia? dystopia? future history? alternative history? satire? ironic social commentary? science fiction?…beats me. It has also perplexed many others, including one of the publishers who rejected it on the grounds that “they never published Ph.D. theses” without having observed that the book is cast as a thesis written in the year 2034! Young's dry irony and understated humour has gone right past many readers, especially those unacquainted with English satire, moving them to outrage, as if George Orwell were thought to be advocating Big Brother. (I am well attuned to this phenomenon, having experienced it myself with the Unicard and Digital Imprimatur papers; no matter how obvious you make the irony, somebody, usually in what passes for universities these days, will take it seriously and explode in rage and vituperation.)

The meritocracy of this book is nothing like what politicians and business leaders mean when they parrot the word today (one hopes, anyway)! In the future envisioned here, psychology and the social sciences advance to the point that it becomes possible to determine the IQ of individuals at a young age, and that this IQ, combined with motivation and effort of the person, is an almost perfect predictor of their potential achievement in intellectual work. Given this, Britain is seen evolving from a class system based on heredity and inherited wealth to a caste system sorted by intelligence, with the high-intelligence élite “streamed” through special state schools with their peers, while the lesser endowed are directed toward manual labour, and the sorry side of the bell curve find employment as personal servants to the élite, sparing their precious time for the life of the mind and the leisure and recreation it requires.

And yet the meritocracy is a thoroughly socialist society: the crème de la crème become the wise civil servants who direct the deployment of scarce human and financial capital to the needs of the nation in a highly-competitive global environment. Inheritance of wealth has been completely abolished, existing accumulations of wealth confiscated by “capital levies”, and all salaries made equal (although the élite, naturally, benefit from a wide variety of employer-provided perquisites—so is it always, even in merito-egalitopias). The benevolent state provides special schools for the intelligent progeny of working class parents, to rescue them from the intellectual damage their dull families might do, and prepare them for their shining destiny, while at the same time it provides sports, recreation, and entertainment to amuse the mentally modest masses when they finish their daily (yet satisfying, to dullards such as they) toil.

Young's meritocracy is a society where equality of opportunity has completely triumphed: test scores trump breeding, money, connections, seniority, ethnicity, accent, religion, and all of the other ways in which earlier societies sorted people into classes. The result, inevitably, is drastic inequality of results—but, hey, everybody gets paid the same, so it's cool, right? Well, for a while anyway…. As anybody who isn't afraid to look at the data knows perfectly well, there is a strong hereditary component to intelligence. Sorting people into social classes by intelligence will, over the generations, cause the mean intelligence of the largely non-interbreeding classes to drift apart (although there will be regression to the mean among outliers on each side, mobility among the classes due to individual variation will preserve or widen the gap). After a few generations this will result, despite perfect social mobility in theory, in a segregated caste system almost as rigid as that of England at the apogee of aristocracy. Just because “the masses” actually are benighted in this society doesn't mean they can't cause a lot of trouble, especially if incited by rabble-rousing bored women from the élite class. (I warned you this book will enrage those who don't see the irony.) Toward the end of the book, this conflict is building toward a crisis. Anybody who can guess the ending ought to be writing satirical future history themselves.

Actually, I wonder how many of those who missed the satire didn't actually finish the book or simply judged it by the title. It is difficult to read a passage like this one on p. 134 and mistake it for anything else.

Contrast the present — think how different was a meeting in the 2020s of the National Joint Council, which has been retained for form's sake. On the one side sit the I.Q.s of 140, on the other the I.Q.s of 99. On the one side the intellectual magnates of our day, on the other honest, horny-handed workmen more at home with dusters than documents. On the one side the solid confidence born of hard-won achievement; on the other the consciousness of a just inferiority.
Seriously, anybody who doesn't see the satire in this must be none too Swift. Although the book is cast as a retrospective from 2038, and there passing references to atomic stations, home entertainment centres, school trips to the Moon and the like, technologically the world seems very much like that of 1950s. There is one truly frightening innovation, however. On p. 110, discussing the shrinking job market for shop attendants, we're told, “The large shop with its more economical use of staff had supplanted many smaller ones, the speedy spread of self-service in something like its modern form had reduced the number of assistants needed, and piped distribution of milk, tea, and beer was extending rapidly.” To anybody with personal experience with British plumbing and English beer, the mere thought of the latter being delivered through the former is enough to induce dystopic shivers of 1984 magnitude.

Looking backward from almost fifty years on, this book can be read as an alternative history of the last half-century. In the eyes of many with a libertarian or conservative inclination, just when the centuries-long battle against privilege and prejudice was finally being won: in the 1950s and early 60s when Young's book appeared, the dream of equal opportunity so eloquently embodied in Dr. Martin Luther King's “I Have a Dream” speech began to evaporate in favour of equality of results (by forced levelling and dumbing down if that's what it took), group identity and entitlements, and the creation of a permanently dependent underclass from which escape was virtually impossible. The best works of alternative history are those which change just one thing in the past and then let the ripples spread outward over the years. You can read this story as a possible future in which equal opportunity really did completely triumph over egalitarianism in the sixties. For those who assume that would have been an unqualifiedly good thing, here is a cautionary tale well worth some serious reflexion.

January 2006 Permalink