Four More Years

Standing on the steps of the Berkeley Springs castle in the colorful Fall of 2008, I was approached by several individuals who had just heard my rambling monologue about the imminent collapse of several banking institutions and the attendant interventions which would follow.  "How are we going to make it through the collapse?"  "What are senior citizens going to do if their retirements devalue?"  As part of his commitment to promoting the role of foresight planning in public debate, John Petersen and The Arlington Institute had provided a series of venues for several years in which I discussed the inevitabilities of the undoing of the Bretton Woods experiment.  Topics like the ECB's strategy to staunch the bleeding in the Eurozone, the consequence of monetary policy interventions in the U.S., and the fitful role of China as producer and consumer were the grist for the Spring Side Chat mill.

Four years ago this weekend, my dear friend and fellow Arlington Institute board member Napier Collyns laid out a challenge. 

"I think it's important that more people be exposed to what you have to say," he told me in the wake of my lecture.

"What I have to say is not warmly received anywhere," I replied.  "In a world that wants to avoid dealing with accountability, transparency is not welcome."

"You know what you should do?," he persisted.  "You should write a blog!"

A blog?  I had no interest in writing a blog.  In October of 2008, the idea of blogging hadn't crossed my mind for any reason.  This, mind you, was not because of my Luddite tendencies.  Blogging wasn’t what it is at present and the means of distributing blog visibility didn't have the social media utility it enjoys today.  So Napier's request for my blog was, to say the least, unexpected.  That my first blog echoes the EXACT same theme that I have been advocating in the ears of Congressional members and bank overseers since the Clinton Administration means that:

1.         I'm crazy for maintaining my passionate struggle to link the utility of marginal productivity back into our financial system;

2.         I'm incapable of presenting it in a compelling manner;

3.         It takes a long time to transform a system that has been 400 years in the making and 100 years in the official dogma of "economists"; or,

4.         A bit of all of the above.

I've been taking considerable time this week reflecting on the irony that we're quietly marking a centennial that is receiving no attention.  Set in motion with Theodore Roosevelt and under the leadership of the 27th President of the United States, William Howard Taft, an impassioned Congressional inquiry was alight 100 years ago.  During this very month, 100 years ago, a group in Congress was quite concerned with the lack of transparency in the nation's banking system and launched a series of inquiries into the possible ill-effects of consolidating too much national economic policy in the hands of conflicted private sector interests.  Ironically, the area of greatest opacity to the Pujo Committee 100 years ago is exactly the same challenge facing our nation and the countries of Europe today - total ignorance of the actual credits and collateral interest supporting debt issued by the world's leading financial institutions.  From 1905 until 1913, a clarion call for actual collateral sufficiency (can you hear Basel III echoes?) was resounding in hearings and inquiries.  Opaque shell corporations (special purpose vehicles) were used to mask assets and liabilities.  Concerned Congressmen were sure that they were inadequately informed but faced an Executive branch that was delaying the compelling for information disclosure until after the November elections of 1912.  Reading the reports of the Committee lead by Louisiana's own Arsène Paulin Pujo reminds me of the persistent value of inquiry and the malignancy of secrecy.  However, I feel like I'm in good company with respect to my self-assessment above as Congressman Pujo was definitely a bit of all 4 conditions I've articulated.

For those of you who don't recall this part of history, the Pujo Committee concluded that under interlocking directorates and due to common corporate ownership, J.P. Morgan & Co. and its board controlled 84.9% of the entire market capitalization of the NYSE.  By controlling banks, trust companies, utilities, industrial manufacturing behemoths, mining, fledgling telecommunications, and railroads, J.P. Morgan, George R. Baker, and James Stillman formed a cartel that controlled the U.S. economy.  With over 300 board positions controlled or influenced in 112 corporations across the country, the idea that the national economy wasn't the handmaiden of private interests was feared an illusion. 

Rereading the Pujo Committee Report's 172 pages and the testimony upon which it was written forms the basis for a rather damning conclusion on the much heralded arguments for transparency supporting democracy.  In depositions and sworn testimony, then as now, the public was informed of the total control and collusion wielded by a few individuals acting exclusively for their self-interest brashly confirmed in their own words and deeds.  Then, as now, the public did nothing to avert the behaviors which would lead to their desperation a few decades later.  I read my blog, the Puju Committee report, and the minutes of today's monetary policy maker meetings and I come to a very particular conclusion.  Being the disseminator of information - whether you're a Louisiana Congressman 100 years ago or a bald globe-trotting private sector itinerant today - is of little import unless people actually consume, and act upon, the information they receive.

The purpose of this blog was NOT intended to be a monologue.  It was put in motion to be my periodic musings to my dear friend Napier Collyns.   It has accomplished that mission as well as being consumed by several hundred thousand inquiring minds.  However, for it to have any effect and consequence, the next four years will need to have something else: ACTION.  This can come in a few forms.

First, it can come in the form of expanding the conversation to include more people.  This is abundantly simple.  When you see something worth reading, pass it along.  

Second, and more important, it can involve a deeper inquiry.  InvertedAlchemy has been constructed not to answer questions but to put context around topics requiring greater understanding.  I would love to see the comment section of this blog actually appended with commentary and criticism.  It is through this mechanism that we all would enrich the experience.

And then there's the greatest challenge of all.  Arsène Paulin Pujo left Congress in 1913 and, following the creation of the Federal Reserve, largely retired from the fight he had championed in Congress.  I'm still running.  However, what I know from many of you is that some of the postings I write are "inaccessible".  Since I don't know another language, particularly when I'm sitting at my weekly scribe table, I'm not sure how to make what I say more approachable.  And that's where some of you can come in.  It would be amazing to see someone or a group of readers take up the challenge to write their impressions of what I meant to say.  This would do two very important things.  First, it could solve the accessibility issue.  But more importantly, as I read what others say on the same topic, I could adapt my mode of delivery to be more effective.  In the end, we would all benefit and that, my dear friends, would make a world of difference.

So, here's to the Four Years Past and here's to Four More Years!  Let's make it a More Perfect Union.  Thanks Napier!  I wouldn't have done it without you.

 _

Ode to Problems

In his exposition on Sir George Ripley's Epistle to King Edward IV printed in 1677, Eirenaeus Philalethes opens with a beautiful phrase describing alchemy as a "whole secret…artificially veiled."  He goes on to state that the purpose for his explication on the alchemical mysteries - mysteries, mind you, that were voraciously consumed by Sir Isaac Newton and later by famed economist John Maynard Keynes - was to demystify any form of communication which would "conceal the Art."  Undoubtedly, influenced by Newton's love for the works of Eirenaeus Philalethes, Keynes is quoted as stating that:

"The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion."  -  First Annual Report of the Arts Council (1945-1946)

Somewhere around the end of the Dark Ages in Europe, we invented PROBLEMS.  Not surprisingly either.  I suppose if I was walking down a muddy street in London and somebody dumped a plague-invested corpse or a basin of sewage out on my unsuspecting head, I would have done my level best to invent the word probleme which, apropos to my analogy was originally used to refer to an obstacle.  It takes a bit of imagination and a basic familiarity with geometry to understand why we'd use the Greek concept of a parabola (not a straight line) to describe the circumnavigation of an obstacle.  And thus, on my muddy, plague and rat invested hypothetical street, voilà, a problem!

I, for one, am sick of our obsession with problems.  We have economic problems, problems of life, political problems, problems of isolation, problems of crime - everywhere you look, someone's ready at hand with a problem.  Which leads me to the irony of Sir George Ripley and King Edward IV.  In a world not awash in problems, the focus of the learned scholars and monarchs was formulae and solutions sans problems!  Real problems?  Sorry JMK but where we're going, we don't need problems.  

One of the great lessons from the Testimony of the Philosophers, a collection of writings that set forth all that was knowable and known about the cosmic terrestrial dance of the ancients was the recognition that nothing was intractable.  While solutions may be concealed by the fickleness of Diana, Mercury, or any of the other cosmic players, wisdom knew that through deep study, interdisciplinary collaboration and inquiry, and consumption of perspectives from all societies of learning, the solution was merely occult - never non-existent.  And the impulse to "solve" a problem - another one of our modern ontological myths that reinforces the same god-complex we deploy when we predict future behavior from regressing past observations - unfortunately blinds us to the realization that our obstacle is one of perspective.  Without shifts in perspective, we can quite readily convince ourselves that there is a "problem" and then expend untold wasted hours, days, months, and years trying to "solve" something that others have already discerned in other contexts.  

In our business, we deal with patents among other things.  For over two decades, I have defied anyone to show me an act of absolute invention - a "stroke of genius" - that cannot be attributed directly to the mere recontextualization of solutions from other spheres.  Two decades later, I have never been met with a single example!  I get into impassioned debates (and, yes, I flatter myself as these are really rather sophomoric arguments) over whether "creativity" exists AT ALL.  Isn't it really the case that what we call CREATIVE is merely an artifact emerging in a context which we recognize as compelling and out of monotonous context?  Is the old Budweiser frog commercial played during past Super Bowls (YouTube it if you don't know what I'm talking about) creative or is it funny because we see stuporous humans caricatured in amphibians?  In other words, did someone create the notion of drunken sensory impairment, frogs, and swamps or did they put it into a context in which they lampooned a social blight in a comic fashion?

I was on Capitol Hill again this week working with a number of lawmakers and regulators to address the Tier 1 Capital shortfalls of our nation's leading banks.  Time and time, I was confronted with the incredulity of a SOLUTION that was not solving a PROBLEM.  It was just a SOLUTION.  Just that.  Then I spent time with some of my most awakened colleagues across the globe and saw them confronting PROBLEMS.  How do I raise money if I think that money is part of a system that needs to change?  How do I build collaboration if I don't have people define the PROBLEMS they're confronting?  How do I effect large-scale social engagement for the unemployed if I don't understand the PROBLEMS they face?

Here's a thought.  When was the last time you saw something done efficiently or in a lasting fashion when the impulse to act was the PROBLEM?  And before you jump down the easy rabbit hole of the out-pouring of aid in times of environmental disaster or war, not so fast.  When we all had sympathy belatedly for Haiti after it was rocked by the earthquake a few years ago, were we responding to a PROBLEM or were we actually being reminded of neglect that was an obstacle to humanity long in development?  And, after the urgency of problem thinking dies away - conveniently being forgotten by the next problem - how many of us are persisting in our commitment to the people of Haiti?  We're not because we've got new problems.

Solution thinking doesn't NOT require problems.  The duality that we impose on the world of our triggers to action keep us from staying in solution mode.  Yes, what I'm saying is that we're less in tune with the world than our alchemist friends half a millennium ago.  For genuine transformative change, we don't need the bad guy.  We don't need the victim.  We don't need the cause.  We don't need the effect.  The wisdom of the remote past invites us to expand our lives and our actions by realizing that everything that is occult to us is an invitation to deepen our understanding and change our perspective.  And when we move out of our perspective in which obstacles are looming, we may see a path less taken.  And that, my friends, will make all the difference.  

Where Your Treasure Is…at the Heart of the Matter

³³ Sell that ye have, and give alms; provide yourselves bags which wax not old, a treasure in the heavens that faileth not, where no thief approacheth, neither moth corrupteth.

³⁴ For where your treasure is, there will your heart be also.

- The Bible:  Luke 12:33-34

Admonitions concerning wealth hoarding are as old as the wisdom traditions of humanity.  They are rolled out, from time to time, when those who perceive themselves 'wanting' wish to shame those in the Occupite 1% elite.  Ironically, the same wisdom traditions warn of the mortal cancer of envy but timing is everything!  Truth, after all, is in the eye of the beholder.

This week has been a comedy of selective morality.  Sycophants and rabid detractors alike have been enthralled with Presidential candidate Mitt Romney's tax returns.  For a guy who, depending on which of his tax returns for 2011, either made $21 million or $14 million, we somehow concern ourselves with the fact that his tax rate was about 14% - less than half of the tax rate for most Americans.  Let's be clear.  According to former IRS Commissioner Fred Goldberg (asked to be the partisan hack for the Romney campaign), there was, "no indication of aggressive tax planning activities…," and, the Romney's have "fully satisfied their responsibilities as taxpayers."  Apparently, Fred doesn't think that off-shoring assets exclusively for tax purposes constitutes "aggressive tax planning."  After all, the average American has a Cayman Island account or two next to their dressage horse stable!  But, to be clear, Fred's probably technically right.  With a tax code set up for those who have wealth to preserve the same, Mitt Romney has likely played according to the rules.  No harm.  No foul.

And, remember America, Mitt's tax accounting pales in comparison to my personal favorite taxpayer - IRS Employer Identification Number entity 94-2404110.  This company, now allegedly worth $656.27 billion with a price-to-earnings multiple of 16.46, is a great American success story that has seduced millions around the world into it's wormy core.  But, make no mistake, an enormous amount of this fruit's nectar comes from its amazing tax cheat status.  Now in fairness, a several hundred million dollar penalty for tax abuses doesn't necessarily mean that they cheat (after all, at the taxpayer expense, their appealing their fine).  But with an effective tax rate 10% lower than the statutory corporate rate of 35%, this firm off-shores as much money as possible to reduce their tax bill while fully insisting their entitlement to U.S. tax credits (last year exceeding $3.2 billion).

Ah, the fickleness of the electorate.  We want our wealthy to pay their fair share but we complain about it on our way to the glass cube temple of the forbidden fruit texting and tweeting our faux indignation on the artifact of the most egregious abuser! 

Now in fairness I, for one, find the Internal Revenue Service one of the most unsavory arms of the U.S. government's infrastructure for good reason.  On January 10, 2003, I provided the Department of the Treasury's Office of Tax Shelter Analysis a report that led to the closure of the estimated second largest tax loophole at that time.  For over a year, I led our firm's collaboration with the IRS to collect hundreds of millions of dollars from tax cheats - a collaboration for which we were promised significant compensation (under a 'whistle-blower' type provision).  Billions of dollars of closures and collections later, the IRS decided to renege on their contractual obligation (despite prior written agreements) because our payment represented a sum "too large" for payment to an external contractor.  Far from being one that owes the IRS, our known uncollected fee from the IRS is in the nine figures and has never been paid!  But, love it or hate it, tax is the way our government has decided to pay for its operations and, under the current code, the asymmetry of compliance is a function of the discretionary resource one has to plumb the loopholes!  This holds for would-be Presidents (and their donors), Presidents (and their donors), and celebrated companies alike.

Aggressively managing tax liabilities for wealth preservation is commonplace.  Remember that the much heralded success of angel investors and venture capitalists had NOTHING to do with investing in the growth of American business.  It only took off when investors could "harvest" tax losses in the failed enterprises they funded!  At present, one of the most successful wealth managers makes its returns from "tax loss harvesting".   Preserving wealth in havens remote from the long arm of an illogical tax regime is a necessary component of some entire industries.  So I'm not one to jump up and down in incredulity when the would be President has some proclivities for storing up his earthly treasures where moth, rust, and the taxman can't corrupt or defile.  

What I would, however, suggest is that we look a bit deeper.  Article II of the U.S. Constitution - how could you not know it with all of Donald Trump's "birther" complex around the current resident of the White House? - sets forth the eligibility for serving as President of the United States.  What would be seriously cool would be an amendment to Clause 5 which stated that, rather than living as a resident of the United States for fourteen years, you actually had to have your entire wealth domiciled in the Land of the Free and the Home of the Brave for the same period!  And, if we really want a More Perfect Union, how about applying the same rule to any financing flowing into campaigns?  Far fetched?  Not so fast.  Remember that loyalty to foreign sovereigns - evidenced by title and wealth - was perceived to be a threat to the young country and, as a result, residency (including property allegiance) was a CONDITION OF BEING CONSIDERED FOR THE PRESIDENCY! 

"Where your treasure is, there shall your heart be also."   Let's get real.  Whether Mitt or a rotten, worm-invested corporate fruit pays taxes or domiciles wealth in the U.S. or not is NOT the point.  What is the point is knowing the derivative allegiance.  Neither Mitt nor his corporate muse are breaking laws.  They're just evidencing a divided loyalty.  They want the benefit of the America they espouse but they want to keep it as anemic as possible.  Great for a vampire - bad for a country!  

Speed of Light Economics

In his dissent to the Federal Reserve Open Market Committee otherwise unanimous initiation of QE3 (no, not another big luxury ship), Richmond Federal Reserve President Jeffery Lacker stated that, "channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve."  President Lacker is technically right and is a voice that needs to be heeded by those outside the FOMC and much closer to the Capitol dome.  But, his voice-in-the-wilderness warning echoes off the walls of the Housing Act of 1949 which initiated the transition of life insurance hegemony on banking to mortgage insurance.  And these walls neither listen nor tell secrets.  The Committee's decision to amplify the role of the Federal Reserve as a surrogate for the much besmirched ecosystem overseen by the odd couple of Freddie and Fannie - both now convalescing in an asylum - is unlikely to produce the stated outcome and may actually worsen the present condition.

Like the life insurance fiduciaries who needed to construct fractional reserve banking in the image of their actuarial (30 year) obligations, the mortgage world (ironically also 30 year durations) is vital to the monetary policy of the U.S. and, by extension, the world which carouses in our opiate den of debt.  And, in the minds of the FOMC, returning to the heady days of "houses as ATMs" is the short term path to employment and economic stability.  This is the same erroneous assumption that led Greenspan and his merry band of jesters to respond to the Bush-era economic debacle with the dynamic which directly created the collapse in 2007 and 2008.  The only thing worse about doing it now is that consumers are actually decreasing their debt-based consumption so the drug that seduced consumers a decade ago is no longer strong enough to bring them back.  "Until unemployment turns around," which is Chairman Bernanke's new temporal nexus to end the Twisted QE3 is a horizon that is both illogical and ephemeral.

President Harry S. Truman reportedly knew nothing about the Manhattan Project before Franklin D. Roosevelt's brain hemorrhagic death.  Four months later, he dropped bombs on Hiroshima and Nagasaki to "save lives".  He neither understood the physics of fission nor the countless futures his nuclear fueled action would cloud.  Failure to fully comprehend a tool used in expediency was bad for Truman.  And in these days of Israel, Iran, Pakistan, India, China, North Korea, Russia, U.S., France and other quasi-sovereign actors' convolution around owned and aspired bombs, he could never discern the futility of his uninformed acts.  FOMC's laser-like focus on housing and Treasury debt would benefit from an understanding of the physics of light to consider the difference between illuminating a path out of the darkness vs. exploding the future with a laser of collimated energy.

Understanding the quantum properties of light requires a bit more than the scope of this blog post.  For those who want to dive into the edge of understanding, I commend the writings of Dr. MacRae and his colleagues at the Institute for Quantum Information Science at the University of Calgary and the Russian Quantum Center in Moscow.  What I find helpful for the purposes of this conversation is the entanglement between photonic excitation (the energized emancipation of light from atomic particles) and the effect of reflected or absorbed power resulting from such excitation.  This sentence requires a bit of unpacking.  When exposed to magnetic and/or thermal states, light energy can be released from atomic ensembles in varying wavelengths and intensities using excitation energy.  That energy can be focused (made coherent or at least resonant) or can be scattered.  Once released, the photonic energy can do all sorts of things based on its organization.  If it's appreciated by us mere mortals, it's most often appreciated for its effect of reflecting off of things and causing a spectrum of reflected light to hit our eyes and, voilà, we get colors, shapes and edges.  What we don't see (because our optical receptors don't give us much dynamic range) interacts with many other physical dimensions and can heat, cool, or ablate (blow up) things.

Now, to stitch this into economics.  Let's say that we operate in a belief "wavelength" presuming Truman's "Fair Deal" mandate advocating housing as the primary visible evidence of economic development in society.  In that zone, we'll see as laudable both the energizing of the housing financial sector and the excitation of the sector as a means to unleash energy in times of stress (like now).  By pulsing energy into the atomic mass called "housing" (added to our already active Operation Twist where we're extending the duration of debt purchases to mirror housing) we will hope to release an optical state that manifests as a collimated flow of energy (in the form of economic activity - both consumption and employment).  If, however, we seek to activate these economic outcomes using an atomic mass that does not emit at the proper wavelength or we fail to energize energy in dissimilar, yet parallel excitation bands, we cannot hope to illuminate an outcome or a path thereto.  Stated another way, a Mortgage + Treasury formula fails on its face because the phase resonance is identical (thirty year correlated periodicity).  If we want either light or ablative energy to unleash flow in the system, we require collective spin excitations of somewhat dissimilar periods to achieve quantum effects.

What the current Fed intervention is doing is analogous to pulsed lasers which require massive amounts of energy pumped into an excitable medium.  With excessive power and with the applications of focal optics in the form of lens, this approach is effective at blowing things up (think the aspiration of Reagan's Star Wars program).  If we want illumination or flow, we are better served by the developments made by Iranian physicist Ali Javan who developed helium neon lasers and Robert Hall who demonstrated the utility of gallium arsenide lasers, both in the early 1960s.  

What we can readily discern is the certain futility amplifying the energy being pumped into equivalent isotopes of ³⁰T and ³⁰M (a little isotopic joke for those of you paying attention).  We need to mix up the excitation and reduce the pumping energy.  

So what can those of us seeking to change things up actually do?  Well, for starters, we can engage in conversation those who blindly rally following every announced intervention.  There are some interventions that DO NOT HELP.  We can engage in a public dialogue (using either my light metaphor or one that makes more sense) to actively practice coherent monetary use.  If, for example, we're buying a coffee or having lunch, match the flow of monetary exchange to the duration of benefit.  Thirty day consumer credit does not match the momentary utility of a beverage or prepared food.  Using capital (and debt, when applicable) in a rhythm which is derived from and matches utility will go a long way towards REDUCING capital flow inefficiency and LESSEN the inventory of temporally uncorrelated debt (like mortgages and sovereign debt) which can be subjected to interventions which do more harm than good.  We the People can intervene by changing the supply - the reckless use of uncorrelated debt - and regain some harmonic that is more resonant to the actual flow of value exchange.

-

Steeling Rubber Chickens

 There appears to be a typographical error in the title of this post but the error, alas, is fully intentional.  We are, once again, playing macabre roulette with the global economy and China's National Development and Reform Commission (NDRC) ended the week with a domestic economic stimulus announcement that rang the Pavlovian bells for a pack of hungry dogs who bet up equities when that bet is empty.  By announcing nearly 1 trillion yuan ($157 billion) in approximately 60 large scale infrastructure projects, President Hu Jintao and NDRC Chairman Zhang Ping's announcement was not merely a shot of adrenaline for the sagging GDP statistics (still multiples greater than the U.S. and Europe).  It was a warning shot across the bow demonstrating the cost of our "Winners Shall be Losers" topic of a few weeks back.  But to understand this, we need to understand steel, chicken, and tires.

On June 15, 2012, the World Trade Organization determined that Chinese import duties on U.S. specialty steel were "inconsistent" with global trade guidelines.  These tariffs were China's response to what it saw as anti-competitive "buy American" subsidies which were a cornerstone of Washington's foundering economic stimulus package.  And to be clear, high-tech steel has not been the only wishbone of contention between the two trading partners.  China prevailed in its complaints against the U.S. on tires, steel, and other U.S. tariff and trade restraint issues recently and is currently in a heated dispute over its solar panel exports.  A year ago, U.S. chicken producers cried fowl (another intentional typo that's just too irresistible) on Chinese tariffs on U.S. chickens - a tariff China levied under the premise that U.S. chickens were fattened on subsidized corn feed - an allegation that doesn't take any conspiratorial insight to readily confirm.

So this week's infrastructure announcement (which, just to keep our heads straight represents about the same investment as China's official Hollywood-esque "culture budget") was supposed to be a windfall for the global economy and pull us back from the edge of the precipice of fiscal despair.  This "news" came on the heels of European Central Bank President Mario Draghi's "new plan" (which seems to be terribly reminiscent of all his "older" plans) to lower interest rates for euro zone economies and provide short term (1 to 3 year) "sterilized" debt.  While most of you have no idea what sterilization of debt is (and, lest you think that it means that it cannot procreate and make other bad baby debts, would we be so lucky!!), what you need to know is that the last time the eurozone tried to deploy this strategy, it came up about 9 billion euros short on the heels of a 23 billion shortfall the time before.  In other words - it didn't work!  And, the U.S. Department of Labor released crappy jobs data that included downward revisions on previously less crappy data estimates from earlier in the year.  By the way, for those who have a mathematics proclivity, the following represents the economics equation of the week:

China Roads and Sewers + EU Money laundering - 365,000 U.S. Workers out of the Workforce = Stock Market Euphoria

or

Δ¥1tC + €_i² _{= -1} - 44% U.S. Labor = Irrational Exuberance^∞

And all of this craziness is because "the market" is pretty sure that the events of the past few days will force U.S. Federal Reserve Chairman Ben Bernanke to lower interest rates making money cheaper still.  When one has compressed yields to zero, the utility of this anticipated Fed intervention is fascinating as the next step will be having investors actually pay for the privilege of owning dollars (and you thought servicing fees on your checking account was bad).

So back to our steely rubber chicken where we embarked on this journey a few paragraphs ago.  The much ballyhooed stimuli aren't.  And worse than that, the masters of propaganda alleging that these are positive steps are overlooking several vital long term threats which cannot be avoided and whose pain will be felt quite broadly.

First, the winners on the China announcement will be those countries who play ball with construction commodities - steel, concrete and the like.  And, to be clear, while a few mining and refining technology suppliers in the U.S. may pick up a few extra orders, it's far more likely that we'll see the October surprise coming out of the Communist Party's government transition which will award business to those countries who have been most accommodating to the Chinese.  For those of you who weren't watching, the U.S. is not on the top of that list and Secretary of State Hillary Clinton's recent visit set us back further down the most-favored-nations hierarchy.

Second, by pricing our debt at excruciatingly low levels, we're relegating our debt purchasers to fiduciaries alone - in other words, the only buyers are those who are compelled to do so by statute or mandate.  However, these buyers of debt use debt as a means to fulfill long-term obligations (like insurance, retirement accounts, pension benefits, etc.).  By 'solving' the short term stimulus rancorous challenges, we're undermining the future earnings of these institutions and that means that we'll all pay in multiples later.  And with Social Security holding the vast majority of our national debt, we'll 'reform' Social Security regardless of what happens in November as the 'promise' of a retirement benefit is both unfunded and now insufficiently yield-generating.  No matter how you vote in November, the end of FDR's New Deal is all but certain.

Third, while many U.S. companies are waiting to get their fingers on China's infrastructure spend, this announced domestic expenditure may very well be the tipping point where China's mandatory technology transfer strategy of the past two 5 Year Plans (executed by the NDRC) rears its ugly head.  Few corporations in the U.S. or Europe have wanted to talk about this phenomenon.  For the uninitiated, China has, for a decade, demanded that when it buys technology from international corporations, those corporations must frequently transfer technology, patents and know-how along with the purchase.  What this means is that large companies like GE, Siemens, and others have assigned to or developed co-owned rights to their intellectual property with  the Chinese government.  Now, rather than dictating the price for goods and services, these same companies will be invited to grovel for whatever crumbs their customer is willing to share.

We've got about 6 weeks before a new China emerges.  The ascension of the "Fifth Generation" leadership will take place in October and the rising leaders of China will, for the first time, be represented by a number of senior officials who were trained in the U.S. and Europe.  Many of the rising stars have real executive experience in companies like SINOPEC, China Telecom, several of the banks and industrial behemoths.  With their business training and corporate acumen, the China that is rising is one that is more likely to be far more savvy than their predecessors.  With an eye towards economic conquest for domestic "harmony" and pacification, the post-October China will be far less collaborative with those who seek to rely on historical hegemonic clout.  

What this means to the rest of the world is that the markets at week's end bet wrong.  Sure, there's the irrational exuberance that is merely our modern incarnation of the Dutch Tulip craze or John Law's giant swindle in the Mississippi Company.  Astute investors should know that the Chinese infrastructure spend is a jobs and commodities play.  Astute investors should know that the ECB concessions are neither new nor announcements - they're a cheap magic act that accomplishes no structural benefit.  And We the People should see through the pressure on the Fed to realize that greater intervention today will merely accelerate the harm to our social fabric tomorrow.  Social Security's creator famously said that, "In politics, nothing happens by accident.  If it happens, you can bet that it was planned that way."  Little did he know that his "sacred obligation" would fall prey to the hyenas who seek to pick the last sinews off the bones of system upon which they've fattened.  Get used to rubber chickens because that's what comes next!

Economic Lipitor: Let the Money Flow

and… Archimedean Theorem VI

On a few occasions, I have been advised to simplify my writing style to make it "more accessible".  This will not be one of those cases in which I fully heed the advice but, trust me, if you get all the way to the end, you'll appreciate that I took the admonition to heart.  You just have to make it to the end.

Federal Reserve Board Chairman Ben S. Bernanke and my chemist brother Dr. James D. Martin could actually benefit from sitting together and hearing each other discuss their respective disciplines.  By the way, turning the conversation into a Pay-Per-View event might go along way in stabilizing the national economy!  Who knows?  Chairman Bernanke could explain, as he did in Jackson Hole this past week, how the near zero federal funds rates successfully place the U.S. economy into a suspended animation state like Japan in the late 1990s where we avert some crises while deferring potentially longer-term sequelae.  My brother could discuss his cutting edge understanding of the nature of crystalline structures in transitional chemical states to understand structural kinetics in near zero conditions.  I'm being dead serious.  If the Federal Reserve economists took a field trip to a chemistry lab at North Carolina State, we may all be the better for it and I'll do my best to explain my rationale for this argument.

My story starts with a letter written on March 14, 1888 from Professor Friedrich Reinitzer to Dr. Otto Lehmann at the Polytechnical School of Aachen regarding cholesteryl benzoate extracted from carrots.  In his letter he recounts observing two "melting points" (one at 114.3ºC and another one at 178.5ºC) and observed notable color and clarity properties at these various points.  His letter, meticulously recording the precise nature of experimental conditions and the physical observations throughout the course of the evaluation, put in motion the on-going inquiry into and commercial use of liquid crystals.  What Professor Reinitzer gave the world was the realization that molecular "structure" was far more dynamic than previously thought and what Dr. Lehmann went on to give us was an appreciation for the breathtaking magnificence of the nature and structure of crystals.  One hundred years and the Framingham (Massachusetts) Heart Study later, we understood that, to deal with arteriosclerosis and heart disease derived from a derivative of this first inquiry, cholesterol, we'd need another crystal - Atrovastatin Calcium (Lipitor).  Pfizer's Lipitor crystal would alter liver function to decrease the plaque building up in our arteries.  By understanding the nature and state in which crystals are permanent structures vs. transient states, Pfizer pocketed $130 billion and some people had less coronary artery disease.

What's truly fascinating about the work of Bernanke, Martin, Reinitzer and Lehmann is the degree to which they do not enjoy the collaborative impulse to see their respective disciplines intertwining with profound effect.  And while I cannot explicate each dimension of similarity, I would like to try to take a moment to link some important 'ground truth' observed in this inter-disciplinary view.

In the past, I have written about the importance of understanding value exchange and enterprise through chemical and physical principles (covalence, fusion, thermodynamics, etc.).  However what liquid crystal sciences provide us is an opportunity to consider the relative merits of permanence vs. persistence.  I will deconstruct these principles further but, in the immediate, consider the following.  The only human construction we've ever endowed with perpetual existence is the corporation.  We lampoon antiquarian societies for their gods and goddesses, their deities for good and ill, but we fail to contemplate that we've stipulated that certain artifacts and idols of our own creation must have the implicit right to that which we mortals can merely aspire - perpetual existence.  And here comes another Archimedean Theorem VI:

The energy required to perpetuate an artifact

is the inverse function of said artifact's capacity

to address the objective for which it was

established.

Liquid crystal chemistry informs this theorem.  If we are architecting for permanence, the structures will increase their frictional rigidity with lower dimension and thermal states.  If we want persistent flow, the higher the temperature and the greater the anisotropy may be desirable.  To bring this home - by reducing the fire of the economy in the current model to suppress yield (the current FOMC policy) - we add rigidity to the system for perpetuation of structure.  However, at the same time, our actions for rigid preservation auger entirely against increased fluidity, dynamism, and exchange.  By collapsing yields to near zero, flow has to be autologous (generated by yourself) because no gradient exists beyond the gradient you manufacture.  For those of you having a hard time following, the success of the past 6 quarters of intervention appears to exist only because the market liquidity is self-dealing.  Through what the Chairman referred to as "maturity extension program" the Fed sold short-duration Treasury notes and bought longer-duration notes creating the illusion of extended maturity. 

We would do ourselves a collective favor by taking a step back from our god-complex of "creating" for a moment and ask ourselves a more basic human question.  Do we need most (or any) of the structures that we vigorously defend.  Where was the mandate that said that every human endeavor needed to be shrink-wrapped into a corporation, an association, or an institution?  Even in the era of the modern corporation, the greatest achievements have not come from within calcified, plaque-filled structures.  A corporation didn't bring us the digital age - a collaboration of Australian, British, American, German, Japanese, and Russian combatants seeking to hide information from each other variously - so elaborately enciphered communication that the transistor computer was developed.  President John F. Kennedy's audacious space race wasn't 'won' by a company.  Goaded by losing to Sputnik on October 4, 1957, untold tens of thousands rallied and came up with the Apollo program and Tang - my generation's Gatorade! 

So why is it that so many "transformation" impulses lately have decided to form corporations, associations, or organizations?  The approximately 30% capital inefficiency (by the way, the explicit cost to maintain the inefficiency corollary to Archimedean Theorem VI) of tax-deductible agency which leads so many to vehemently defend the necessity of a corporate structure could easily be eliminated by changing the singular reliance on monetary animation.  I wonder how many of the U.S. religious faithful have stopped to realize that their tax deductible tithe of 10% to their respective organized houses of worship is explicitly subsidized by the U.S. government in the form of tax exemption at the cost of restraint of freedoms of activity.  For example, could it ever be the case that one's religion might jeopardize the prohibitions such as:

-  attempting to influence legislation;

-  intervening in political campaigns; and,

-  violating "fundamental" public policy?

Somewhere along the line, we've forgotten Professor Reinitzer's lesson.  By focusing on a structure in isolation - no matter what it is - we are distracted from its utility and, in time, become more consumed with the preservation of the institution and artifact.  Then, as Chairman Bernanke tiredly concluded, we venture into untested waters using, as our only compass, the reflected light of our self-made certitude.  If, as he stated, the policy goal is to release the flow of money (or value exchange) and gain employment (or productive engagement), preservation of statutory, crystalline rigid instruments and artifacts in motionless states near zero Kelvin is antithetical to the goal.   We actually need nematic, smectic and chiral phases of alignment and transformation where we invite existing systems to transform into transitive utilities.  For in the final analysis, we don't gain from permanence of form and substance.  Rather we rise on the persistence of productive mission. 

So here's where it gets super easy.  When you contemplate the anachronism that is the United States' "Labor Day" when, for inexplicable reasons we are encouraged not to work, let's embark on a path to transition this legacy of Smith and Marx into "Engagement Day".  See if you can find a pathway to work with someone with NO AGREEMENT save the manifest evidence of working together.  See if, through that process, you find that you need much less organization, budget, logistics, planning, etc.  And, if that works, repeat.  And if that works, repeat at scale.  Having done this for over two decades, I can assure you that it leads to the greatest flows of value you'll ever experience.

http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm

Winners Shall be Losers

Would that every citizen, prior to receiving suffrage or any other rights, be required to understand the judicial system in the United States of America.  Such literacy might serve as a poignant calibration on the copious fallacies underpinning many of our social impulses.  We may realize that, as egregiously demonstrated this week, the media-hyped Apple v. Samsung case was not a "win" for Apple or a "loss" for Samsung (stay tuned as I show you the context for this argument in the following post), but rather, a huge loss for society all around.  Apple didn't invent the tablet and its "winning" patents - declared invalid when first submitted to the United States Patent Office and issued only with pathetic horse-trading - do not represent the Constitutional intent from which they spring. 

Article I, Section VIII:  Congress shall have the Power: To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

Neither "Progress of Science" nor the "useful Arts" were served by the abuse of a Constitutional right (the only property right granted in the Constitution) perpetrated by both Apple and Samsung with their "rounded edge rectangles", their "rubber-banding screens displays" and their "perpetually moving finger slide-to-unlock" devices.  To be clear, the jury, held in willful ignorance on the error of the presumption that either party had valid, Constitutionally compliant patents, were correct in finding what they were asked to find.  Aided by an explicitly biased foreman who used an illegal standard of, "If this were my patent, could I defend it?," he led his juror colleagues down a path that is in direct conflict with the standard of obviousness and novelty set for the issuance of a patent.  Judge Lucy Koh's blatant, emotionally-charged abuse of the Judiciary, facilitated by her evisceration of complete consideration of the facts in a case with billions at stake around indecipherable claims and restricted evidence, created the illusion of justice while presiding over the miscarriage thereof.  And, with willfulness, she may add insult to injury by trebling the damages for an award in excess of Apple's ridiculous assertions.

Eager to create the stock market hyped illusion of winners and losers, headlines scream their adulation for Apple's alleged victory.  Investors, like the throngs in the ancient Coliseum filled with gladiatorial savagery, rise and applaud when they see the tyrannical emperor mete out faux justice.  But, behind this defiling of the goddess Justitia - not merely blindfolded but eyes gouged out - the throngs celebrate today only to illumine their crucifix-strewn Appian Way to a greater loss tomorrow.  We reward the proclaimed victor only to puzzle over the stench of the charred corpse of Constitutional intent.

First of all - this case is not over.  Appeals are likely.  Restraint of trade that would make the authors of the Sherman Act turn over in their graves is inevitable.  Reprisals are certain.  And both Apple and Samsung will undoubtedly face opportunist patent holders with equally un-Constitutional "innovation" estates who will seek to pile on to the abuse just rendered.  Jury Foreman Velvin Hogan (faux-inventor of an un-maintained, abandoned U.S. Patent 7,352,953 issued in 2008 for recording personal videos on a "disk drive") and Apple's CEO Tim Cook want us to think that this verdict is about teaching the elementary lesson that copying is wrong - incompatible with Apple's or America's "values".  Neither admit the reality that their complicity in the contravention of the Constitution is a more fundamental abuse.

In the fuller light of day, this case reminds me of a seemingly unrelated matter several years ago.  And, fair warning, the following may be the ONLY blog post you ever read in which I actually fully agree with former President George W. Bush, so you may want to print it out and frame it.  When Dubai Ports World sought to purchase Peninsular and Oriental Steam Navigation Company (P&O) in late 2005 and throughout 2006, they followed the law and came to the Committee on Foreign Investment in the United States (CFIUS) to seek approval.  With the acquisition of P&O, DPW would become a major port manager in New York, New Jersey, Philadelphia, Baltimore, New Orleans and Miami.  But eager to fan anti-Middle Eastern bigotry, Congress led by Senator Charles E. Schumer (D-NY), successfully blockaded the full deal ultimately letting the P&O U.S. port interests be transferred to AIG for an undisclosed amount.  In the name of "intelligence" and "security" and over President Bush's objections, the U.S. Congress decided to scuttle a transaction that posed no security risk.  Obviously, AIG's Global Investment Group's acumen for security exceeded that of a bona fide operator.

At the time of this transaction, I pointed out that the "win" for America was ultimately going to be our greater loss.  You see, the same United Arab Emirates (their name had a "branding problem" with the A-word) that allegedly made a reputable, trusted operator a "security risk" also serviced the U.S. Navy's 5^th Fleet in that cozy, placid backwater of the Persian Gulf and the Gulf of Aden!  Zim Integrated Shipping Services, Isreal's largest shipping firm referred to DPW as an entity they were, "proud to be associated with" while New York activists saw DPW as the enemy.  The Jebel Ali port - the most frequented foreign port for the U.S. Navy - was safely managed by the people who couldn't be trusted in New York.  But here's the kicker.  DPW knew that its "loss" was mitigated by two fully anticipated gains.  First, in the final P&O transaction, they would sell the U.S. port operations to AIG's GIG (now proudly owned by the U.S. taxpayer, fixed income investors, and pension holders) for between $783 million and $1 billion.  Second, they knew their provisioning and security contract with the Navy was up for renewal and, not surprisingly, they'd make up their economic loss by liberally charging higher fees to the Department of Defense (in other words, the U.S. taxpayer). 

You see, in a world where our consumerism requires that 80% of our goods originate in ports we neither own nor in which we oversee security controlled by "foreign" operators, we pretend that our local ports must be safe.  This paradox suggests that: a) in their off-loading, contents like dirty bombs, drugs, or weapons become unsafe; and, b) we've had an impenetrable success on controlling port activities to keep guns and drugs out of our nation.  By proving our duplicity - extolling fair competition in Doha (in an Arab country safe enough for trade negotiators) only to sully our national honor by clarifying that fair doesn't apply if you're Muslim - we lost the money in the transaction and permanently entrenched a geopolitical racism for which we suffer a perpetual, self-inflicted moral blight. 

How do Dubai Ports World and the Apple faux victory meet in the same critique?  The answers are quite alarming.

First, both of these cases are built on false pretenses that clearly undermine a greater societal good.  By celebrating an arrogant hegemonic pretext we punish the foreigner and then applaud our local "victor".  By creating an illusion of conflict using unsubstantiated assumptions of superiority derived from our national institutions (the faultless U.S. Customs and infallible U.S. Patent Office, respectively), we laud justice while besmirching our constitutional foundation. 

Second, we create Kangaroo proceedings to publicly humiliate foreigners and explicitly violate our own jurisprudence standards which we would find intolerable in any other venue.  While we gag disclosure of substantive information material to a considered review, we bias the public with a ruse.  Remember, in the Apple v. Samsung case, the jury was invited to apply trade-dress standards to a patent case courtesy of an activist judge.  In DPW, our "national security" interests in the Persian Gulf were somehow less relevant than they are in, say, Baltimore.

Third, our self-inflicted injuries cost in both economic and moral consequence.  Apple (and other U.S. manufacturers) will lose through reprisal actions in other countries.  Apple's desperate attempt to move into television - the only chance that investors could ever get real investment returns for it's stratospheric valuation - will be blocked by companies and countries who actually own the patents on TV and display.  To maintain or grow their business operations, U.S. contractors in the Gulf region found it necessary to abandon their U.S. nexus and relocate their operations (and their tax liabilities) to foreign countries harming direct and indirect economic national interests in the wake of DPW.  While lauding "innovation" and "intelligence", we displayed pure contempt for both in both instances undermining any vestige of credibility.  And, when we face a profligate patent issuance system (for example the explosion of patents in China), we will see our economic growth horizons curtailed for two decades while they apply our own ill-advised standards against our own export interests.  Courtesy of Chuck Schumer's Congress and Lucy Koh's courtroom, we've celebrated an impotent skirmish while entirely losing any claim to moral imperative.

We all lost this week.  Samsung executives were correct in saying that the U.S. consumer will lose in the short term vis-à-vis technological options today and chilling innovation options tomorrow.  But the greater loss to the general public is the reinforcement of an institution - the U.S. patent system - that promotes counterfeit "invention" as a necessary utility for masquerading trade biases.  And, like the DPW case, the quintessential casualty is the collective admission that our much celebrated successes are not based on absolute merit and quality (under such a standard, our greatness would be, well… less great) but rather based on our conspiracy with our social institutions and their manifest ignorance.  Should we actually seek to play on a level field - one where knowledge and transparency were unqualified standards - we'd find that our capacity for collaboration and competition would be atrophied or entirely paralyzed.

Do yourself a favor.  Use your iPhone, Galaxy IIIS, HTC, or Nokia and Blackberry if they survive their own, self-inflicted corporate suicides to liberally infringe bogus U.S. patents, and Tweet, LinkedIn, Facebook, hyperlink, re-post, digg, or do whatever else you do to share this post with all your friends.  In our name and preying on our ignorance, this system will persist until We the People call for a More Perfect Union.  That won't happen in passive diffusion but can only emerge if we recognize that there's no honor in hollow victories.  While Justitia may be blinded for the moment, do her a favor and hold her hand so we can safely cross the road to more suitable future.