Greedy for the Sun

April 1 was no joking matter for me this year.  At 12:01 AM I had the opportunity to put a real price tag on my value for stewardship - it's greater than $50 million dollars.  In the monotony of unconsidered capitalism, I was asked to put in jeopardy the interests of investors in one of my enterprises for great personal advantage and benefit.  It would have been 'good' for my interests as I would have been in more direct line to greater monetary benefit, more influence, and less headaches from the nuisance of governance that attends a world including many inconsiderate, passive shareholders.  While some of you were reading my fresh blog post in the Pacific, I was pressing 'send' on an e-mail that said "No" to an offer of a lifetime.

"And so in war; if the campaign is in the summer the general must show himself greedy for his share of the sun and the heat, and in winter for the cold and the frost, and in all labours for toil and fatigue… the princely leader and the private soldier may be alike in body, but their sufferings are not the same: the pains of the leader are always lightened by the glory that is his and by the very consciousness that all his acts are done in the public eye."

When I said "No" to a massive capital partnership, I was not diminishing the value of provisions for our enterprise.  In fact, I neither rejected the money nor the party offering to fund; rather, I was rejecting the form in which it was offered.  To achieve what we seek to manifest, the utility of capital is a critical component of our endeavor.  Without it, the market perceives risk where little actually exists.  But the idea of dishonoring those who have provisioned our enterprise to this point for the excessive benefit of the latest to arrive on the scene is beyond the pale.  And, quite frankly, illogical.

Imagine a world in which you are to be trusted with the resources of others.  You will be held to public and private scrutiny - success or failure.  You will be asked to apply yourself each day to the productive deployment of resources for greater returns.  The only catch is to start out, you must disavow pledges - actual and implied - that you've made to those who, with similar expectations, merely had the curse of preceding the present beneficiaries.  Gregory Bateson sought to disentangle this paradox in his effort to explain the roots of schizophrenic pathologies in what he referred to as the "double-bind".  

"I want you to be loyal," pleads the new investor, "so I want you to abandon the returns expected by all those who came before."

"But if I'm prepared to be disloyal to those who came before, how can you expect my loyalty to persist for you?"

"What I will do is place golden handcuffs on you so that you are penalized for any act of future disloyalty," the new investor stipulates.

"Than you don't seek my loyalty - you seek my indenture for which one day I will loathe my condition and you."

What on earth could be salutary in this social dynamic?  I was advised that the answer is the non-answer: "That's just how the system works."

Well, on April 1, 2013, that system stopped working, at least for one instance.  I said, "No." 

"Now some of his scholars showed such excellent aptitudes for deception and overreaching, and perhaps no lack of taste for common money-making, that they did not even spare their friends, but used their arts on them.  And so an unwritten law was framed by which we still abide, bidding us teach our children as we teach our servants, simply and solely not to lie, and not to cheat, and not to covet, and if they did otherwise to punish them, hoping to make them humane and law-abiding citizens. But when they came to manhood…, the risk was over, and it would be time to teach them what is lawful against our enemies."

Cultivate values of accountability and stewardship, loyalty and integrity through life but to succeed, be prepared to apply them selectively!  Is it any wonder that we see our system in the throes of collapse with integrity failings at both great and small?  Is it any wonder that remarkable abuses of law and public trust go unprosecuted when those who take oaths to uphold and defend are blissfully suckling at the tit of the treacherous?  

"Many have won the very wealth they prayed for and through it have found destruction."

There are many who seek some karmic or eschatological resolution for this consensus delusion of selective accountable stewardship.  For them, I am afraid that you'll find ample evidence of perpetrators of ill intent who were enriched by their treachery and who die fully sated in the life that they led.  Equally, paupers' graves are filled with principled folk who took the road of morality and died ignominiously.  The ends-and-means justification question is a naïve catechism.  It neither informs critical moral development nor does it resolve the shrouded reality.  I cannot tell you that the decision I made on April Fools Day was astute or absurd. 

Here's what I can tell you.  For the past six days, my life has been surrounded with dozens of remarkable people - some in disbelief - who have seen a decision taken on principle and have rallied to the notion that there is path that does not require acquiescence.  Exposed at the vanguard, I have been surrounded by allies and together we press on.  Bring on the sun, the heat, the cold, the frost because our toil has been lightened!

(All quotes in italics are from Xenophon's Cyropaedia)

Off By 6,371 Kilometers and Losing Our Way

What does 6,371 kilometers have do with the economy, social systems, and how we rationalize our understanding of the world?

Work with me on this because it’s actually an important conversation that was born with the sunrise on Friday and through trigeminal neuralgia (TN) carried into my office Thursday afternoon by a noble soul successfully treated with a gamma knife procedure that interrupted a case of the "suicide disease".  The sunrise, with it's apparent relentless northern progression across the mountain upon which Monticello sits opened a conversation with Colleen about horizons and perspectives.  Experiencing a brilliant person who was reconstructing cognitive function after being afflicted with TN for years and realizing that triangulated focus of gamma radiation pivoted his journey from suffering to healing reminded me of the imprecision of perspective.  In a world where we fail to contemplate the dimensional simplicity to which we cling in our metrics, social schemes, and religious myth narratives thereby neglecting the more rich, complex adaptive reality that is, the consensus perspectives we celebrate lead to our collective impoverishment.  As surface dwellers and myth tellers, we begin at a layer of concentricity which we mistake for ‘center’ and this makes all the difference.

Here’s the literal answer to my opening question.  When Persian and Arabic astronomers contrived a mathematical model of the universe, they began with, not surprisingly, where they were standing.  This spot happened to be concentrically ‘off’ by 6,371km – the radius of the Earth.  And from that horizon-circumscribed vantage point on the apparent plane, they discerned that the cosmos contained intersecting orbital planes defined in altitudes and azimuths. Watching the stellar lights pass above them and being inspirationally transcended from the plane on which they stood they began to form metrics and tools to discern their place on earth and their relative position in the cosmos.  They were not standing in the center – neither of the Earth nor the cKosmos (note: I use the 'cK' combination intentionally.  To my secularly predisposed friends, I'm comfortable with cosmos describing the expansive universe.  To my spiritual friends, I embrace the Kosmos metaphor to define the 'intention' dimension of the universe.  My adaptation is motivated by respect of both perspectives.)  

I stand in mathematical and spiritual awe of these careful observers who were drawn into this inquiry not merely for the complexity intrinsic therein but to the impulse to understand the precession of terrestrial and celestial events and discernment of auspicious seasons.  But I’m equally stunned by the elementary skewness evidenced in that, while looking up, their impulse failed to correct for the distance from center. What if stellar paths were not projections of orbital bodies in circles or spheres but more complex dances?  What if, from the center, the observations would be devoid of horizon?  Standing at 'the center' informed of no horizon, what cKosmology would we form and how dogmatic would be hold the correctness of our view?  What new tools would we devise to make sense of our place and the trajectory of our journey?

Our denominated and consensus ‘sense-making’ accessories are artifacts of a sensory state that deflects our ascension to our deeper core - both in our understanding of ourselves and the world in which we operate.  And yes, I mean the literal, non-paradox of a rising to a deeper core.

Those of you who are astute will appreciate the link between Aristotle's understanding of the basic human senses and the trigeminal neuralgia where this musing began.  The vital trigeminal nerve is the approximation of all sense into one cranial nerve.  It links the opthalmic, maxillary and mandibular nerves and, without its function, we are incapacitated in our effort to communicate perception.  Imagine a world in which Aristotelian basic senses were embodied singularly in five individuals.  One sighted, one olfactory, one tasting, one touching and one hearing.  These people are placed in a room with a candle.  In total integrity, they describe the completeness of the essence and state of their observation. They, like surface dwellers, could have a series of experiences.  In our present state, they could generously label as ‘spirit’ or ‘belief’ that which they apprehend ‘described’ by the other sensates.  Having no frame of reference (no planar 'horizon'), our disintegrated sensates would never apprehend a knowing state regardless of their individuated intention.  However, if they were to add a center – in this case transference integrity and trust into a transcendent collective – they could share a common sense of ALL and be lit, fragranced, carboned, warmed, and serenaded by a literal common narrative from the center – the candle.  This would have room for no dogma, no catechism, no tradition.  It could be informed by the sensory utilities refined in traditions but it would be harmed if these were anything but utilities for sensory acuity enhancement.

On all days of the planar, temporal and incorrect Gregorian calendar, Easter is the best of all days to reflect on this human paradox.  On a day which is meant to celebrate the incarnate human transcendence over death by a force that absolutely embodies the sacred and the profane we see the Celebrated enshrined in denominated discord by adherents rather than seeing an impulse to comprehensive union.

There is no unknowable phase or state.  There are several phases and states that defy our observation and our quantification because we have been incapable of refining our discernment and acuity to apprehending their signals.  The more firmly we hold our dogma of the unquestioned and absolute nature of our spatially distorted perspective, complete with building complex astrolabes and sensors to confirm that which we're sure we know, the less aware we are of the absolute phases and states and the more prone we are to pointless myths to rationalize that which does not comport to our vantage point.  Our social and ontological calluses, anesthesia, and cataracts limit our accession and our narratives preclude our collaborative impulse to engage in integrity transference in favor of our stale myths and beliefs.  Our efforts seek to confirm the certainty of our vantage point and our navigation therefrom without holding open the possibility that we are uncentered and, in fact, narrating our story from an indeterminant concentric horizon some distance away from the center.

On this Sunday, set by the First Council of Nicaea in 325 A.D. to be the 'right' time to celebrate the culmination of Passion, ask yourself a transcendent question:  Is there one 'other' perspective that might help inform my view of the world?  If I triangulated my perspective with one other observer clearly holding another vantage point, could our shared view more completely inform our experience?  Can 'wealth' and 'poverty' find shared purpose and stewardship?  Can 'powerful' and 'subordinate' gain operating effectiveness through alignment of interest?  

Sounds impossible or unlikely?  No, just uncommon in our times.  But our times, they are a changing!

Open Letter to Shareholders - Be Accountable!

I had the occasion this week to be invited to state some of my personal principles around enterprise provisioning.  In current capital market behavior, there are several assumptions which, while being implicit, create the plastic failure of our system rather than facilitating the elasticity that expands collaborative success.  I use the term "provisioning" rather than "financing" for an intentional reason.  Without exception, NO enterprise's success is solely arbitrated based on access to, or command of, money.  Therefore the myopic obsession which places money at the heart of economy defiles what centuries of evidence show: namely, that shrewd multi-dimensional asset stewardship, experience, leadership, innovation and countless other tangible inputs are necessary for any phenotypic success. 

That said, tragically our current system favors what is known as "the last man holding the bag" principle.  This principle simply states that there must be a series of inefficient extractors in a system who need to withdrawal excessive benefit just until the point of plastic failure at which point in time, there's nothing left for the last man holding the bag.  Market price rises, put another way, are heralded as "success" but what is forgotten is that monetary flow means someone's gain is being extracted from someone else's loss.  The current public equity surge is NOT the sign of a great economy - it's the evidence of a wealth transfer in which subsidized monetary policy from the FOMC is transferring money from public future productivity to present isolated private investors.

In the interest in giving you a personal window into my views in my daily business, the following is excerpted from a letter I sent to a board and to some potential joint venture partners on one of my business activities.  For those of you who seek to miss the point of this post to decipher the parties, here's the paradox.  This week I've been embroiled in issues arising from several multi-billion dollar mineral and energy transactions, an exceptionally large banking transaction, and the initiation of a large health-care transaction to treat one of the world's most virulent diseases.  The letter excerpted below is not TO one alone but generalizable across several.  I trust you find the points helpful as a point of departure for deeper conversation.

With respect to an impulse to effectively "cram down" the interest of prior shareholders in one business for the benefit of new joint venture investors, I wrote:

1.                  Honoring Fiduciary Stewardship:  Any predatorial instinct to dishonor fiduciary commitments made in the past to sate future greed is unethical, offensive and the basis of the highest form of dishonor.  While the majority of (a venture's) shareholders have acted with callous neglect in many instances…, this does NOT entitle them to our dishonor.  Any deal that moves forward …, that lays in its foundation the evidence of dishonoring fiduciary interests is a deal that will not happen.  (S)hareholders’ capital will have a mechanism to be returned or be attached to a minority participation…. (New) management would be ill-advised to assume that this venture can succeed if it begins by asking me as the opportunity creator and steward to defile my absolute fiduciary commitment. 

  

While my second point, as written, contained enormous amounts of proprietary information which I will not reproduce here, the principle should be highlighted:  Honoring Assets / Asset Stewardship.  So, allow me to share an example from my company's activities.  I am fascinated by the impulse to seek "control" of assets which provide no utility to one enterprise in an effort to "contain" or "focus" management efforts in another.  In our history, we have developed countless technologies and information platforms which have been placed in perpetual public trust - things like the Global Innovation Commons and the Heritable Innovation Trust.  We also have capabilities that have been placed in service to numerous interests including global humanitarian crisis response, security concerns, law enforcement, and other activities.  While these activities do not evidence monetary productivity on conventional financial statements, their value is inestimable.  The notion that one can, in the name of one enterprise, remove or restrain these vital Asset Stewardship opportunities which benefit millions around the world is an evidence of a system that defines value and success far too narrowly.  Similarly, if one stipulates value only in what they apprehend as the extractive "value" (e.g. copper out of the ground), defiling forests and fouling streams are merely artifacts of sociopathic greed and represent impulses devoid of trustworthy stewardship.

The third has to do with how future benefit should be allocated in the face of a proposed joint venture bringing together capital, talent, technology, market knowledge, and, in this case, capital arbitrage.

3.                  Honoring the Meritorious Team:  Money is a utility – not the agency of control.  A funding party has every right to a fiduciary return of stewardship and reward.  This is a principle that I warmly embrace.  That said, if this program moves forward, our mutual wealth will be derived from the effort, intellect, experience, technology, relationships, monetary and non-monetary provisions, and instincts of the team that we assemble.  As a result, while economic returns are reasonably, and may (in early majority) flow to risk capital, insofar as that capital has NOT been truly at risk, then returns for perceived and illusory risk will be commensurate with its actual role.  This does not diminish (a partner's) role AT ALL.  In fact it places it first in (monetary) returns.  But greed – when one is relying on the dedication of credentialed access and talent – is evidence of shortsightedness.  This attribute predisposes the enterprise that we’re building to failure. … (Success)… will only be realized if we honor ALL THE CONTRIBUTIONS at the table and realize that while I seek no majority or control, neither do I tolerate predatory, short-sighted greed.  Our wealth will be commensurate with ALL OF OUR CONTRIBUTIONS.  If we don’t share that vision, than we don’t share a common table.

These principles are as relevant to our structured finance programs as they are to our work in Asia and the Pacific with the ethical reframing of existing agricultural and extractive industry businesses.  Systems that fail to integrate: complete appreciation of all Commodities; sufficient time and effort investment to establish shared Custom & Cultural values; transparent Knowledge sharing; alignment of Monetary resources; full integration of Technical capacity; and, full team engagement for the Well-Being of all participants; are systems that cannot flourish.

Call Me Ishmael

Queequeg (played by former JPMorgan Chase & Co's Ina Drew) was in front of the Senate Permanent Subcommittee on Investigations explaining how a harpooner could personally net $29 million in blubber alongside Starbuck (played by supervisor Achilles Macris) and his $32 million haul.  Meanwhile Fedallah (played by the celebrated Chief Investment Office London trader Bruno Iksil) - long bloated on the seabed having been entangled in ropes and drug down to the abyss by Moby Dick- was once again the object of great theatrical wrath served by a court of landlubbers who, themselves, have been incapable of a single rational fiscal decision in the past decade.  More harpoons.  More ropes.  And still more tragedy meted out by a system long unmoored from the safety of Nantucket.  One can only imagine what Herman Melville could do with this week's latest episode in the ongoing saga to tame the great white bull whale or the maniacally fixated Ahab.  But reader, take heart!  The Pequod (played by the inestimable JP Morgan Chase & Co.) though taking on water according to the stress test results in which the Fed concluded that there is "weakness in their capital planning process", is not yet sunk.  Still clinging to the rope around his neck and now fated to join Moby Dick in whatever fiendish designs the bull whale contrives, Ahab remains steadfast. 

Melville's 1851 MOBY-DICK or THE WHALE served as an amicus indictment on the hubris of both an industry and a human condition in which monocular and cruel task-masters could expend humanity for the pursuit of an iconic purpose.  Within a decade of its publication, the pretextual metaphor of 'white' and 'black' would animated a nation to draw over 3,000,000 men from their homes into the field of battle where over a third would pay with life and limb.  Within 50 years, mining and smelting would overtake whaling as the leading temple of Kali drinking the blood of thousands for the enrichment of the few.  And 150 years later, we'd replace industry with indenture and make trillions of dollars in bets against humanity's performance (in the form of credit default swaps) and further entangle humanity in the harpoon lines of previous greed-fueled quests.

The Senate's inquiry happens to be a hubris exceeding that of the Ahab they so revile.  While Jamie Dimon's "tempest in a teapot" dismissal of $6.2 billion in losses inflames vindictive public servants, these same judges fail to recall that just a few weeks ago, their failure to accept accountability invoked over ten times Jamie's teapot and their careless neglect still fails to consider the looming $3 trillion in debt and entitlement liabilities the country is not prepared to honor.  

"All that most maddens and torments; all that stirs up the lees of things; all truth with malice in it; all that cracks the sinews and cakes the brain; all the subtle demonisms of life and thought; all evil, to crazy Ahab, were visibly personified, and made practically assailable in Moby Dick. He piled upon the whale’s white hump the sum of all the general rage and hate felt by his whole race from Adam down; and then, as if his chest had been a mortar, he burst his hot heart’s shell upon it."   Replace "Moby Dick" with any of our present too-big-to-fail or too-big-to-hold-accountable institutions and we realize that it's not JP Morgan, Jamie Dimon or the rest of the lot that we really revile.  It's our own incapacity to start with our own accountability and realize that we can only ever require of others a standard that we are willing to hold faithfully.  What we most revile is likely that which, in our own view, we're most unwilling to confront.  As the magnitude of our vindictive impulse grows, so too should the reflected consideration of our own loathing of the points in life where we've traded purpose-filled engagement for the expediency of self-interest.

Victimized by our own surrogacy, we can join Ahab in shrieking:  

"Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee: from hell's heart I stab at thee; for hate's sake I spit my last breath at thee."

Or, we could take another view.  We could realize that the gear of the great machine that is represented by JP Morgan Chase & Co. and the United States Senate is a machine built to serve a system dedicated to perpetual growth without consideration of sustainability.  As long as we celebrate any portion of that system or seek to consume its oily production for our own sloth (marketed as "convenience"), we have no place to critique.  It is not until we actually establish new paradigms for engagement and live within the means sustained thereby that we realize that vindication and blame serve no purpose.  In a realm of personal accountability and communities of responsible citizens, we can finally realize that there is no 'other'.  Just We The People.

Here's to krill and plankton.  Like the lilies of Solomon's field, they grow in elegant, frail complexity, neither toiling nor spinning, yet I tell you, even Solomon in all his glory was not arrayed like one of these!  Consider and want not!

My Dear Darwin…Devolved

Sir Francis Galton penned this salutation in a letter to his cousin Charles Darwin on Christmas Eve 1869.  In the letter, this polymath of the 19th century who reified linear regression, and contributed to the burgeoning fields of genetics, meteorology, biometrics, psychology and eugenics celebrated Darwin for the emancipating effect of Origins seeing it, "in the same way as converts from barbarism think of the teacher who first released them from the intolerable burden of their superstition."  In his 1875 publication Statistics by Intercomparison, with Remarks on the Law of the Frequency of Error, he explains his motivation for population statistics - the heart of social modeling - as an efficiency of labor.  One could, he argues, "marshal a series" of men, behaviors, or attributes or more efficiently sample a small set and derive generalizable conclusions so long as we know the frequency of error.  And to be clear, error is defined as the divergence from the normative mean. 

As with so many other social assumptions, I am puzzled by the present moral repugnancy of so much of Galton's inhuman disdain for those of "lesser" standing while we go about promoting his mathematical dogmas without a moment of consideration.  Consider the following absolute statement made by the father of regression:

"The practice of sorting objects into classes may be said to be coextensive with commerce, the industries, and the arts.  It is adopted in the numerous examinations, wither pass or competitive, some or other of which all youths have now to undergo.  It is adopted with every thing that has a money-value; and all acts of morality and of intellectual effort have to submit to a verdict of "good," "indifferent," or "bad.""

Galton uses another term that most of us have lost to antiquity: "binomial ogive."  Now you know what this is as you can't pass a day without encountering one or the consequence thereof.  It's a line graph on an x-y coordinate.  Most of the time we present information where "up" is "good", "down" is "bad" and flat-line is "indifferent".  Speed limits were borne of ogives.  Interest rates were borne of ogives.  Prices on goods and services were borne of ogives.  How are students learning and teachers teaching?  Ask an ogive.  What Galton and is dutiful band of modern adherents fail to sufficiently consider is the implications of this fallacy of simplistic reductionism combined with the confounding effects of dimensional and temporal dynamics.

Now you may be asking yourself, "what does this have to do with the economy or Inverted Alchemy?" long about now.  Good question!  Let me muddy the waters just a bit more before I shine a light on my thesis. 

I took part in an interesting social experiment yesterday in which a group of about 20 individuals were asked to re-imagine a large Intergovernmental Organization derived from multi-lateral treaties and accords nearly a half century ago.  What was clear to this group was the dysfunction of the enterprise.  What was occult was how one would go about changing the efficacy of the endeavor for the lofty ideals once held as socially desirable.  What became painfully obvious within the first 30 minutes was the ghost of Galton.  Incentives and outcomes flew across dogma and ideology and our inquiry was reduced, at one point to a literal analogy of a "church" seeking "believers" who would embrace a 50 year old ideology.  How do we get people to believe?  Why can't we get countries to participate?  Why aren't "they" joining "us".  As an itinerant heretic, I inquired as to the relevance of the ideology, the institution, for that matter, any proper noun at all.  Suddenly the room polarized.  Program and Institution pitted against Process and Invitation.  What's so Galtonian and simple about Programs and Institutions is that "in" and "out", "good" and "bad", "we" and "they" can be so cleanly dichotomized.  What's so uncomfortable and messy about Process and Invitation is that you have to be dynamic and compelling - not through coercion and force but through convening inclusion. 

As I was watching the dervishes twist around the notion that institutions may have temporally limited relevance, I reflected on the week's economic news.  I watched as another week passed with the U.S. and European economies stuck in the 1938 National Bureau of Economic Research doctrine set forth in Frederick R. Macaulay's seminal work The Movements of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1856.  Everything we "know" we "know" about financial instruments is derived from the lines drawn on scatterplots in ogives constructed by Macaulay.  However, as he pointed out in 1938, what we "know" and what we "forecast with more assurance" are highly divergent and not overly helpful.  Every investor has seen a Prospectus statement saying that past performance is not an indicator of future returns.  And few, if any, investors have taken the informed next step to ask whether there was multivariate validity in the metrics used to quantify past performance. If we don't go back to the ordinates used to confine the scattering of data, we can neither describe the past nor inform the future.

Which leads me to the convergence of my point.  Institutions, Programs, Outcomes - together the proper nouns - are static artifacts which serve representational roles of a moment in time.  Dynamism, flow, interstitial communication give us a sense of periodicity, amplitude, ebbs, and flows.  And it's this observation that brings me to my final observation.  In one of his best works - though lesser known and referenced - Galton confronted a system that stretched his model by compelling statistics to confront reality.  In his paper, On the Conversion of Wind-charts into Passage-charts published in 1866, Galton concedes that multiple, uncorrelated observations frequently taken are the only way to effectively convert wind data into transportation utility.  And he concludes his paper with the following compromise:  "The method of altering a diagram so as to include the effect of current, is too simple to require explanation."  This "too simple" explanation was never given because in the real world of dynamism, it's about provisioning for journeys, not aspiring to destinations.  Galton's two dimensional prison could no more explain the tides than our modern economic wizards can predict future performance on past behaviors.  My Dear Darwin, we have not yet evolved but we need to.

Lance Armstrong Economics and the Swedes

Swedish King Charles X Gustav bears a little responsibility for the U.S. sequester.  He gets the nod this week for his innovation derived from the Swede’s logistical nightmare of minting copper coins at par value with silver and gold dalars (named after the Bohemian term “Tolar” first minted in the early 16^th century).  When you’re trying to conquer Northern Europe and pay for a war, you don’t want your ships hauling around a bunch of copper – even if you’ve got it in abundance – so you circulate notes instead.  And it’s the circulation of notes – or more precisely the idea of circulation attached to money – that was vital to the king’s aspirations and what invites him into my observation today.

Inexplicably, the other source of inspiration for today’s observations come from Sweden too:  Per-Olaf Astrand (a Swede) and Bengt Saltin (trained in Sweden).  These two gentlemen together with famous Danes Dr. Johannes Lindhard and Dr. August Krogh isolated the physiology of circulation with a functional discipline unknown prior to their work.  In turns out that living systems require gas exchange – inbound oxygen and outbound carbon dioxide – to function.  Lance Armstrong and other inspired Tour de France cheaters notwithstanding, there are limits to this system’s function beyond which more doesn’t do you a bit of good.  How does a conquest-animated 17^th century Swedish king, a group of Nordic physiologists and Lance Armstrong all come together?  In a word: Currency.

Now let’s think about the mistake we make when we confuse terms and blend disparate meanings for convenience sake only to add ignorance to our collective system awareness.  Currency is not Money.  Money, properly functioning, is a temporary storage unit of value.  It is an artifact that says that, for a defined period, trading parties agree that they will recognize an artifact that, though in and of itself likely worthless, is imbued with representational value that can be held or exchanged to discharge future obligations.  Currency – literally from the English term curraunt describing something in circulation itself derived from the Latin currentia describing the bounded flow of a thing – only works in exchange.  Whether it is the exercising muscle that can only metabolize 70mL/kg/min or the circulatable monetary supply (or M2: roughly $12 trillion when we stopped counting in the U.S. around 2011), there are upper limits in systems beyond which stockpiling actually does not lead to greater wealth but in fact leads to systemic failure.

Close inspection of the balance sheet of the Federal Reserve in the U.S. highlights some of the challenges arising from a blurring of the lexicon of money, currency, and assets.  While the utilitarian impulse (think Charles X) to issue a circulating currency that is connected to copper and the expanding trade network built by war seems to work when you control the flow of value within a limited geography (money across a trade network), if you detach either the value base or the scope of exchange from limits, flow ceases and stagnation happens.  Take a look at the graph below and realize that the Federal Reserve Open Market Committee has decided to continue “investing” in U.S. Treasuries and Mortgage Securities to the tune of $85 billion each month.  This action evidences a systemic physiological ignorance. 

When investors (and yes, I mean people like you with your retirement accounts, pensions, etc.) are advised to keep some money ‘safe’ in low-risk assets, the argument supporting this advice is that assets like U.S. Treasuries are ‘liquid’.  In other words, if you needed to sell them, there would always be a buyer at or near par value.  However, this notion of ‘safe liquidity’ is an illusion that was exterminated by the current fiscal policy.  Injecting illusory money (backed by vast amounts of illiquid ‘assets’) for the inflated purchase of cheap debt actually harms the real asset value of these instruments and inflates the inventory of the same beyond what physiologists call T-Max.  T-Max or transport maximum is the concentration of a substance beyond which exposure does not result in an increase transportation or utilization of the substance.  In the body this means that you can breathe 100% oxygen but your blood simply cannot carry more than its saturation limit.  In economics this means that the system can exchange a certain volume of assets after which more cannot be absorbed by or liquidated into the system.  

Bill Gross, PIMCO’s notorious investment architect, reported that his fund decreased its holdings of mortgage assets – assets that should theoretically be cash-flow generating – in favor of more U.S. Treasuries.  Bill understands the problem of liquidity around ‘risk free’ assets.  If you’re PIMCO with nearly $2 trillion in assets, the volume of assets you hold actually presents its own market risk.  If you ever had to sell them for redemptions, you’d actually dump more supply than the market could buy at par and so the volume of your ‘wealth’ would harm your value.  He also knows that the Federal Reserve is not buying real estate and Treasuries because it wants to ‘invest’ but rather to inflate their balance sheet.  When (not if) they start selling off assets, he knows that the pressure to sell will be coming not when they see maximum investment return opportunities but rather when they have to release the dam to discharge the gargantuan pool of assets they’ve acquired.  And when that happens, the over-supply of secondary sales around these assets will devalue the assets he holds.  Worse still, this could happen coincident with inflation which would accelerate the devaluation and present fiduciaries like PIMCO and real people – like you – with large amounts of worthless assets.  

Behind this drama is the systemic failure to appreciate the difference between utilitarian wealth and hoarded wealth.  Utilitarian wealth evokes the principle that greatest wealth happens at a saturation point where all needs, demands and aspirations can be sated without restriction.  Uncoupled from a sense of interchange and interdependence, hoarded wealth creates the malignant illusion that perpetual more is persistently better.  Regrettably, hoarded wealth is also sucked into the monochromatic world of ‘green’ where the only surrogate of stored value is that ubiquitous European / Nordic innovation known as the dollar, dalar, and tolar.  Utilitarian wealth understands that certain values cannot be stored in, or denominated by, representational currency.  Because at the core, utilitarian wealth understands that current is a function of conductivity and flow.  Stymie either and you build up a static load that has to discharge somewhere.  It’s nature and in the end, it won’t let you cheat.

Shifting Eroding Bases

We should know that we're in trouble when bureaucrats make up words to describe behavior which, if stated literally, would incite consternation and outrage.  Just in time for Spring Training for America's pastime, we've added yet more accountability shifting phrases to the lexicon of irresponsibility: "Base Erosion" and the more descriptive "Profit Shifting".  The former is especially cool because you really have little clue what it actually means.  We know that erosion is usually considered to be bad but, if we're chemistry minded for example, we could imagine that this could refer to some precise form of surface etching using a caustic substance which could be good.  Profit shifting feels like it should be good - particularly if profits are being shifted towards social benefits.  Imagine if a company realized that it had been extracting excessive returns; the idea that they'd shift their profits for supporting community needs would be great.  This nomenclature is reminiscent of one of my favorite jargon artifacts: "anti-dumping".  Having grown up during the birth of eco-awareness, the idea that you'd recycle more and dump less sounds quite good.  That is, until you find out that anti-dumping actually has nothing to do with limiting what goes into landfills.  Quite to the contrary, 'dumping' is an over supply of goods (usually in excessive amounts) to flood markets and drive down domestic produced prices.  And anti-dumping practices - for which the General Agreements on Tariffs and Trade organization (the forerunner to the WTO) formed committees and policies - actually were protectionist measures to support price support and, at times, inflation in domestic markets.  "Sequestration", "Base Erosion", somehow I feel like we're in Oz.  I want to see the Wizard because every time we add a word or phrase to mask what's really going on, I feel like there's a Wicked Witch hiding in a tornado and we'll end up a long way from Kansas wearing really weird shoes.

Base Erosion, a term re-introduced at a G-20 gathering in Russia several days ago refers to tax evasion.  When companies like Google, Starbucks and Apple - stalwarts of the American capitalist ideal - declare their businesses to be variously domiciled in Ireland, Bermuda, or other 'tax-friendly' jurisdictions, investors have been encouraged to applaud these moves as a means of keeping revenue remote from the long arm of the tax collector.  Nearly $200 billion in corporate collections at the Federal and State level are lost each year by relocating the official domicile of businesses and profits to off-shore jurisdictions.  In 2011, over 1/2 of the U.S. Fortune 500 companies used off-shore tax havens with an estimated $1.6 trillion in profits being declared outside the U.S. for business exclusively done in the U.S. by U.S. consumers.  On its face, it's quite easy to suggest that the tax-aggressive companies are corrupt.  In many cases they are.  While establishing corporations purely for tax evasion is a violation of U.S. and many international laws, both the perpetrating companies and their accounting firms do so with impunity in part because of a lack of enforcement and in part because of complicity purchased each election cycle which sidelines credible tax reform.

But corporate Base Erosion is a symptom of a deeper pathology, not the disease itself.  We just passed the 74th anniversary of the Internal Revenue Code of 1939 which was the refinement and restatement of the 1874 taxation statutes in the Revised Statutes of the United States.  The 1939 Act has been substantially altered with major revisions in 1954, 1986, and minor revisions in nearly every Congress.  Whether you're a bootlegger in Virginia during Prohibition or the modern day outlaws further West, the incentive to evade taxes is fueled not as much by greed and profit motives but by sociopathic contempt.  This contempt extends to (and emanates from) the government seen to be both incapable of effectively stewarding the public interest and maintaining integrity when challenged.  Additionally, this contempt is directed towards consumers and shareholders who are both asked to pay premiums for goods and services and accept that profit-sharing or dividend distribution is beneath the role of enterprise.  This week, Federal District Judge Richard Sullivan sided with Greenlight Capital's David Einhorn who brought a lawsuit against Apple for seeking to change it's corporate charter to shield its profits from its shareholders!  Yes, this is the same Apple who famously in 1984 promoted non-conformity from the Orwellian machine.  That same Apple, now rotten to its core, has become a nightmare even Orwell couldn't have imagined.  Contempt.  Disdain.  Derision.  As if seeking not to be outdone, the U.S. Congress this week evidenced the same contempt for the U.S. and global economy choosing the blunt object of sequestration of expenditures rather than addressing the accountability demanded to reform our national fiscal position. 

Is Ireland to blame for establishing a tax regime that provides predictability and simplicity to corporate tax planners?  Probably not: they're probably simple opportunists. Are tax havens a natural byproduct of contempt for one's own public sector dysfunction?  Probably yes: in a world where money is the preferred arbiter of power, its movement with contempt and impunity speaks volumes.

This week the U.S. economy will be subject to the theatrics of self-imposed tragedy yet again.  Having created the illusion of a temporal milestone of fiscal accountability, we'll watch as markets shudder and stress under the weight of timely Lenten guilt.  But as with Lent, odds are good that our prayers for mercy and forgiveness for our indiscretions will soon be once again drowned in the cacophony of consumption.  Debating Base Erosion - today's version of dumping only this time with money - is futile until we address the root of public contempt.  And public contempt will remain unexamined until we address its root entangled in our manic surrogacy - our demand for a redeemer to absolve the consequences our thoughtless behaviors. 

It's time that we realize that treating symptoms of contemptuous neglect is itself an exercise in futility.  It's time we turn our attention to a foundation for productive engagement which calls for our best in the common interest of the ecosystems in which we operate.  Only then will we shore up the eroding base and begin to build again.