Mind the GAAP

When William Hewlett filed U.S. Patent 2,268,872 for the HP200A resistance-capacitance audio oscillator, he and his buddy David Packard unwittingly set in motion one America's most powerful illusions.  There's no small irony in the fact that it was Walt Disney's Fantasia that put HP on the map and World War II communications that provided the fuel for the "rocket" that Hewlett would describe in the following manner.

"We just happened to be on top of the rocket when it took off.  We were here with electronic products when electronics became a big thing.  We went up with it.  We don't deserve one damn bit of credit for the success of Hewlett-Packard."

The garage-to-icon myth is one of the most told, most misrepresented, stories of our modern economy.  RCA's David Sarnoff saw the value in Hewlett's technology and integrated it into Walt Disney's epic visual orgy set in motion in late 1930s.  But it was the war, and more precisely, MIT's microwave signal engineers which moved the duo out of the Palo Alto garage and solidified a government procurement cash-flow that would go on to support the enterprise.  It was 30 years between the garage and the first calculator in 1968, the HP9100A.  Hardly the 'overnight' entrepreneurial success that so many have chased into the Silicon Valley mirage.  So, this week when Illusionist-In-Chief Meg Whitman announced the nearly $8.8 billion charge-off, she was doing a lot more than swallowing the ipecac of the misguided Autonomy acquisition.  At the end of day, she was further indicting an economic model that she and her predecessors, though lauding at every turn, have failed to rationalize.  Growth, for its own sake, is to corporations what malignancy is to cancer.  While radical therapy can, on occasion, save the organism, this latest erasure of 'asset' value is but a whisper in light of the nearly $75 billion of market capitalization that has been vaporized in just the past few years from this once unassailable behemoth.  Ms. Whitman is probably correct in writing off Autonomy - itself an illusion created by a myriad ofcompliance and 'big data' noise - because it really wasn’t worth what HP and its investors paid.  But to blame the multi-billion crater on the impact of an accounting discrepancy (true or not) is still an illusion of gargantuan proportion.

What Meg (to say nothing of her unhappy colleagues like Ben Verwaayen at Alcatel and Stephen Elop at Nokia) doesn't get is that it's not GAAP accounting that is the enemy.  Revenue recognition audited by PricewaterhouseCoopers may be aggressive and wrong in the Autonomy deal.  But let's face it, the board (including Meg) should have been independent and inquisitive long before pen ever hit paper on the deal - not now that the target's name has become one of the greatest Icarian jokes of all times.  For Autonomy to work, it requires a bunch of dependencies!  HP, Alcatel, Nokia and others have the short term governance pathology of boards and management who live in the echo chamber of the past 30 years of public market lies.  Being at the top of the equity food-chain, growth through acquisition is favored above organic innovation.  Ironically, HP killed much of its true innovation about the time it adopted the "Invent" brand campaign.   And, when faced with the looming specter of presiding over the death of iconic brands, the same markets that celebrated the growth orgy stand more than willing to indebt the organ donor for one last gasp at profiteering.

For a bit of a digression, consider this week's announcement that Lloyd Blankfein's Goldman Sachs is looking at financing Alcatel in its hour of need.  Generous?  A real corporate citizen helping out another ailing giant?  Not so fast!  According to the press, Goldman is seeking to "stabilize" Alcatel's balance sheet.  This coming on the heels of Verwaayen's announcement that he's looking at selling many of Alcatel's patents to the Sherman Act-testing RPX.  Is Goldman's deal a stability play, an intellectual property collateral land grab, or a bit of both?  Does Goldman, RPX, or Verwaayen know the value of the assets once built in another innovation icon - Bell Labs?  Out of the firm's combined nearly 64,000 patents, slightly under 25% would stand up to validity challenges.  With over $150 billion in revenue generated by parties who are likely infringing a few thousand of the firm's legitimate IP, neither Alcatel nor its investors have any visibility into the assets of consequence.  Having one "too-big-to-fail" bank step into finance a "too-big-to-fail" company isn't going to shed more light on the matter.  However, if Blankfein plays his cards right, he'll get nearly $7 billion worth of collateral for a few hundred million.  And, like the HP story, investors will have their collective pockets picked by a system that has failed.

After 1999, 2001, and 2008, aren't we supposed to be more transparent, more informed?  Don't we have accounting and reporting requirements that are supposed to protect investors from these colossal blunders?  Don't we have oversight from the SEC, L’ Agence Nationale de la Sécurité des Systèmes d'Information, Committee on Foreign Investment in the United States, the UK Serious Fraud Office, and other agencies who are watching out for the stated interests of States and their citizens?  Haven't we learned our lessons about assuming that someone, somewhere is actually paying attention so we don't have to do so?  If this week's news is any indication, the answer is an unequivocal "No".

But let's get back to the GAAP.   In our fervor for consolidating small enterprises into cumbersome polyphemes we do grave harm to the economy and rend our social fabric.  In the Small War Plants Corporation Congressional Act of 1942, we once acknowledged that agile small businesses were vital to employ the population and innovate in times of need.  Justified by an innovation-filled war machine in the Third Reich, the U.S. recognized that tactical response to economic, social, and technological demands required a fertile infrastructure to support the formation of new enterprises.  However, in less than a decade, this impulse had been infected with tax and debt incentives that favored a view that small enterprises were, in the end, part of a food-chain ending with the very large corporations they were formed to out-maneuver.  The utility of enterprise - including the gainful employment of millions - when it comes to merger frenzied financial predation - is seen as an inefficiency.  Efficiencies of scale erase livelihoods in the name of profit.  GAAP doesn't cost-account for the social burden of unemployment and underemployment, of failed cities and towns, of lost spirit of enterprise.  After all, those are masked by tax advantaged corporate practices which domicile costs in one jurisdiction and shield profits in another.

What the G-20 need is a peacetime version of the SWPC of 1942.  And, to be sure, failure to address this will cost us more than iconic names like HP, Nokia, and Alcatel.  When the Glencore Xstrata merger actually closes (which looks like it may finally happen), the resulting over $200 billion revenue entity will loom far above the GDP of many of the countries from which the combined firms extract minerals and other resources.  And, like BHP, Vale, and Rio Tinto, this powerful size will attract new challenges.  In a world where being large has run into powerful social and practical headwinds, the ecosystem upon which titans depend is becoming more fragile.  When the industrial incumbents weaken, opportunistic impulses surface.  Nationalization of assets occurs on the margins.  Trade barriers are built explicitly and implicitly.  And in the end, we see fragmentation.  We can either preside over, and participate with, it in an orderly fashion or allow it to happen to us.  The former requires genuine accounting for the things that we value.  The latter will allow us to wax nostalgic for values we failed to explicitly acknowledge.  We could benefit from the recognition that innovation and enterprise is a pathway for purposeful engagement - not an inefficiency from which capitalist pressures should extract every dime.  We benefit from William and David's first impulse - not Meg's last one.  We benefit from a wire stretched between two rooms which made remote communication possible - not from Goldman's final leverage.  It's time that we revisit our myths and divine the truth that they've masked.  We've been weighed in the balance sheet and have been found wanting.  It's time that we mind this integrity gap.

Big Data, Small Imagination

When I wrote my novel, Coup d'Twelve, in the Spring of 2011 the idea that a project with the code name "ORCA" would show up in the U.S. elections during November 2012 in reality and in my fiction would seem to be a rather creepy coincidence. In my novel, ORCA was a system that was used to coordinate massive financial data transmission resulting in unfathomable wealth transfer. In Mitt Romney's failed Presidential election bid, ORCA was a poll and voter watcher that was supposed to coordinate massive data which would have resulted in unfathomable wealth transfer. My personal favorite association of the giant sea mammal and data is the Hamamatsu CCD camera used to photograph cosmic rays… but I digress.

Reviewing the patchwork of contracts that are disclosed in Federal Election Commission filings, Targeted Victory appears to be one of the architects of ORCA and, quite to their chagrin, their name seems to have delivered Defeat to clients Mitt Romney, Floridian Connie Mack, Virginian George Allen, Massachusetts' own Scott Brown, and Wisconsin's Tommy Thompson. Their concoction of text messaging, social media blizzarding, keyword optimization and the like looked more like a penguin diving into the yawning jaws of a hungry sea lion than the silent lord of the deep. Targeted Victory did a nice job of lining their own pockets with campaign cash but, beyond that, they delivered a forgettable performance. The obsession with watery names persisting, Rockfish Interactive also siphoned some of the campaigns' sea lettuce with their "be the first to know" digital campaign apps. Together with MindShift Techonologies (run by former COLT Telecom Group's management team) and SCM Associates (established by Stephen C. Meyers in 1991), it appears that the one thing that the campaign can reasonably be expected to produce is generous donations to Babson College in Wellesley, Massachusetts. Why? Because more Babson alum were at the Republican trough slurping up campaign cash than many if not any other school. U.S. News & World Report gave Babson high marks for entrepreneurship education and they did the French word proud. Their alum stashed the cash while presiding over a national big top circus. Well done! Probably a good idea not to overplay the Technology, Operation, and Information Management degree as the tech side of the story is not quite so rosy.

Why did Romney's whale beach? In part because of the same arrogance promoted by IBM's pronouncement that "90% of the data in the world today has been created in the last two years alone." Daily dozen terabytes of tweets, 500 million phone call records, billions of pictures, videos, and documents - how couldn't they be right? Well, the answer is digital. No, really, I mean digital. Romney's campaign and IBM both think that the only thing worth counting is discrete variables: yes or no; black or white; on or off; red or blue. Complexity (like two or more dimensions) is the enemy of this illusory world. It's best if we ignore the fact that the world we inhabit and the cosmic expanse through which we travel are analog with continuous flux. When you over-attribute confidence to one-dimensional perspectives framed in digital reality, you lose. And when it's done at scale, we all lose.

So… after Mitt and Paul were sent packing in favor of Four More Years, pundits, still trapped in digital flatland decided to blame ORCA - the killer app that, well, wasn't so killer after all. Oh, and in the interest of fair-and-balanced, Charles Pruitt's A.B. Data Group (armed with a lot more money), delivered what WPP's advertising heft couldn't lift - a win for their candidate. Macalester College in Minnesota better be getting a bump in their endowment too! And by the way; good on ya' Macalester (Pruitt's alma mater)! I think that your college website is the only one that promotes Sauropod expeditions and anybody cool enough to have 65 million year old fossils on a website gets cool points in my book!

But the other reason why Romney's sea creature was more blubber than sinew was the failure of imagination. When one seeks to understand a complexity - like emotional human behavior - it's pretty important to start with complexity. Race, gender, socio-economic status, and the like are blunt instruments. With them, you might remove the overburden of mud to unveil the site of dinosaur bones but you'll never get into the granular details with digital classifiers. What's the difference, for example, between fossil and the surrounding dirt and gravel? Well, in truth, probably a few million years. The fossil is just earth dust with its geometry preserved. And that's where Romney, IBM and all the "big data" evangelists miss the point. They forget that signals (both digital and analog) are produced in words, pictures, embraces, dances, emotions, reflexes and mediation all the time and they emanate from impulses in context. Any attempt to decipher one without the other - to say nothing of the greater harm in concluding that one is of greater or lesser importance - is madness.

When Herman Hupfeld wrote "As Time Goes By" in 1931 (sung unforgettably by Louis Armstrong), he wasn’t expecting a literal interpretation of "A kiss is just a kiss." Tell this line to Jesus of Nazareth the night he was kissed by Judas. Tell this to your bride at the consummation of nuptials. Tell this to your son or daughter the first time they plant a slobber-filled smooch on your cheek. You see, when you take words out of context, you can fill in a thousand contexts in which they don't apply and then you can form an argument with one of the more romantic, lilting songs from the 30's. The impulse in context is not a "big data" challenge - it's actually something that neither Romney nor IBM can wrap their head around. It's an invitation to realize that by pretending to communicate signals through "social media", we've actually constricted the dynamic range of our communication. And in so doing, we've shrunk the complexity of context thereby generating more meaningless signal devoid of humanity.

Here's a simple way to confound the social spiders crawling every signal to infer meaning from your every move. Don't feed them. If you like this blog post, after you've shared it on your Facebook page, Tweeted it to your friends, and "Liked" it as many times as you can, think of someone you really love and actually READ it to them. You know, that good old-fashioned concept of actually letting your voice resonate with the poetic magic of words. When you do this, do me the favor of imagining me sitting with you and smiling. Imagine that we're starting a conversation that will last long into the night in front of the hearth or to the relentless crashing of the waves on a beach. And then choose to tell your version of this story to others. In so doing, you'll reconnect with a bit of your humanity and enter the realm of cosmic data - a realm too big for campaigns and computers. A realm through which a silent ocean mammal slides quietly waiting for the migration of the perpetually moving seas.

Bribes at the Supreme Court for Thermodynamics

Spending two days in Hilversum (Netherlands) at the Global Breakthrough Energy Movement Conference provides ample cognitive deuterium to power cold fusion reactors for the foreseeable future.  All kidding aside, Global BEM did a phenomenal job of doing something I last saw elegantly executed by John Petersen's Arlington Institute.  With an aptitude somewhat unique to the Dutch, they assembled one of the most improbable of audiences from all corners of the globe and exposed them to content as dimensionally complex as the attendees.  Under the moniker of "Breakthrough Energy" - a more suitable term than the ecosystem disrespecting term "Free Energy" which fails to account for the constituents contributing to the system - they appealed to an expansive consideration of how we animate our future.

I couldn't help but marvel at the allegedly uninvited guest that seems to haunt gatherings such as this.  From Foster and Kimberly Gamble's Thrive: The Movie to the coffee breaks in Hilversum, the ghosts of Bretton Woods, the IMF, and David Rockefeller were running amok again.  The evidence of the homicide of alternative energy efforts seen to threaten the global financial system was presented by speakers ranging from Canada's Honorable Paul Hellyer to George Bush's Former U.S. Assistant Secretary for Housing, Catherine Austin Fitts.  While in years past, these voices were seen as fringe and discounted as conspiracy theorists, in the wake of the continued accountability and performance failure in the global financial sector, current headlines lent a certain credibility to what is very old news.  This post is NOT about the fact that, since 1913 and unquestioned since Bretton Woods cum International Monetary Fund, the current monetary system is controlled by and for private interests at the expense of public interest.  Rather it is about the apparent cognitive dissonance that should disprove the First Law of Thermodynamics.  By observation, in an isolated system (the passionate advocates for alternative energy paradigms), energy expended in blaming the global financial cabal for non-adoption of vital technical solutions is infinite. 

Why the title for the post?  Well, for a bunch of reasons. 

First, according to the practice of law in the U.S. and its thermodynamically constrained allies, perpetual motion isn't.  In one of the landmark cases that struck down perpetual motion as a "violation of the first and second law of thermodynamics" and therefore an "incredible utility", the U.S. Court of Appeals for the Federal Circuit actually did not conclude that Joseph Newman concocted a scam.  To the contrary, the actual case recites a report stating that, "evidence before the PTO and the district court is overwhelming that Newman has built and tested a prototype of his invention in which the output energy exceeds the external input energy; there is no contradictory factual evidence."  But, it goes on to say that since the evidence "seems contrary to recognized scientific principles" the results are "impossible".  Cold fusion researcher Dr. Mitchell Swartz's patent application efforts have been held up as irreproducible and therefore added to the Hall of Infamy by those who accept that science articulated in 1850 is the constraint with which we should all be hobbled today.  Having reviewed neither of these actual devices or the data associated therewith, I have no ability to comment on what the individuals did or didn't do.  What I can say is that the adherence to an 1850's mathematical assumption conveniently cloaked in the ominous designation of "Law" doesn't auger well for our social or scientific "advancement" illusions.  And to declare violations of thermodynamic "laws" to be "incredible" (in the pejorative use of the term) is incredible.

But equally incredible is the insistence that, with adequate financing (do we recall that the money is distributed by private institutions for the benefit of their shareholders?) we would be able to unleash alternative energy that would economically harm the shareholders that actually mint the thing that we "need" to destroy them.  If this sounds like the convoluted logic replete in the iocane powder laced Vizzini scene from The Princess Bride, good.  It should.  Because it is.  If we need distributed power available at each home, office, and human point of electrical consumption to rid ourselves from our vampirish monetary overlords, asking them for permission is more illogical than, "getting into a land-war in Asia or matching wits with a Sicilian when death is on the line." (For those of you who haven't seen the movie, you won't get this but you can click the link above and catch up.)  Which is only slightly more illogical than our continued addiction to our 60 Hz matrix unto which we've sworn unqualified allegiance.  We're blaming the poppy grower while the diacetylmorphine (a.k.a. heroin; a.k.a why we're really still fighting a land-war in Afghanistan…Asia?) needle is pumping the drug into our arm at our own hand.  If I were James Carville, I'd probably say, "It's the electricity addiction, stupid."  If we're serious about cutting the literal and metaphoric cord, we need to examine all of our dependencies we've placed on our electrical grid and figure out how to amend our technological entitlements which reinforce the incumbent system. 

If we spent as much of our time coming up with empowered appliances which actually address human needs and desires as we do trying to force gravity, fluid dynamics, toroidal fields, magnetism, light, and biodynamics into the 19th century utility grid, we may find that we need a lot less of a lot - including conflict metals, scientific ego reinforcement for "finally being recognized", money, and corporatization of energy.  We say that we want humanity, justice, peace, liberty, and countless other aspirations.  We say that these ideals can be achieved with distributed energy (or free software, or free medicine, or any of a number of other 'causes').  Yet we pave the road to our own demise with the sticky sludge of our refusal to emancipate ourselves from our reflexive preconditions that keep us enslaved to the very system that we claim is harming us.

The only perpetual motion machine that has clearly violated the Second Law of Thermodynamics is our fractional reserve currency system in market application.  What we've seen is clear evidence that trillions of dollars representing the notional value of hypothetical credit default and other synthetic instruments actually moved into dis-entropy between 2007 and the present.  This phenomenon, by the way, actually challenges Newton's Laws of Motion as money in motion actually suspended in an invisible cul-de-sac in the face of the clear violation of the Antoine Lovoisier Law of the Conservation of Mass in which the isolated system actually just created more ex nihilo.

Let's review.  You don't use the only perpetual motion machine that is embraced by governments and private elite alike (fiat, debt-based currency) to replace coal-fired electrical generators with gyroscopes, water screws, photonic or acoustic cavitation, and the like.  You start with what the Global BEM did well.  Bring together an eclectic, yes, at times, somewhat erratic crowd.  Let them share perspectives and interdisciplinary thinking.  And then, after all the energy condenses into infinite mass in infinitely small space, you spark the birth of a star by changing the paradigm that you perceive to be your principle constraint.  This cosmic process is, by its very nature, volatile.  But what you know is that somewhere on a planet far, far away, what will be seen is Light.  And that is what I wish for us all!  Pure, undefiled, LIGHT.

Austerity: Progress in Retrograde

Bernard Mandeville's Fable of the Bees, first published in 1705, served as one of the many philosophical underpinnings for Adam Smith's, John Maynard Keynes', and numerous other economists' causal economic models.  For those who have the time, I commend the 1714 full text for edification.  For those who don't, I've quoted the fable's moral below.

"Then leave Complaints: Fools only strive 
To make a Great an honest Hive. 
T' enjoy the World's Conveniencies, 
Befamed in War, yet live in Ease 
Without great Vices, is a vain 
Eutopia seated in the Brain. 
Fraud, Luxury, and Pride must live; 
Whilst we the Benefits receive. 
Hunger's a dreadful Plague, no doubt, 
Yet who digests or thrives without? 
Do we not owe the Growth of Wine 
To the dry, crooked, shabby Vine? 
Which, whilst its Shutes neglected stood, 
Choak'd other Plants, and ran to Wood; 
But blest us with its Noble Fruit; 
As soon as it was tied, and cut: 
So Vice is benefcial found, 
When it's by Justice lopt, and bound; 
Nay, where the People would be great, 
As necessary to the State, 
As Hunger is to make 'em eat. 
Bare Vertue can't make Nations live 
In Splendour; they, that would revive;

A Golden Age, must be as free, 
For Acorns, as for Honesty."

Despite the conspicuous absence of a "Finance Minister", the G20 have convened in Mexico for what undoubtedly will be one of the most stupefied assemblies to date.  The missing minister happens to preside over the economy of greatest magnitude currently careening towards a self-imposed fiscal cliff with no driver at the wheel.  On Tuesday, House Majority Leader Eric Cantor (R-VA) correctly stated that we can't "tax our way out of it."  It turns out that revenue sufficient to be a nation "Befamed in War..." living …"in Ease" where "…Fraud, Luxury, and Pride must live; Whilst we the Benefits receive," is as illusory today as it was in 1705.  Britain's continental conflicts were then what our War on Terrorism is today - an imposition of uncommon values at the end of a gun.

Mandeville paints an entirely hopeless picture of the struggle for the State to encourage the populace to "conquer (rather) than indulge his Appetites".  To encourage citizens to "disapprove their Natural Inclinations, or prefer the good of others to their own," while admirable, is futile as there are not enough rewards suitable to encourage such an ideal body politic.  And so Congressman Cantor eludes courageous unpopular leadership like his English lord forebears just 300 years ago.  Correctly describing the untenable without once evidencing the courage required to deliver the sober message:  We the People have become Entitled to the point of Sloth and that's what's got to change.

Befamed in War and Living in Ease (a dubious expenditure-to-GDP ratio distinction shared by the U.S., Saudi Arabia, Israel, Oman, Jordan and the United Arab Emirates - all luminaries of human excellence and...well,...) is an ironic paradox given the U.S. insistence on being dedicated to Freedom and Liberty.  "Physicians valued Fame and Wealth Above the drooping Patient's Health," while we spend over 15% of our GDP on disease management suggesting that the "Living at Ease" ideal is not adding to our well-being.  Between war, disease and debt, we spend more on these three than we do on all those things that would add to our benefit.  And this is the "big government" that the Democrats are accused of supporting and the same "big government" that the Republicans are unwilling to challenge.  Tragic, when you think about it!  Both sides sharpening their teeth on the same pestilence that will devour all in the end and no one willing to call either side's bluff.

Which is why I'm so fascinated by the much ballyhooed scourge of "austerity".  We've been conditioned to see ourselves dependent on Defense, Health, and Money - the sovereign duty of the government under the current paradigm.  Yet we enjoy neither safety, wholeness, nor productive value exchange!  So when we hear that the conditions under which government is operating are not sustainable, what precisely do we find so repugnant about this prospect?  Isn't this a time to celebrate the natural end of a failed experiment of nation-state intervention and a time to embrace the personal and community accountability we've been conditioned to eschew?  A world with fewer self-incriminating corrupt political actors incentivized to duplicitous behavior through opaque indulgences brokered through graft - now that's some austerity we could all use.

Rather than swooning under the popular fear of the terminal condition of a system wracked with the cancer of corruption, I suspect that we'd do ourselves a favor for examining the value of that which we're warned we'll lose.  Sure, the transition from public funding to community values may be bumpy but maturation is always a bit messy.  Think about it - were your teenage years your best?  While I'm sure one of you passed through puberty with nary a pimple, most of us had more than our share of the generalized plague-like appearance that no amount of Noxzema could fully tackle.  But, for most of us, this was a passing state and we came out the other end with a character that learned to accept that which was uniquely our challenges and release the emotional scars that were skin blemish deep.  We the People are now invited to join our European brothers and sisters and realize that the pruning that is upon us is not our enemy.  We are confronted with an opportunity to engage an accountable life at scale.  And this may form a More Perfect Hive.