Sunday, February 23, 2014

Margin(alized) Truth


 According to the Australian Presidency of the G-20 concept paper, approximately 600 million young people around the world are neither working nor studying.  Without addressing confidence and employment there is no way to “lift people out of poverty and build national prosperity.” 

But if you turn the metaphoric page (to page 4) you see some interesting inconsistencies that seem to insure that employment doesn’t grow.  The economies of the world need to “improve productivity and competitiveness”; the former has a negative effect on employment and the latter suppresses global economic growth.  The plan calls for greater commitment to building ‘infrastructure’ (a highly variable employment enterprise typically incentivized by the public sector) while suggesting that priorities must be placed on structural employment.  A few pages later, Australia points out that the G-20 wants to “fight corruption and work to address its negative impact on economic activity.”  It went on to state that corruption, “increases costs for business and deprives developing countries of up to $40 billion each year.” 

Each year, I read the G-20 statement and find myself musing about the monotony of what passes for “thought leadership” at the helm of the globe’s self-proclaimed elite.  And it was probably this last point on corruption (one I find particularly amusing given the Australian corporate involvement in countless global mining deals rife with corruption) that made me pause to reflect on the illusion that is the G-20 summit cycle.  Corruption – bribes, greedy officials, concessions, and general unfair practices – is conveniently placed at the feet of marginalized countries.  Most of these countries have extensive mineral, energy, or land exploitation value to the G-20 industries and it is the G-20 private sector which fuels the corruption engine.  Bribes only work when someone pays them.  If the G-20 really wanted to get serious about corruption, it would enforce laws prohibiting corporations from engaging in corruption by facilitating the same. 

But let’s take a bit closer look, shall we?  Unfortunate businesses have inconvenient “costs” due to corruption and a paltry $40 billion is lost to the world’s most economically disadvantaged.  That’s bad, right?  I mean, seriously, $40 billion is like two times the value of WhatsApp, the Silicon Valley firm being acquired by Facebook after being started by “two geeky” ex-Yahoo guys.  And let’s put this in a little more context:  $40 billion is just over half of the profits Apple alone ‘shielded’ from U.S. taxes.  So the WHOLE corrupt world’s market consequence is about half of what one celebrated (corrupt) U.S. corporation does on its own account.  Is it just me or does it feel like we don’t really care about corruption given the fact that the G-20 explicitly says that it needs to come up with ways for the private sector to have a more ‘favorable’ operating environment so that it can build private sector employment?  As we’ve watched global corporate tax rates fall as much as 30% from 2000 to 2011 with effective tax rates plummeting even further, is it any wonder that the current puzzle facing corporate leadership is not questions like, “How do I employ more productive people?” but rather, “How do I hire the best accountants and financial analysts to optimally shield my profits?”  Which leads me to the obvious and missing conclusion from the G-20 report: we should simply take all 600 million underemployed youth; train them on tax loopholes and Excel or QuickBooks and tax shield and base erode ourselves into prosperity. 

If we’re really serious, we could save ourselves the tediousness of pretending to care.  We don’t want a world with less poverty – we just want poverty contained and remote.  We don’t want a world without economic shocks – they provide a fabulous way to move public sector funds into private sector accounts.  We don’t want more transparent trade regimes – we want trade negotiations done out of the public eye like the Trans-Pacific Partnership Agreement (TPP).  And when you look at who the TPP covers (U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) you don’t have to guess which countries’ see themselves as benefactors and which are seen as beneficiaries.  In case you’re not up to speed on the global flows of trade, the U.S. has a negative trade balance with Canada (-$32.5 billion), Japan (-$76.3 billion), Malaysia (-$13.1 billion), Mexico (-$61.3 billion), and Vietnam (-$15.6 billion) so you can clearly see why all these countries should be forced to accept our intellectual property and trade regimes for their benefit.  Oh, that’s right.  They WOULDN’T if their populations knew what was being done.  But this signature trade agreement of the Obama presidency is being negotiated in the dark because it couldn’t survive under public scrutiny.  Its only hope is secrecy, ignorance, and corruption – all of which the G-20 seeks to combat.

While you’re reading this post, it’s fairly likely that a secret faction of your government is either directly negotiating, or complicit in the negotiations of, treaties to preserve the imbalance in the current system.  And while all the media coverage on the G-20 meeting Down Under provides the cover story of global concern for a more sustainable world, the same very entities are actively engaging in agreements that conflict every piece of the cover story.  And this works as long as we marginalize our pursuit of knowledge and understanding.  Our problem is not unemployment; rather it is our incapacity to engage in a world that is fueled by accountability and productive engagement.  Our problem isn’t the lack of infrastructure; rather it’s our capability to engage our ecosystem in sustainable scale.  Our problem is not ‘developing world’ corruption; it’s our view that corporate profits are the panacea for our social challenges.  By reading and sharing this conversation, you’ll take at least one small step away from the disdain of the anonymous ‘others’ and find a possibility to elevate humanity into a more transparent and constructive alternative.

Sunday, February 16, 2014

Absolutely Corrupt… Almost


When Robert E. Lee surrendered to Ulysses S. Grant at the Appomattox Court House on the morning of April 9, 1865, Grant declared that the Union had been preserved.  An ocean away, a notable Catholic John Emerich Edward Dalberg-Acton, 1st Baron of Acton lamented, “I mourn for the stake which was lost at Richmond more deeply than I rejoice over that which was saved at Waterloo.”  His abiding sympathy for the cause of decentralized government – a cause he saw embodied in the campaigns of Lee as battles for “liberty, progress and civilization” – was but a fraction of his broader liberalist perspective.

Many of us almost know of the maxim attributed to Lord Acton:

“Power tends to corrupt, and absolute power corrupts absolutely.”

Few of us are aware of the corollary that was part of the same thought:

“Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority.  There is no worse heresy than that the office sanctifies the holder of it.”

Few of us understand the emanating impulse for his misquoted adage.  Far fewer contemplate the profound insight he maintained during the latter half of the 19th century – insight that has been lost to the dust of time for the most part.

Lord Acton’s quote came from a letter to Bishop Mandell Creighton written on April 5, 1887 in which he was vigorously arguing against the canon of Papal Infallibility.  But in this same letter, he addressed the association between the power usurped by Kings and Popes and the rest of the prevailing systems associated with the promulgation of power – including economics (you knew I was going to get there somehow).  Conspicuously missing from our recollection of Lord Acton’s philosophical musings are his equally poignant but less anarchist observations like:

“If we may debase the currency for the sake of genius, or success, or rank, or reputation, we may debase it for the sake of a man’s influence, of his religion, of his party, of the good cause which prospers by his credit and suffers by his disgrace.  Then History ceases to be a science, an arbiter of controversy, a guide of the Wanderer, the upholder of that moral standard which the powers of earth and religion itself tend constantly to depress.”

Now, for the sake of common usage, let’s remind ourselves that the definition of power is:

Power = Work / Time and Average Power = DWork / DTime.

This formula, in isolation can neither corrupt nor be corrupted.  When applied and misapplied to human contrivances, Lord Acton’s caution is prudent.  Why?  Because when human systems are aligned for the purpose of commandeering “work” and when capricious delimitations of temporal realities are imposed, the purveyor of “authority” (the definition of “work” and “time”) is the agency through which the debasing of the system is effectuated. 

Consider the following.  Conventional economists since the middle of the 18th century live in a Rent Labor paradigm.  Economies are said to be functioning when employment is maintained and when wages are sufficient to support a mercantile industrialist paradigm.  They are said to be in dysfunction when employment is insufficient to fuel consumption.  But does ‘employment’ equate to ‘work’?  Absolutely not.  The fact that we don’t observe this linguistic compromise does not make it unimportant.  Long before Lord Acton, social systems – notably religion and government (in his observations indistinguishable since the time of Constantine) – dissociated the “work” in the power formula from productivity.  It’s not an accident that countless heretics went variously to the pyre and their watery drownings for questioning whether “faith” or “works” were central to Christian dogma.  In a world defined by illiterate labor and conniving, self-enriching literate elite, the more people focus on the occupation of time as opposed to the substance of productive work, the more the illusion of power can be maintained.  In fact, modern government and religion would collapse entirely if we actually realized that modern power relies not on physics but on belief where:

Illusory Power = DTime Spent Thinking You’re Doing Something / DTime.

Before we carelessly react with a call for anarchy, neither Lord Acton nor I find that to be the logical conclusion of a system clearly hijacked for the benefit of the few at the collective cost of the many.  Such a response is ill-considered.  Lord Acton’s observation that most great men were bad men must be examined more closely.  In his litany of bad actors is great wisdom.  The “great men” to which his observations were made were entirely from the Christian Occident.  The “general wickedness” of “men in authority” was correct but failed to consider the fact that these corrupt characters in their full bloom came from a fertile field of surrogated masses – masses who saw the Church and State as their benefactors.  It turns out that if predators see prey turning their necks towards the fang, they tend to bite.  If, however, we interrupt this impulse to look to authority for succor but rather collaborate with authority to support general accountability, we may actually rebalance the power equation to its incorruptible state.

But what does this mean?  Well, practically it means that we have to bear responsibility for things that we have pawned off on others.  It means that we need to care for those who need support; we need to rally to productive pursuits; we need to set aside our predilection to philosophize and instead engage in real work towards real future benefit.  In so doing, we address the integrity of the numerator and reduce the capriciousness of the denominator.  This means that we’ll work for the love of its results – not for the rents we collect – and in so doing, become Great Men and Women Incorruptible.


Sunday, February 9, 2014

One Stroke (in Time) of the Lutine Bell


The French frigate La Lutine was six years in His Majesty’s Service following its surrender at Toulon in 1793.  Passing the Dutch coast in 1799, she sank and with her about 1 million pounds worth of gold and silver and her bell.  Long after her economic loss was borne by the Lloyd’s underwriters, her treasure was located and, much of it salvaged.  Most cherished of the salvaged wreck was the ship’s bell.  This bell – along with thousands of bells – once served the important role of insuring that everyone knew that something important had happened at the same time.  As church bells summoned the faithful to assemble, so the Lutine Bell summoned risk takers to account when a loss at sea was confirmed.  If the Lutine Bell rang once insurers knew that an insured loss had occurred as a ship’s overdue status had been confirmed as a sinking.  Ringing twice, the bell provided good news that an overdue ship was just late and had in fact delivered its cargo.

Edward Lloyd, the coffee and maritime gossip house proprietor on Tower Street in London was known more for his quality of shipping intelligence than his coffee.  From a reward for a missing chestnut mare believed to be taken by a man with “black curled hair” with “Pockholes in his face” published in the London Gazette 326 years ago this month to the more important news of shipping movements and calamities, Edward knew that he could sell more coffee if his place was seen as the most reliable source of news of the day.  As the bloody 18th century opened, the speculation on shipping losses became big business.  With the seas boiling with perils – pirates, battles, faulty maps, storms, shoals – the frothy wagering on the fear of loss became one of London’s most celebrated markets.  In less than half a century, underwriting activities at Lloyd’s had become so exotic and speculative that the London Chronicle described the fever pitch of “illicit gambling” at Lloyd’s as “the melancholy proof of the degeneracy of the times.”  Those who understood the significance of disciplined, intelligence-based underwriting abandoned the debauched coffee shop and set up a new operation (complete with coffee) at Pope’s Head Alley in 1769 – just in time for the Atlantic to explode with cannon and cutlass.

There is something particularly fascinating in the colorful history of the birth of modern insurance.  Edward Lloyd knew the value of reliable information and used it to sell coffee to speculators.  John Julius Angerstein, the rate setting moral icon of Lloyd’s in the 1770s, knew that getting a jump on everyone else’s access to information was even more important.  Like the infamous Napoleonic wartime knowledge advantage that gave the Rothschilds their control of the banking system, Angerstein’s intelligence gathering collaboration with the British Navy cemented the unrivaled dominance of Lloyd’s in the market.  It’s not surprising that the 1820s competition to Lloyd’s came from Nathan Rothschild!  And while the tolling of the Lutine Bell was an essential form of leveling information asymmetry – everyone knew the conclusive facts at once – the most successful underwriters actually realized that timing of knowledge was more important than the knowledge itself. 

And here is the subtle fascination I have with this seemingly pointless, obvious fact.  Insurers, like today’s high frequency, low latency quantitative traders, exist solely based on an anomaly within our ‘civilized’ societies – a willingness to reflexively pay for the illusion of time.  When it comes to monetary-associated events, our behaviors are more similar to a reflex then a cognitive process. 

Now let me diverge for a moment for those of you who did not sit through Dr. Bruce Craig’s neural physiology lectures.  Peripheral nerves in the skin and soft tissue do a great job of triggering digital (on / off) responses.  While they are constantly stimulated, they do not trigger a response until there is sufficient stimulus at which point they have an “all-or-none” consequence.  When they fire, the neurons rush information to the spinal cord which immediately and dramatically links sense to muscle stimulation which again acts in an “all-or-none” fashion.  When you touch a hot stove, for example, your recoil is not carefully considered.  Rather it is instantaneous and reckless.  Your brain finds out about your reflex as a completed event and has no time to override the muscle response.  Considered, organized cognitive motion, in contrast, synthesizes numerous inputs – vision, distance, wind, sound, balance, capacity – and then formulates a recruitment of activation which can anticipate outcomes and then orient efforts to manifest them.

We know that events perceived to be adversity will happen throughout life.  We’ve been advised that speculators (known as insurers) should be paid a “premium” (ironic in its common derivation to the concept of a reward for a game of chance) for taking an ‘unknown’ tomorrow’s risk today.  And we know that, in most instances, when ‘bad’ things happen, these entities actually pay what they’re contracted to perform.  Societies’ willingness to transfer money to surrogates of accountability has become a ubiquitous feature of our current system.  And these surrogates actually respond – like spinal reflexes – in a timely fashion (most of the time).  But this too, is interesting. 

The Lutine Bell’s single strike meant that it was time to pay for a loss.  Everyone who had been paid to take the risk was now called to account – immediately.  Famously, Cuthbert Heath, a famous property and casualty underwriter from Lloyd’s who insured properties in San Francisco at the time of the 1906 earthquake paid not only those who had earthquake damage but paid, “all policyholders in full, irrespective of the terms of their policies.”  And herein lies a more interesting temporal nature of how the system ‘works’ for the surrogates.  By creating a near instantaneous settlement – like the spinal reflex – the societal ‘brain’ is informed of the completed event (loss and recovery) rather than taking the time to consider premiums paid to claims made.  And this time function is as, or more, important to the reinforcement of the denomination of risk than the timing of information referenced above.

An insurer and a quantitative trader are like highly refined spinal reflexes in our monetary system.  Their intelligence gathering has to involve a long-arc synthesis of observations that anyone could make but few do.  They need to be sensitive in the periphery and be masters of subtleties in large volumes of information deemed too tedious to occupy the average person’s attention.  Then, they need to modulate their behavior to evidence immediate capacity to perform – pay a claim or execute a trade – drawing as little attention to the proportionate scale of inflows and outflows as possible.  If these two dynamics are managed well, profits are amassed.  And with complex computational models which have mapped humanity’s behavioral reflexes with hyper-evolutionary efficiency, those who have sensed the most over the longest observational period will always have the coffee-house advantage. 

What I find ironic is the absence of a counter-narrative.  The model of Lloyd’s has profitably traded on temporal human reflexes surrounding loss for over three centuries.  The core principles which make insurance and quantitative speculation work have evidenced greater continual profitability than any other venture without significant government intervention or support.  In other words, We The People have predictably behaved around fear of property and life loss more consistently than we’ve done much of anything else.  So what would a system look like if it was built around presumption of resilient access to abundance?  What if our starting position was that we’ll be fine no matter what?  What type of transactions would be structured and traded around the ability to participate in the productivity to come?  I’m not talking about speculative futures which themselves were a form of insurance against future price uncertainty; I’m talking about real shared alignment against known, model-able, persistent enough.  What would accounting look like if we didn’t see a binary world of ‘gains’ and ‘losses’ but rather we saw a world of interdependent sufficiency in which wealth was informed by our ability to access resilient capacity rather than surrogate future ‘uncertainty’?  The answer is that it looks a lot different, and last night, in a coffee-shop in London, that future was born.  Ring the bell twice!  We're heading into turn two!


Sunday, February 2, 2014

Trading Slaves


Two hundred and seven years ago this week, William Wilberforce saw over two decades of impassioned zeal pay off.  With the patronage of The Right Honorable William Wyndham Grenville, PC in the House of Lords and The Right Honorable Charles James Fox, PC in the House of Commons, the Slave Act of 1807 was on its way to passage in the British Parliament.  While this moral victory was on the horizon in London, for the next 50 years over 1,600 slave ships were interdicted by the Royal Navy and over 150,000 African slaves were released.  Why?  Because a moral legal victory does not morality make.  And while many view slavery through the blurry bespectacled lens of nostalgic history books or the occasional condescending Hollywood film, two hundred and seven years later, we’re no less prone to enslave – we’ve just changed the manacles.  Rather than ships plying the seas, we’ve come up with the quite cunning enslavement of humanity in situ (Latin for “in place” or “in position””). 

Now before we go too far, let’s recall that slavery then as now, is a complex matter.  Driven by a consumer who wants to receive goods or services for less than their fair value, producers are seduced into examining how to ‘cut’ costs.  And, benefiting from the anonymity afforded by distance, whether you’re Apple Computer or WalMart you can look the other way when it comes to the labor conditions of people who you never think will have a voice or represent a market.  And if you think this is hyperbole, in the United States today the Securities and Exchange Commission requires companies to publicly disclose their use of “conflict minerals” from the Democratic Republic of Congo.  Remember that Apple and Intel were celebrated in 2011 for their announcement that they would “cease use of conflict minerals” directly acknowledging that they had done so in the past!  But, from the passage of §1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act in July 2010, it is not until May 2014 that companies will actually have to comply with the rule!  Why?  Because We The People prefer the illusion of morality over genuine, authentic, conscious humanity.

Now, take some Dramamine® because the seas of this post are going to get a little choppy.  We’re about to circumnavigate the globe at warp speed and if you’re not strapped in with your seat belt low and tight across your lap, the unexpected loss of cabin pressure will trigger the oxygen mask above your seat but you’ll be too loopy to put it on!

The Parliament of Mongolia has been working for over four years to come to terms with a massive indebtedness that they acquired for the privilege of having their copper and gold wealth extracted from the Gobi Desert.  You see, in a transaction that was advised by a U.S. investment bank who had conflicted ownership interest but carefully circumvented legal liability by having their Asian subsidiary do the “advising”, Mongolia was allowed to take a 34% equity stake in Oyu Tolgoi – the massive copper mine acquired by Robert Friedland’s Ivanhoe Mines Ltd in 2000.  What the Mongolian government did not pay attention to was the financing charge that their equity stake would cost while the mine was not in production.  With mounting liabilities exceeding $1.7 billion at interest rates as high as 12%, the last several years have seen Mongolia slip further into debt while the public has traded on the debtor’s prison business model Friedland sold the former government.  Rio Tinto and its shareholders (and Friedland) are rolling in equity value while the indenture of Mongolia mounts.  At no point did the Mongolian people or their government realize that their “equity stake” was a carefully disguised money machine in which the international shareholders (including, for all you “ethical investors” PAX World Fund) would actually make more money financing the expropriation of Mongolian minerals than on the copper sales themselves!  In the most insidious and cunning fashion, the debtors prison – the colonial dynamic that fueled slavery – is now being presided over by the slaves themselves!

An isolated case?  Absolutely not. 

Japan’s Itochu, Japan Oil, Gas and Metals National Corporation (JOGMEC) and the JGC Corporation have teamed up with Robert Friedland on his Platreef Project about 275 kilometers from Johannesburg, South Africa.  This nickel, copper, platinum, palladium, gold, rhodium metals bonanza is thought to extend for over 30 kilometers and be another one of Robert’s storied “discoveries”.  And, as he did in Mongolia, several months ago he told the South African government that he’d allocate 26% of the project to a private company in South Africa – BBBEE SPV – and generously offered to finance the equity out of – you guessed it – Ivanplats (his company).  Like any banker, you can imagine who holds the lien on the equity until the citizens can pay off their debt!  Oh, that’s right, the banker!  The best part about the filing in South Africa is Robert’s commitment to insure that this equity stake benefits local communities, women, children, and employees!  He’s becoming so politically correct in these later years.  Ivanplats also opeates the Kamoa Project in, you guessed it, the Democratic Republic of Congo where he financed a 5% ‘non-dilutable’ interest for the government in a local company in which no other equity owner would ever be contemplated.

Robert Friedland is not the bad-guy in this story at all.  This former drug-convicted felon in the U.S. who now lives under the generous sanctuary of Singapore (ironically where his U.S. conviction could have earned him the death penalty), is evidence of a system that promotes faux values while demanding mercenaries to do the dirty work.  His sojourns with Steve Jobs in India and Oregon (I wonder where Apple got their comfort with conflict metals?) exposed him to multiple aspects of cultures – both those he valued in homage to his Hanuman inspiration and those for which he held contempt like the gullibility of corruptible governments.  And the fact that he continues to persist with the same model from the Gobi Desert to the Bushveld of South Africa is evidence that neither citizens nor politicians take the time to let simple diligence get in the way of their individual predation instincts on the citizens they govern.  While I have no idea whether his penchant for ‘discovery’ of gold, platinum, and copper would continue if he didn’t have a complicit system that follows his iron cudgel from the Milky Way (a cultural metaphor if you know the cosmology of China), I do know that it’s the ecosystem that sustains him, not the man, that needs to wake up.  As long as we value metals, we will value the divination proclivities of prospectors like Robert.  Unless we provide an alternative system of incentives, we’ll keep the enslavement going.

Which leads me to a glimmer of hope.  On Wednesday, Papua New Guinea Prime Minister The Honorable Peter O’Neill formally apologized to the people of Bougainville – the location of one of the world’s most storied and bloody copper and metals mines.  Stating that he was putting in process a mechanism to repeal the tyrannical, extra-constitutional Bougainville Copper Act of 1967 (a democratic action currently opposed by Rio Tinto) he punctuated the abusive practice of legislative corruption that persists in Mongolia, South Africa, the DRC, and numerous places around the globe.  Who knows?  Maybe a vision for a new humanity – one that sees minerals and their custodians as a service for the stewardship of humanity – may emerge from one of the oldest cultures on Earth!  Here’s to the emancipation of Bougainville and with it, the end of enslavement!  That would be Amazing Grace!

If you’d like to stand with me in this call for human liberty, share this post with 207 of your friends in honor of the anniversary we celebrate this week.  Maybe we can get Hanuman to give Robert a new dream!