Archimedean Theorem 1 – “Reality” Metrics

One cannot escape the cognitive reductionism which is a constant companion in our recent economic paroxysm. “No one saw it coming.” “We are adequately capitalized,” immediately preceding business failures and bankruptcy. Triple-A ratings on investments that had no market or value. Bank stress tests. Earnings growth by slashing future productive capacity. Equity market euphoria over missed earnings forecasts. Without question, we are collectively measuring the wrong stuff, or applying the wrong metrics, or applying the wrong metrics to the wrong stuff, or we just haven’t a clue. While we bask in the nuclear winter light of what I’ve been told is our post-post modernism (come-on, we can’t even come up with a decent name for today so we just revert to a very, very, very, very old technique we last used when counting words for our first written assignment in elementary school in which the number of words was the objective), we seem to not only have lost our way, we seem to have no clue where Polaris is or how to use a compass.

When Sir Isaac Newton inadvertently set in motion our present economic calamity, he did so by postulating that to every action this is an opposed and equal reaction. He never knew that central banks, bound by his “law” would find themselves compelled to engage in manifold folly by falsely misdiagnosing the action (the mortgage crisis rather than a destructive, dehumanized consumer debt cycle propped up by careless leverage policy which turned real estate into ATMs) leading to an insanity where recovery came from further indebting the taxpayer by bailing out AIG and providing year end bonuses for bankers who actually made their earnings on fee income derived from moving bail-out funds between themselves! We have a malignancy of ignorance and, courtesy of the market reporting media, we have the evangelists for the cult of impulsive greed chanting incantations at such a frenzy that if you wanted to find the truth…wow, I’m exhausted.

Let’s take a breath. Let me take you to one of the first places we lost our way. To find the roots of our current value bankruptcy, we need to understand that our current debt-based view of economic systems has inextricable roots in the 13th century – specifically the Fourth Lateran Council and the funding mechanisms put in place by Pope Innocent III for the financing of the fourth Crusade. In his Papal Bull (why does this animal keep showing up? – and yes, I know it’s not that kind of bull), he details the establishment of taxation of the public, preferential dispensations for the central bankers, and a removal of all rights from those outside the faith – not to mention his ultimate creativity of accelerating mortality for those who didn’t play by his rules. All of this to fund a war and provide liquidity for the State. Sound familiar?

Ironically, the reason why I link Newton and Pope Innocent III is critical. Both of them were absolutely confident in their definition of “truth” “values” and “laws”. Both of them were greatly motivated to impose reductionist simplicity on a world filled with heterogeneous thought. And both set in motion those who would become sycophant adherents who would conduct literal and figurative inquisitions which would stifle enlightened, creative thought and inquiry. And they did so by what appeared to be an innocuous act. Pope Innocent III gave us reality in the form of transubstantiation where the paradox of St. Augustine and Aristotle was resolved by fiat – it was the body and blood for Christ’s sake! And Newton gave us reality by confirming that only that which can be measured and observed is, in fact, real.

In our collective evolutionary regression, we obsess with “real”. We want to measure things, count things, compare who has more, who has bigger or better. Our obsession with metrics has paralyzed our creativity. It has dehumanized value and values. When my friend Tony offers to buy happiness from a company because they say it has no book value, no one is willing to part with it for any price. If we have less, than others with more should move to action. If we have more, we want to keep it from those who have less and want ours or find our morality in self-laudatory generosity and sharing. Pope Innocent III gave us debt-based currency. Newton gave us metric-delimited reality. And the present moment has given us a wonderful opportunity to realize that we have no clue what we’re measuring anymore.

What is the value of gold? As we swooned to see our golden calf (there’s that animal again) leap over the $1,000 an ounce moon, did any of us realize that the all in cost of movement of ore for processing last year’s production of gold required the equivalent of 14 billion human year’s worth of effort? That’s right, just to move the ore from mine to refinery, it would take 14 billion people working 24 hour days every day for a year just to move the ore. If you’re reading this, you clearly weren’t carrying ore. Neither were most of your neighbors. No, thanks to technology that pollutes the earth, water, and sky, we’ve become more efficient. But did we ever pay for the land from which we’re taking the gold? Did we actually set aside value to repair the environmental, social, and ecological damage of gold? If we did so, would gold really only cost $1,000 per ounce? Is its value what it costs? What it will cost the future? Is it worth what someone pays for a certificate saying that someone, somewhere has a bar with your name on it? What is its value? We have NO clue.

What is the value of earnings? When Intel and JPMorgan reported better-than-forecast results, their stock was rewarded with a vote of confidence, right? No! They lost 2% of their value. IBM topped expectations but investors rewarded it with a loss of value.

What is the value of prosperous engagement in the workforce? Unemployment continues to rise. The Federal Government demonstrated this week that it cannot even track its own expenditures when it attempted to report on the jobs saved or created with the Recovery Act. Silver lining? The Recovery Board is spending a reported $18 million on updating its website so the stimulus recipients’ self-reports of economic impact are more prone to accuracy.

What is the value of public support of innovation? I just spent the past two days with an inspirational leader from South Africa. During our conversation, I was disheartened to hear yet another instance when the innovative value of a country was measured by the number of patents filed by its researchers. We measure the innovative contribution to the world by how much we block others from using creativity? How tragic.

I am repeatedly asked questions about how much revenue my company makes. How many employees do I have? Why don’t I turn our technology towards making massive wealth and, after amassing a fortune, use it for good causes? And these questions come not only from crass capitalists but by perplexed social activists.

It is time to understand the elegance of the Archimedean Theorem I. Reality is that which catalyzes, harnesses, releases or perpetrates action or stasis in one or more projections thereby evidencing energy, dimension, field effect, and consequence. The understanding and assessment of Reality can be described only when Perspective delimiters are honestly disclosed with sufficient clarity so as to evidence understanding in the observers. The fulcrum we need to open a new, more integral view of value and its exchange will include a dynamic, kinetic understanding of Reality. And our social challenge is to move our ontology from metric to metaphor – from finitude to infinite orthogonality. One step closer to the next…

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A Nobel Paradox – Orpheus in Detroit

In the space of 7 days, I journeyed between a glorious meeting with James Quilligan and a small cadre of social and financial luminaries in the Berkshires hosted by Tim Murphy, to a quixotic gathering in Detroit hosted by the Rev. Jesse Jackson’s RainbowPUSH Coalition vainly attempting to use outmoded tools to stem the carnage in the minority-owned automotive business sector in North America. I reflected, as I experienced this existential schizophrenia, that we are living out a paradox not unlike the one that warranted the 1972 Nobel Prize in Economics – Kenneth Arrow’s “Impossibility Theorem”. For those not familiar with the Arrow’s paradox, it is, in brief, the assertion that when presented with greater than three options for consideration, no voting system can accurately find an acceptable and stable representation of a social group’s values. In an effort to define a socially acceptable order of priorities around which consensus can be built, Arrow postulates, complexity of greater than three options renders any attempt largely futile.

I’ve given several speeches over the past few months where I have discussed my latest understanding of the word “impossible”. To understand impossible, it is helpful to consider what “possible” is. The word, derived from Middle English generally refers to that which may be done or that which is feasible. So, when one concludes that a thing is impossible, the imputed judgment is that it cannot be done or is impracticable. I’d like us to see “impossible” in a new light – an invocation or prayer of what is about to be. Remember, when we apply the term “impossible” in our present day, what we really are saying is that, with the resources, knowledge and time that we presently have, we are unable to see a resolution manifest in a time-frame or at a cost that is acceptable. And by judging a thing “impossible” we discourage others from threatening the finitude and truth of our judgment.

Well, no time like the present to re-examine the “Impossible Prayer”. We are a few short weeks from Copenhagen when, in December, it will be impossible for the leaders of the world to arrest our rush to self-immolation. While Wall Street and Washington bathe themselves in impossible greed celebrating a recovery to their bonus-laden excesses, while cities like Detroit hold the ruins and tombs of a productivity that is impossible to replace, while water, food, and energy crises form an impossible specter too hideous to address – we find ourselves drowning in a cacophony of impossible. As a result, we sit and wait for the next shoe to fall, crushing another unsuspecting glimmer of humanity. Impossible… we pray.

I was invited to participate on three projects to envision a way to answer the impossible prayer. To show a path forward in the face of all convention arriving at the terminus of its force and sway. And, in each case, what I’ve started with is the Archimedean Theorem (by the way, don’t try to find this one because you’re reading about it here first). While the world and its power models have abused and enslaved one half of Archimedes wisdom – the lever – too little time has been spent on the real genius of Archimedes which is the fulcrum. Over the coming weeks, I am going to begin building an Archimedean Solid (you can look this one up) which can serve as the foundation for a new future – one in which we show that Arrow’s Theorem is a lever model and lacks the kinetics of a well positioned fulcrum.

There is a way out for Detroit. It involves a conceptual shift from the legacy of entitlement and set-asides where manufacturers and their suppliers maintain an unsustainable obsession with the top of the levers and those objects in motion to an understanding that the future is about well positioned fulcrum where the inevitability of the future becomes certain. Detroit will not be rebuilt on Obama’s proprietary technology “green jobs” program because the U.S. abandoned its ability to build proprietary positions by abuses in the patent system since the 1980’s. It can rise on the wings of collaborative innovation commons funded by technology procurement receivables. We will not heal the ethnic, geographic, and employment injustice if we allow the >60% of FDIC watch list banks co-located with critical manufacturing entities to fail thereby extinguishing vital lines of credit for our production base. The private sector needs to see that the road to Copenhagen will pass through the ruins of Detroit because we must see an entirely new vision in which we answer all the “impossible” prayers. Stay tuned.


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Read This and Act - If you want to be part of the change...

If you would like to be part of the solution and you are in agreement with the following, use this text and sent it to the e-mail address below following the Federal Register response rules...


E-mail: Comments@FDIC.gov. Include the RIN number in the subject line of the message. [RIN 3064–AD49]


Under President George W. Bush, American depositors were encouraged to step in to bailout the balance sheets of banks with an enticement that extended FDIC insurance to $250,000 per insured bank deposit. American depositors obliged. They inverted the troubling trend of negative savings and began depositing cash. Ironically, while the Bush administration was desperately seeking to stabilize the financial sector, they did not heed my, or others’ warnings that this was neither a fix nor even a temporary logical step. Further, they were not carefully considering the now lamented decrease of cash-flow in the consumer sector now helping fuel the deepening recession. At the time of this ill-considered decision, we suggested that the FDIC consider a more appropriate action. By actually measuring the “real” assets of our economy, the risk criteria paralyzing banks could be modernized to reflect both present and future financial performance and the drivers thereof.

In its Federal Register publication on October 2, 2009 (12CFR Part 327, Vol. 74, No. 190), the FDIC has proposed a booking-keeping plan to raise liquidity which will have disastrous effects both prolonging the real reform of the financial service sector and actually increasing the likelihood that more banks will fail therby further impeding access to credit. Under a book-keeping manipulation which is meant to satisfy quantitative investors but do nothing to actually fulfill its statutory requirements, the FDIC is proposing a “pre-funding” of assessments due by participating banks based on estimated risk as of the fourth quarter of this year. These “pre-fundings” are to be paid on December 30, 2009 and are to cover insurance premiums for 2010, 2011, and 2012. This strategy would raise an estimated, paltry $45 billion. There are two fundamental loopholes in the language of the proposed rule which are clearly advantageous to the FDIC and its member institutions but disadvantageous to the public. First, by calculating the assessments on December 24, 2009 – not at the end of a reporting or fiscal cycle – neither the FDIC nor the financial institution will have confidence in the appropriateness of the real position of any member bank and its reserves. Second, by allowing the pre-payment to be credited for special assessments, the FDIC cuts off its own capacity to respond to immediate liquidity constraints as it will have merely an acceleration of recognized cash – not genuine new liquidity at such time as a special assessment is required.

I would like to renew my call from 2008, that the FDIC immediately pursue another option which would: 1) more adequately reflect the current U.S. economy and its drivers; 2) align with economic development strategies promoted by the President and the Congress targeting the expansion of new and high technology businesses and the capital required therein; and, 3) correctly account for the correct value of assets both in its own portfolio of distressed and toxic assets and those of insured institutions. Specifically, it is vital that the FDIC and its member banks establish a means by which the intangible assets (executory contracts, licenses, franchise agreements, copyrights, patents, and trademark uses) are actually counted as bankable assets. Representing an estimated 80% of the value of the S&P companies, at present, neither the banks nor the FDIC are authorized to view any of these assets as investment grade. The irony of this is staggering in the face of the FDIC’s present proposal in which they are using one of the least creative accounting manipulations to stem a short-term problem with a longer term calamity.

Should the FDIC’s recommendation be adopted as presented, the banking system of the United States and the depositors therein, will be assured of decreased confidence in the FDIC and greatly reduced incentive to place funds into savings accounts. This, in turn, will further impair an already dysfunctional link in the capital system that has underpinned the U.S. business landscape for decades. However, in the event that the FDIC has the vision and foresight to plan for the present and future by adjusting its arcane metrics to those that reflect present reality and future aspirations, it can expand upon the nascent efforts that the FASB took in its impairment testing rules and that the IRS took in beginning to instill discipline around intangible asset opaque accounting loopholes that robbed the Treasury of billions of dollars.

Do something! Copy the message above and send it, by e-mail, to the e-mail address above. Add your thoughts and join in an effort to begin bridging into the new rather than continuing to apply patches to an already popped balloon.

Make sure you read the preceding post which is part of this one...

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Investment Grade? Your FDIC deposit isn't "I" anymore

If you want to understand where I’m going with my next blog post coming this weekend, please take 26 minutes and listen to the most audacious accounting slight of hand pulled off by the FDIC board on September 29, 2009. This is the day before September 30 which happened to be the day that the FDIC actually fulfilled my forecast of becoming insolvent. (Remember that the Chairman of the FDIC said that it was "impossible" for this to happen just a few months ago) And yes, take heart, the “staff” are optimistic that they can be compliant with their statutory reserve balance in 2017! The Bush administration’s expansion of deposit guarantees – unaltered by the current administration – means that the U.S. depositor has an actuarially insolvent position and, as of October 1, 2009 – we’re all 100% exposed and effectively uninsured. So, how does it feel? The “full faith and confidence” of the U.S. banking system now hangs on an accounting game where banks will “pre-pay” their assessments on December 31, 2009 so that the FDIC can appear to have liquidity that it actually doesn’t have thereby creating the illusion of a guarantee that fails the most basic test of legally mandated fitness. Take the time to view this and let’s talk about a new future – one in which transparency and accountability are both expectation and responsibility. Here it is…http://www.vodium.com/goto/fdic/boardmeetings.asp. Download the file of the board meeting on September 29, 2009.

Where’s the Asteroid When We Need One

O.K. You’ve all been reading my blog long enough to wonder, does this guy ever just have fun? I mean, who seriously reads the fine print in thousands of pages of financial data just to find out who’s really behind the scenes? Well, let’s take a moment and enjoy a little levity. I was thinking, while on my carbon free 36 mile bike ride with my Earth Science teacher brother Tim, how could I explain our economic situation in terms that an eight-grader in his class would understand. On one of our particularly long hill climbs in Central Virginia, I began musing about last night’s conversation about “extinction events”. Apparently, an extinction event is when a luminous object hurtles through space and smashes into Earth significantly altering life as it was known immediately prior to said event. So… I started musing about Ben Bernanke’s Friday, September 25th comments about how we need to get consumers borrowing again and it hit me – we have an asteroid coming in and unfortunately for some, we have two species of beasts who have walnut-sized brains and extremely large appetites, who are running the show. I’ll let you decide whether I’m referring to Geithner and Bernanke or whether I’m referring to certain entities on Wall Street but, let’s agree that, at impact, it won’t matter. Oh, and the moral to this story is to be one of the little furry creatures who is smart enough to live in a community as far away from these characters as possible.


Veloci extractor (from Latin meaning playing a shell game so fast that the friction burns up whatever was under the shells but always slipping one loaded shell off the table into its own pocket while no one is looking.) This beast believes that the way to maintain power and control is to keep acronyms coming at unsuspecting prey faster than they can understand what’s really being done. It is sometimes referred to as a quant fund or a Goldman Sachs’ rapid trading platform so vital to profitability for themselves that they are in a quandary over exactly how vigorously to pursue the lawsuit against a mathematician who allegedly misappropriated the algorithm. Interestingly, the Veloci extractor has no concern for its prey and simply wants to devour any and all living matter so long as it can take calories from fresh or carrion alike.


Transactosaurus wrecks (from Latin meaning a belief that you solve a challenge by denying its root cause but coming up with a story that unsuspecting prey will believe long enough for you to eat them). This beast believes that the way to maintain power and control is to keep prey so focused on consumption at their miniscule level that they won’t see the carnage being wrought by its own kind. It is sometimes seen in the company of rating agencies, pension fund managers, or Government Sponsored Enterprises. Lately, the Transactosaurus wrecks has been hanging around the FDIC and the close to 1,000 soon to be failed banks in the company of Veloci extractors as they’ve formed a great scheme that takes statutory reserve funds (for banking, insurance, and pensions) and seeks to use them as long as they can do so with impunity. At the G-20 Summit (or as I like to call it G20assic Park), many of these beasts successfully got the leaders of the new 12 member countries to believe that the way to become globally powerful is to clone the same genus and species of walnut-sized brain inspired programs that took us to the brink. However, what they didn’t point out is that the Veloci extractors’ and Transactosaurus wrecks’ real motivation was to expand their feeding grounds with prey that they understand.

As the asteroid of illumination comes closer to us, you should see both of these beasts continuing to ravage unsuspecting prey like they do. You should assiduously avoid putting yourself within easy reach of having “prey” and “you” as synonyms and if you do, all I can recommend is the homonym.

The good thing about being one of the smaller furry creatures is that you can prosper with a smaller appetite. You can band together and create shelter and safety. You can keep warm and cozy with other furry things. And, most importantly, you can think! So start using the part of your brain above the stem, disengage the fear that the beasts have used to their advantage for a long time, and celebrate that change is that growing light in the sky!


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When Green Meets Gold

John Schmidt and I will be discussing the interplay between economic systems and the adoption of ethical prosperity energy, water, and infrastructure systems. Here's John's summary of the conversation which will be broadcast live on MONDAY, SEPTEMBER 28 at 2pm EDT on VoiceAmerica Business...


When Green Meets Gold

David Martin PhD., Executive Chairman of M-CAM (www.m-cam.com) —the international leader in innovation finance and trade—returns to ZOOM’D for a further riveting look at the relationship between the world’s growing green economy and the current global system of finance in a show entitled “When Green Meets Gold.” David reveals realities of the financial system to be aware of, describes the underbelly of inertia and barriers that complicate responses to climate change, and points to a view of positive movement that showcases potential, not gloom and doom. The global financial crises may have a silver lining—offering opportunities not before seen at scale and around which engaged leadership across society can be mobilized. This ZOOM’D segment initiates explicit emphasis on visions for a desirable future—which extend beyond the polarities, doomsday clamor, and fear that pervades much of the dialogue going on within this era of extraordinary change.

To listen to the show, please point your browser to...

http://www.modavox.com/VoiceAmerica/vshow.aspx?sid=1531

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The Maelstrom and the Matador

I took a few days to make sure you all downloaded the Federal Reserve Flow of Funds report for September 17 and waited to see if any of you would take up the baton to explain what’s happening to the rest of us. If you were one of the lucky ones, you read the Reuters report that gushed that U.S. household wealth grew by $2 trillion. “Household” ownership of U.S. Treasuries grew to a level 65% greater than similar holdings one year ago. On the surface of the superficial reporting one could have concluded that the September 17 report was, well…uneventful. But that’s if you don’t look at the report.

A dear friend of mine read last week’s post and asked if I could explain the “maelstrom” metaphor I used. And, I realized that several weeks ago I promised an expansion on the Matador analogy so, here goes.

Popularized in the English language by the University of Virgina’s favorite (drug addict) son Edgar Allen Poe in 1841 , the term maelstrom has Nordic and Dutch etymology likely from the Dutch for “crushing (or grinding) current”. In Poe’s terrible short story, we see a remarkable metaphor for the past, present and future of the U.S. financial situation. The narrator in Poe’s story, during the descent, reports the following.

“I made, also, three important observations. The first was, that, as a general rule, the larger the bodies were, the more rapid their descent — the second, that, between two masses of equal extent, the one spherical, and the other of any other shape, the superiority in speed of descent was with the sphere — the third, that, between two masses of equal size, the one cylindrical, and the other of any other shape, the cylinder was absorbed the more slowly.”

Let us consider my use of the metaphor informing the Federal Funds Flow data. We’ve all been inundated with the “too big to fail” moniker since the great unraveling last year. Ironically, what we’ve done is actually responded by making a few things bigger. In a review of the Flow of Funds, a simple realization comes into sharp focus. First, consumer and business access to, and use of, credit is moribund. Second, the Federal Reserve has done a wonderful job of consolidating it’s sphere of influence (yes, read the double Poe meaning) in both conventional debt instruments and those linked to GSEs or Government Sponsored Enterprises. Calculating the loss of future-income based personal and corporate access to and use of credit combined with a measurement of the excessive, off-setting utility of unsecured credit by the Federal government, one realizes that we are left with a rapidly GROWING insolvency. There is greater debt in the system and it is further removed from revenue-related enterprise. Remember that tax is the revenue that services the debt in a simplified sense and, with profits, income, and employment depressed on a >35% devalued dollar, you have a going-concern problem.

And, I can’t help but add my signature warning. In the September 17 release, we found out that pension reserves are MORE desperately under-funded and leveraged than previously estimated. So, in a time when personal “savings” growth is almost entirely attributed to three “assets” – namely, functionally uninsured deposits in FDIC formerly insured banks; U.S. Treasuries (which are the ultimate Ponzi as the individual buyer will one day have to pay - in tax - for the insolvency of the maturity of the instruments); and Mutual Funds (overloaded with, you guessed it, Treasuries, municipal bonds and equities in Government Sponsored Enterprises) – and the population is aging, we’ve placed fewer, larger bets at the high-roller table. Are you ready for this? Reserves for pensions and insurance defined benefits now stands at about 1/3 of the value the same liabilities had 4 years ago. That's right, with LESS financial confidence in the system, we have 2/3 less backing our annuity obligations. And, yes, the PBGC is still in a free-fall.

Which begs a number of questions that I’ll touch on later. However, let’s settle into the precipitous descent. The anniversary of the Matador’s slaying of the bull – death by a thousand lances – has been marked by a recognition of the identity of the Matador. Many readers thought I meant Bank of America when I used the metaphor. But, alas, I didn’t. The identity is the Fed, Treasury, NY Banking trinity which used the cataclysm of Merrill Lynch and the collapse of Lehman Brothers to create the most amazing hostile takeover of a national financial infrastructure since – well, the 1840’s when Henry, Emanuel, and Mayer Lehman read a short-story by Edgar Allan Poe. Isn’t symmetry wonderful? We are all under the waves on this one in the U.S. And, worst of all, September 17, 2009 really was what I had reported – the conclusive evidence that we’ve got challenging days ahead. And, foreshadowing a future posting, you’ll note that insurance and reinsurance firms will be reporting revenue growth from increasing fees assessed to policy-holders as they are rapidly unwinding their balance sheets before the next circuit of the maelstrom.


(1) Edgar Allan Poe. “A Descent into the Maelstrom”. Graham’s Magazine, May 1841, 18:235-241.

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