Terra nullius – When not in Rome

For those who seek to rationalize preposterous injustice that serves their expedient ends, the careful selection Latin words or phrases adds a touch of civility to inhumanity.  Need to violate the Geneva Convention with people who we love to hate in Cuba (an island that we officially love to hate unless it serves our expedient ends), easy.  Just claim the jus cogens principle of non-refoulement in which, are you ready for this?, we’re doing the Gitmo prisoners a favor by not exposing them to persecution should we return them to their own homes!  Need to steal mineral filled land in the Pacific, no worries!  Just blame the Romans and their principle of terra nullius – the legal right to take what doesn’t belong to you by stating that it doesn’t belong to anyone.

“Pleased as we are with possession, we seem afraid to look back to the means by which it was acquired, as if fearful of some defect in our title; or at least we rest satisfied with the decision of the laws in our favour.”

-          From Commentaries on the Laws of England (18^th Ed.) Vol. 2.  1823.

Now if you search on-line for terra nullius you will see copious references to the most recent nation-state founded on the principle: Australia.  And lest you think that the Crown conveniently invoked this international standard of land expropriation only on the big island down under – think again.  Under the direct auspices of the League of Nations and then the United Nations, Australia was given carte blanche to pillage the islands in the Coral Sea including the most egregious of all violations – the theft of Bougainville.

Now let’s be clear.  Melanesian communities from New Ireland settled Bougainville over 25,000 years ago and established a persistent social order that predates any of those who promulgate and then abuse “international legal conventions”.  When Louis de Bougainville (anyone still guessing how the island got its modern name?) arrived from France in 1768, he decided to name the place after himself.  Germans took control over it in 1899 and the Catholics (another contender for the gold medal in Latin-based land piracy) annexed the minds of the inhabitants in 1902 rewarding their Lord with some prime cocoa and coconut plantations for the inconvenience of stealing land in the name of god.  Australia got in on the act under the auspices of the League of Nations around the First World War; Japan held it briefly during World War II and then Australia – this time under sanction from the U.N. – took it back in 1946.

As I write this blog post, I’m sitting on land that was stolen from the Monacan under the 1722 Treaty of Albany.  Less than one mile from my dining room table are over a dozen white quartz burial mounds that entomb the remains of Monacan and Tutelo leaders.  The land I live on – like Guantanamo Bay – was not stolen under terra nullius.  In the United States, we are far less creative.  We entered into Treaties and Covenants with absolutely no intention to keep them.  We had the decency of looking Communities of Persistence in the face when we were lying to them!  In the case of Bougainville, neither the Australians, the League of Nations nor the United Nations had that much courtesy.  By invoking the Crown’s (that’s the United Kingdom for those of you who don’t know that the Queen and her off-spring still enrich themselves off of land that they and their ancestors stole) Roman legal conquest principle they actually committed a double crime.  Not just did they steal land and resources but they, by invoking the terra nullius justification, stated that the inhabitants of Bougainville were nobody. 

It’s one thing to maliciously lie, cheat and steal.  It’s still another (more egregious) thing to stipulate that the humanity that exists does not exist.  Terra nullius means, “land belonging to no one” or land that has never been subject to sovereignty.  The Bougainville situation is one in which Australia and the United Nations stipulated that 25,000 years of habitation did not happen.  The High Court of Australia, when challenged on this legal principle in their own backyard, has actually made the right decision.  On December 23, 1996 The High Court of Australia issued the highly controversial judgment acknowledging native title rights co-existent with pastoral leases in Wik Peoples v The State of Queensland.  This decision reaffirmed some of the principles in the 1992 Mabo v Queensland (No.2) in which “aboriginal title” was affirmed over terra nullius. 

Why did the people not exist?  Under the Mabo and Wik reviews, the answer was simple.  Because Communities of Persistence did not organize “land rights” under a system that matched the paternalistic, colonial, Westphalian sovereign models “understood” by occupiers and colonizers, the “leaders” with whom treaties could be signed could not be identified.  If no “owner” could be identified, “no one” existed so the land could be taken.  In other words, if you don’t “own” you don’t exist.  What the Crown and its minions failed to understand – spoiler alert – is that the men who were doing the conquesting were not tuned into the principles of matrilineal land rights that continue to exist in places like Bougainville.  They couldn’t find the “man” in control because the “man” wasn’t in control.  The women were.  And they were not consulted.

This week I sent the following document to the Australian Securities and Investments Commission, the Financial Conduct Authority of the United Kingdom, and the U.S. Securities and Exchange Commission.  I would welcome each of you to read it, consider it in light of this post, and inform others about the need to make a simple proposal:  if Mabo and Wik establish the legal framework to put a stake through the heart of the Roman conquest doctrine of terra nullius than isn’t it time for the doctrine to be retired once and for all?

Think about it.

An Open Letter to the ASIC, FSA, and SEC Re: Rio Tinto and Bougainville Copper Ltd.

Copied to Global Reporting Initiative, Transparency International, International Council on Mining and Metals, World Bank, and IFC

August 15, 2013

Sirs,

I have had two opportunities in the past 12 months to visit the Panguna Mine, the Arawa village and the Six Mine Lease Areas (SMLA) of the property formerly operated by Bougainville Copper Ltd (‘BCL’, majority owned by Rio Tinto with 53.8% of the issued shares).  Most recently, I spent two days at the mine on August 12-13, 2013.  Given the fact that both BCL and Rio Tinto report to their shareholders that, since 1989, they have not been capable of accessing the mine site for security reasons, I felt that it would be helpful to provide you and their shareholders with information that may be helpful clarification to material statements made by both companies.

Rio Tinto’s 2012 Annual Report has a footnote on the BCL project on page 206 which indicates that it’s incapable of safely accessing the mine site.  Rio’s Annual Report preamble statements about The Way We Work (page 14) are inconsistent with direct observations made during my visit to the mine, overburden deposition, and tailings discharge in the only major western riverbed at the Panguna Mine in the Autonomous Region of Bougainville, Papua New Guinea.  Dislocated communities, significant health and safety issues, and profound environmental degradation are evident everywhere.  While it would be convenient for the companies to attribute this to the conflict and post-conflict incapacity to manage conditions at the mine, the physical evidence of mining practice suggests that pre-conflict operations neglected to take appropriate consideration of Rio’s own stated standards.

Figure 1.  An aerial view of the BCL Panguna mine site.  From the mine pit to the end of the lower tailings is approximately 18km and at its widest is about .75km.  The diversion of the river around the mine site rejoins the former natural river bed below the Overburden primary deposition and diverts not more than 40% of the natural river flow (which now runs blue with copper beneath the overburden and through the tailings).

The following footnote is reproduced from Rio Tinto’s 2012 Annual Report.

43 Bougainville Copper Limited (BCL)

Mining has been suspended at the Panguna mine since 1989. Safe mine access by company employees has not been possible since that time and an accurate assessment of the condition of the assets cannot therefore be made. Considerable funding would be required to recommence operations to the level which applied at the time of the mine’s closure in 1989. An Order of Magnitude study undertaken in 2008 indicates that costs in a range of US$2 billion to US$4 billion would be required to reopen the mine assuming all site infrastructure is replaced. The directors consider that the Group does not currently realise a benefit from its interest in BCL and therefore BCL information continues to be excluded from the financial statements. BCL reported a net loss of US$2 million for the financial year (2011: net loss of US$2 million). This is based upon actual transactions for the financial year. The aggregate amount of capital and reserves reported by BCL as at 31 December 2012 was US$137 million (2011: US$139 million).

The Group owns 215,920,089 shares in BCL, representing 53.8 per cent of the issued share capital. The investment of US$195 million was fully provided against in 1991.  At 31 December 2012, the number of shares in BCL held by the Group, multiplied by the share price as quoted in the Australian Securities Exchange, resulted in an amount of US$111 million (2011: US$164 million).

This footnote represents the only material disclosure regarding BCL in the Annual Report.  As is evident, no mention is made of any liabilities that may arise from a closer examination of several important facts surrounding the Panguna Mine’s operation and cessation of operations.  These include:

• a.       Unquantified environmental remediation costs.  To consider re-opening the mine under rudimentary compliance with global environmental best practices would entail reclamation of land that could far exceed the estimated costs in the 2008 Order of Magnitude study.  Given the affected watershed, surface and groundwater damage covers an excess of 18km at depths of over 100m in many locations (Figure 2).

Figure 2.  The Middle tailings deposit completely filling the valley and riverbed.  The riverbed field of view in this image is approximately 3km. 

• b.      Management of landowner claims.  To date, the landowners and ex-combatants have identified several claims against the companies that have not been adjudicated by any court of competent jurisdiction.  In the event that BCL or Rio Tinto are exposed to prosecution for these matters, civil and criminal liabilities arising therefrom could represent material impact on performance. 
• c.       The legality and corporate complicity with the formation of the 1967 Bougainville Copper Act which exists as a supra-Constitutional agreement affording Bougainville Copper Ltd rights in direct conflict with the Constitution of the Independent State of Papua New Guinea.  As evidenced in related cases (including inquiries into Indigenous Rights in Australia), this unilateral agreement benefiting BCL’s interests over those of the right holders under the Organic Law of Papua New Guinea could be subject to challenge potentially opening inquiries into Fraudulent Inducement.  This observation is made from both the facts surrounding the establishment of the Act as well as the incapacity for local landowners to fully understand the structure and consequences of the Agreements into which they entered.  Should improprieties be found, BCL and its shareholders could be liable for considerable financial damages including, but not limited to, complete remediation of the sites impacted by the mine.
• d.      Securities reporting compliance.  Shareholders have been inadequately informed as to the nature of the assets of BCL and may have economic harm arising therefrom. 

At present, the Autonomous Bougainville Government is being advised on its proposed new Mining Act by Australians (including ANU's AusAID funded Anthony Regan) who are advocating for many of the status quo pre-conflict conditions and the possible reinstitution of the conditions similar to the 1967 Bougainville Copper Act.  With no capacity to consider this advice in light of global best practices (another risk of Fraudulent Inducement), the interests of the companies are being advocated at the expense of a fully transparent, globally informed process.  Most problematic is the fact that the negotiations including the companies are being done without competent and complete understanding of the facts on the ground.  A simple example of this is the reported Asset Value of property at the mine.  No single building on the mine site is intact.  No operational equipment remains on the mine site.  The 2010 Annual Report estimated Plant & Machinery depreciated value of PNG K 296,094,000 is grossly inflated.  The most intact building on the site is pictured in Figure 3 below.  Metal is being sold as scrap and infrastructure damage (including considerable landslides) make the asset estimates grossly inflated.

Figure 3.  A view of the location of ball crushers and concentrators. At this location, only one defunct crusher remains on its stand with the others destroyed for metal salvage.  Twenty four years of metal salvage has left the remaining structures damaged beyond reasonable repair.

Setting aside the considerable questions surrounding the establishment, operation, and violent cessation of operations of the Panguna Mine, it is important to note that the companies and their shareholders can now benefit from direct, on the ground observations and photo documentation.  As such, in accordance with the reporting standards set forth by Australian, United Kingdom and United States regulators, it is important for the companies to more accurately state their condition with respect to the Panguna Mine and offer a more realistic assessment of their asset and liability condition.

Given the recent trading activity stimulated by press statements regarding the possible re-opening of the Panguna Mine, it is important that regulators closely monitor this situation.  While regulators and the corporations involved may continue to seek refuge in the reasonability of their defense of misleading and erroneous statements due to their limited access, the availability of that access to an independent third party severely curtails the assertion of insufficient visibility.

I would strongly recommend that an independent inquiry into the matters articulated above be commenced as failure to do so may lead to further damage to shareholders’ interests and those of the affected communities.  I will be delighted to offer a more detailed assessment as and when required.

Respectfully Yours,

Suspend Belief

On the 42nd Anniversary of Bretton Woods

I spent a half day with renowned ‘Experimentalist’ Gerard Senehi a few years ago.  I have often thought of our conversation since then but it wasn’t until I was flying home from my recent trip to 64° N in Sweden that I finally put another one of his puzzle pieces in place.  If you’ve never met an Experimentalist, I highly recommend it.  While the casual observer could dismiss components of Gerard’s art as that of a performance magician, such a conclusion would evidence an acuity deficit. 

Great performance magicians do what no one else can pull off.  If they’re really good, rather than triggering a reflex that seeks to confront the implausibility of the illusion, they actually invite their audience into a yearning for an ever deeper experience.  Most of us, when we see a bent wine goblet conclude that the stem suffered a terrible mechanical malady or was brutally manipulated in its blowing.  Watching a spoon bend while being softly held by the hand of a talented performer, we find ourselves at once puzzled by the impossibility of the observation but, in the same moment, wanting to see just how far the bend can go.  In the midst of the illusion, the vast majority are at once hoping to be dazzled more and wondering why we can’t do it.  In the middle act, few seek to argue with their direct observation based on their knowledge of steel and how ‘it can’t do that’.  And, by the way, if you’re one of those types, get real!  It’s all an illusion after all!

Back to Gerard.  We discussed the conspiracy formed between the performer and the audience in which, through subtle manipulation of the apparent ‘normal’ the apparently ‘abnormal’ can be introduced to the point of having the audience become a willing participant in the expanding experience of ‘unbelievable’.  Performance magicians use this graduating incredulity to build to the crescendo of an act – the Prestige – at which time anything, albeit implausible, is possible.  While skeptics and fans try to work out the “How does he do that?” question regarding the individual acts themselves, my fascination with Gerard had to do with his sensitivity to his audience.

“How,” I asked, “do you know the point at which the illusion will evoke an expansion of possibility vs. the line over which, should you cross it, the audience will reject you and the illusion as too intrusive and too unbelievable?”

Over the course of the remainder of the conversation we entered into a delightful and unresolved inquiry into the evocative responses from individuals and groups which either build an incredible opening for expanded perception or lead to a full shutting down of ‘possibility’.  We discussed the moral implications of navigating the edge between heretofore unconsidered perception and deception.  As Gerard has frequently stated in interviews, it is not his to answer the question but to more thoroughly ask it.

Which leads me to today’s flight.  I spent several hours inside the magic of the illusion brought to commercial scale by William Boeing in 1916 and the U.S. Navy in World War I.  Pushed across the Atlantic from Stockholm to New York in just over 8 hours with a couple of Pratt & Whitney turbofans, I marveled at how, in less than 100 years it had become possible to spend a long weekend in Scandinavia the week after flying 24,700 miles around the globe in the preceding two and a half weeks.  For millennia, flight was the domain of birds and phantasms.  Now, when I board the plane I pay little mind towards the inviscid flow of fluid air over the contoured wing – a notion that would have been considered absolute madness three short centuries ago.  Sitting in row 12, I am entering the persistent illusion that compresses time and space and makes neighbors out of continental divides.

Just prior to boarding the flight in Stockholm this morning I was reminded of the news I had not missed.  Markets across the globe are teetering on the edge of collapse as they seek to divine from employment and durable goods the moment in time when the illusion of interventionist ‘free’ money has to end.  None of the equations work anymore.  We’re not getting a healthier economy.  We’re not seeing more economic activity across the global scene.  We’re holding our breath for the German elections in September after which we know that the Eurozone will seize up.  We know that the U.S. equities bull run has been more golden calf than exodus from bondage.  We know that, without tax ‘advantaged’ abuses, our celebrated cash surpluses would evaporate revealing the abject anemia of our capital circulation.  And we know that the illusion in Washington D.C. and playing out in capitals across the G-20 is neither by nor for the People but for the patrons who seek to dance their marionettes one more time before the strings all fray.

Ironically, we’re living in one of the most pervasive stage magician shows ever assembled.  On stage we see production illusions in which money and balance sheets are created out of thin air.  We see reports of growth while liquidity vanishes.   We see transformation where what used to be faith and confidence is transubstantiated into uncertainty and fear.  We see levitation of balance sheets and prices driven by pure speculation – not for a productive future but for a timed exsanguination.  When the music stops and the curtain falls this theater of the absurd will not leave us yearning for more.

The magic show that began with fledgling conspirators at Bretton Woods during July of 1944 in the midst of World War II began unraveling 42 years ago when the U.S. defaulted on its sacred trust to the assembled throngs at the Mount Washington Hotel.  Then U.S. Secretary of State Cordell Hull set the stage for the act by stating that the accord could eliminate, “the economic dissatisfaction that breeds war, (and) we might have a reasonable chance of lasting peace.”  Did he (or we) ever intend to end economic dissatisfaction, discriminations and obstructions as he stated to the American people.  And now, which of these have we elected to abandon?  Economic dissatisfaction?  Discrimination?  Obstruction?  Lasting Peace?

Yet why do we stay in our seats as if to wait to see if the outcome might actually be something other than the certainty of the curtain falling on the act?  Unlike the Experimentalist who seeks to open unconsidered perception, why are we still stupefied with the deception?  Sadly, I think the answer is that we still desperately want to believe.  We want to know that some beneficent someone is looking out for us and understands things that are too complex for the common man and woman.  We want to know that in our darkest hour, a few intrepid souls have their superhero capes pressed and ready for action and that, despite our banal neglect, we’ll have the just-in-time savior who will make sure that no meaningful harm comes to us.

Gerard’s persuasive show enjoys its magnetism because the consensus illusion is not questioned.  He’s not the mentalist.  Rather, he demonstrates the power of being liberated from illusions that limit experience and perception.  Impossible – whether its bent wine glasses, transoceanic flight, or integral economics – is merely a temporal illusion held vigorously by those who seek to control and constrain.  Bend a glass, soar above the clouds, emancipate wealth from the consensus predatory illusion and just maybe you’ll experience a little magic yourself!

Life after CDS

One of my closest friends and colleagues in the Netherlands wrote to me this week reminding me of a conversation we had years ago.  Jan J.Ph.M. de Dood, Director at Rabobank Noord-Holland Noord has been advocating for fundamental transformation of the banking system not as an isolated industry endeavor but as a critical utility serving all human enterprises.  Together with his colleague Marieke de Vrij, he published The Future of a Truly Sustainable Economic Order  in which they lay out an accessible assessment of where society is at the moment and where we might consider transforming our behaviors and systems if we wish to establish a more sustainable economy.  As many of Marieke’s and Jan’s analyses and suggestions are plainly articulated in their piece, I will simply commend its reading to you.  Take some time, follow the hyperlink and take in their insights.

The conversation we had in Amsterdam a few years ago had to do with organizational behavior that arises from the explicit and implicit expectations we manifest by virtue of the titles and roles we use.  At the time, Jan served as Chief Risk Officer at Schretlen & Co, an investment bank and wealth management unit of Rabobank Group.  In our conversation, we were discussing what would happen if financial institutions had a Chief Synergy Officer at a role equivalent to (or above) the Risk mandate. 

“What if,” I suggested, “a bank would be as concerned with the economic and credit success of their borrowers are they are forced to be about the risk of credit failure?”

What would a Chief Synergy Officer do?  This question opened up a wide-ranging conversation about the ecosystem of banking.  Imagine a situation in which a bank would lend money to a farmer growing wheat, to a miller who grinds grain into flour, and to a baker (a nice example if you know Rabobank’s roots).  Each of these actors has economic utility requirements that are fundamentally shaped by factors that are beyond their direct control and that happen in variable durations. Wheat is harvested in its entirety once each year.  The farmer’s “wealth” is an annual pulse.  The miller receives the abundant harvest and has the role of processing and storing the grain and flour for distribution to users of flour.  Unlike the farmer, the miller has some sequencing control over when grain is ground into flour and when the supply is expanded or contracted.  The baker sells bread each morning and purchases flour from the miller once each week. 

A Chief Synergy Officer at a bank would do a few vital functions.  Realizing that “credit quality” is a function of the healthy flow of currency in systems of exchange, the CSO would identify the entire value chain and seek exposure to, and the health of, all units within that exchange.  By participating in the farmer’s business, the CSO would understand that “risk” and “abundance” is a commodity function tied to weather, for example.  By participating in the miller’s business, the CSO would understand that the “risk” and “abundance” has to do with the price controls possible in setting the price of staples.  By participating in the baker’s business, the CSO would understand that “risk” and “abundance” is linked to the daily annuity of multiple individual transactions which perpetuate the flow of value exchange within the system. 

But in addition to the closed loop system of the wheat to bread cycle, the CSO would keep a watchful eye on: 

• new irrigation or crop management technologies which could benefit the farmer and limit the “risk” of climate related production failure; 
• better energy systems to improve the efficiency of the mill or climate control the warehouse of flour; and,
• better property locations to improve the baker’s store front placement (or oven venting for the scent temptation effect) to increase traffic to the bakery.  

Rather than proprietary trading against clients – a practice that is routinely done by today’s leverage optimized banks – a CSO would actually trade into the benefit of borrowers to increase their collective chances for sustainable success.  In this world, there would be no Credit Default Swap (CDS) but rather a Productivity Enhancement Option (PEO).  Returns could be improved by virtue of market vigilance for enterprise enhancement rather than hedging the risk of failure. 

To be clear, the present system has its Paleolithic version of this system in the most inefficient and crude fashion.  The opportunistic association between private equity and banking achieves a fungal version of this model with one notable deficiency.  In the present system, the system most often serves the rentier (banker) and his constituents at the expense of the farmer, the miller, and the baker and the bread-eaters.  The bread-eaters receive the crumbs from this system after the feast is consumed through their meager, manipulated pensions.

Jan de Dood and his colleagues are showing the world the pathway in banking that Robert Kendall demonstrated in Cole Publishing.  By serving an industry ecosystem in which the goal is to build the success of actors within that ecosystem, the potential for wealth and health within that system goes up.  Those who subscribe to the “profit at all costs” model fail using their own metrics (unless they corrupt the system by covert accommodation from elected political benefactors).  The model suggested by Jan and deployed by Bob don’t require bailouts – they have celebrations of success.  As Marieke and Jan observe, this more constructive approach is as close as our capacity to think differently. 

Think differently.

Economic Innovation – Beyond Infinite Growth

Economic systems can be an outward manifestation of confidence and trust – the collective agreement between persons to store and transfer value.  When these systems explicitly acknowledge the full range of costs (the accounting for all values of input) and benefits (the utility derived from interaction and consumption), they can serve as a constant reminder that we are participants within, not lords over, the abundance of our entire ecosystem.  In a human-scaled system we would explicitly acknowledge the values derived from, and expressed through, commodities, customs & culture, knowledge, money, technology, and well-being.  We would commit to honor productive utility rather than the illusion of perpetual and unsustainable growth.  We would define wealth as the state in which maximum utility is accessible while preserving all future options for all future users without degradation or exhaustion.

Time magazine’s August 12 issue declared that Germany must save the Eurozone and the euro by abandoning their restraint on consumption.  With Mittlestand firms continuing to hold on to values of fiscal discipline and persistent quality, the author argued, Germany’s productivity has ‘caused’ some of southern Europe’s contagion and instability.  I suppose in a world where we prefer Twitter fueled street uprisings and infinite expansion of central bank balance sheets tenuously propping up the capitalist illusion that has, in its current manifestation proven its own failure, this assessment makes sense.  However the author’s imposition of a growth-by-consumption paradigm is one of, but certainly not the exclusive, economic model that can be considered. 

Americans (and the rest of the deluded world) forget that the conditions of surrender at the end of the Second World War included massive reparations of German technology (magnetic data storage, dyes and chemicals, aeronautics, encryption, communications, nuclear engineering, medicine) without which we may still be using IBM’s Selectric typewriters and teaching our children how to change the ribbon, listening to our 33 LP vinyl phonographs and answering our land-line phones.  Careless neglect of the memory of Operations Paperclip, Epsilon, Alsos, and Lusty – including the arrests of key scientists and their subsequent rendition-evoking “invitation” to join the U.S. military and industrial research programs – perpetuates our self-determination myth that has no basis in reality.  Time’s Rana Foroohar is not fully culpable of drawing temporally expedient conclusions – I’m sure she hasn’t studied the German expropriation that defined much of the technology of the last 70 years of industrial development – but she does nothing to point readers in the direction of a more complete view.

Why do we need revisionist history as a central tenet of our current economic paradigm?  The answer is quite simple.  Our imperialist form of scarcity-inspired capitalism doesn’t work as advertised.  Why would I conclude this?  Well, that’s easy too.  Without massive price support, our agriculture sector collapses – thus the U.S. Farm Bill and its equivalent throughout the G-20.  Without tax loss harvesting, our venture capital system doesn’t work.  Without Federal Reserve, Central Bank and tax-payer intervention our banks fail.  Without protectionism (including over-ruling decisions made by our protectionist USITC), our innovation can’t stand up to global competitors.  Without tax exemptions, our charity starves.  Without international scientists and graduate students (many of whom come from communist or socialist states who are indentured in labs in exchange for education), U.S. science chills.  Does this mean that there is nothing salutary in our economic paradigm? No.  But it does mean that the illusion requires an awful lot of props that should be anathema to the principles we espouse.

Is it in the principle or the practice where the economic illusion dissociation really emerges?  Well, on that score, the lines get a little blurry.  Our consensus of economics and their essential nature are born of natural philosophy infused with faith.  Faith, you ask?  Absolutely.  From Aristotle to the Confessions of St. Augustine the explication of the universe and its origins assume finitude, “beginnings” and duality.  From Newton to Maxwell to Planck, science emulated religion and set forth dogma and “Laws” around which inquiry was replaced by adherent confirmations and reproducible observations in controlled conditions.  The laws of thermodynamics, for example, explicate the relationship between heat and work in systems defined by boundaries defined by irreversible flows.  Newtonian physics presumes conditions in nature without examination of the essential nature of nature.  Embedded in these catechisms is the precept of statistical equilibrium without consideration of the dynamics and substance of Source.   Economics, our cult du jour, callously thumbs its nose at the Laws defining natural philosophy of the past with the falsifiable paradox of perpetual growth.  Rather than seeing systems as operating cycles of productivity and latency with interchangeable flows, we’ve imposed an ‘ideal’ of linear perpetual growth from which profits are extracted through explicit and implicit friction.  When we don’t see evidence of its success, we change the metrics (current central bank intervention) or fall back on the fable of mystifying booms and busts (the explanation given for unemployment, expansions and recessions, and ‘resource curses’).  

Our adherence to ‘Laws’ limit our capacity for systemic innovation.  And our convenient neglect of evidence that is observable but unquantified in our controlled experiments condemns us to illusion perpetuation.  If we don’t correctly understand systems, we assume a beginning without precondition.  We can haphazardly combust fossil fuels because we presume their existence to be ‘free’.  We rip forests down and carve up the land to extract elements because they’re there and they’re ‘free’.  By the application of ‘work’ (which is why we cannot escape our addiction to ‘labor’ statistics) we render ‘useful’ the elemental commodities which, without our intervention are ‘worthless’.  Yet, despite the irreversibility underpinning our natural philosophical presumptions, we maintain an illusion of perpetual growth to fuel the monster of our own creation – uncorrelated, persistent growth demanding, capricious debt. 

Which brings me back to Germany.  Not surprisingly, Germany’s industrial productivity is heavily informed by natural philosophy underpinnings.  Like the scientists and philosophers who rationalized the observable world in the Holy Roman Empire under the patronage of Friedrich Wilhelm I and Leopold I, German industry has more often used economic utilities as a means, not as the metered ends.  The relationship between capital and industry has been one of liquidity between boundaries of metaphoric and actual thermodynamic processes and states.  Into that reality, deterministic chaos and entropy (in the form of central bank accommodation for profligate States) has been inserted leading to a toxic imbalance.  German industry needs German banks.  German banks, bloated with obligatory exposure to non-creditworthy bonds, are facing existential threats.  Compelled to support unsubstantiated promises of future fiscal discipline (buying sovereign rubbish bonds and having to call them “assets”) while attempting to maintain their role as credit providers to industry, they are now in a precarious and unstable state.  If, on the one hand, they become increasingly the agency of European Central Bank illusions, their capacity to offer credit into industry will be diminished.  Alternatively, if they reduce their complicity in interventions, they highlight a reality that is politically unacceptable in the EU and in the global trading dynamic generally – namely, evidence that Germany is stronger than many would like them to be.

Rather than fearing this, as Rana Foroohar and Time would have us do, why don’t we take a step back and see what essential elements are working in Germany.  Maligned as unhelpful in the consumer-insanity based global economy, Mittlestand attributes like production value over volume, accommodative (including forgone or deferred) profit-taking rather than employment shocks, exceptional value of education and research, actually sound like things to emulate – not fear.  Consumer frenzies fueled by planned obsolescence could be replaced by things working!  Wow, that doesn’t sound too bad!   We may actually encounter and embrace, from time to time, the nearing-extinction principle of “Enough”.  Why wouldn’t We The People desire this?  It wouldn’t fit the patriotic narrative we’ve had indoctrinated into our social psyche.  It would mean that we may be encouraged to be more thoughtful in what and how we consume.  But, in the end, we may just find that credit-worthy productivity (and systems built around that) is more desirable than decadent profits at the expense of the planet and its inhabitants.  And we could certainly profit from such a transformation.

Make It Simple

I have lost count of the number of people who have written to me after a blog post.  “David, please make it simple.  I have to read your blog with one eye on the screen and the other in a Thesaurus or on Wikipedia.”  I don’t know when we were taught to be intimidated by money in our society but I’m pretty sure that it was not accidental.  Create a system of indenture; co-opt every human endeavor within that system; and, use terminology embedded in small font and, voila, you’ve got slaves to the celebrated illusion of capitalism that has never been truly and transparently attempted on the planet.

I would suspect that the first encounter most of us had with money was the “responsibility” laced allowance in which parents paid children for doing basic household chores.  As early as the 1830’s, the Progressives encouraged parents to give their children money to teach “fiscal restraint” and “charity”.  Behaviorists advocated the habitual enticement in the form of allowances or pocket money to induce socially acceptable behavior.  In post-Depression America and post-War Britain, an estimated 50% or more of children of white collar workers received allowances while only 15% of their blue-collar or agriculture peers had any such experience.  Churches got in on the act by including charity collections in Sunday schools and children’s gatherings placing the expectation on children to be in a position to adopt the practice of tithing.  This religious tax, once meant for the sponsorship of clergy and relief funds, was long ago co-opted by the institutional patronage required to support real estate and corporate programs operating under the moniker of religion. 

Ironically, during this first introduction to money, none of us were told what money was.  We knew that it could be granted or withheld capriciously.  We knew that it was “important” and with it we must be “responsible”.  But these constructs were devoid of any explanation.  In adolescence, the idea of working for money was introduced – in same cases out of familial support and in some cases to enable greater autonomy of behavior.  With money, one could individuate:  go to the movies; get clothes that were more to one’s liking; gain status as a sustainer in a family; etc.  At no point was money explained.  And then, for many, the first sizable encounter with large sums of money came with education and with that education – debt.  Still no education!  No real knowledge of how monetary systems work (or not).  Just the certainty that, having been invited into debt, “getting a job” would be a necessity to become a responsible adult.  How’s that for insanity?  To get an education to get a good job, someone has to be indebted – student, parent, or society – for which an obligation of indenture is explicitly formed – get a job!  Besides being circular in its illogic, it’s no wonder that I could sit this week with a group of women in D.C. who, at mid-life, had little to no actual financial literacy despite being highly educated.  What they knew was that they needed money to sponsor their lives and their causes but they had no idea what they actually were asking for with that blind insistence. 

Make it simple, Dave!

O.K.  Most of you are wearing your chains modestly well but you are slaves!

As a “responsible adult” you buy life insurance.  Why?  So that your family can pay off your debts when you’re dead.  Really, that’s why most of you buy it.  And many Americans buy term life insurance (insurance that is only good while you’re paying premiums and accrues no terminal value).  In data collected by the National Association of Insurance Commissioners, in 2010 alone, $1.1 trillion in term life insurance was bound.  At the same time, $112 billion in credit life insurance was in force.  The average life insurance policy in the U.S. is about $160,000.  With funeral costs running about $8,500, this leaves the balance of benefit for, you guessed it, the debt you didn’t pay off in life.

As a “responsible adult” you invest in real estate.  O.K., kind of.  What you really do is attach your labor indenture to a contract that flows much of that money to the bank (oh, and did I mention that the bank required you to get credit insurance?).  By the time you pay off your mortgage – a diminishing prospect in the current refinancing regime – you will have paid more to the bank than the real estate was worth by as much as 150% (or more).  So who won? 

As a “responsible adult” you will put money into savings.  Your bank – not you – will have your money insured for their benefit through the much misunderstood FDIC scheme.  And you will be paid a fraction of what your bank will charge for the use of your money.  And when they use it, they don’t use it.  They use it ten times over.  That’s right, your dollar deposit gets to be used by others 10 times at the interest payment the bank imposes.  You get paid once.  They get paid 3-5 times what they pay you 10 times over.  Who won?

As a “responsible adult” you will donate money to charities and non-profits.  Good news here, right?  Well, let’s not get too excited.  About 39% of what you give for others actually goes to others – just not the “others” you thought you were helping.  It actually is going to administer the charity. 

Make it simple, Dave!

O.K. Between taxes (40%), credit-related fees (25%) assuming you’re living among the top 20% of fiscally responsible citizens, and “charity” (5%), your existence is a majority indenture to the interests of others.  And if you’re capable of using the remaining 30% wisely – for things like eating, being mobile, and communicating – you’ll put 5-10% into “investments” which, at the moment do not earn enough to make up for the management fees you’re being charged.  In short, this whole racket, from start to finish is a mess.  You’re in the middle of it.  And the system is structurally unstable meaning that, when central banks decide to stop flooding the market with money, you’ll run the risk of inflation (rapidly rising prices), increasing taxes (governments doing less service for more of your money), and highly volatile investment markets (think about the mid-June equity swoon when Ben Bernanke said he might relax the Federal Reserve’s intervention). 

Make it simple, Dave!

Here’s the little problem.  The simple part is that the current taxation-state, indebted government, indentured labor routine has effectively enslaved the populace across much of the planet.  The average informed citizen knows that they’re part of the predation but doesn’t want to confront that reality.  The majority of humanity is chasing the illusion of fiscal footing and, in so doing, doesn’t take any time to reflect on the structure that is in place to insure that they do not progress.  Even elite capital market professionals, when asked basic questions like: what is a derivative contract?; how is solvency of government sponsored enterprises truly calculated?; what is the real capital exposure measured by rating agencies and what does ‘investment grade’ actually mean?; can neither answer nor clearly articulate where they’d go to find the answer.  The hard part – the part that defies ‘making it simple’ – is the fierce defense of the system of predation mounted by humanity – the prey – when they are confronted with the fact that they’re enslaved.  And that one, that core Stockholm Syndrome paradox, is the one that defies simplicity. 

These posts are simple.  They are direct.  And they’re not written in cartoon or Crayon.  That’s because you, the reader, are intelligent.  Co-opted, exhausted, but intelligent.  And with any luck, you’ll make the simple choice.  To continue to be more informed.  And with that information, choose to disengage from the utilities of your indenture. 

On the L(Edge)

This week we found out the use of covert information for individual advantage is officially a bad behavior…officially. Well, that’s so long as you’re not part of the Administration's Citizen Espionage Cabal in which case the misuse of secret-court-sanctioned covert collections is in the best paternalistic interest of the citizens who are incapable of knowing what is right or wrong and need a benevolent spy to insure that they are not seditious or subversive. And we’ve learned this because we have been treated to a steady drumbeat of the allegations of misdeeds perpetrated by Steven Cohen’s SAC Capital Advisors. For those of you who are trying to keep track of which criminal activity is criminal and which is “stimulus” to “support the economic recovery” you need one simple rule to keep it straight. If it’s authorized by the Administration, it’s good, legal and beneficial for the promotion of all of our collective interests. If it’s taking advantage of those stimuli monies by private traders not in the official Letter of Marque Privateering club, it’s criminal. Wasn’t it so much easier when you could see the Jolly Roger and say, “Oh, that’s a pirate!” before your wealth was stolen?

The indictment clearly highlights, among the alleged wrong-doing, “solicitation and use of illegal inside information”, (clearly you need a secret court to adjudicate as legal what is unconstitutional) on “a scale without known precedent in the hedge fund industry.” By accessing Inside Information, SAC Defendants provided “high conviction” trading ideas giving management and investors an “edge” over other investors.  In doing this, they made “millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.” 

This activity was happening, according to the indictment at the same time Goldman Sachs was independently advising the Government of Mongolia to assume 12% debt on the development of one of the world’s largest copper reserves to “purchase” illiquid equity in their own national resource despite the fact that they were also advising people to buy into Ivanhoe and Rio Tinto – the beneficiaries of the structure developed to bankrupt the country.  This was happening at the same time that the World Bank and the IFC were advising governments around the world to enter into indentures that would destabilize governments for the sake of accessing natural gas reserves and minerals.  This was happening at the same time that rating agencies were defrauding investors using inflated credit quality ratings.  This was happening at the same time that the LIBOR price-fixing behavior was happening with nary a glance.  This was happening while the criminal enforcement division of the Internal Revenue Service was privately acknowledging billions of dollars of corporate taxpayer abuse of the In Process Research & Experimentation Tax Credit – one of the largest tax frauds by government estimates – while the Treasury turned a blind eye towards evidence provided by whistleblowers.  Unprecedented?  Seriously.  Steven Cohen’s indictment is a rounding error for the abuses listed above.  And the U.S. Department of Justice action on ANY of these other matters is…, well, umm…, oh, that’s right – these other ones are in our National Interest!

I don’t know Steven Cohen and I don’t know the individuals named in the indictment.  I am intimately aware of the industry.  What Steven did was wrong but the hedge funds that purchased real estate right next to equity and bond trading switches so that they can trade in and out of positions at the speed of light (literally) are perfectly legal.  High frequency, low latency trades; proprietary trades trading against high net worth wealth management account clients’ asset allocation; and, misrepresentation of pension solvency (and the insurers thereof) – these multi-billion dollar defrauding activities are beyond the scope of investigators.  No criminal indictments.  Just political donations.

It may be the case that SAC ran afoul of the law and for that I am certain that law enforcement (including criminal convictions) is appropriate.  But I’m getting quite tired of the selective enforcement of laws in which the language contained in indictments actually specifically indicts the un-prosecuted behavior of sanctioned actors.  This is the part that really is an offense.  And worst of all, the public is led to believe that the judiciary is actually doing its job while the real crimes go undetected.  We The People, the ones who pay taxes for the authorization of the Department of Justice, are being defrauded by “Justice” and nobody’s the wiser for it. 

“The accumulation of gold in the treasury of private individuals is ruin of the timocracy; they invent illegal modes of expenditure; for what do they or their wives care about the law?

Yes, indeed.  And then one, seeing another grow rich, seeks to rival him, and thus the great mass of the citizens become lovers of money.

Likely enough.  And so they grow richer and richer, and the more they think of making a fortune the less they think of virtue; for when riches and virtue are placed together in the scales of the balance, the one always rises as the other falls.  True.  

And in proportion as riches and rich men are honoured in the State, virtue and the virtuous are dishonoured. “  

Plato had it right.  And we need to be as wise today as he was when he dictated The Republic.  Sitting in the Shenandoah Mountains with my aunts and uncles at yesterday’s family reunion I was reminded that intelligent, thoughtful citizens are living in entire oblivion to the nature and structure of the perpetuation of financial high crimes.  That needs to change and you, the reader, need to make sure that you share information that can illumine what is being done in secret in our names.  Until we shine light on the real corruption, we’ll be hanging over the edge without knowing our own precarious state.

Fabricated in Detroit

On December 11, 2010 I wrote a blog post on Article 1, Section 10 of the U.S. Constitution entitled “Debtor in Possession… well at least Possessed.”  In the wake of that posting, many professional investors and advisors (those who have a vested interest in picking the pockets of pensioners) suggested that my conclusions were overstated and the risk to bonds was not as great as I stated.  The Honorable Rosemarie Aquilina, Judge for the Ingham County Circuit Court in Michigan sided with my precedent-setting blog post.  Sorry Chrysler and Eminem – “Imported from Detroit” doesn’t get you free from the long arm of the law.  And for those of you have been sleeping, when a Circuit Court judge finds it necessary to add, in her own handwriting on the court order, “A copy of this Order shall be delivered to President Obama.  It is so Ordered.”, my warnings on the fixed income pension crisis are not black swans anymore – they’re a whole flock of buzzards getting ready for the carcasses. 

Michigan Attorney General Bill Schuette immediately announced that he’s appealing Judge Aquilina’s ruling at the Michigan Court of Appeals.  Governor Rick Snyder’s trying to limit the collateral damage from Detroit’s filing and Kevyn Orr, Detroit’s emergency manager is left looking like President Nixon at a Chinese table tennis match.  At issue is the constitutional provision in Michigan barring a Chapter 9 bankruptcy that prohibits actions which “threatens to diminish or impair accrued pension benefits.” 

Now, I’m not saying I told you so but I did thus inform you years ago!  We’ve got a real problem on our hands and the Detroit filing – a reality that President Obama desperately tried to cover with a thin veneer in his acquisition of the Presidency – is neither isolated nor the most consequential.  What makes this one somewhat ironic is that conservative pundits and many Republicans thought that unions put Obama into 1600 Pennsylvania Ave.  Detroit will give us another interesting view of the President turning his back on that very population at the whim of his true benefactors: “The Powers That Be”.  Detroit wasn’t spared in the auto bailout.  The financial institutions exposed to distressed financing of the auto sector that had a lot to lose were paid off handsomely (and anonymously)! 

So this record-setting $18 billion bankruptcy is fascinating on its face.  In the actual filing Detroit states that:

It has over 100,000 creditors;

It has “More than $1 billion in assets”;

It has “More than $1 billion in liabilities”;

It has over 60,000 parcels of land and more than 7,000 vacant structures which pose “a threat of imminent and identifiable harm to the public health or safety”; and,

Detroit has been in a state, “of 60 years of decline for the City, a period in which reality was often ignored.”

It’s this last line that really jumps off the page.  Call me Cassandra (think Trojan Horse) but the reference to “60 years” is particularly fascinating and vindicating.  What was it in 1953 that put Detroit on the collision course with today?  Ian Fleming introduced us to James Bond in Casino Royale, Watson and Crick unwound the helix, the CIA authorized the use of LSD to test human cognitive potential, Hugh Hefner published a nude photo of Marilyn Monroe in his first issue of Playboy.  A more careful view of history may suggest that this reference hearkens back to the contentious polarization of relationships between management and unions which, under President Harry S. Truman, was punctuated with events like his veto of the Taft-Hartley Labor Management Relations Act of 1947.  In his veto, he played the part of Cassandra to today’s Trojan Horse with his preamble, “I have no patience with stubborn insistence on private advantage to the detriment of the public interest.”

Private advantage insistence over public interest!  Seldom could such a ringing indictment of our current fiscal state be more succinctly stated.  And seldom have fewer paid attention to principles of fostering constructive understanding between management and labor evidenced in Truman’s veto.  Ironically, however, one must consider what’s lurking behind the masquerade in Michigan.  Does the court, the Attorney General or the Governor actually have the pensioners’ interest in mind or are they, once again, mere marionettes on the fiscal strings animated by benefactors who will profiteer from this bankruptcy?  Tragically, when the City Manager seeks to put General Obligation Bonds (munis for those of you who are in the capital markets) on the same level as unsecured creditors and retirees, you realize that “safe assets” are getting far more volatile than sellers would want you to believe.  PowerShares VRDO Tax-Free Weekly Portfolio (PVI) and PowerShares Insured National Municipal Bond Portfolio (PZA) reportedly have significant (over 3.5%) exposure to Michigan’s bond headaches according to S&P.  And while retirees read the headlines wondering what this means for them, bond traders are placing bets against their future liquidity.

I’ve said this too many times but today begs recitation.  Economies built on debt (uncorrelated, perpetual growth-dependent, leverage) must fail.  Whether it’s the U.S. Treasury’s debt currency model that mandates perpetual GDP expansion or Detroit’s 60 year descent into insolvency, the jury is in and capricious debt speculation has once again failed.  It took World War II to mask the first 30 year maturity default; Nixon’s gold default to mask the second; and, planes into the World Trade Center on 9-11 to mask the third sovereign default.  Bottom line, we’ve never proven that debt works in the long run and the actions we take to cover our illiquidity events are dramatic and far-reaching to say the least.  In last week’s post I warned of the looming specter of pension harm that is casting an ever-growing shadow across the G-20 economies.  Detroit is merely the canary in the coal mine and, with any luck, some of you will wake up before the methane knocks you out.

“I got a question for you.  What does this city know about luxury?  What does a town that’s been to hell and back know about the finer things in life?  You see, it’s the hottest fires that make the hardest steel, add hard work and conviction.  When it comes to luxury, it’s as much about where it’s from as who it’s for.  This is the Motor City.  And this is what we do.” – Wieden & Kennedy / Eminem

It’s going to take more lawyers charging millions and more slogans than Wieden & Kennedy (that’s right, the same guys that Just Do Nike) can muster to paper the mess that Detroit’s in now.  But none of that will fix the real problem.  Until we align capital to measurable productivity (including contractions), we’ve got more promises to break.  And We The People must wake up from the trance or there’s more wheels to fall off.