Not over yet

A new consensus is seeing the end of World Depression II sometime in 2010. As a matter of fact, the list of positive elements is not negligible:

• - The very existence and the conclusions of the G20 show the existence of a fast global public response to the events, certainly going in the right direction
• - The US stimulus plan has had an initial favorable impact, paving the way for the other plans
• - Europeans plans are not as small as they look, considering the fact that social protection mechanisms mechanically increase public spending each time unemployment levels rise
• - The banking system has now ceased to crumble down, and the main pieces are back in place
• - Protectionism is being discarded as a solution
• - Destocking is reaching its material limits
• - Most commodities are back to reasonable prices
• - Confidence is being restored
• - Key currencies are stable: the ‘Chinamerican’ system protects the dollar, while the Euro structure prevents members to freely print money for their own selfish benefit
• - A reinforced IMF can be of assistance gain in the most disastrous areas
• - Last but not least, the US administration, having ceased to be an arsonist force, is now a factor of global appeasement .

Now, on the other side of the balance sheet, still lies a list of liabilities of such importance that the 2010 target remains a product of wishful thinking:

• - The financial system is by no means limited to the banking system, and it will take a long time (years) to monitor, fix, regulate and control the non-banking part which had become the largest part. This requires a better understanding and monitoring of securitization, another revision of corporate accounting, multilateral as well as bilateral negotiations for the creation of appropriate regulation entities, and adjustment of tax laws
• - Stimulus plans, limited by a dominant ideology against public deficits, are being set at an order of magnitude below actual needs: the financial wealth recently destroyed (stock markets, real estate, commodities, leveraged securities, for a total of perhaps $ 200 trillion) had been fueling growth, and must be substituted by public injections (today in the range of $ 3 trillion). In the meantime, business will lack funding and growth will stall.
• - Toxic assets are not yet entirely eliminated (CDS, and weak real estate based securities) and not even entirely identified
• - The global real estate crisis has not by any means reached its climax, and in many places (such as Spain or Dubai) drops in prices are still expected to reach 80% from currently already discounted levels
• - The West should continue to keep for several decades the largest consumer markets, and is also the place where unemployment shall keep rising: the gradient in technology capabilities which had separated East and West for the last two hundred years, creating the global system of economic specialization which in turn did sustain the extraordinary economic growth rate observed along the same period of time, is now reduced to very little. Countries like South Korea can produce basically anything the West can produce (except in the fields of airspace, nuclear energy, and armament), and can produce what the West cannot efficiently produce (e.g. consumers electronics). When China –which is a subcontractor of the West in about every sector) inevitably reaches the same situation than Korea, then Western and Eastern salaries will have to adjust. If they don’t, unemployment in the West will reach unprecedented levels, triggering an attrition of Western consumers markets, in turn preventing the East to generate resources for their own new consumers markets. If they do, social unrest in the West will contribute to the depression. In any case, the substantial cause of the economic crisis (not the occasional cause which was the financial crisis) is still in place for a while
• - When such stubborn facts appear in public view, further stimulus plans shall come. This time, however, they will have to be funded by deficits that only inflation can cure. For a short while stock market’s rallies should multiply. One could even use the opportunity to invest in the most protected sectors (let’s talk about them some other day). Yet, better miss a rally that hit the next crash sooner or later.

This is how the world goes. Please stay tuned.

In Defense of P2P

While an emblematic trial against the activist group piratebay.org now starts in Stockholm, various parliaments – in an attempt to keep alive the obsolete business models of some ailing industries – are debating bills of law degrading further the intertwined principles of secrecy of correspondence and freedom of ideas.

As we all well know, ancient democracy, the system by which citizens directly govern themselves, is no more. Modern democracy, the system by which citizens actively protect themselves against their own representatives, is losing momentum. With a reduced constitutional protection of privacy and freedom, democracy vanishes altogether. It is the nature of governments to invade the content of private communications as much as they can, and to limit the scope of civil associations. Public officials are prone to always find new reasons for eroding the corpus of legal guaranties which is their sole hindrance. They usually base their will of control on the somewhat cynical claim that ‘good citizens’ should have nothing to hide and should never pursue any activities not in the immediate interest of the State. War, crime or even the mere consideration of health are the main chapters in the sad book of Attrition of Civil Liberties, which is now describing our political lives. The perpetual guerilla between ordinary citizens and their benevolent enemies mostly takes place on a series of seemingly benign grounds, carefully chosen as to minimize the probability of efficient counter-reactions. Peer to Peer electronic networks (P2P) are a recent example of such local battlefields where essential principles are nevertheless at stake.

P2P networks enable a correspondence between individuals in the same way postal and telephone services do. What makes them specific is that individuals subscribe  to information services providing the electronic address of other individuals willing to exchange pieces of data files. To compare it with older technologies, one could simply say that the system works as if lists of postal addresses were published, allowing readers to exchange letters, each containing parts of the texts they are mutually interested in and contain description of ideas, poems, drawings, musical scores, or any such intangible products of the mind. The main difference is that they P2P networks are much more efficient.

It is important to remember that ideas may not be appropriated, and that even the fiercest advocates of intellectual property do not go as far as pretending that they should. When Einstein discovered ‘E=MC2’, no patent, copyright, monopoly was provided to make him as rich as any successful music composer or movie director can become. What is supposed to be protected by intellectual property, as an exclusive right or monopoly, is only the material form under which the idea is expressed, in this case a scientific paper or a book containing the original expression of the celebrated formula, not the formula in itself. For a period of time, the paper  may not be copied by anyone unless previously authorized by the original publisher or the subsequent owners of the rights. Brief quotes, however, are permitted in order to avoid the obviously absurd consequence of preventing ideas from being not only copied but even mentioned.

The problem is that the distinction between an idea (or any product of the mind) and the form under which it is expressed is a misleading metaphysical concept. Suppose that the formula, instead of being short enough to be quoted in less than one line, would be so complex that it would take a whole scientific paper to express it. Then, quoting the idea would actually mean copying the entire text of the paper. As doing so is expressly prohibited by law, the very idea – not only its form -  then becomes the object of a monopoly and may  not be legally spread. This shows in a lear light how absurd the foundations of  the so-called ‘intellectual property’ can be.

This situation is not restricted to mathematics, physics or philosophy. When asked by a lady how he could possibly put his ideas into the marble with such ease, Rodin answered: ‘Madam, I think in marble…”. The same applies to all arts. There is no real difference between a product of the mind and its very expression. Therefore, preventing the copy of the expression of an idea (or any product of the mind) is equivalent to preventing the free communication of ideas, an unreasonable prohibition indeed. Legislators, being at least subconsciously aware of this implication, the more an idea or product of the mind is important for mankind, the least protection they actually grant it. Disney and rap dancers thus turn much better protected than Einstein.

Great artists are not put in any more danger by P2P than scientists or thinkers have always been. The main ones to be threatened by this development are the traditional music industry, and – to a certain extent – film industry, as their business model is based on the material monopoly they had kept in the distribution of music and films. It was not only illegal to multiply copies of songs and films, but it was mainly impractical. The progress of electronics now makes it extremely easy in the case of music, and rather easy in the case of films.

Adjusting the business models of these two industries to the technical change requires a degree of imagination their management is lacking. It would in any case hurt their short-term interests. So they found simpler to initiate a brutal crusade against P2P, mobilizing part of the vast financial resources and influence they had accumulated over the past. This is i nothing but a crusade against the tens (or possibly hundreds) of millions of consumers over the world now enjoying P2P protocols which have rapidly grown as the main usage of the Internet, way beyond browsing and email. What the crusaders are trying to obtain from gullible legislators is the protection of their old business model, an undertaking directly rooted in medieval corporatism. More modern is their lobbying practice: they take the precaution to pretend acting for the defense of artists and creators more than of their own. Who would indeed be cruel enough to deprive an aging industry from revenues artists and creators receive a (small) percentage of?

Of course, things are quite different. Musicians can always make money by giving concerts, and the more famous they become through free electronic access to their music, the larger the audience they attract. In other words, music production companies do no need to exist anymore for musicians to thrive. Younger talents can find a career after being chosen by the public rather than after being selected by the executives of music companies. Other industries would also be better off without them, such as radio and TV, not to mention night-clubs, bars and the many other businesses broadcasting music as waiting tones or in elevators.

The situation is slightly different with films, as the movie industry is better protected by the material nature of the product. Blockbusters are better viewed in large theater than at home, and can generate income in the traditional way. The more modest independent films are more difficult to find on P2P networks than on DVDs. The least well placed are the mid-size productions which are too expensive to amortize on the limited number of screens distributors are usually willing to grant them. Yet, even they can survive, cable channels having proven (immense) profits can be made by financing such films even in the absence of any other distribution. More importantly, all segments can thrive, provided the whole industry accepts to change business models from copyright-based to service fee-based distribution. Consumers, as a matter of fact, have shown (for instance with i-Tunes) that they are not unwilling to pay (large fees) for the service of providing good quality files from fast servers, as soon as or shortly after the content is available otherwise, in the same manner that they are willing to pay for theater seats. Artists and creators do not care which model is used or who pays them, as long as they are rewarded by salaries or otherwise.

The notion that replicating electronic files is a forgery is the miserable argument multimedia crusaders have found. By definition a forgery is the act of imitating documents or objects in order to deceive. When a file is exchanged on a P2P network no one is deceived, as nobody claims that the compressed electronic version of any given film is the film itself or has qualities equivalent to those of the original versions available from theaters or from high definition supports. The only exceptions are the fake files sometimes injected by the movie industry vainly hoping to make the selection of good files more cumbersome for P2P users. I see no reason why the authors of such injections, deliberately violating the contractual usage policy of P2P servers of trackers (the lists of addresses of interested users), should not be sued rather than the generally non-profit activists who maintain the servers.

From a broader standpoint, copying or replicating any document or product of the mind should never be restricted, unless the original remains unpublished, or unless the copy is a strictly defined forgery. It is not at all the same thing to distribute a copy claiming it is the original than distributing a copy advertized as such. Forgeries mislead consumers on the nature of their purchases. Overt copies don’t. The history of art and culture in general is made of a large number of overt copies and a smaller number of forgeries. Let the courts deal with the last. Let consumers determine the value of overt copies. At times, they give a higher value to copies, like the Romans did for marble statues imitating Greek bronze originals. At others, they are fetishistic enough to pay a fortune for one of Duchamp’s ‘original’ urinals and not a dime for the exact same object yet not approved by Duchamp himself. Legislators are not to interfere with such preferences.

Sadly, they do. Giving way to the outrageous claims of corporatist defenders of old business models, a galore of intrusions in the privacy of consumers is sanctified. Government agencies and private operators are allowed to set up a full scale surveillance of Internet users: who contacts whom, exchanges what files, using which trackers, ports or protocols. This information, kept in databases, will serve the purpose of fining users, shutting down servers, suspending Internet access, in other words, punishing in any possible way consumers who are simply hoping for the new business models to emerge and, who, by the way, often turn out to be the same people who also go to the theater and purchase DVDs (preselected after a P2P screening). Such information can also serve more perilous purposes, too easy to imagine and useless to describe here.

Even when reluctant to so restrict civil liberties, many governments seriously consider compensating the loss of income incurred from the obsolescence of the business models, by so-called ‘global’ licenses, which are taxes unfairly levied on Internet subscriptions, no matter the nature, number or even absence of downloaded data files.

Surprisingly, such blind and large concessions made to the lobbying of aging business actors, seem insufficient to appease the wrath and greed of some enraged multimedia crusaders. Recently, Luc Besson, a French filmmaker turned into owner of a film studio, published a most heinous article, asking all people even remotely related to P2P or streaming, from advertisers to Internet access providers, to be sent to prison as accomplices of a crime he compared to drug dealing. You would think this is the mere utterance of a deranged mind. Unfortunately, the current trial against the young activists of piratebay.org, shows that the danger is real, and that greedy madmen, when influential enough, may sometimes succeed in destroying the life work of good-will visionaries.

This is how the world goes. But let’s hope (and fight) for the best.

Persian dreams

Is there any limit to how deeply Washington can misunderstand the world? Persia is a showcase for the negative answer. Since the 1953 coup at least, now officially acknowledged as the US operation ‘Ajax’, American foreign policy has been going from one misconception to another: notably, from a candid Carter administration pressuring the Shah into exile and triggering Khomeini’s revolution, to the staggering reinforcement of Iran by the destruction of its nemesis and main regional counter-weight, Iraq. Now, when the US position in the Middle-east would have seemed to reach its nadir, a series of clumsy moves indicate that things could still worsen.

The Obama administration is wise in trying to defuse the explosive situation left by the last presidency. This is not a good reason, however, to play naively in the opponent’s hand. The belief that the mere prospect of entering in Washington’s good grace will move the Iranians to the tears and will be sufficient to get their badly needed assistance or neutrality, looks like the idea of a dreamer or a madman. It is, though, what the DOD seems to have in mind.

NATO’s Supreme Allied Commander, Gen. Bantz J. Craddock just came up with the astonishing idea to ‘allow’ NATO state members to ask Teheran for supply routes into Afghanistan. Why not ask Pyongyang for intelligence support about China? General Craddock avoided requesting personally Iran’s assistance in better invading a neighboring country, and hinted that Germany or France would be welcome to make the first move. After an initial chuckle, Teheran might in fact take the ‘bait’: wouldn’t it be nice to have a say in any further deployment of NATO countries in Afghanistan? After all, the more the Iranians facilitate the switching of troops from Iraq to Afghanistan (at the considered levels which are way too low to bring a real military control), the easier it becomes for them to take over Iraq directly or by proxy. In the event you believe this was a whim from some isolated general, please note that the US Treasury one-sidedly labeled the Kurdish resistance movement against Iran a ‘Terror Organization’ on the next day.

It is difficult to understand why Iran is such a puzzle for the United States. The simple reading of a history book should be enough to make it clear that Persia is used to being a unified super-power (the only one who could resist the Roman empire), with a long patriotic – now nationalistic – tradition, and viewing itself as a matrix of culture. The basic mistake is to see a contradiction between an appetite for modern technologies and the safekeeping of local traditions, including Shiite Islam. Iran is not interested in becoming a part of the Western world, as many Iranians are convinced that US technological superiority is temporary and hides a cultural deficiency. It is therefore perfectly logical to combine an industrial and military modernization, financed by enormous mineral resources, with an effort to promote Shiite values all over the world, starting with the Middle-east and central Asia, the two mains parts of Persia’s courtyard. As long as the curve of American decline –which is seen as inevitable – does not cross Iran’s recovery curve, Teheran can rely on a strategy which has proven its efficiency: war by proxy and martyrdom. This low-cost method was capable of creating chaos at will in Lebanon and in Iraq, leaving Iran as a key-player in both places. It is now applied also with success In Palestine; where Israel is considered by Iran as nothing but a US stronghold. This strategy could be turned anytime against Saudi Arabia and the emirates, once the Palestinian showdown is settled under terms found acceptable by Teheran.

It is now too late to prevent Iran from building up a Mesopotamian hegemony after the departure of US forces. Western presence in Afghanistan does not represent a threat for Iran, as only massive investments (an option now closed by the economic crisis), not additional (and yet insufficient) troops could have made a US success conceivable there.

To complete the picture, the Russian-built nuclear reactor of Bushehr will be operational by the end of the year, in spite of constant Western opposition. Moreover, the acquisition of a military nuclear capacity is not unlikely over the next 2 years. Inside Iran, the search for this capacity is considered natural and legitimate, as a guaranty against US/Israeli arsenals and the repeated threats of invasion expressed during the past decades. It is kept as unofficial as the Israeli (now obsolete) nuclear bomb.

The idea that the next elections or the elections after next will dramatically alter this perception, strategy and power position is sheer wishful thinking. Mahmud Ahmadinejad is obviously not a very educated man, considering his poor knowledge of world history, but is neither the author of Iran’s present political vision nor will he be its last defender. No indication whatsoever has been given that Iran would embrace a complete or even a significant reversal of strategy after his fall.

Within this context, the West is right now clearly in a weaker situation than Iran in the Middle–east and Central Eurasia. Granting with condescendence a reintegration into the ‘concert of nations’ will achieve nothing under the circumstance. If anything can be certain in world affairs, no doubt the sudden US need of Iran will but raise all stakes. The opening of talks, the reduction of diplomatic anathema, the reluctant acceptance of Iran’s inevitable civilian nuclear industry and the lifting of ineffective economic sanctions will not be enough to obtain Iran’s passive neutrality. It would additionally take a settlement in Palestine, the only way to contain Iran’s proxies in the South.

Preventing the Persian nuclear bomb, would require an even bolder move. As suggested already in a previous post, only a military denuclearization of the Middle-East and central Asia could offer an alternative attractive enough for Teheran. The concept is not entirely new, but its time may have come. If the US administration is not ready for it, its main rival in this key region will be virtually impossible to contain for quite a long time.

This is how the world goes.

Corporation, MD

The present economic scenery does not allow for narrowness in the search for diagnosis and remedies. It may very well be the case that our macroeconomic illness also plunges some of its roots into microeconomic malfunction.
Let’s therefore put aside for now both (i) the regular macroeconomic cycles, although one of them definitely just ended, and (ii) the long term decline in the technology gradient between East and West, although it threatens the foundations of the entire international trade model, as well as (iii) the leverage bombs which triggered the depression. Let’s focus instead on business management at corporate level.
Business administration theory is essentially teaching how to fight Schumpeter’s concept of inevitable corporate death. The mainstream idea is that, given enough goals setting, planning, focus, hard work, diligence, persistence and disciplined execution, corporations can follow a perpetual ‘S curve’ from fast growth to maturity, from start-ups to cash-cows. The transition to maturity is recognized as a critical phase, which calls for new managers and business consultants, in order to regenerate income, in spite of reduced growth. The task of the consultant is to recommend and the task of the tough (=good) new managers is to implement the recommendation of trimming the fat, i.e. eliminating any product line, market segment, supplier, channel, employee or investment, which either does not fit the historical success profile of the company or does not produce the best income. This method has proven itself, and it is a certain fact that the deliberate trimming of the business to the core, does indeed create a short- or mid-term improvement of income in the so-called ‘mature’ companies, i.e. companies large enough to be in the first tier of their own sector and now probing the limits of their core market.
On the other hand, it is a dangerous medicine the one that guaranties the death of the patient. If the trimming logics are pursued to their end, as a matter of fact, the company will find itself with only 1 product, 1 client, 1 employee and no investment, another name for sheer disappearance. There is no practical escape from this theoretical conclusion: large companies die. The more the mainstream management cure is applied and the better the managers are in implementing the recommendation, the more in fact the company is doomed.
With the temporary exception of oil companies, almost no corporation listed on the US stock market at the time of WWI is still in existence today; and the handful of survivors is mostly in bad shape. The biggest, strongest, and best managed corporations according to standards are dead or in agony. There is no space enough here for the endless obituary they would deserve. Just think of PanAm and most airlines, Polaroid, Kodak, Kmart, Dell, GM and most automakers, AT&T, ITT, DuPont, all banks, DEC, Bell-Lucent-Alcatel, Bethlehem and most steel titans, Tribune and most newspapers companies, AOL, Marlboro and most tobacco companies, etc, etc, etc.
The main reason behind the mass slaughter is that while companies tend to stick to what made their success and eliminate the fat around their core business, markets have a life of their own. Few assertions are more certain than the following: there will always be a market change capable of killing any company.
Based on these facts, one would think that the best management method is not the ‘trimming to the core’ but the preparing at all times for market change. The problem here is twofold. First, stock markets are not inclined to sacrificing sure short-term improvements by trimming for unsure long-term investments for survival.
Second, the risk, as usual, is to underestimate randomness. It takes many entrepreneurs to get a successful one. God and Evolution, with their 50 million spermatozoids per ejaculate, are in fact much more conservative than venture capitalists with their acceptance of a 90% average rate of failure. Moreover, the established business management theory is wrong in confining randomness at the level of start-ups. Randomness remains a reality after the initial stage. Even if an exceptional business genius was capable of anticipating most of the future market changes and designing the appropriate product solutions, he or she would still be confronted to randomness under the form of timing. Timing is determined by such a complex combination of factors, that it can almost never be forecasted and can only be guessed. Wrong timing is yet the worst of all outcomes, having consumed vital resources to no avail.
Under these conditions, is it possible to design the kind of meta-corporation it would take to continuously self-reorganize in order to face market change? A couple of entrepreneurs, like Jack Welsh (GE), Steve Jobs (Apple, Pixar) or to a lesser extent Richard Branson (Virgin) and Lou Gestner (IBM) have shown it can be done on an individual basis. But can this be done on a global basis?
In what is possibly one of most stimulating books ever written on Business Management (Create Marketplace Disruption: How to Stay Ahead of the Competition FT press, 2009), Adam Hartung gives a positive answer, and explores various ways for a corporation to manage its success formula to achieve adaptative success: such as stop the ‘Defend & Extend’ old habits through trimming, generate controlled disruptions of the corporate personality, and create an autonomous ‘White Space’ to continuously create revised success formulas.
Although I am not sure any business organization can overcome Schumpeter’s spell forever, Hartung’s suggestions may certainly increase their longevity. If he is right, the good old ‘best practice‘trimming will give way to a much healthier type of management. Successful corporations would probably not only survive longer, but they would also be likely to do a much better job than venture capitalists at attempting new success formulas , having more resources to do so and a portfolio of potentially synergetic technologies to leverage. Last but not least, consumers’ markets would be filled with a smaller number of laid-off employees…
This is how the world goes

Rationality vs. Nationalism in the Palestinian conflict – Part II

Public opinion is as strong a force as it can be blind. Sides are usually taken according to the proximity of the respective propaganda sources. Historical rectifications are conceived as aggressions, and self-righteousness reigns on all parts. A rational approach can still be attempted, with limited chances of success. It is however the last resort left for not dying or killing based on utterly wrong reasons. The worst in never certain, after all.

 Let’s start by putting the historical background aside, as it is unable (as we have seen in the previous post) to show us anything else than the extreme relativity of the foundations of all opposing claims. The present issue is not anymore the historical legitimacy of Israel or of a Palestinian State, which is simply dry wood for the flaming ideologies. We should rather consider the rationality and efficiency of the strategies now determining the future of Palestine and Israel.

 The basic objective fact is the following: although at this time militarily unmovable, Israel is facing a lethal danger if the state of war persists indefinitely, because of Israel’s vital dependence on external supports which in turn depend on public opinions that are emotionally inclined to back victims. In an environment where nationalism feeds political analysis with its own notions, when confronted to a conflict between State-haves and State-have-nots, public opinion tends to back the have-nots. Even Congress can abandon a cause it was supposedly ready to die for, when a shift in public opinion starts blowing the whistle of a new electoral tone. Gradually, appalling TV images undermine the most solid positions: South Vietnam, the former ‘bulwark of our liberties’ is long gone and only one example of what it is fact a general rule when you look at it close enough. Many Israeli leaders know it; most Islamic extremists know it too. For this very reason, and sometimes for other motives, most Israeli are aware of the necessity for Israel to make a Palestinian State happen, and most Islamic extremists are convinced they will get one sooner rather than later.

 The issue therefore boils down to the negotiating muscle of the respective parties. The Palestinian strength rests almost exclusively on the public opinion battle, a battle in which Israel has been continuously losing ground since the First Intifada. The weakening of PLO, the war in Lebanon, the building of the wall, the retaliatory incursions into the West Bank, the one-sided withdrawal from the Gaza Strip followed by siege and reinvasion, all carried much more negative consequences than positive ones from the public opinion standpoint, no matter how much sense they might have made for other purposes.

 Symmetrically, the strategy adopted by the Islamic Extremists has recently shown to be much more efficient than the one of the Moderates. It consists in deliberately worsening the situation through aggressive martyrdom: provoking the opponent in order to become a martyr in the eyes of public opinion. Such strategy, the (non-aggressive) roots of which are to be found in the Christian martyrs (who took over the Roman Empire), in the pacifist Indian martyrs (who took the upper hand against the British Empire) or even in the martyrdom of Haile Selassie facing Mussolini, is extremely powerful and should not be underestimated. Triggering a full scale invasion with numerous civilian victims, by launching psychologically dreadful and yet physically almost harmless series of homemade missiles (3 dead at this time), is almost as winning a strategy as having children throw stones at tanks. It is much more efficient than the ill-designed methods of Al-Qaeda (spectacular destruction of civilian targets, and human bombs, especially women or children) which turn to be somewhat counter-productive for the goal pursued by their authors (i.e. the elimination of the United Sates from the Islamic world).

 Countering such a politique du pire cannot be done by simply accusing opponents to be terrorists, criminals, primitive or stupid, even when they are. It can definitely not be done by a sheer repression; hoping to exhaust the opponent’s determination while actually reinforcing it (Please note that Hamas leaders gave themselves the pleasure of initially rejecting the ceasefire in their favor, and asking for more martyrdom). It can only be done by offering terms that public opinion – right or wrong – will consider fair.

 The core of such terms has been known for a while, and it is probably a mistake to keep them under the table in order only to hopefully maintain one’s bargaining position. To be viable, the future Palestinian state must be territorially unified, have a critical size and the capacity to economically and socially absorb the refuges under decent conditions. It must be exempt from enclaves justifying major claims. Territorially, this implies not only the restitution of almost all Occupied Territories, but also some concession on the status of Jerusalem. A delicate issue seems to be the Right of Return, yet more apparent than real: the combination of a moratory with a viable Palestinian State should logically lead a majority of former refugees to waive it. Palestinian concessions will be essentially limited to the formal acceptance of the negotiated borders and the actual banning of terrorist activities, under the control and assistance of an adapted International police force.

 It is likely that the next Israeli government and the new US administration will give it a try to a certain degree, the main problem being to find counterparts to negotiate with, in the absence of a strong moderate Palestinian leadership. As it is neither in the Hamas nor in its Iranian backer’s immediate interest to pursue a rapid peace which would reduce considerably their role and influence, the only sound option for Israel is to create the conditions for a political comeback of the Fatah. This could hardly be achieved in the absence of an intermediary phase during which the extend of the territorial concessions that are being considered is publicized, the settlements are methodically dismantled, response to attacks while remaining firm is restrained and targeted from a distance, the daily life of Arab Israeli and Palestinian workers in Israel – an important link – is proactively improved, and the reelection of the few Arab Israeli MPs facilitated.

 This is of course faster said than done. At least this sets a reasonable course of action, foreign to ideologies and partisanship. The coming elections in Israel and the visible aspiration of the new US administration to get out of the hornet’s nest give it at least some minimal possibility.

 At some point, for peace to eventually take place the Iranian pressure will have to be released. I doubt mere ‘conversations’ will do the job, unless a trump is put on the table. The only pacific one I could see is the prospect of an International conference on the global denuclearization of the Middle-east, which is no not entirely impossible as a good way to temper the region.

 If none of this happens, if no real attempt is made to enact a reasonable plan prepared by intermediary phase, Israel will survive but its situation will continue to degrade. Both local populations will continue to undergo unsafety or misery and extremists will thrive.

 I am not sure bookmakers would bet on a rational development rather than an intensification of nationalism. Yet, who knows?

  

 

 

Rationality vs. Nationalism in the Palestinian conflict – Part I

Few topics are subject to more irrational partisanship than the Palestinian conflict. Any discussion of historical claims or legitimacy issues is a sure way to reach a quick dead-end, the particular complexity of the regional history being buried under a thick layer of ideological beliefs and errors. Here is a quick reminder.

 The very name Palestine was given by Emperor Hadrian to his province of Judea, as a punitive symbol after the bar Kochba revolt. He also simultaneously renamed Jerusalem Aelia Capitolina and banned the Judeans inhabitants from the city. Palestinia was a transposition of a word used by Herodotus for the land of the Philistines, these descendants of the People of the Sea (including the Phoenicians), a mixture of Indo-European populations having invaded the so-called ‘Asian’ territories of Egypt during the 12^th century BCE. The renaming was nothing but an expression of the Roman aggravation in front of the obstinate refusal of the Judean Bedouins to integrate the Empire: at the time of Hadrian, very little was actually left from the former Philistines in Judea, except a small presence around Gaza.

 For most of its long history the territory today known as Palestine (corresponding more or less to the southern part of the Roman province of Judea Palestinia) was subject to a series of realms and (mostly) empires: including but not limited to Cannaites/ Phoenicians, Egyptians, Hittites, Hebrews, Assyrians, Persians, Greeks, Romans, Byzantines, Arabs, Franks, Mongols, Turks and British.

 As to the Hebrews, they dominated the area as a group of beduinic tribes over the 11^th century BCE. A short-lived unified kingdom lasted for about one century until the death of Salomon (-933). It was then divided into a Kingdom of Israel in the North (10 tribes) and a more destitute kingdom of Judah in the South (2 tribes). In -733 the Kingdom of Israel was thoroughly annihilated by the Assyrians. In -586 the Kingdom of Judah was in turn destroyed by the Babylonians and its modest population deported to Iran (soon to be called Persia).

 The Persians rebuilt Judea as a buffer state against Egypt, reintroducing part of the Hebrews in the area and rebuilding their temple in Jerusalem. When Alexander conquered Persia, a significant part of the local population was sent to the new city of Alexandria. Judea remained a Greek dominion until the Romans took over.

 Following their preference for indirect rule, the Romans allowed the creation of a Judean client-state under a Jewish (new name for the Hebrews) dynasty, the Hasmoneans (-138), replaced in -37 by the mixted (Greco-Edomite-Nabatean-Jewish) Herodian dynasty. A succession of revolts, mainly in 66-73 and 132-135, ended in direct Roman rule followed by the exile of most of the remaining Jewish population.

 Beduinic armies coming from the Arabian Peninsula conquered the region in 637, defeating both the Persians and the Romans (now the Byzantines), and converting most of the population to Islam. Palestine was thereafter placed under the domination of a succession of Islamic empires almost never run by Arabs but by a mixture of Turco-mongols or even European conquerors or slaves, until the dismantlement of the Ottoman Empire after WWI.

 In 1881, before the arrivals of the firsts Zionist migrants, the population in Palestine was limited to 457.000 souls (400.000 Muslims, 40.000 Orthodox Christians and 17.000 Jews). As the Arabian conquest did not take the form of a migration, it is reasonable to believe that a significant part of the Muslim population of Palestine was then formed by descendants of the Roman Jews converted to Islam.

 The recent part of the story is the direct consequence of the rise of Nationalisms, from the mid 19^th century on. Nationalism, a French creation, is the invention of mythical common origins in order for a culturally or geographically connected group to claim a right of absolute sovereignty over a territory. Please recall that the Normans and Britons were Vikings, French monarchs Germans, Provence Roman, then Germanic, then Arabic, before integrating the German empire of Charlemagne, that Burgundy was German and Spanish, that Picardie was annexed by Louis XIV, and that Savoy and Nice joined France 20 years after Senegal. The unification of 200 German speaking principalities, in spite of their deep religious divisions, under Prussia (a State artificially created during the Crusades), was a response to French imperialism. The historical existence of a ‘German nation’, however, rested on even weaker grounds than the one of a ‘French nation’.

 A Jewish nationalism was soon to follow, first as an intellectual reaction against these evolutions, then as a practical escape from their dire consequences. A vast majority of the European followers of the Jewish religion were settled inside the Russian empire. Some were certainly actual descendants of the exiled Hebrews; many others were the descendants of Turkic populations converted to Judaism over time (such as the Khazars). Some were preserving their ethnic idiosyncrasies; others were assimilating into the dominant Christian fabric.

 The pogroms which had followed the assassination of Czar Alexander II, as well as the Dreyfus affair in France, triggered a sudden growth of Jewish nationalism. In spite of its shaky foundations, the idea was then accepted that all the Jews in the world (then speaking in excess of 130 different languages, and having very distinct ethnic characters and genetic origins, including Yemenites and north-African Berbers among several others) were nothing but the very same Hebrews that had been dispersed by the Persians and the Romans. About ¼ migrated to America and British dominions, ½ were exterminated by the Germans, and a good part of the remaining ¼ took step by step the road to Palestine.

 Last but certainly not least of all, the Arab nationalism had taken birth out of the decaying corpse of the Ottoman Empire. Populations who had little in common, except a language (more or less) and a religion started feeling a common origin and a common destiny. Their new origin was of course as mythological as in all other nationalisms, and their common destiny an illusion. Various ‘nationalisms’ were attempted by trial and errors: from Arab at large, to Palestinian, via Syrian, etc. At the end of the day, no actual ‘Arab’ nation took birth, and – except in Egypt- the nationalisms adopted the artificial divisions introduced by the British Empire and secondarily by France.

 Only one area of the former Ottoman Empire, Palestine, could not be filled by an Arabic state, as the Zionist migration first and then the creation of the state of Israel made it impossible. Both Arabs and Israeli refused to even imagine a common state. The question then became: would the Arab-speaking populations of Palestine be the only ones without a State reflecting their nationalistic aspirations? Both Jordan and Lebanon had by then acquired enough identity to prevent their territories from turning into a solution for the missing Palestinian element. Backed by the United States of America, Israel was now militarily invincible and could not be removed. Fueled by an anti-American sentiment, most Arab states (and later the Islamic Iran) funded the terrorist turn of the Arabic resistance in Palestine.

 While the nationalist ideology was reaching a climax both among the Jewish Israelis and the Muslim Palestinians, the most powerful force in contemporary politics – public opinion – was called to take sides.

 (to be continued)

Reflation – the basics

A major stock market crash reduces both the capacity (as a mechanical effect) and willingness (as a psychological effect) of consumers to spend, and the capacity and willingness of suppliers to produce. The crash, as a matter of fact, reduces the value of all assets (except cash). Therefore consumers have fewer saving to spend and suppliers get less financing to produce. Moreover, consumers, who depend on corporations for their income, also have less income to spend, and suppliers have fewer assets to use as collateral for their borrowings. The most logical cure is to restore first the capacity and willingness of consumers to spend, as this also creates not only revenues but also backlogs for suppliers who in turn can use such backlogs to obtain leverage.

Reducing interest rates is part of the treatment, but increasing the money supply in the hands of consumers is the main one. Some consider it wiser to increase public spending under the main form of new infrastructures. If these infrastructures are not productive, however, they cannot be as efficient as private spending which brings stronger social and psychological benefits. Increasing consumer spending can be achieved in many ways, such as tax reductions or subsidizing pensions.

The well-known risk of this type of cure is of course inflation when demand eventually overreaches supply. There is yet a long way to go in the present situation. The mistake would be to consider only the monetary mass and its strictly defined aggregates, which vary must less throughout a depression than the value of the assets that can be used as collaterals. An injection of additional monetary mass, as a matter of fact, can and should compensate the loss of asset value.

The global loss of asset value is reaching gigantic proportions: perhaps up to $ 200 trillion (¼ for the stock market and ½ for commodities as of today, and ¼ for real estate within the next 12 months). All were assets that could be used as collaterals and can no more. On the other hand substituting this entire loss would be madness, as prices vary much faster than demand. For instance a 10% increase in the demand for commodities can raise the price of commodities by over 50%, just in the same way than 10% of more cars in the streets create major traffic jams and vice versa. A tripling of the current plans (about $3 trillion were announced worldwide), however, would seem a strict minimum.

There is unfortunately no way I am aware of to adjust the money supply to the loss of asset value with precision. The effects (particularly the psychological ones) are certainly not linear. This means that when governments realize they need to change gear, and they now do need to, or when they realize afterwards, they should start reducing the supply again, inflation will be triggered at some point. I would thus personally consider inflation-protected securities as a wise choice for a while.

Once the depression is more or less over (this is not happening overnight), only technological innovation can sustain new growth. Technological ‘reserves’ in the pipes are not many: green techs will have to wait until the price of dirty energy is on the rise again; biotech will have to wait even longer for budget deficits to stabilize; and hopefully military spending (until now the main source of innovation) will be kept under control if we really want the planet to survive. This implies to concentrate already the new public infrastructure spending on civilian research, the most productive of all methods, while leaving a place to subsidizing pensions and other social benefits on the short term.

Dissenting voices can be heard. The ones consider the monetary mass as the Holy Grail and will simply not back reflation or not back it enough. Others believe in sheer magics, and expect the end of the recession for next year, based on a combination of Obamania and a blind belief in some anonymous ability to rebuild as fast as mankind can destroy. Beware: such voices can become very loud and could make the depression even longer.

This is how the world goes.

Maalox for Madoff

You are inevitably aware of the nature and magnitude of the fraud: $50b lost in a Ponzi scheme, according to Madoff’s own confession, the exact amount remaining to be determined. The scam is different from any of those which were recently revealed, as it is based on an absence of due diligence rather than an absence of regulations. The most interesting aspect is that a man, for over 20 years, was able to convince most members of an entire profession he could fulfill their dreams, and maintain their unwilling complicity, by offering high and constant returns insensitive to market conditions and generating high fees.

Asset managers – a motto in this blog – are totally unable to produce – as advertised – long term returns for their clients at higher rates than economic growth corrected by inflation, while grossing for themselves between 2 to 4% of the mass under management. They know they cannot achieve this by themselves individually or as a profession globally. They are ready, however, to believe in exceptions in others, and prefer to leverage such exceptions for their own profit rather than question their reliability. Although betting on exceptions made into an average phenomenon is certainly not the soundest of ideas, it seems a good way for average people to reach impossible goals.The most reckless and/or naive  among money managers started doing this in the 80s. The 90s turned it into an industry trend.

It is true, after all, that at any given moment, a handful of asset managers have beaten the market for a long time and made an impressive fortune. The best known are Warren Buffet and George Soros, others are Louis Bacon, Paul Tudor Jones, Julian Robertson and …Bernard Madoff. Obviously, not all are crooks like the later. Most are simply lucky. Some are even lucky and shrewd. Luck is a very important element in what is essentially a random distribution of outcomes. It is a well known fact that the ‘Monkey’ investment (i.e. random stock picking with positions held over a long period of time) produces results that are strictly superior to those of average professional asset managers. One of the reasons for this is that the Monkey is not concerned with generating fees by a fast turnover of portfolios, and carries fewer costs. Shrewdness cannot hurt: Warren Buffet has shown that Grand Pa’s type defiance against anything sophisticated, together with a witty wording of principles, can be good for business. Shrewdness may also reach some rationality when arbitrating between market discrepancies over identical assets. This last method – the best one – is unfortunately limited in scope and self-cannibalizing, as the more discrepancies are used the less remain to be exploited.

In any case, as these exceptions do exist, the advertized concept became: our bank (or financial entity of some sort), is formed of professionals capable not of outstanding results (something as a matter of fact difficult to believe) but of identifying outstanding independent asset managers. Asset managers picking soon replaced ‘stock picking’. The hunt was supposed to be so difficult and tricky that funds of funds had to be created and a whole new profession of distributors of funds invented. These new distributors of funds did not need any specific training, except in hunting, golfing and/or gourmet dining. Most came either from banking mid-management or impoverished aristocratic families. All they had to do was to be lavish enough in their invitations and jolly enough in their conversations to become your friend (if you are a ‘high net-worth individual’) and your banker’s friend (if you are not). In this way they could foster trust, a necessary item when dealing with expensive opacity.

From this moment on, bankers enjoyed a wonderful streak. Salaries paid to well trained asset managers for managing your money according to your own actual needs could now be eliminated. Younger, better looking and less paid account managers were in charge of convincing you to accept the new products: house funds mimicking successful funds, funds of funds, and ‘alternative’ funds that few could understand and less could explain. Not only these products came to the bankers at no cost, but they also started receiving kickbacks (more politely called ‘retrocessions’ from brokerage fees), on top of the fees you were officially paying (entrance fees, redemption fees, management fees, performance fees, custody fees). Your banker friend being your friend he could be nice with you and lift one of these many fees generated by your own money.

All such funds were supposed to have long track records showing steady returns and outperforming markets. When the emphasis is on performance, the track record is usually limited to an ad hoc selection of the best performing among a series of sister funds. When the emphasis is on the duration of the track record, a scarce item, a promise is made to provide funds by the most successful managers. This is where Madoff played his best cards. In order to create the proper hype, he made people believe that his funds were ‘closed’ and would not accept any new investors. In other words the most open of funds (what can be more open than a Ponzi scheme?) were sold as closed. Letting you in was a favor made to friends.

In a way, you can consider it good marketing: against all expectations, the ‘Dom Perignon’ is the best sold champagne in the world (it really is). Yet, this has had far reaching consequences. One cannot be too picky with favors. Illiquidity (redemption notice on the last day of each month, 35 days to redeem, then 30 days to obtain payment) was overseen. Complete opacity of the underlying assets was accepted as an effect of a necessary confidentiality (after all funds of funds have even more opacity as they refuse not only to disclose the nature of the assets – your assets- but even sometimes the name of the asset managers). Absence of understanding of the techniques being used was partly an effect of opacity. Absence of real guaranties, by the formal waiving of most rights, seemed a natural condition for products reserved to ‘sophisticated investors’. Absence of alignment with the client‘s interests was hidden, as most banks would prefer to cash-in their fees rather than include such products in their own portfolio, or simply denied (‘the managers have their own money in the fund’). Market risks involved were covered by distortions in the terminology: sheer speculation was called ‘arbitrage’, build-up of leveraged open positions were called ‘hedging’.

Facing such hype and making money at every step, the financial industry forgot all diligence: money managers trusted their bank, banks trusted distributors, distributors trusted custodians, and custodians trusted auditors. All trusted their own fees to come, and no one checked. This confederation of dunces became so powerful that regulators and authorities had to look somewhere else.

This is how an average man who certainly started his career with reasonably good performances, based on a right combination of luck and insider’s information, could then become a crook when his investments started going array. He is probably not alone in the present state of the financial industry. But we shall know quite soon, as no scam can resist for long the current storm. Attorneys are likely to be the only winners when one of the largest class-action ever starts, including the SEC among the many defendants. Last but not least, beneficiaries of a Ponzi scheme are liable to give their returns back to indemnify the last comers and victims. Considering the exceptional duration and magnitude of the scam,  it is going to be very messy.

There is little doubt that the money management industry is going to change dramatically after such events.  After a period of attempted resistance, bankers who had cautiously stored their profits in Treasury bonds while their own (now infuriated) clients are the first victims of their policies, will have to take some commercial (or legal) losses. Insurance companies, custodians, auditors and governments will contribute. Most hedge funds boutiques will have to shut down. Funds of funds will slowly vanish . Regulations will be drastically reinforced. Opacity will be banned and kickbacks will disappear. Bankers’ and managers’ responsibilities will be increased. Asset management will cease to be the cure-all for banks who had opted-out from lending. Risks awareness will be somewhat restored. Bankers will start playing serious golf or  kill less game.  Perhaps, the day will come when the best offer on the market will be a guarantied loss of 1% per year in real terms: a serious improvement indeed.

This is how the world goes.

 

Back to the Future

In 1992, a very famous book announced the End of History. For the better or for the worse, current events may be pulling us back to the future, i.e. to change under incertitude, the old feature of human condition. One of the foremost economic crises in modern times is not only blurring the vision of a triumphant capitalist market, but is also reopening the possibility of a political eschatology somewhat different from the everlasting parliamentary State.

While governments minimize by a full order of magnitude the quantities of financial medicine they should inject into the arteries of a chocking world trade, entire populations get closer everyday from feeling personally the pains of new poverty. The higher the recent growth their respective countries had reached, the harsher the depression will be for them. The most dependent zones on foreign trade are likely to undergo a severe social turmoil. For once, Western Europe is not the weakest link. Equipped with the strongest social infrastructures and relatively good reserves, the area is also protected by its dominant inner trade, as well as a long habit of bad news and of lagging in economic growth. “Chinamerica” should be the seismic zone, together with Eastern Europe. The United States cannot solve all issues by simply playing with an overwhelming currency, as in the good old days, and the Chinese armed forces are not strong enough to fight a violent resentment against so great lost expectations.

What’s really new is that domination of the State is not as much at stake as the State itself. We are not confronted with the prospect of opposition parties taking over, but with the one of a pervasive distrust for States in general. Tax boycotts could very well appear in America, and riots in many places. Young people raised in false hopes will show their anger. Nihilistic sabotage, rejection of intellectual property may also join the symptoms. Such disorders, not being driven by a structured vision of society, are among the most difficult to fight by anything else than extreme ideologies. Even Islam may prove unable to capture a negative energy essentially indifferent to geopolitics.

You may smile at this kind of doom saying and you may be right in only one case: if we can rebuild the system nearly as fast as we destroyed it, if the economy can take a fresh start on the basis of a fraction only of the assets which were annihilated. If you do not believe this is a real possibility, then better get ready to meet History again.

Bertolt Brecht had a say for the optimist and one for the pessimist. You can now make your choice: ‘The worst is never certain’ and ‘The belly is still fertile from which the foul beast sprang’. Personally, I would pick both.

This is how the world goes.

GDII?

The Great Depression II (or Great Recession for the optimist) has taken most of us by surprise. Its most astonishing feature certainly is the speed with which the financial crash has been hitting trade, way beyond the global credit crunch generated by the interbank crisis. The credit crunch should have been more moderate after the recapitalization of major lenders and the injection of liquidities which took place almost immediately and on a massive scale. Even if we take into consideration the additional force of the end-of-cycle recession which was due in any case, both the magnitude and velocity of the impact on trade could not have been expected at this level. This means that most economic actors (even those who were not yet directly affected in their current production capacity and did not observe a sharp decline in demand on their own segments) overreacted in their anticipation of a market crunch, creating a self-fulfilling prophecy. In other words, negative expectations went much faster than the negative mechanical effects which are unfortunately still to come as a direct consequence of the ongoing stock market crash, e.g. reduced offer from undercapitalized corporations and declining consumers’ demand from both unemployed and retirees.

In front of such a disaster, even the nationalizing of major financial institutions and industrial leaders, together with a continuation of the lowering of interest rates (possibly even briefly to negative levels, which can become an option if governments and central banks start being considered as the only reliable borrowers), is unlikely to be enough for the job. Large public deficits now look inevitable, in order to both reflate the system and amortize the social turmoil to start anytime soon. Governments shall be tempted by the ‘wise’ approach of new infrastructural investments. They are yet bound to take care of consumers if they want to avoid the collapse of the two pillars of the entire modern growth: automobile and real estate (the growth of services being ultimately associated to the one of final products). New technologies are unfortunately not well placed to be chosen as the core of reflation: bio techs represent for the time being an insufficiently productive additional burden for governments, while green techs are temporarily competing again against low cost traditional energies. As to renewed military spending, no one in his own mind can consider it seriously, at least until the main mistakes of the Bush administration are repaired.

In theory, stimulating demand by large public deficits can be done without uncontrolled inflation as long as the previous level of liquidity is not substantially restored. It has been done in the past, but not on the scale to consider now. We are thus entering unknown and probably stormy waters. Let’s hope for the best as

This is how the world goes.

Suave mari magno

Unusual as it is to mix finance with philosophy, yet large events may call for ancient wisdom.

For the weekend, here are from Lucretius, the most rationalist of Roman thinkers, a few lines on being happy in troubled times:

’Tis sweet, when, down the mighty main, the winds
Roll up its waste of waters, from the land
To watch another’s labouring anguish far,
Not that we joyously delight that man
Should thus be smitten, but because ’tis sweet
To mark what evils we ourselves be spared;
’Tis sweet, again, to view the mighty strife
Of armies embattled yonder o’er the plains,
Ourselves no sharers in the peril; but naught
There is more goodly than to hold the high
Serene plateaus, well fortressed by the wise,
Whence thou may’st look below on other men
And see them ev’rywhere wand’ring, all dispersed
In their lone seeking for the road of life;
Rivals in genius, or emulous in rank,
Pressing through days and nights with hugest toil
For summits of power and mastery of the world.
O wretched minds of men! O blinded hearts!
In how great perils, in what darks of life
Are spent the human years, however brief!—
O not to see that nature for herself
Barks after nothing, save that pain keep off,
Disjoined from the body, and that mind enjoy
Delightsome feeling, far from care and fear!
Therefore we see that our corporeal life
Needs little, altogether, and only such
As takes the pain away, and can besides
Strew underneath some number of delights.
More grateful ’tis at times (for nature craves
No artifice nor luxury), if forsooth
There be no golden images of boys
Along the halls, with right hands holding out
The lamps ablaze, the lights for evening feasts,
And if the house doth glitter not with gold
Nor gleam with silver, and to the lyre resound
No fretted and gilded ceilings overhead,
Yet still to lounge with friends in the soft grass
Beside a river of water, underneath
A big tree’s boughs, and merrily to refresh
Our frames, with no vast outlay— most of all
If the weather is laughing and the times of the year
Besprinkle the green of the grass around with flowers.
Nor yet the quicker will hot fevers go,
If on a pictured tapestry thou toss,
Or purple robe, than if ’tis thine to lie
Upon the poor man’s bedding. Wherefore, since
Treasure, nor rank, nor glory of a reign
Avail us naught for this our body, thus
Reckon them likewise nothing for the mind:
Save then perchance, when thou beholdest forth
Thy legions swarming round the Field of Mars,
Rousing a mimic warfare— either side
Strengthened with large auxiliaries and horse,
Alike equipped with arms, alike inspired;
Or save when also thou beholdest forth
Thy fleets to swarm, deploying down the sea:
For then, by such bright circumstance abashed,
Religion pales and flees thy mind; O then
The fears of death leave heart so free of care.
But if we note how all this pomp at last
Is but a drollery and a mocking sport,
And of a truth man’s dread, with cares at heels,
Dreads not these sounds of arms, these savage swords
But among kings and lords of all the world
Mingles undaunted, nor is overawed
By gleam of gold nor by the splendour bright
Of purple robe, canst thou then doubt that this
Is aught, but power of thinking?— when, besides
The whole of life but labours in the dark.
For just as children tremble and fear all
In the viewless dark, so even we at times
Dread in the light so many things that be
No whit more fearsome than what children feign,
Shuddering, will be upon them in the dark.
This terror then, this darkness of the mind,
Not sunrise with its flaring spokes of light,
Nor glittering arrows of morning can disperse,
But only nature’s aspect and her law.

(De natura rerum, II.1 sq, transl. William Ellery Leonard)

This is how the world should go

The Crash for Dummies

Although brokers are doing most of the crashing for us, a crash course in crashonomics seems more urgent today than any ‘Ms Office for Dummies’ or ‘Family website creation for Dummies’. As passive crashing represents the largest part of a crash, it should be interesting for almost anyone to understand the mechanics of crashes and learn how to talk to bankers rather than listening to what they are paid to say.

- Can one make profits during a crash?

Basically no (see exceptions below), for a crash is precisely a massive loss with no or little counterpart. In regular situations and according to the laws of physics, whenever people lose money, others simultaneously make money. In a crash, on the opposite, wealth is annihilated, not captured by anyone or stored anywhere.

- What are the exceptions?

Obviously some people get luckier than others by losing less than most others. These are the ones who, for some reason, held a larger percentage of liquidities at the beginning of the crash (unless, of course, the crash is a monetary crash, in which case people holding the wrong currency get busted). There are many random reasons for this to happen: some may not have had time to make the specific investments they were preparing for, others may suffer from a maniacal fear of investing, and some others may have had a bad feeling about the health of the markets, thus divesting before the crash. All of these in fact increase their own net worth, even if they take losses on the invested part of their portfolios, for their cash assets would now allow them to purchase more of the discounted assets on the market. A much smaller group may even have increased their cash holdings, having used special financial instruments to sell the market instead of buying it, and getting paid as the market declines. Please note however that selling the market being a very dangerous exercise, past gains can quickly turn into major losses during oscillations of the market, which always occur, no matter the trend. In any case, winners in a crash are a minority by definition.

- Are these exceptions a sign of genius?

Nope. Nobody can forecast accurately and with certitude the behaviour of unbiased markets. A theorem exists to prove it, but it should be enough to realize intuitively that if anyone could, he or she would accumulate the entire wealth present on the markets. People may have good or bad reasons to anticipate the behaviour of a market the way they do, but they cannot overcome incertitude. Astrologists as a matter of fact obtain on the long run equivalent results to Nobel Prizes’. Globally, winners and losers are distributed at random. It is mathematically inevitable that some investors make more accurate (although no less random) anticipations than others, even over very long periods of time. The illusion than such people have a secret and profound understanding of the markets is also inevitable. As they tend to be treated as pundits or even oracles, masses of average investors imitate their investment decisions, giving them a small edge, and reinforcing – up to a certain point- the influence these gurus can have on the markets. Asset managers, whose are supposed to make more enlightened investments recommendations than astrologists, always find an unlimited number of arguments to explain why they made you lose money, their main excuse remaining, however, that on the average they did not make any worse than the other average asset managers. In the best case scenario, one can become a savvy investor, cautious when others get frantic and capable of spotting opportunities (when they can be double checked).

- Does this mean that markets are irrational?

Not at all. Markets accomplish rationally what they can accomplish. However, markets do not have any knowledge of anything; they simply match offers and demands from actors who have various levels of knowledge and yet all share in the overall incertitude. For instance, in March 2000 most investors started underestimating the positive implications of the Internet, not realizing it was the most important industrial development in the last part of the XX century. A sudden panic seized them and the notion of a ‘dot.com bubble’ emerged, wiping out many technology companies. In October 2002 $ 5 trillion had been destroyed. It took about 5 years for the average actors (summed up as ’the market’) to understand they had been wrong, and for market indexes to reach unprecedented highs. If the savvy anti-internet oracle nicknamed ‘Bluffette’ had been as insightful as he suggests he is, he would have purchased technology shares over the crash and become not the second but –by far – the richest investor on earth.

- Do crashes destroy ‘nominal’ or ‘real’ wealth

No matter how we call it, wealth it is (or was). At any given time, there is no difference between nominal and actual wealth. The underlying substance of wealth – buildings, companies, commodities, pieces of art, etc – is not economic wealth in itself: these things are wealth only as much as they have a price tag. When their price goes down sharply, destruction effectively occurs.

Against certain appearances, stock markets are not primarily gambling houses. They are tools for corporations to obtain financing (a vital necessity) and for individuals to maintain some of their savings. After a crash, the average corporation cannot produce as much as before and the average consumer cannot consume as much. Therefore economic crashes entail or reinforce recessions.

- Is it good or bad to destroy nominal wealth based on wind?

Yes and no. Phony assets, like many of the securities which just exploded in flight, must be eliminated, no doubt about it. On the other hand they were very useful as currencies. Without them the world would never have reached its recent level of growth and globalization would have taken much more time. Now that this phony and yet useful currency is getting eliminated, it must be replaced.

Here is an example. Let’s say that I purchase your shoes for $ 100 million dollar, while you purchase my watch for an equivalent amount. This is something we can do as I can pay you in paper from my company, and you can do the same. Each one of us now has $100 million in our books, and together we have created about $ 200 million. Let’s assume now that for some reason our banker accept these values (for instance we have convinced him that the watch is capable of predicting bad crops and that the shoes are made from an extra-terrestrial material with amazing properties which will become obvious in 10 years from now). He will lend us cash against shares of our companies as collateral. As the banker is otherwise very conservative, he ‘only’ lends us 2/3^rd of our nominal assets, i.e. about $ 133 million. Now, we can use this cash to build a solar energy platform in China and a hotel in Spain. Our suppliers are getting more work; they hire people who in turn spend their income. We have contributed to the worldwide growth. When suddenly it is revealed that we were nothing but crooks, the banker refuses to renew his loans and we go bankrupt. Yet, we are not the only ones in trouble: the banker himself has probably lost a part of the loans and must restrict his credit policy for a while; our suppliers must lay off workers who in turn will spend less than before; the price of hotels in Spain shall decline, and China will lose some resources, among many other repercussions. If we want the global economy to recover, someone has to inject brand new money to turn around our failed ventures. This is called ‘reflating’ the economy. After a crash, it is always a good idea to reflate the economy in order to attenuate the coming recession.

- Is it easy for governments to reflate the economy after a crash?

First of all, it must be done; otherwise the risk is to transform a recession (i.e. a short term decrease of production) into a ‘depression’ (i.e. a long term decrease of production). This is not a problem as long as governments and central banks use the money they have to invest or lower taxes, and lend (or guaranty loans) based on assets they have. The thing is this may be insufficient to fill the gap, in which case the only solution is to ‘print’ money at the risk of triggering inflation. For instance, as of today, the gap between the worldwide hole (certainly more than $ 100 trillion) and the current available public resources (certainly less than $ 10 trillion) is gigantic. ..

- How long can the downturn last?

What matters in not so much the length of the crash, measured as the time it takes for the markets to reach their bottom, than the duration of the subsequent recession which lasts as long as the pre-crash amount of wealth is not recovered. No economy can regenerate wealth in a ‘natural’ manner anywhere as fast as a crash can destroy it. The 1929 crisis, not so long ago, lasted almost 2 decades.

- As the pace of economic changes is now much faster, should not a recovery come earlier?

Apart from the global amount of money available , economic velocity depends mainly on the rate of innovation and the size of consumers’ markets. We are currently in a phase of relatively slower innovation (see the many previous posts on this). Energy would be the core of innovation today. Unfortunately, the recession entails a decline in prices of energy, in turn hindering new developments. The positive element is globalization.

- How deep can markets crash?

Nobody knows exactly, but possibly very deep. The final magnitude of crash cannot be extrapolated from observed trends, as any number of thresholds can be crossed before things eventually settle. Market oscillations are normal, and rallies certainly do not seal the end of the turmoil. Temporary rallies mostly mean that investors like to ‘average’ their losses by purchasing the same assets that declined at a lower price.

The best approach is to compare the main causes of the crash with the simultaneous capacity to reflate. The 1987 crash had been triggered by what investors had perceived as an excess of so-called junk bonds (which were basically corporate obligations). The total amount of such bonds which had been issued in 1986 was $ 200 billion only. No wonder the recovery was fast. We are dealing today with an unheard of level of uncontrolled leverage forming a completely different order of magnitude of bad assets. Rescuers are on the job but with very limited means compared to the phenomena they are dealing with. Next to so many uncertainties, we are left with at least one certitude: the crash was not irrational and will carry long lasting consequences.

This is how the world goes.

Elements of Speleology

How deep? That is the question. Stock markets have now lost 25 to 30% globally in less than a month, which represents a destruction of nominal wealth of approximately $25 trillion.

Announced bailout packages amount globally to about $3 trillion. The largest portion of such packages is made of temporary loans from central banks and guaranties, as opposed to long term transfers of liquid assets from national treasuries. A significant part has already been used to cover the losses from subprime loans, as well as the immediate consequences of Lehman’s failure under the double form of defaulting receivables and defaulting Credit default swaps. Assuming the packages can be doubled in size (which is probably the upper limit before entering into stormy monetary waters), they cannot cover the reasonably expected defaults within remaining CDS net positions ($ 37 billion). If we add to theses amounts the destruction of nominal wealth in real estate to be expected over the next 6 months (perhaps 30 % globally) and in other real assets such as mineral reserves, it is hard to imagine how governments could reflate the system at the appropriate level fast enough to avoid a depression.

If stock markets are rational they should drop further. More likely, some cash-holders will start believing they are soon reaching the levels of new opportunities for a reentry into the market, triggering volatile rallies, yet unable to steadily reverse the trend at least for a while.

Obviously the world economy will be craving for a recovery and there is little limit to what can be invented in terms of money creation to soothe social injuries and calm down unrest. Risky times, by all means.

This is how the world goes

No explosion, Turkish-style strangulation

Quite a lot was learnt yesterday from the settlement of Lehman’s credit default swaps. First of all, we were all relieved to see the process complete with no major incident. Simultaneously, the reasons to continue worrying were made clear: (i) the main losses had already been taken and gradually paid for over the last weeks, under the form of both margin calls or “stop loss” returned positions; (ii) payments were made using the recent giant bailout packages as well as the central banks’ new credit facilities; (iii) and such packages and facilities had precisely been precipitated in order to allow the settlement. We also learnt the exact amount of CDS contracts now registered in the Depositary Trust and Clearing Corporation’s clearing warehouse, totaling approximately $34.8 trillion at this time (as opposed to the previously estimated $ 60 trillion, which was based on surveys, and down from an actual $44 trillion in April).

The residual funds transfers that took place yesterday were only the last ones to complete an actual monster loss of about $400 billion. There was basically no difference between nominal and actual losses: margin calls are not a free ride, nor is returning one’s position (unless this can been done way before the event and in a none-volatile environment). Instead of one-day explosion, death took therefore the smoother form of a slower Turkish-like strangulation.

One has to remember that Lehman’s CDS were nothing but a first test of the process, representing a minute portion only of the total outstanding Credit Default Swaps. It is true that the percentage of loss was extremely high in this specific case due to an underlying bankruptcy. It is yet fair to say that very few net positions on all other CDS are winning, in a global situation when almost if not all credit ratings are crumbling down fast.

Regulators are of course scrambling to take some control over CDS. All they can do, however, is limit the creation of new ones and give them more transparency. They cannot reduce by 1 cent the present amounts of further losses to settle which should reflect in the quarterly reports to come, at least for listed companies.

This is not good news for the stock markets and yet

this is how the world goes.

Bloodbath aftermath

A quieter week was wrongly expected after the interbank pacemaker was put into place and before October 21^st, the day when the general public discovers the meaning of the three letters C.D.S.

Leveraged investors are now forced to sell and the professional wishful thinkers (e.g. your account managers) are losing drive, leading markets to nervously slide down to the levels reached 6 years ago (2002). This is much steeper than the 87 crash, the oldest memory of most traders, and the main obstacle to their comprehension of current events. As they were raised to believe that stock markets downturns are short-lived, they took immediate comfort in a ready-made solution: just wait for recovery while only the panicking fools are selling. These ideas led them to ignore 2 important facts: thresholds can be reached beyond which situations do not repeat themselves; and this crash has causes (uncontrolled financial leverage on a giant scale) that the 87 crash did not have. Even the optimist is now aware of the recession to come (it has hardly started yet), under the impact of the inevitable crunch of consumers’ markets which shall follow mechanically a universal loss of net worth, leverage and employment The only debate is how deep? How long?

This depends on various factors, such as the intensity with which leveraged real estate shall blowup, the magnitude if the CDS blast and the capacity of governments, which are already drained of blood, to ‘reflate’ the economy. Concerning real estate, prices have not yet declined in percentages anywhere close to those of the early 80s. Thus the risk is high in many places, including Europe and emerging countries, where a 50% decline is not unrealistic at all. For the CDS, better not talk about them until October 21, where we shall know the proportion of net exposure in the due $410 billion for Lehman only (i.e. 0.6% of the total), who are the main victims and if they can survive. As to what’s left of the capability of governments to compensate all the losses, no one has the slightest idea at this time.

Let’s fasten our seat belts (before tightening our own belts)

This is how the world goes

Multiple organ dysfunction syndrome

Considering that the lead physician in the intensive care room was, by far, the most incompetent of all, we are very lucky a proper treatment was eventually applied. Following the bold plan designed in UK, Europe has mobilized enough resources to reestablish interbank confidence, and driven a clumsy US administration into following (more or less) the same path. Theoretically things should improve for some time: guarantying interbank credit is like inserting a pacemaker to make a failing heart continue to beat. Recapitalizing major institutions is also a good remedy: it is not only a better way of injecting liquidity than adding to the total amount of debts, but also leaves some hope of getting part of the taxpayers money back once the markets are completely cured.

No doubt governments will use the opportunity to treat the very origin of the disease, i.e. uncontrolled leverage. Most financial institutions should be submitted from now on to banking rules, and especially the Cook ratio. Exposure will become more explicit and subject to surveillance. New equivalents of the good old Glass-Steagall Act, which had protected generations of depositors against the hidden risk of seeing their own money burn under the form of mindboggling securities, should be put into place. There is no need of a world government to achieve this; any local regulator of a market large enough to be indispensable to global investors, can impose it worldwide.

Everything would then be fine if the banking system was the only failing organ. Unfortunately the volume of wealth destruction which has occurred goes far beyond the $ 3 (or perhaps 5) 000 billion governments can possibly gather to reflate the economy at a proper level, and goes far beyond banks. The sepsis has reached industrial corporations, both as stockholders and as suppliers of markets. It has reached pension funds, as well as consumers directly. Even if the real risk represented by CDS (see previous posts) did not turn out as disastrous as it could be (we’ll know for sure before the end of year), a consumers’ market crunch is inevitable, which cannot be adequately compensated by sufficiently massive injections of additional cash. Even if some confidence was to be restored for a while, a deep recession would still be inevitable.

This recession will be dangerous for fragile stock markets and for depleted public treasuries. It should also bear large-scale social consequences. The average person is still stunned and silent. Scared for his (or her) family‘s future, he cannot believe what he is witnessing, and hardly realizes he will be the main payer of other peoples faults, the same people who just kicked him out of his home and his job or threaten to do so anytime soon. It will not be long before he awakens to the fact he has been playing an unfair game for the profit of an unreliable, reckless and somewhat criminal elite. Then what is likely to happen?

This is how the world goes.

Good Sunday

Today is Sunday; most stock markets are closed except in the Gulf area; it’s time for a pause. My recent posts have be depressing friends and giving nightmares to my son. So, let’s sit down for a minute and look and at the bright side of things. Yes, there is a good side.

Free markets, as opposed to planned economy, are as important and useful an invention as writing. They allow people to exchange any services (the so-called ‘goods’ are in fact services) they are capable and willing to exchange, and thus to benefit from the existence of other economic agents also capable and willing to exchange. As such, free markets are definitely a good thing and should be preserved.

Free markets, however, must always be regulated. Aristotle, who was the first theorist of markets, explained it very well: without a public control of weights and measures, people could not possibly know what they are actually exchanging, and would end up being cheated most of the times. Indeed, a large majority of goods cannot be checked at the time of purchase: how would we know what molecule is in the pills, if the pilot of the flight we are about to take has been properly trained, if the securities we intend to buy correspond to real assets? Two millennia later, Adam Smith, who was not a communist, insisted on the importance of public infrastructures, including courts, to make the system work.

An essential aspect of globalization is that a significant part of the financial markets was able to evade public regulations and controls. This is the main cause of the major problems we are currently confronted with. Things could have gone otherwise: it would have been relatively easy for the regulators of either or both the two most important economies, the USA and Europe, to impose global regulations. Exactly in the same way that the USA were able to efficiently pressure Switzerland (and other countries with ‘offshore’ banking) into submitting themselves to certain US rules (the deadly threat being to ban their banks from US markets), it would have been possible to prevent the global trading of uncontrolled securities, such as subprime loans and CDS. Ideology was the sole obstacle: 20 booming years of reagonomics and thatcherism had convinced many – against the constant opinion of free markets thinkers- that markets could self-regulate. We now realize that this was nothing but magical thinking. The good news is that, after we are finished paying the tremendous price, we know the cause and we know the remedy. No doubt it won’t happen again for a very long while.

Toxic securities are not the only issue the current crisis can help solving. The price of assets had reached ridiculous levels. Some companies were selling for 100 years of profits, when we now know (see Adam Hartung’s excellent blog on the blogroll) that no company has ever been able to anticipate the necessary market disruptions for any such length of time. The same applies to real estate which had been reaching price levels which would have made sense only if the earth was overcrowded, whereas millions of square miles can still be build (most of London is underused), and whereas most office space in the world is empty at least half of the time. It will take a long while before a closet should reasonably be worth $50.000, a price recently reached in several cities, including Mumbai…A world with cheaper enterprises, real estate and commodities can only be a better world.

Last but not least, the economic comeback will be centered on high-tech sectors, including green techs. This is also very good news. Feeling better now?

Have a nice Sunday. Worries on Monday. Perhaps also a quieter weather for a few days… until October 21, date of the first test for the CDS blast.

This is how the world goes

How will the world look like when the shock wave hits?

It has been fashionable for some time now to distinguish between ‘finance’ and the ‘real economy’. This is not very sound as finance is nothing but the cardiovascular system of the economy (made of goods and other services). The heart is now in surgery room, surrounded by physicians with limited knowledge and – above all – limited means. All they know is not to repeat the same mistake that was made in 1929, which consisted in adding a liquidity crisis to a stock market crash, and putting the overall activity close to a standstill. Governments and central banks are now pouring all the cash they have and soon all the cash they don’t into the failing arteries, in order to keep liquidity at a par with the massive destruction of wealth which is now occurring on stock markets. They definitely try their very best to save the banking system from complete crumble, by guarantying and nationalizing one after the other major financial institutions. Even after their current reserves are gone, they should be able to continue doing this by using their status of ‘least bad’ borrowers: sovereign obligations (close to having null interests’ rates) shall allow them to pursue this exercise for a while.

There is however a quantitative limit to the number and scope of entities they can bail out. Financial institutions are one important thing, and yet not the only components of the financial system. Corporations, pension funds, high net worth individuals are also facing almost unprecedented financial losses. Even massive tax cuts cannot compensate such losses (tax cuts are more or less automatically granted as losses are not supposed to be taxed in any case). For the economy to work, corporations and high net worth individuals must invest and pay salaries, while pension funds must pay pensions to consumers. Globally, they will not be able to do it at previous levels for a long while. And this is precisely how the shock waves hit the rest of the economy.

At this point, even if both causes and treatments are different from what they were in the 1930s, the phenomenology of the crisis shall look pretty much the same: massive plunge in the price of assets, massive unemployment, and massive physical poverty. As during the 30s, there will be some winners too: these are basically the owners of cash, now able to purchase the massively discounted assets as they come, provided however their cash is in safe currencies placed in a safety deposit boxes or nationalized banks. Opportunities, as a matter of fact, should multiply for them when the stock market goes down to 25-30% of its peak values, and real estate (or contemporary art) 50 to 20%. The problem is obviously that most people and corporations not only have little cash but are carrying heavy debts. Leveraged assets (many exist in the private equity sector) should go bust, and consumers’ markets will violently contract, fueling the vicious circle of recession. This should happen even if the CDS shock wave does not hit (see previous posts). If it does, you’ll see your attorney offer to work for food, and fascism come back.

Many people do not realize this. As few of them were directly exposed to the stock market, they are happy to see the ‘traders’ and the rich in general pay the price of their own mistakes, and believe they won’t have to pick the tab also, while governments are finding a solution. How wrong. They should start discovering the ugly truth sometime in 2009, and feel the consequences for a while (5 or 20 years?) afterwards.

How will the final relief come? As usual instant experts will promote gigantic schemes involving new ‘Bretton Woods’ (to achieve what as this is not a monetary crisis?) and ‘Marshall Plans’ (how can this be done in the absence of the equivalent of the 1945 USA?). As usual also, the military will attempt to be the new trusted economists, pointing at strategic hotpots (Iran, Taiwan) and lurking at weaker countries were money is left.

Let’s hope Obama can resist and someone comes up with better ideas.

This is how the world goes (sorry about that)

Don’t bother to be pessimistic: things are much worse than you may think

Remember my last post on the Credit Default Swaps? Dubai just obtained a 15 billion $ bailout from Abu Dhabi to face a default of their own Credit Default swaps. Dubai…

Let’s look again at the issue. The outstanding amount of subprime debt is about of 1,300 billion $. The outstanding amount of CDS is about 50 times larger. The good news is that a large part of this amount is made of offset positions by players reducing their exposure or netting their own contracts. As it is currently impossible to know the net total amount of outstanding CDS, let’s make the most unrealistically optimistic assumption, and consider 90% of the positions as offsets. The bad news is we are still left with at least 5 times the total amount of subprime debt.

Another element to be taken into consideration is that subprime debt is somehow based on real assets: even if they are worth a fraction only of their nominal value, buildings and apartments are still worth something. This is not at all the case with credit default swaps which are based on nothing else than gambling, a very special case of gambling, indeed. Casino gambling is regulated, CDS are not. Casinos have money to pay their own losses; this is not the case with CDS issuers. Casino’s risks are stable; CDS’s risks are not. Quite the opposite in fact: Credit Default Swaps are bets on the credit quality of third parties, at a time when the credit quality of all institutions in the world (including governments) is crumbling down under the effect of the financial crisis. Therefore most (net) CDS are doomed.

Just as the explosion of an H-bomb is initiated by the explosion of an A-bomb, the subprime crisis is getting ready to trigger the CDS crisis.

How many crises are we dealing with? Let’s count. 1 is the end of cycle which started last year and was accelerated by the surge in the price of commodities. 1 was strong enough to entail a recession that the general public would have started feeling in any case by the end of 2008. 2 is the subprime loans crisis, which already turned out to be big enough to shake the world banking system. 3 is the CDS crisis which has not started yet but looks inevitable, considering the combination of 1 and 2. 3 is definitely capable of destroying a large part of the global financial system. 4 is the subsequent mega recession which should logically follow, with major expected unemployment levels and market crunches.

Oh my, enough for today (to be continued though if you can still face it)

This is how the world goes.

From Financial A-bomb to Financial H-bomb

On the A-bomb (i.e. subprime securities meltdown), please see the March 11, 2008 and March 20, 2008 posts.

As if things were not bad enough, a financial H-bomb is about to explode in Wall Street. The name is CDS for Credit Default Swaps. Please get ready for the blast.

Subprime securities and Credit default securities have a lot in common: i) they were designed for the sole purpose of generating fees, ii) they are submitted to no control, regulation or authority whatsoever, iii) they appear as assets from the outside, iv) they are in fact instruments of credit deprived of guaranties or collaterals, v) they are worth a small fraction only of their book value, v) they contaminate any other assets they are combined with, vi) they are the product of a collective crime (by financial institutions and absentee- regulators), vii) they have generated unheard of amounts of fees for the culprits, as well as vast quantities of ideological exhilaration for the self-restrained regulators, viii) their necessary elimination may represent the strongest blow ever on the world economy.

The technical difference between them is minor. Subprime securities consist in postponing as long as possible the built-in default of borrowers, by lending (third party’s) money to people who cannot pay it back, and differing installments for a while. CDS consist in being paid to guaranty the credit quality of any entity, with no obligation of offering a collateral. You do not have to be an insurance company to do this, not even a bank, but simply licensed to sell securities. You do not have to tell the market how much risk you are taking, as these securities do not appear on your balance sheet, except as generated fees. Of course you do not need to have the money to fulfill your commitments. Best of all, you can get rid of the risk by selling the securities (confusingly mixed with other derivatives or assets) to your victims. I know, it sounds like a joke or a mistake. If you do not believe me (how could I blame you?), just search the web for “Credit Default Swaps” and see by yourselves.

Now the main difference between them is not technical. It is their magnitude. Subprime securities are in thousands of billions of dollars. That is certainly a lot of money, and enough to create a recession when taxpayers have to pick the tab. But it can still be handled somehow.

So, what about CDS? Their total outstanding value this morning was close to (hold your breath) 60.000 billion dollars, i.e. slightly more than the total of all bank deposits on earth or 10,000$ per living human being (including infants in Ethiopia) . If any significant fraction of them go bust, then we’d better have kept a few rolls of cash in our drawers.

What can I say?

This is how the world goes.

A pyrrhic victory in Georgia?

The ancient art of managing empires did not enter the 21st century without a need for amendments. The use of brutal force against foreign countries and the sheer violation of international treaties in order to simply consolidate one’s territories and sphere of influence are not stopped. They tend however to meet massive opposition and trigger worldwide pressure. Even hegemony, this mild form of imperialism invented by the Athenians, which consists in abusing quietly one’s leadership in an alliance to roll-out a one-sided agenda, is not as easily implemented as it used to be.

Obviously, any careless aggression of the strong by the weak, based on blatant miscalculations, particularly by military means, remains a very bad idea, as the misguided president of Georgia just experienced. The lesson goes far beyond geopolitics: in about any field of activity, a kitty cat should always think twice before eating the tiger’s prey. It was natural for a hyper-nationalistic and humiliated Russia to seize the occasion to show some muscle.

This irresistible move does not imply, however, that Russia is again in a position to restore its crumbling empire. On the contrary, it may have unwillingly initiated a new bad streak for its imperialistic play. Externally, the surrounding countries released from the ‘Prison of Nations’ by the fall of Soviet Union, are now fully warned of the precarious nature of their independence, while NATO is left with no other choice than shielding them by accelerating their integration, or taking the chance to lose them again any day. Internally, several of the hundreds of non-Russian nations covering both the Caucasus and all territories East of Ural, can now hope to benefit one day from the same unilateral recognition by the West that Moscow just granted to South Ossetia and Abkhazia.

The notion of “powerlessness’ can become quite tricky. In the same way that NATO was powerless against what happened, Moscow would be just as powerless against what could happen to its vital interests, if secessionist claims were now refueled in the entire region. In the same way that NATO could not prevent Russian troops to penetrate Georgia, Russia could not prevent Western fleets from locking up the Black Sea. As Russia can certainly not afford any isolation these days, the military stalemate which was playing its favor after WWII, now allows the West to slowly but surely undermine the last of modern empires.

This is how the world goes.

A solution to the oil crisis?

The most serious dangers come unannounced and generals are not the only ones to prepare for the last war. We became aware of the depletion of oil& gas resources and now start panicking at the very time an exit solution is at hand.

No matter what the primary source of energy is (hydrocarbons, biomass, nuclear, solar, geothermal, aeolian or hydraulic), electricity is a universal carrier, as any primary source of energy can be transformed into electric current. Electromechanical heat engines or kinetic energy directly activate turbines which in turn produce electricity ready for distribution.

The only limit to existing centralized or semi-centralized electric distribution grids is a lack of portability, excluding most mobile engines, with the notable exception of railways. Until very recently the weight and inefficiency of batteries was such that the additional energy needed to simply transport them, made electricity impractical for most vehicles.

The situation has changed. A combination of major improvements in the technology of batteries and a bright and simple idea are placing us on the eve of a major energy revolution. By 2011 the automotive industry will put on the market not prototypes but mass series of electric cars with an average autonomy of about 150 miles, a threshold for convenient urban use. A larger autonomy is of course required for a full substitution of thermal engines, considering in particular the time it takes to recharge a battery. This is where the bright and simple idea comes into the picture. Just as Formula1 cars can be refueled in a matter of seconds, car batteries can be instantly replaced at will. Using the existing network of gas stations, extended to other kinds of outlets, car batteries will be recharged from the power grid, allowing subscribing drivers to exchange their empty battery against a charged one for a fee, with no waiting time. The system is being experimented by Total in Israel as we speak. No doubt it will be a tremendous success, leaving only aircrafts and boats (partially) to the old hydrocarbons system… until the next generation of batteries comes up.

Technically, substituting most of the existing installed base of mobile thermal engines can be done in a decade, and this is the kind of good news both the world economy and the environment were badly waiting for. Extending the substitution to coal-supplied plants is nothing but a matter of political opportunity, as it is both easy and tempting for certain countries to tax ‘dirty’ imports, made from polluting energies together with other negative factors (e.g. slave work). Heating is likely to be the last element to be aligned with the new system, and the price of fossil energies mostly will decide of the pace for this sector.

While these events are taking place, the skyrocketing price of oil & gas is generating a new cycle in exploration. This means that as the use of petroleum products decreases the amount of reserves will increase in possibly unprecedented proportions. For instance, it has been know since the 70’s (before the first oil crisis) that the Western Mediterranean basin, having been depleted 150.000 years ago, is covered with a thick layer of salt, which is not unlikely to hide among the largest fields of fossil energy on earth. Exploration (now possible at such depth) should soon start in Marseille and Cyprus. If successful, the oil & gas markets are doomed even sooner than the above mentioned revolution would have entailed by itself.

A zero oil economy, therefore, with local exceptions in the poorest countries (then unwillingly limited to using ‘cheap’ oil!), far from belonging to science fiction or utopia, is a good prospect for the middle of this century. Obviously, the question of the primary energies remains open. Most large resources have a limit or a downside. Nuclear energy is dangerous, coal and biomass extremely polluting; and other energies still insufficiently efficient. Nuclear energy, however, is the only one which can sustain the new energy system on a massive scale, until technological innovation allows its potential elimination. Reserves are not a problem at this stage. The proven reserves of uranium can cover 60 years of the current needs. The limited proportion of mineral costs in nuclear energy (about 5% of total costs) makes exploration (today almost at a stop) financially easy. Above all, a new generation of so-called ‘rapid neutrons reactors’ exploiting the plutonium produced by the very transformation process occurring in reactors, should soon increase by a factor 50 to 100 the efficiency of Uranium 238 (which represents 99.3% of the reserves). Nuclear energy can therefore offer a constant fallback position, as long as it takes to make non-polluting renewable energies, e.g. solar and tidal, efficient enough to become the main sources of primary energy for the electric power grid.

The laughable paradox in all this is that crumbling petroleum markets could become be the main factor of slowdown in the change, postponing somewhat the major economic benefits of the energy revolution to come (new technologies, new products, new markets, new investments, reduced financial and environmental costs). The other factor is more simply political. How long will it take for Europe, Japan and other countries to force the US (where 49% of electricity generation comes from burning coal) as well as China to drastically reduce their consumption of highly polluting coal, through new treaties against global warming and import taxes? Some time indeed.

This is how the world goes.

Food or drug administration?

Genetic Modification technologies are neither good nor bad, they are tools. Anyone can agree with this, including activists and Monsanto.

Can GMOs be bad? They certainly can, for simple logical reasons. When a genetic modification is introduced, the resulting organism is different by definition. The differences may be small or large, visible at first sight or after microscopic investigation only, immediate or delayed; they may relate to the shape, chemical composition or biological properties (such as resistance of reproduction) of the resulting organism. A GMO may therefore carry or produce toxins, hormones, proteins which were absent from the natural organism. Their presence may induce, on the short or longer term, allergies, epidemics, all of which may also be extended and multiplied by genetic alterations all over the food chain, as well as by contamination of other cultures.

It is therefore a logical property of Genetic Modification technologies to induce a high level of risks. Theoretically, risks of the same kind are also present in the random natural modifications described by the theory of evolution. They exist, however, at a much higher order of magnitude in GMOs, as modifications occur and spread at a completely different pace and on a totally different scale. Traditional graft hybrids were unable to affect most aspects of the DNA and definitely did not cross the animal/vegetal-barrier, generating moderate biological risks. It should also be noted that graft hybrids increased biodiversity, when GMOs now tend to reduce it, because of the existence of specific ‘kill-all non GMOs’ pesticides (namely the ‘RoundUp’), as well as for economic reasons.

Now that we have the certitude that Genetic Modification technologies can induce dangerous biological consequences on a very large scale, the only question becomes: how should we handle them?

Industrial GMOs appeared in the 90’s, during the peak of the Great Deregulation move. Instead of being submitted to at least the same control than pharmaceutical products, or even the same than mere food additives, they benefited from an extraordinary political decision in the U.S. It was legally decided (not scientifically established, which would have been impossible) that a ‘substantial equivalence’ existed between them and natural organisms. The meaning of this decision, which is still in force, is that no evidence of their innocuousness has to be established by their producer, under the control of independent public agencies like the FDA, before they are put on the market. Moreover GMOs should not be tagged as different for the consumer who thus becomes the unwilling guinea-pig of a free and large scale experiment from which no one can opt out.

In practice, free trade agreements do not allow any country to decide in favor of more reasonable precautions. The maximum limit to GMOs is the possibility to tag them locally or suspend their distribution when and only when positive evidence of their actual dangers can be legally set forth. As even complete bans could not protect entirely other crops from contamination (which already happened in the case of the Mexican maize), any shorter measure represents a superior level of risk.

The advantages of GMOs would deserve a specific discussion. Let’s say briefly that they are unclear. They probably can increase the productivity of certain crops, prolong the delay of conservation of fresh products, improve the visual quality or even the taste of insipid industrial food, and they certainly can increase the profits of Monsanto. This is well enough to build up strong lobbies in their favor. On the other hand, they cannot eliminate or even reduce the need for pesticides. They increase the cost of seeds now submitted to a growing monopoly. They tend to eliminate agricultural independence of other countries. It is also interesting to note that the generalization of GMOs preceded a spectacular surge in the price of agricultural commodities, particularly those, like soy, in which their market share is the largest. Once these macroeconomic downsides and the biological risks described above are put together, the cost/advantage balance seems to go clearly at this stage against the GMOs.

One would like to review more scientific literature on such a major topic. It unfortunately turns out that most of the relevant research is directly or indirectly funded by Monsanto, and should be considered as unreliable at best, a situation which in turn increases the level of incertitude and risk.

The problem is that no matter how powerful lobby is, it cannot resolve the issues it so actively keeps hiding. No matter how blind a government is, when pushing across all borders a potentially very dangerous type of product for a short-term trade-balance advantage, it cannot prevent disasters to occur. Innovation does not imply letting irreversible problems take place before we learn how to take them under control.

GMOs may have a brilliant future once we know how to handle them. This is not the case yet. Even though genetically induced pandemias have been avoided during their very recent industrial devolopement, biological and economic incidents have already taken place, from mass suicides of Indian peasants, to accidental contamination of crops and allergies to associated pesticides. Time has come for independent research, limited experiment, premarket control, not yet to wild and world-scale industrial applications. The exact opposite is happening.

This is how the world goes.

How working hard has led to ignorance and could lead to poverty

From Ancient Greece to WWII social elites belonged to the leisure class. In other words they did not work or did not work hard, using their vast free time not only for love and hunting (as a training for war), but also for reading, writing, travelling, learning all sorts of things. As others were working for them, from childhood to their death, the happy few had culture for environment and did take a decisive part in it. When they entered politics, they carried with them a strong base of information, having read law, history, philosophy and geography, seen at least a couple of continents and usually given some previous thought to what should be done.
Things have changed dramatically. The so-called working classes are working less and often not at all. Children go to school, teens also go to school or join the gangs and adults retire in their 50’s or at the latest in their 60’s, while work hours have been reduced by half (in some countries by 2/3) in less than a century. Unemployment adds to the phenomenon. At the same time the elites have become workaholics. Their unlimited pursuit of wealth does not allow for much rest. Business breakfasts are being prepared under the shower, meetings follow meetings, dead times are entirely filled by the operation of PDAs. At night, time has come for emailing more than for love. Deals are discussed even on the golf course, and hunting parties produce more business cards than dead game. Vacations, limited to 2 weeks, 4 in Europe, are used for  business encounters as much as or visiting family. Patronizing the arts is mostly a housewife activity, and collecting a speculative endeavor. Information is obtained from business news, press excerpts or Internet briefs. Almost no one reads books, but a best seller here and then.
Books stores, when they still exist, keep a small space somewhere in the back for the lunatics interested in ‘Non-fiction’, and Plato can only be found inside a bizarre mixture of ‘Religion & Spirituality, Self-help, Philosophy, Gay& Lesbian studies, Foreign Language Non-Fiction’. Books are produced only according to market segments, and are not supposed to be read by anyone not pre-approving their content. The word ‘Culture’ applies to about everything from folk dance to comic strips, and exclude literature and thought almost entirely.
As a consequence, thinking is an activity one pays other people to do, advisers, consultants and journalists mainly. These are however too busy themselves to read much or think deep. One can become head of state without having crossed more than one border, or knowing the names of most capitals and prime ministers. An entire region can be conquered without the least clue of its anthropology or sociology. Vast operations are conducted, with no one having worked on a plan B.
Even business gives no price to ideas (under the pretext that only implementation has any value), and cares only for proven recipes. Dissenting positions get the young ambitious employee fired more surely than laziness. The only wise new investment of the past 20 years, the Internet, was eventually called the ‘dot.com bubble’. Venture capitalists actually venture very little, having no new ideas on their own, investing only into what the next big guy has already invested in. Things have reached the point where lack of innovation is becoming the main economic issue for the near future.
While the lower classes are informed by propaganda and TV, ignorance grows everywhere among the elites. Universities have become temples of specialized knowledge. Academics pursue their careers completely sheltered from criticism from anyone else that a handful of experts, and are forbidden to publish outside their limited field of immediate expertise or even acquire a global vision. When called for assistance in real life, they can hardly be of any help, other than on minute topics strictly belonging to their own specialty.
The only consolation is to imagine the face of Karl Marx discovering today what the contradictions of class struggle have been leading to.
This is how the world goes

Capitalodespotism in Chinamerica and other places

Capitalism likes Free Market up to a certain point, i.e. as long as it means not to be hindered from selling and buying any quantity of merchandise. Capitalism, however, starts disliking Free Market when it allows foreign products to do better than your own and manpower to increase its costs, or when it prevents the governments under your influence to grant you subsidies and de facto monopolies, or to negotiate for you some privilege abroad.

The ne plus ultra is a combination of Free Market and Despotism, a good model of which is now in place in Chinamerica, a chimera which should stay alive as long as the two economies can complement each other. In order to do so, the West must keep the most advanced technologies, while the East keeps sheltering the cheapest mass production system. The West must continue to shift its intermediary productions to the East, while retaining most of the profit margins as a payment for its own technologies. In exchange, the East benefits from massive investments, becomes a dominant exporter, and grows at a rapid pace.

Despotism plays here a double role. Totalitarianism – a direct legacy of the Communist system – is used to control the cost of manpower and reduce sovereign risks in the East, while covert public subsidies and militarization allow the West to maintain its vital technological edge.

Unfortunately for its beneficiaries, such a synergy cannot last forever: a) Western governments are unable to justify their hidden support to totalitarianism, a system absolutely opposed to their own public opinion’s ideology. The Olympic flame crisis is nothing but an example of this difficulty. b) Transfers of production entail transfers of technology; while at the same time a constant increase of wealth in the East allows a gradual build up of an autonomous technological capacity. At some point the two poles are therefore bound to compete on the same technologies, losing their complementarities. c) Shifting production in the East also implies growing unemployment in the West, reducing in relative terms the size of Western markets and increasing social costs and pressures in the West. This reduction cannot be fully compensated in the East by the growth of its inner market, exports representing too large a share of the national income.

For the battle to come, the West is at first sight better placed than China, as India represents an excellent substitute for cheap mast production with less ideological downsides. A political liberalization of China is a very difficult exercise, never attempted to this day. Economic growth being a strong factor leading to it, the immediate outcome is likely to be a new surge of despotism and repression, making it very difficult for the West to keep a harmonious relationship with China, and fostering the shift to India.

On the longer run, however, the West is likely to lose the economic war, for lack of innovation. Mechanical engineering and electronics are already behind. Its advance in both computing, telecommunications, energy technologies is soon to be reduced to nothing. Its financial techniques are currently undergoing a fatal blow. Biotechs and materials are lagging. The absence of both large-scale military opponents and financial reserves of governments limits the prospects of military funding of R&D. The cost of manpower in developed countries has seriously weakened their agriculture. Remain the consumers’ brands. How long will it take before there are taken over by the actual producers?

If and when this happens, a new poverty in the West will call for a new despotism.

This is how the world goes.

Tibet and Game theory

During its long history China never was an expansionist power and yet never abandoned lightly any inch of gained territory.  The notion of Yellow Peril originates in the Mongols, the most expansionist people in the history of mankind, not in the Chinese. The common absorption of China and Tibet by the Gengiskhanids, in the 14^th century, put an end to their old rivalry. Since that time, Tibet has always been considered somehow as a Chinese protectorate. Even though most Tibetans would certainly prefer to regain their independence, the protectorate is at least de facto accepted by both the Dalaï Lama and the international community. A Tibetan war of Independence would mean nothing else than a war between India and China, a most unrealistic prospect. The only thing at stake for Tibet is therefore a possible return to home rule within Chinese borders. Can this happen?

Humiliating China over the Olympic Games can achieve little. Chinese nationalism would be exacerbated to no avail. On the other hand, the international community is not prevented from stating that the Chinese presence in Tibet is acceptable if and only if the cultural and legal internal autonomy of Tibet is achieved. Should this stance be adopted simultaneously by the United States, Japan, India and the three main European countries, not precluding discrete and yet firm prospects of commercial sanctions, this strategy would have a limited but real chance of success. Its current trade balance makes China ultra sensitive to such pressures.

However, would the International community be willing to keep a united front that China should try to break by using Game theory and extending here and there commercial favors? Odds are high that any single player having a greater advantage in betraying the group than in obtaining a collective advantage, will indeed betray the group.

This is how the world goes.

Cassandra’s Principle (part 4)

This time Cassandra’s dark predictions are showing some of their truth in real time. One after the other, major players/abusers of the financial system join the defaulting league, saved by central bankers. The nature of the rescuers is not indifferent. It is not exactly the same thing to be bailed out by a government or a central bank. Governments can spend taxpayers’ money, something central bankers cannot do. They are limited to lending, a short term exercise nor adapted to structural failures, or creating money which -except to accompany growth- means adding a disease to a previous one. Governments, particularly when their respective deficits are already high, as it is the case today, can at best slow down a recession or speed up a recovery, not change the phase of the cycle. They certainly cannot at the same time also save the largest financial institutions from the inevitable consequences of their past mistakes.

Markets are indulging in wishful thinking for now, mixing up the willingness of central banks and governments to do their best with their actual capacity to do so. They also are blind to the nature of the recession, not understanding that what’s at stake is nothing but the real value of securities. How many Enrons are still undercover? How many torpedo stocks will appear when the lack of technological innovation shows its magnitude? How many bonds are waiting to be written off?  Nobody knows and markets don’t want to know for the simple reason money has nowhere else to go. While lunatics build their fragile rafts in gold, silver and Swiss francs, assets will continue rallying until eyes open on the naked king.

This is how the world goes

Who is leading trade? – The facts

(source WTO, 2007)

Share of world merchandise exports

o   1948: United States 21.7% Europe: 35.1% China 0.9%

o   2006: United States 14.2% Europe: 42.1% China 8.2%

Share of world merchandise imports

o   1948: United States 18.5% Europe: 45.3% China 0.6%

o   2006: United States 21.0% Europe: 43.1% China 6.5%

Intra-regional trade flows (2006)

o   North America: 905 b$

o   Europe: 3651 $b

o   Asia: 1638 $b

Inter-regional trade flows (2006)

o   North America-Asia: 1022 b$

o   North America-Europe: 709 $b

o   Europe-Asia: 970 $b

Neither angel nor beast

The governor of New-York was forced to resign after the revelation of his using the services of a high-end escort service. Europeans observers were shocked by the price the gentleman was paying (hourly fees being in the $ 3,000-5,000 range), a disturbing sign of sky-rocketing inflation in the United States. American observers viewed his lack of personal morality as a proof of unfitness to public office. Who is right?

It is a constant principle of Puritanism that private behavior is a good indicator of public capacities. What makes this principle slightly inconsistent is that Puritanism also places a wall around sexual activities, which are supposed to be actively hidden from public view. In practice, the indicator is therefore discretion rather than actual morality, and can only be used if dissimilation is considered a political virtue.

More importantly, history does not seem to conclude in favor of the puritan principle. Many among the great political criminals of all times preferred mass murder as a channel for releasing their libido, to mere personal excess. Savonarola was impeccably abstinent, Aurangzeb, the most cruel of all the Great Moguls slept on the floor and seldom took time to visit his own harem, Philip II of Spain ruled his empire from a monk cell in the Escorial, while his troops where annihilating entire populations. Stalin was famous for having water poured into his glass instead of vodka, and using a modest office in the Kremlin. Adolph Hitler was anything but a womanizer. Ascetic personal behavior is no more a guaranty of political fairness, than debauch the sign of a statesman.

One does not need to suffer from a divided self to be capable of minor personal disorders while being at the same time completly able to run a government. Blaise Pascal wisely said: “Man is neither angel nor beast; and the misfortune is that he who would act the angel acts the beast”. What we need are competent politicians innocent of public crimes, rather than dangerous fakirs or even incompetent saints.

Abiding with the law certainly remains a legitimate requirement for politicians in a civilized country. In this respect, however, a reasonable scale should be applied. No one would consider a parking violation as a good motive for losing office (unless one is mainly in charge of parking policies). Corruption, a major public vice, is of much more importance.

Prostitution is a specific concern, less for its illegal character, than for its potential encouragement of sexual slavery, an unlikely possibility when consenting adults contract at the surprisingly high rates the Governor was willing to pay. In his case, embarrassment and matrimonial tensions could have been considered enough of a punishment, particularly at a time when financial abuse and white collar crime – Eliot Spizer’s specialty when District Attorney – is one of the most serious dangers we are confronted to.

This is yet how the world goes.

Cassandra’s Principle (part 3)

In the mind as well as writings of its historical fathers, free market economy was never supposed to mean wild and unregulated economy. Left to itself, any free market inevitably generates distortions, e.g. monopolies behaving like tumours which may very well kill it if left unchecked. It is therefore the duty of market authorities to constantly protect markets from self-generated diseases.

A well-known condition for a healthy open economy is for instance the speed and quality of the information circulating within markets. This principle is today often understood as meaning that prices will automatically incorporate all available information about underlying assets. This interpretation is wrong. Market information does not come as a fixed quantity and its quality is a goal to be proactively achieved, not a given or spontaneous feature. Sources of distortions are varied and many: for instance, some agents are too weak to leverage the good information they possess, while others draw their strength from distorting information.

It is indeed difficult to overstate the importance of protecting economic agents in complex markets against bad information. This is particularly true in an age of extended securitization. Series of complex operations can transform any financial product bearing on real assets into an unrecognizable object composed of intricate layers of derivatives. When the distance between the final buyer of a security and the underlying assets is very large, there is simply no way for the final buyer to verify the nature of assets actually purchased. At each step of the transformation process, waivers are signed making it impractical or impossible to exercise guarantees from operators who may have corrupted the product or its components.

The subprime mortgage tragedy is nothing but the most massive example ever seen of this problem. Market authorities and regulators were unwilling to prevent manufacturers and brokers of such trash securities to create and sell on the largest scale nominal obligations having the highest probability of default. A chain of intermediaries was able to multiply their poisonous effect by mixing them up with otherwise healthy securities, spreading both the disease and its opacity into what was precisely supposed to be the safest and most liquid part of portfolios.

The magnitude of the crisis can only be guessed based on unheard of injections of liquidity made by central banks visibly attempting to avoid a market meltdown, without any further consideration for what used to be their primary concern, i.e. inflation. The best informed institutions all simultaneously trying to get rid of their plagued assets, are calling all possible margins, also creating the conditions for a domino effect and credit crunch.

 At this stage the probable willingness of governments to bail out irresponsible lenders is the least of many systemic problems induced by a major lack of market regulation and surveillance. Good wealth (made from real contributions to the global economy, e.g. long term investments in emerging countries) is likely to be destroyed together with artificially made wealth (from junk assets), when stock markets eventually adjust to the situation. Stagflation, the cancer of economy, will then show its hideous figure.

Cassandra’s principle (II)

If certain pessimism seems appropriate when considering geopolitical affairs, one would hope for some relief from the economy.  Cassandra, unfortunately, is not in a better mood in this regard, for economic globalization is not as tranquil a road that theoretical thinking would have leaded us to believe. The current squeeze in natural resources is but a consequence of another scarcity. The most important by far of all economic resources, i.e. technological innovation, has entered a phase of slow down.

We are so used to technological change that we take it for granted, and we should not.  Any technological system is centered on a source of energy. Ours is still the same than in 1875, based on hydrocarbons. Nuclear energy is limiting the problem, yet only to a certain extent. Its dangerous side effects, both environmental and political are well known. With the exception of railroads, it cannot fulfill the growing needs of transportation. Alternative energies are either inefficient (solar) or direct sources of greenhouse effects (biofuel). Moreover, no energy revolution is in the pipes for the visible future.

Biomedical research is increasing the scope of treatable diseases at an increasing cost, when reducing the cost of global public health would be more urgent and useful. Nano-technologies have little to offer for the present, while discovery of new materials is stalling.

The last major technological revolution was the Internet and cellular telecommunications. There is of course still some way to go until it is fully deployed, and its last major elements (eg Wimax or equivalent) are in place. It is however unlikely that it can by itself sustain a durable growth of the world economy for several decades.

As I said in a previous post, growth is dependent on the persistence of waves of technology. Innovating countries increase their own efficiency and fulfill new needs, while transferring to other countries their previous technologies. Developing countries, producing at a lower cost, can export to developed countries which in turn finance their imports with the products of their newer technologies. There may be hiccups, bottle necks, or cycles, but the overall picture remains positive as long as the transfer of mature technologies goes on a par with the constant influx of new ones.

In the event innovation slows down in such a way that all countries en up sharing more or less the same level of technology, their complementarities are turned into a competition for production prices, and all markets retract. Richer countries are bound to adjust their own labor costs, reducing both their own consumption and imports. Their markets start closing themselves to developing countries which in turn start facing the prospects of a recession.

This danger is not the only one we are confronted to.

 

(to be continued)

 

 

Western identity & Residual Privacy

Conflicts between public order and private liberties are as old as jurisprudence. The only conclusion, however, that was able to survive after centuries of critical thinking and political experience, is that whenever privacy disappears and the limits to public control are lifted, law becomes a mere shadow of itself. There may be, as a matter of fact, no better definition of totalitarianism and tyranny than the crossing of these borders by governments and public force.

It is also a constant lesson of history that, at any given point of time, excellent reasons can be found for shrinking somehow the sphere of privacy or violating it altogether. Authorities can always point to some actual or imaginary danger, coming from some inside or outside enemy, to justify such abuse. Every time the argument remains the same: “honest people have nothing to fear: their life can be turned into a glass house at no risk to them, as only the guilty has motives to protest”. Opponents to invasions of privacy are thus accused of criminal inclinations, absence of civic sense or lack of patriotism. Submission at all costs to the supposedly superior interests of law enforcement authorities becomes the sign of a good citizen, while taking at heart the principles of law in a civilized society is seen as proof of moral weakness, as if  hoping for a good police prevented  from blaming a bad one.

Perfectly aware of the implications of so dangerous an ideology, the fathers of modern constitutions were unanimous in safeguarding privacy against recurrent attacks. All over the Western hemisphere, these men thought that individual freedom is together with dignity the only value to be placed above any other consideration, even when efficiency and security are at stake.

The Universal Declaration of Human Rights thus sets forth: “No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honor and reputation. Everyone has the right to the protection of the law against such interference or attacks.” Few principles are now turned into more mockery. The “War on terrorism” was the occasion for the United States and the United Kingdom to ridicule all such rules. Germany, the most protective country for privacy, and France, against its own constitution, are now on the move. Spyware – ironically renamed ‘policeware’ – will be officially allowed, putting the entire content of private computers at the disposal of law enforcement authorities. At all times and from any place, all communications and data belonging to the targeted persons will be available online for analysis and storage, – an invasion of privacy in many ways much worse than putting cameras in bedrooms.

The fact that these new methods of surveillance are initially placed under the control of a judge is far from insignificant, but is certainly not a sufficient protection. As long as judges are not granted the appropriate tools allowing them to verify effectively the strict application of their orders, as well as the destruction of data irrelevant to specifically authorized investigation, the door is more than open to abuse. No one of course will give judges access to spyware allowing them to check the computers belonging to law enforcement agencies.

These methods are relatively inefficient against criminals, as was shown by the inability to catch Osama bin Laden in spite of the largest deployment ever of surveillance technologies. Criminals will use pigeons if need be. They are on the contrary very efficient against the average man, generally unaware of such threats and always defenceless against them.

There was a time when the Western legal system could be arguably opposed to Eastern despotism. This time is no more. The only residual differences are between primitive methods of coercion, such as actively blocking access to selected website, and the more sophisticated invasions of privacy through spyware or similar instruments.

The main combat of the 21^st century will not be between Right or Left or West and East, it will be between the defence of civil liberties and the submission to the universal tyranny which taking shape in front of us. Time has come to take sides.

This how the world goes.

No post today

I am now traveling in Dubai, a more hectic city than expected. Yesterday, I heard someone say: ‘If you want a quiet job, go to New-York!’

Cassandra’s principle (Part 1)

A law of incertitude applies to political events: if they could be forecast, most could be prevented from happening, therefore most forecasts would be proven wrong. If anyone can predict political events, he is a Cassandra no one believes or listens to. One can nevertheless get a feeling on how things are going. The main question is whether we are in stable environment, i.e. one in which few events have a high probability to upset the present overall situation, or in an environment close to chaos and full of crossroads, i.e. one in which anyone of a large range of possible local events can trigger dramatic changes.

Obviously, no period of history is either completely stable or chaotic (total anarchy almost never happens), but some are shakier than others. It would seem to me that we have entered an age of particular fragility, in some ways similar to the first decade of the 20th century. From an optimistic point of view, things look rather good. The great confrontation between East and West, Communism and Democracies, Soviet Union and the USA, which had been very close to terminate mankind (all direct actors now admit that the Cuban missiles crisis had put during three days the world’s future at the mercy of a dice roll), is now over. The globalization of the economy has opened gigantic markets made of billions of new consumers, while massive transfers of technology have allowed these populations to acquire solvability. The parliamentary regime is an accepted model, at least as a matter of principle. In real terms, production has reached a point where starvation is not far from being under control. Global public health is gradually improving.

On the other hand, several lines of fractures can be noted. Nuclear proliferation is the most visible danger, especially in connection with the Middle-East, a zone of extreme instability and major implications for all strategic interests in the world. Both Israel and Pakistan are nuclear powers; Iran is actively trying to become one; Several NATO countries and Russia are located in the immediate neighborhood; the U.S. have concentrated most of their troops in the region, a majority of which are already in a situation of combat. Organized liberation forces are willing and financially capable of acquiring nuclear substances usable as ‘dirty bombs’, and perhaps ‘lost’ tactic missiles from the former Soviet Union. Iran and the Hezbollah have emphasized their stance of refusal of the Israel’s existence. Israel in turn is now a fortress, physically surrounded by a wall, threatened by a new generation of Palestinians born and raised in refugee camps outside the wall, or humiliated by the intense security controls they are subject to inside the wall. This population, which could not be integrated in either Lebanon or Jordan, and which is being denied an actual ‘right of return’ by all peace agreements that have been contemplated, receives a strong ideological backing from a Muslim world composed of 1.2 billion individuals, including most surrounding governments. Deprived of classical military forces, Palestinians can only oppose their enemy by civilian disobedience or rebellion, as well as terrorist attacks which have become a standard mode of action. Such attacks are renewed, in a vicious circle, by the inevitable repression following each of them. No Israeli administration would ever consider a withdrawal, and if the country was to be placed in a situation of ultimate danger, the chance of nuclear weapons being used can be estimated as high. The vital assistance Israel is receiving from the U.S. is an additional motive for alienating neighboring populations and governments who tend to view the Jewish state as a colonial instrument in the hands of the Superpower. The US, having vainly attempted to dissuade opposition to their views by conquering altogether Iraq, one of the major local powers, and threatening both Syria and Iran of extending military actions to their territories, are now suffering from a drastic credibility decrease. Failure to control the civil war in Iraq or Afghanistan, as well as a confusion between the notion of ‘peace process’ and the mere enforcement of their own immediate interests, are preventing them from stabilizing the area. Iran finds itself reinforced by prospects of either a formal or an informal partition of Iraq, thanks to strong ties with the Shiite majority. Pakistan, a key player, is entering a new phase of incertitude. Pressured for years by the US for a better assistance in the Afghanistan conflict and elimination of Al Quaeda, General Musharaff had to accentuate the dictatorial aspects of his regime, and is now on the verge of being ousted. Even if he his replaced in the short-term by new leaders agreeable to the West, history has shown that such evolutions can take an unpredictable turn, as the exile of the Shah demonstrated in Iran against all the Carter administration’s plans. A nuclear Pakistan eventually falling in radical Islamist hands would probably mean a catastrophic change for Western interests. Waves would be likely to reach the shores of Saudi Arabia and other fragile monarchies hosting critical reserves of mineral energy.

Even if the Middle East was the only zone of strategic concern, and even putting aside long term (but serious) climatic risks, other lines of fracture must also be taken into consideration

(To be continued)

The formation of public opinion

Public opinion is not an aggregate of individual opinions which would have been formed independently. Quite the opposite, really: opinions are for the largest part products of a preexisting public opinion. Naturally, public opinion acts in a circle, as it is reproduced through the very elements it has produced, the individual opinions.

Within its workings, Individuals are not passive, but they are restrained. All they can generally do is select according to their own preferences or interests (what Mark Twain used to call their ‘corn-pone opinions’) among a limited set of possible opinions deemed as legitimate and previously authorized by public opinion. In practice I may, for instance, entertain an opinion favorable to Obama, Clinton or McCain, not an ’illegitimate’ opinion, i.e. one which would be considered as eccentric, ridiculous, foolish, extremist or mad by public opinion. Well, I can, but I may not, at least if want my opinions to be discussed, respected or spread by others on any significant scale, and unless I don’t mind being ridiculed, isolated, silenced or persecuted. Actually, if I am obstinate enough not to mind this kind of social pressure, my attitude is likely to be interpreted as an additional confirmation of the illegitimacy of my opinions.

No individual or group of individuals can control public opinion which is essentially a-centric. Believers in conspiracy theories do not understand the mechanisms at work. The most one can do is influence public opinion, propaganda being the primary tool. Advertising – as we shall see – is the other one.

Not all individuals, however, were born equal before public opinion. Some of them are simply more intelligent, they have the capacity to question received ideas. Those can be extremely influential, usually after their death, when the previous ideas have lost momentum. They are very rare.

Another group are the so-called ‘opinion makers’. These do not actually ‘make’ anything, but have the power to focus public attention on a specific opinion rather than on others. These people are the actors of the Media. Their role is to increase the legitimacy of a subset of opinions, first by mentioning it, then by relaying it. In the general case, their audience already shares their subset of opinions. Very few people read a newspaper promoting adverse opinions. All they are looking for is a reinforcement of their established opinions, by the proper selection of appropriate facts and points of view. The more an opinion is reinforced, the better it spreads. Media backing such opinions get more following, and become more legitimate and influential.

The surge of the Internet did not entail any dramatic change until now. Assuming that the entire range of possible opinions is present on the web (a reasonable assumption), each of them remains almost invisible and diluted until some mass media directs public attention onto them. This can be done by non-digital media (a newspaper or a TV program mentioning an opinion expressed on the Internet, or adopting such opinion), or by digital media (e.g. major blogs). Self-organized buzz can in some cases spread virally, although none – to this date – have been able to become influential on a macroscopic scale without the leverage or traditional media.

In order to survive, traditional media need resources. Subscribers not being enough in most occurrences, advertising does the rest or does it all. In other words, any non-digital media is dependent on advertising. As advertising has also become the main source of revenues over the Internet (see previous post), the rule applies basically to all media of any kind.

Theoretically, advertisers on a perfect market are indifferent to the content of the support. They are supposed to advertise strictly according to the size of the audience. They don’t. They advertise only in ‘legitimate’ media, i.e. media relaying ‘legitimate’ ideas. Not only they are human beings, reluctant to help in any way people spreading dissenting ideas, but they are also aware that the ‘illegitimacy’ of the content can affect the image of whatever they have to sell. Even in the rare occasions where they accept a certain amount of scandal to draw more attention, things are kept within strict boundaries. For instance, Benetton ‘shocking’ marketing campaigns remained politically correct, until they had to be stopped altogether.

This means that media and therefore people working for them cannot afford emphasizing anything else than mainstream or innocuous ideas, unless they have a niche and motivated subscribers. Any opinion deemed to be illegitimate, no matter how sound or well documented it may be, is put aside or condemned. This includes original ideas, as well as views opposed to those of most people, or contrary to the interests of the advertisers.

Large corporations do not have to plot to impose their views. They don’t even have to plan it or think about it (although they of course can if need be). They simply have to advertise. Directly taking over the media is also an option, but not a necessary one. This is easily done, their opinions being usually of the mainstream kind or, more precisely, representing the subset of mainstream opinions the most compatible with their own interests.

The American people will soon elect the next President. Their choice will be limited however to candidates acknowledged as being legitimate by the media. May be a good group, may be not. Nothing can be done about it.

By the way, this post is a self-fulfilling prophecy.

This is how the world goes.

Please make me pay!

The more we use the Internet, the least we seem to have to pay for anything. I couldn’t list the almost unlimited number of things that are offered for free. Free search, free delivery, free trial, free software, free email account, free download, just name it (even THIS blog is free). Everything is free, gratis, no strings attached. What a wonderful world.

Of course you know the secret: the so-called ‘ad-funded’ model. You don’t pay for anything, as the nice, the sweet, the generous advertisers do it for you. The ad-funded model is what allowed Google, one of the smallest companies in the world to become almost overnight one of the largest ones. Every day the add-funded model gains more ground. Forecasts are clear: the future is there. Web 2.0 or Web 99.0 simply means more and more advertising all over the web. In the event you are an entrepreneur, don’t even think of raising a dime for anything else than a project under an ad-funded model.

Yes, I know there is no free lunch and you sometimes wonder if the whole thing is really that healthy. Let’s not be paranoid. Why bother when such a galore of free stuff lies beyond the keyboard? Do I really care if my mailbox is limited in size or if the software I downloaded will only work for 2 weeks? Or if I lose my account when I change my ADSL subscription? Is it more meaningful that search results showing advertised links at the top, quickly followed by garbage at the bottom, or scientific information drawn from an unedited encyclopedia? Is it of any importance to me that my email address and all information gathered about me are being resold all over the planet, generating spam and opening the fascinating possibility of identity theft? Why should I worry about discreet cookies allowing gentle advertisers to better target me? A minor inconvenience compared to all the money I save. Because I save, don’t I? It is after all the well-known purpose of advertising to make people spend less and save money. On top of it, all the messages advertisers send me are for my own good. Thanks to them I am more intelligent and better informed. I had no clue, for instance, that my next car was a transformer and that it would make me a better father. Now, I know.

What would be really great is a fully ad-funded universe. What if I id not even have to pay for my car? Well, in fact, I don’t have to. They will give me such extended credit that buying it is definitely a no brainer. Can you imagine calling long-distance for free, and simply having a reliable soda company interrupt the boring conversation every 2 minutes for always more instructive news?

I am dreaming. Things are not that perfect yet. For some bizarre reason, some of the things I need most still carry a price-tag, including my high-speed Internet connection. Can’t I change that, for a marvelously free and sluggish connection, full of funny pop-up screens? Yes, you can.

This is how the world goes.

Schedule

Next post on Monday

How smart are the cynics?

Political cynics are people who support or implement some ‘dirty work’ in order to protect their own personal or national interests. They view themselves as smarter than people who simply think their best interest is to promote the goals they believe in, using means that do not contradict the very goal. The cynics call themselves realists and practical minds. They call their opponents idealists and dreamers.

Realpolitics is to deal with other people as they are, not as they should be. Even idealists can accept to interact with their enemies, and compromise on certain points to obtain more important ones. Cynics seldom compromise with anyone who does not share their views, with the exception of pawns whom they think they can manipulate. Their nature is to adopt the same methods they condemn in others, and fight anyone different from what they would themselves like to be (and are not). Starting from such illogical principles, they tend to come up with schemes generally too complex to be successfully implemented, entailing incontrollable implications. Cynics, as a matter of fact, are the ones who back dictatorship to protect democracy or reduce civil liberties to warrant them, attack weak countries to threaten powerful ones, torture advocates just as well as opponents of free speech, bomb civilian populations to deter terrorists, or take any such inconsistent course of action.

Cynics are extremely inefficient. They engage in covert operations, overlooking the fact that they almost always end up in being publicized. They back political regimes contrary to what they would like for themselves, blurring their own image, and alienating therefore masses of potential supporters. They spend vastly more in attempting to control resources than in simply purchasing them, or in plotting against the nationalization of a company than in accepting a reduction of its expected profits. They start wars they rarely win and cannot end. Too confident is the absence of limits of what they are ready to do, they bet on total victory in such a way that humiliation inevitably follows any reversal of fortune .

Absence of scruples is not enough to make a political cynic. It also takes a complete misunderstanding of social dynamics, as well as a rare degree of historical ignorance. Al Capone never became the richest man in America, Adolph Hitler’s death was not full of glory, and most dictators end up executed, assassinated or in exile. Gandhi and Mandela, sticking to means compatible with their own goals, and proclaiming their actual intentions directly, were much more successful. As always, really smart people are scarce. They prefer simplicity to complications, plain truth to tangled lies. Being aware of the incertitude of events, they contemplate failure as a permanent possibility, and take steps that have a value in themselves, each one of them still making sense even if it was to be the last one. They also are the only ones capable of turning their opponents into followers, by the force of example.

The cynics, a widespread species, do not belong to a specific place or ideology. They survive not because they achieve anything, but only because there are so many of them that there is plenty of supply to replace those who fail. By the laws of randomness, some can still get lucky.

This is how the world goes.

Dealing with socialist leaders in Latin America

Of the three main diplomatic issues the future administration in Washington will be confronted to, one can be considered as more easily manageable than the others, i.e. the relationship with socialist leaders in Latin America. It is disconnected from the intricacies of the Middle Eastern situation, and free from direct involvement of foreign powers.

This was not always the case. Until the fall of the Berlin wall in 1989, Latin America had been a major field of confrontation between East and West. The following decade was the time of an illusion for the U.S., then contemplating the prospects of unbound hyper-power. Concerns were limited to minor local conflicts, and the strategy was to focus on imposing the Washington consensus (also dated 1989) to the global economy, including obviously South and Central America. The possibility to enforce unopposed both the Monroe doctrine and the Washington consensus led to pursue a policy of eradication of socialism in Latin America. Masterminds of covert and clandestine operations went unleashed. The debt crisis of the 1980s (when banks had been losing almost overnight in the region a century of profits) was forgotten. Military dictatorships received full support.

After 2001came the discovery that hyper-power has limits. No matter how many troops, how much money, how many restrictions to civil liberties, how much acceptance of the deterioration of one’s public image, the best that could be achieved, even in the absence of any strategic rival, was the abduction and execution of an obnoxious leader in a weak country. Almost everyone came to understand that time had come for revised foreign policies.

Unfortunately, instead of considering the easiest problem at hand (Latin America), the attention remained focused on the most difficult one (Iraq and the Middle-East). Escaping the mud pit in Iraq will be almost as tricky as calming down the hornet’s nest in Palestine. Things can certainly be put on a better track. No free ride can yet be expected. The more, however, Washington will pull back from the East, the more important dealing with issues in the West will become.

Discussing a strategy for Latin America should not remain a parlor conversation, and should move up in the priority list, even though socialism in Latin America certainly does not attract masses of supporters in Washington. Introducing the topic in the presidential campaign would even be a dangerous move: who, other than a radical or a wimp, could even think of softening the hard-line? On the other hand, Latin America can become a problem.

The danger does not come from governments. Putting propaganda aside, any one who does not get his primary information from TV, knows that Hugo Chavez, Evo Morales, Raul Castro, Alan Garcia, Daniel Ortega, and of course Lula da Silva, Tabaré Vasquez or Michelle Bachelet, are no threat at all for the security of the United States. The danger is more in the fact that – except the Castros who are a legacy from the past – all of them have been democratically elected, in spite of powerful opponents strongly backed from the North. Even Chavez was able to lose a referendum (not something that would happen frequently in a regular dictatorship). He had previously managed to be reinstated after a coup attempt supported by the local media. This means that the majority of the population of the entire subcontinent has now shifted to left-wing opinions, an evolution not to be taken lightly, and which cannot be countered anymore by series of military coups like during the good old days. The reasons for this are well-known: extreme poverty, extreme inequalities, resentment against right-wing authoritarian regimes, discredit of the U.S. administration.

None of these leaders obviously intends to serve the U.S. economic interests and it may be unpleasant to see Chavez pressuring ExxonMobile Corp. for more tax income, unpleasant and yet certainly not tragic. Not only the amounts at stake are limited, but the motivations are also understandable. Let’s try a thought experiment: let’s imagine that Venezuela is by far the largest economic and military power in the world or that Bolivian oil companies are the biggest, while extreme poverty and unemployment is dominant in the North, a handful of billionaires close to Caracas pushing for always more international control over U.S. companies. Who in Washington would not be tempted by reclaiming part of the oil fields in Texas, and preventing some Bolivian TV network based in D.C. from pouring its propaganda all over the country? Not even going as far as imagining Nicaraguan covert operations in Virginia, the whole thing sounds like a joke or madness. It nevertheless reflects a widely spread feeling down there.

There are only two ways to go about it. One is ” too bad, tough life, that’s how things are, in any case this could not happen as socialism cannot build strong companies (what about Gazprom?), so let’s continue as before”. The other way is to compromise in order to avoid further radicalization, as well as a possible connection with other sources of radicalism elsewhere. One can be a believer in the virtues of free market economy and still understand than certain situations, such as the one which justified the New Deal, require a modified treatment. Persistent extreme poverty and growing inequalities in Latin America are a long term problem which can only made worse by short-sighted views.

Normalizing the relations with socialist leaders is a two-way street. In all fairness, there is a double cost attached to it: ideological, as the Washington consensus may have to be softened down; and financial, as one would have to allow theses countries to reclaim some of their national resources. In exchange, a consolidation of Latin America (including Cuba) as a safe strategic area may be obtained, together with an much improved image of the U.S. in the world, a weakening of purely revolutionary movements, and a reduction in sovereign risks.

Unfortunately manly hardliners often look better than long-term and more pacific strategists. Brutal thinking is an all-time bestseller.

This is how the world goes.

Czar and Emir

Russia is now the last great colonial power in the world, ruling over 160 ethnic groups speaking 100 languages, on a vast territory (the largest in the world). Three quarters of its surface is located east of the Urals, i.e. outside the metropolitan part of the empire.

Russia’s economy (smaller than Brazil’s) is predominantly based on the exploitation of natural resources inside its colonial domain: commodities, raw materials, agricultural inputs. Oil & Gas by themselves account for about 30% of the total tax revenues. At 10 to 15 dollar per barrel, the second largest producer of crude oil after Saudi Arabia was a former communist country; at $100 it turns into an Emirate.

Russia is a somewhat unusual emirate, being governed by an elected Czar chosen by the KGB aristocracy. It is not a particularly efficient one, with a GDP growing by 5 to 8% a year, while the price of commodities was multiplied about 4 times over a period of ten years.

As most emirates, Russia is also bound to be conservative in foreign policy. Soviet Union was backing every movement of independence. Russia is not. The main goals it can now achieve are formal respect for its national pride and be left alone in Chechnya.

More awkward than anything for an emirate, Russia is not a friend of Islam. Afghanistan is the name of its worst humiliation, more painful perhaps than the loss of Central Europe. Muslims are the only potential danger for the internal peace of the realm. Orthodox Russia is thus coming back with a vengeance. Hence the significance of Serbia, and the hostility to Kosovo’s independence, a multiple blow to the new Russian values.

Can the Kremlin do much about it? Not really. A move against the Baltic Republics, the only one to be technically feasible, would entail long-term isolation and would not achieve much. The almost inevitable partitioning of Kosovo, the northern province rejoining Serbia, may be enough of a nominal consolation.

In any case, the Russian public opinion is currently focused on a more extraordinary event: the turning of the Emir into a Vizier after next elections. A good subject of conversation.

This is how the world goes.

Nationalities in Europe: Confederacy or Commonwealth?

The European Union started as a future confederacy, all it has become is an intricate commonwealth. Both have their own advantage. It is however important to neither mix the two things up, nor consider them as mutually exclusive. A confederacy or confederation can emerge within a commonwealth and be a part of it. Conversely, not all members of the commonwealth wish to participate in a confederacy. Trying to reform the European commonwealth in order to turn it into a confederation would be a mistake, for members actively resisting such integration will always be found. The two entities are compatible as long as they remain separate.

The British (or should I rather say the English?) are experienced and comfortable with commonwealths. They reject the idea of a confederation, for a good reason among many. UK is the only country in Europe entirely made of clearly distinct nations placed under the domination of one, and odds are high that several of them would obtain quasi-independence as autonomous parts of a confederation. Scotland and Wales do not have the critical mass to be actual countries in the modern world, but could become direct participants in a confederation, severing more ties with England than what they have already been doing. The more diluted the European Union, the safer Westminster is. Italians, for symmetrical motives, are inclined towards a confederation: as none of their rival regions ever succeeds in dominating all others, more European integration can only reduce their persistent tensions, while preserving the concept of Italian unity. Belgium is placed in a similar situation, with none of the two provinces being able to takeover.

Some other countries in Europe also have serious problems with their nationalities, but these are minority problems of a different nature. Spain is the main one with Basques and Catalans, followed by Greece with the Turks in Cyprus. Hungarian minorities in Romania and Slovakia, or Corsican separatists in France do not have as much momentum and resolve. As Greece, Romania and Slovakia are most unlikely to be initial members of a European confederation, the only real question mark comes from Spain which, until now, has been demonstrating strong pro-European inclinations (while keeping a close eye on its historical ties with Latin America).

A commonwealth, in any case, doesn’t help solve such issues. Being indefinitely extensive, even the presence of Turkey in the current commonwealth is easily conceivable, whereas its presence in a European confederation would hardly make any sense. A confederation can only happen between countries willing to share at least the same currency, and common physical borders, a step already taken by many. They must also accept to form a joint constituency and elect a confederate administration endowed with actual (yet not exclusive) judiciary, diplomatic and military responsibilities. This does not look totally unrealistic if we consider at least the initial core countries of the EU, too strong to leave all their military decisions to NATO, too weak to act separately and by themselves on any significant scale. In agreement on most international issues, they also share more or less the same economic and social model.

European integration was put at a standstill by its extension to Central European nations. No matter the structure of institutions, there was no way so many actors could to be in agreement on all major policies, or could build anything else than a forced free market economy, opposed to the views an traditions of countries that had initiated EU. France was the first one to back off, vetoing by referendum the treaty of Nice. This does not mean that the confederal idea is dead. Having supported and ratified the so-called ‘mini-treaty’, which effectively ends the institutional deadlock, France has proven to be back in Europe. With his Mediterranean Union initiative, the French President is also trying to show that a loose commonwealth can be added to a tighter one, a concept Germany is reluctant to accept. Would a loose confederacy within a tight commonwealth be agreeable to both of them? That’s about all it would take to make it happen.

A small European confederation would inevitably become the dominant element in the large European commonwealth, an unpleasant prospect for some other members, but one they could do little to prevent, as any move towards unification can be made within the framework of the established system of “reinforced cooperation”.

As it is already hard to understand the past, I shall certainly refrain from predicting the future. All I can hope is that clarifying what EU has become, i.e. an over-administrated (and under-managed) commonwealth, may help find new and perhaps more reasonable solutions. Reasonable solutions are rarely the most probable, and yet may never be deemed impossible.

This is how the world goes.

Re-educating educators

The education system in France, which used to be among the best in the world, undergoes a deep crisis, for reasons of wider interest than the local problems encountered by this specific nation.

The most-cited causes are lack of public funding and rigidity of the unions. Lack of public funding is a relative notion, especially when the entire proceeds of the national income tax are devoted to education (€77 billion in 2007, equivalent to 28% of government spending, almost 6% of GDP, compared to about 5.5%. in the U.S.). Private funding is missing much more, as the total expenditure for all levels of education reaches 7.5% of GDP in the US against 6.4% in France, a spread that could not possibly be reduced by a further increase in public spending.

Improper diagnosis and subsequent mistreatment only add to the intricacies of any serious illness. What motivates teachers’ unions to oppose almost any reform is a combination of constant decline in relative income together with a severe degradation of their working conditions. Masses of students are now unfit to classical forms of education for which they show little or no respect at all. It should be said in their defence that the system was not designed for their current needs, leaving them with high levels of unemployment.

The key to these issues is that a small-scale production system was turned into a mass-production with no structural change. This would be true in almost any country. Shameless demagogy only made things worse in France. Politicians, who had received an ultra-elitist education, promised the baccalaureate to everyone (a target of 80% of each generation was proudly announced in 1985).Putting aside the pure and simple impossibility to do this by other means than devaluating diplomas, professional training at primary school level was abandoned, secondary education being put on the same track in the name of equality, while overcrowded universities were discreetly postponing the necessary selection until it was too late.

Before WWII, a university such as Sorbonne had a faculty of hardly a few dozens people and a few thousands students. Secondary school teachers were recruited among the best students, paid like superior army officers, and treated as notables. Most jobs were obtained after primary school. Faculties are now measured in thousands, upper education in millions, teachers are underpaid, students spend years unwillingly sitting in classes where they remain unprepared to the real world. Those of them who do not dream of becoming drug-dealers or civil servants struggle to obtain internships from corporations terrified by what they see as hordes of unreliable barbarians.

Well-off families spend fortunes in private lessons to help their children keep up with the most exclusive private or public schools which, in any case, eliminate all students not on a par with their statistics, leaving others with the prospects of always more assistance from their parents or of a shaky future.

Few students are good or bad in maths by themselves. Some are lucky to have had a good math teacher, while others were not. The same applies to most fields of knowledge. No country can produce tens of thousands of good maths teachers. It is even more difficult to train at once new teachers for new branches of education better corresponding to the actual marketplace: accounting, law, electronics, general problem solving, design, etc.

The goal therefore is not to have more teachers leading more students to upper education, but teachers better paid, preparing all students to citizenship and employment.

One way to do this is to include professional training at every level, instead of turning it into mockery and a dead-end for the least gifted. One doesn’t need to be a follower of Mao to understand the advantage of having been trained in several skills during one’s youth. Some notions of say carpentry learnt at primary school and of software development learnt at secondary school would not make a worse lawyer after he got his PhD. Conversely, the basics of citizenship (introduction to the legal system, tax returns, world history, etc) should be considered a must for everyone.

The other way is to switch from the archaic system of one teacher in his class, to fully interactive digital learning. Richard Feynman, a leading physicist of the 20^th century, was also a great pedagogue. He could have planted the seeds of science in to the mind of lemmings. Minds of such quality are scarce, and yet can be found in every generation. We can however leverage their talents by massive investments in the production of multimedia courses by people of this kind. Regular teachers should be retrained as coaches for the controlled and efficient use of digital lessons and related tests. A smaller number of more efficient teachers would select these courses as they used to do with manuals, customizing their usage for their various types of students. A large part of school time would be spent at multimedia libraries and workshops, requiring less physical supervision. Work could be seamlessly continued from home. Programs could easily evolve according to the economical or technological developments.

The goal is clear, the money is there. Will it happen soon enough?

You know how the world goes.

Please do not write novels

I shall never write novels.

When I was a little boy, a priest confiscated the novel I was about to read. I now understand he did it for the completely wrong reasons. His idea was that various sexual references included in the book were a threat for the purity of my soul. He did not realize that familiarity with sex and romance is part of a good education and a precious stock of knowledge. The problem with novels is elsewhere.

There is nothing neutral about a literary genre. Each one conveys a specific view of things. The vision of the world you can find in a novel will never be the same than the one you get from a tragedy or from epics. They cannot be translated into one another other. A Shakespearian novel would be a total impossibility. Each society puts some genre above all others and for good reasons: our favourite literature reflects who we are. The novel is the democratic genre par excellence. No matter the author, the message is the same: do not worry about your low level of self-esteem, other people, particularly the ones with noble aspirations, grand ambitions or romantic hopes, can be much more miserable than you could possibly fear to be. The entire art of the novelist is to tell their story, torture them like an entomologist pinning an insect on a piece of cork, humiliate them in all imaginable manners, show their weaknesses and - above all – make sure not a drop of illusion does remain in their heart when we turn the last page.

Tragedy does exactly the opposite. Shakespeare always treats his monsters with utmost respect, and shows divine forces animating their dark projects. Lady Macbeth, Gloucester, even Shylock are never mocked. The grandeur of their crimes is what brings them onto the scene. They stand there with as much dignity as Juliet.

“Lost Illusions” could be the title of any good novel. “Journey to the end of Night” is an alternative. No wonder Louis-Ferdinand Celine, immense genius and abject man, is by far the best French novelist in the 20^th century. His character was the person he despised most and knew best, i.e. himself. Debasing so much and so well one’s own double cannot be the act of a good man. But who told us after all that an artist should be a moral person?

If modern novels are a long exploration of the gutters of the mind, the spirit and of society, classical novels were already of the same vein. It all started with Cervantes depicting a brave man trying to restore the values of chivalry and exert the proud virtues of knighthood, as a grotesque example of the vanity of men. Mrs de Lafayette turned the loving Princess of Cleves into a harlot. Flaubert forbade mutual love or even intelligence to all his characters. For a while, however, American novels kept an epic tilt, while Russian authors were still breathing the sharp air of the steppes. Melville could not help being fascinated by Ahab’s folly. Dostoyevsky felt visible compassion for Raskholnikov’s. But when Jack London’s Martin Eden came, the game was finally over. Humiliation was to be from now on the only reward of extraordinary men.

I read novels. I must confess I do it with great pleasure when they help me discover aspects of the human heart I did not know existed or could not understand. I have generally little personal sympathy for the imaginary world novelists live in. All they can get is my admiration. This is not enough to want to be one of them.

No matter what my own preferences are, novels will remain one of the best expressions of our time.

This is how the world goes.

Intellectual Improperty (Part 3 – end)

In the same manner that new technology and market forces are undermining the role of copyrights in performing arts and related industries (see previous post), plastic arts (sculpture, painting, photography, etc.) are being forced to change directions and return to more traditional solutions.

Marcel Duchamp and Andy Warhol are landmarks of contemporary art which cannot be fully understood without their contributions. Although both were gifted artists under classical standards, showing great talent at creating individual and carefully crafted masterpieces, their fame came from their opposite stand that major art may come from minor displacements in our relationship to highly reproducible objects. Duchamp introduced ‘ready-mades’ and his famous ‘Fountain’ (a mere urinal) as a proof that industrial objects of minimal value can acquire an entirely new meaning when the very exhibition of art is used as an artistic tool. Warhol continued the demonstration with reproducible images of commodities, such as Campbell cans, Brillo boxes or icons of movie stars.

The irony was that while both artists were denouncing the fetishism traditionally associated with art, their own works became subjects of more veneration and more fetishism than anything before. Collectors started purchasing at prices never heard of and storing inside vaults objects which could have been obtained for a dime, and that a better understanding of the artists’ explicit intentions should have led to acquire preferably from supermarkets. The comedy was to reach a climax when Duchamp’s Fountain was hammered by a fan at the Beaubourg museum. During his trial the iconoclast explained that he agreed to pay for the repair, within the limits of what a decent plumber could ask for, as opposed to the half million requested by the museum as the actual cost of the restoration by experts trained in works from the Renaissance. He also claimed to be recognized as a co-contributor to the piece and a co-beneficiary to all related copyrights. Hilarious indeed and a good example of the paradoxes of copyright…

For a while photography was threatening sculpture and painting to become the major form of contemporary art. Serial art was reaching the same prices than unique pieces. Things have been recently calming down, and the specific quality of each singular copy is again considered as an essential factor of its economic value.

Absurdity, however, has not completely left the field of photography, as owners of rights to the objects that are being photographed are also granted rights to the picture itself. I am not talking of the legitimate right to privacy and control over one’s own image, but the strange idea that the mere image of material objects should be appropriated by someone. The city of Paris has a claim, for instance, on any picture taken of the Eiffel Tower. One could understand that smaller museums with limited funding would ask for a modest fee for using a camera within their premises. There is no justification, however, to limiting the passive reproduction of images of things already offered to public view, unless we adopt the metaphysical and rather primitive creed that the essence of things resides in their image.

In the distribution of digital copies of images of any kind, a part of the value comes from the service of distributing them, sometimes more than from the image itself. An image bank can draw revenues from gathering pictures, classifying them and making them available for downloading. The bank still has to pay for procurement, particularly when images are associated to trademarks, as trademarks imply contractual arrangements with their respective owners. A photographer’s trademark may or may not be important, only the market can decide. What is certain is that no one can contract on behalf of Leonardo when dealing with a picture of the Mona Lisa!

Protecting artists against unauthorized commercial use of their work does not mean preventing unlimited duplication for private use, nor the free secondary reproduction of images taken of any primary work.

Analogue is the situation of writers. In the case of journalism or screenplays, the work being created at someone else’s request for immediate release, a simple contractual arrangement is sufficient to generate payment. Such contract may very well include an override on future revenues. If the signature of the author has any residual value, then it can be treated as a trademark and protected as such for a while against infringements during secondary distribution. If on the contrary the market does not acknowledge any value to the trademark, i.e. if the text is completely dissociated from the author’s name when reproduced or used, such text has become a commodity, and I frankly would see no reason to grant it any privilege, compared to ideas or concepts. I feel sorry while writing this for one of my closest friends who specializes in remakes of foreign films. I simply hope he will see the advantage the recommended change could mean for the creation of films in general.

It is considered ignorance or bad taste to refer to a concept without mentioning the name of its first author, unless the reference is implicit or obvious. Nevertheless, it would not cross anybody’s mind to initiate lawsuits for payment of fees to Freud’s or Lenin’s heirs for use of their respective notions of the unconscious or the proletariat. Why then should we be fined for having bought a cheap copy of a Gucci © handbag, at least when the trademark is not used? Infringement of the trademark should be repressed (through sellers not buyers), as it can induce the consumer in error about the genuine quality of the object. In the absence of a trademark, however, the transaction bears on the idea of a Gucci © handbag, which is a totally different reality.

A world with no patent and copyright (and yet with trademarks) would be a better world, more logical and efficient. Creators would still create, and their creations would be used more. Trade would continue, based on services rendered and contractual arrangements. Lawyers and monopolies only would have something to lose. Who do you think will win, at least on the short term?

This is how the world goes ©.

Intellectual Improperty (Part 2)

Copyright is the minefield of intellectual property. Its main beneficiaries seldom are intellectuals, and yet find among the intellectuals their best allies, copyrights applying to books, newspapers, plays, films, software, websites, painting, sculpture, photography, architecture, etc.

As post-Guttenberg kings were trying their best to make sure no publication would escape their control, free minds were left with no other choice then than finding publishers in foreign republics, drawing small income from their works, if any at all. At the end of the 18^th century, an awkward alliance took place between the censorship of governments and the greed of authors. Beaumarchais, the author of the ‘Marriage of Figaro’, also an arms dealer and a tirelessly litigious character, succeeded in combining things at his best advantage: from now on the legal control of printing would be used not only for censorship but also for remunerating authors. This was the beginning of copyright.

Not a philosopher nor a mathematician, Beaumarchais did not bother to protect ideas or concepts, no matter how valuable they were. As a matter of fact copyrights do not protect any such things, or for that matter, anything immaterial. They only protect the material form of the specific types of immaterial creations people like Beaumarchais could produce. No wonder paradoxes and contradictions would flourish on such grounds.

The current problems are quite different depending on the area of we consider: e.g. performing arts, writing and plastic arts. Performing arts have found themselves in the eye of the cyclone since the introduction of digital technologies. Verdi never sold music; he contracted with owners of theatres to sell seats, and became rich. One would purchase a ticket to listen to his performances, and the Italian wall painters whistling his best airs next morning on their scale were not asked for a fee. A contemporary Verdi can do exactly the same, leaving Sony Music desperate. Record companies had a short moment of glory. Among the mass of would-be musicians, they used to pick talents on a commercial basis. In the digital world, the audience is in charge of discovering new artists, for free, mostly though websites and (still illegal) copies. No one can impose purely commercial choices anymore, and talents can emerge as they did in older times, by the force buzz. Successful artists give concerts and can make fortunes. Copyright in music is useless and should therefore disappear. It will unless an irrational protection is given to an obsolete industry.

The next victim, obviously, will be the film industry. The disaster is soon to occur. There is simply no way to prevent a digital copy of a film to spread over the Internet in a matter of hours. The good news for the industry is that most people would probably be ready to pay for the service of a guarantied quality of the files, and of large bandwidth for faster downloads. The bad news is they would only pay a modest fee, unlikely to be sufficient to amortize the cost of Hollywood productions. The only reasonable solution I can see, other than fighting lost legal battles against millions of consumers, is to change the very nature of future films, dividing them into two completely different types. The first group would be productions so spectacular that it would make little sense to watch them on a TV or computer monitor. Such films would be placed in a situation very similar to live concerts. After all, who would bother downloading a digital copy of an Imax movie? The second group would be inexpensive and smaller films, typically shot with video cams, and perhaps pre-financed by subscriptions. The film industry is likely to resist as much as possible this evolution which will however open new paths to creation. Yet, inertia guarded by lawyers is a losing strategy.

(to be continued)

Opinions & readers’ mail

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Intellectual Improperty (Part 1)

The choice of words is a powerful weapon. For years Marxists were the great masters in this art, naming single-party dictatorships ‘Popular Democracies’, a cynical antiphrasis among many others. After enough harsh lessons, Conservatives have achieved equivalent mastery.

‘Intellectual property’ is one of these magical expressions which can trigger instant approval as soon as pronounced. Who can oppose ‘intellectual property’ but an idiot, an anarchist or a thief? Property is a universal right. The epithet ‘intellectual’ gives it full sanctity. Intellectual property, as it would seem, is the reward of genius and a key to human progress.

One might nevertheless wonder why it took so long for mankind to discover such obvious a concept, and why it does not apply to the most valuable products of the human mind. I am not referring only to Homer, Plato, Mozart or the inventor of the wheel, none of whom where protected by any kind of intellectual property; but also to Einstein whose ‘E=MC2’ was immediately appropriated by the world. Why is it that reproducing the last video clip of a rapper can lead you to jail, while one can freely use any major theorem even if discovered last month? What makes Mickey Mouse so important and so special that his very name and image still belongs to a single corporation after so many years, while no philosopher can retain the least control upon his own ideas?

From a legal standpoint, the confusing notion of ‘intellectual property’ (which remarkably belongs to no one) includes 3 main and somewhat unrelated components: trademarks, patents and copyrights. Trademarks are certainly a good invention. They play a role similar to measures. Measures have been controlled and guarantied by governments since markets started being in existence. As buyers can seldom verify by themselves the nature of what they intend to purchase, a public control of weights and measures remains an essential service. Verified trademarks carry important information on the quality of crafts. It is critical for instance to make sure that such or such pill contains the right molecule, something patients could never check by themselves. The manufacturer’s reputation being a strong indication in this respect, the presence of an appropriate trademark should not be overlooked. Even people involved in “piracy” over the web, insist on the value of their own informal trademark as a guaranty that their DVD ripping is state of the art.

Patents are a completely different animal. They inconsitently apply to certain sectors of the economy, not to others, with no better justification that old habits and vested interests. Manufacturing is much better protected by patents than any other area. Different countries choose to include extremely different types of inventions in the bizarre list of what may or may not be patented. Isn’t it quite irrational to allow the patenting of human genes (oh my!) on a continent and not on another? It makes little sense to protect a chemical process, not a financial invention.

This being said, the most important aspect of patents is the way they work: a patent does not allow someone to use an invention, it only excludes others from doing it. In other words, by their very structure, patents do not spread new knowledge but help slowing down its expansion. The main argument in their favour is that they are supposed to stimulate research and discovery by rewarding inventors. Inventors however are not the ones who are protected by patents but those who invest in their creations. Elizabeth Maggie was the inventor of the ‘Landlord’s game’ soon to be made famous, after minor modifications, under the name of Monopoly ©. Parker had bought her out for $500 and no royalty. Albert Fert, Nobel Prize in physics (2007) is responsible for an invention which changed the order of magnitude of data storage. He could easily have claimed a patent and become one of the richest men. His deliberate choice was not to delay the advantage for mankind of a discovery all of us are using today, rather than accumulating a wealth almost impossible to efficiently spend in charities.

Even if we consider investment in research, as opposed to inventors, as a valid object of protection, it remains to be seen whether or not patents are good at stimulating research, and whether or not the larger number of economic sectors in which patents play a minor role, have been less inventive or prosperous than the others. Finance and banking have been doing rather well (or at least did until ‘subprimes’ were invented!). They continuously bring to market highly sophisticated products, and the people who come up with these concepts for them are generally well paid. When traveler’s checks were introduced by American Express in 1891, the absence of patents did not impede success, this company having kept a leadership for over a century. Patented electronic traveler’s checks are hardly used by anyone. Pharmaceutical industries are patent-freaks, a feature which turns out to be counterproductive not for their revenues but for their discoveries: when was last time new antibiotics (a major need) appeared on the market? Not a convincing change from old times when universities and hospitals did the primary work in medical research, and when discoveries were almost immediately published and rarely patented. The cliché that patents are made necessary by the sky-rocketing costs of biomedical research rests on shaky grounds. Patenting is a partial cause of the increase, together with lobbying (and corruption in various countries). The associated secrecy is another one, making evaluation and clinical trials such an inefficient process that in the U.S. only public funding (through the National Institutes of Health, not to mention other public sources) has had to be raised to almost $30 billion a year.

I personally would be inclined to get rid of all patents altogether; not for the sake of an ideology but for a better release innovation in the economy, and a faster cross-seeding of ideas. The most inventive corporations would still retain a decisive advantage under the form of acquired market-shares, experience and know-how.

(to be continued)

 

 

Italian discipline and stability

Seen from abroad, Italians are undisciplined and their politics chaotic. Forget the cliché. Having inherited from Ancient Rome, one of the most militarily societies in history, they are disciplined. Having inherited from the Florentines, they consider politics as a science.

When a bill of law was introduced a few years ago prohibiting smoking in restaurants, bars and public buildings overnight, you might have bet anything that it would have been treated as a joke. You would have lost. The rule was instantly enforced with total efficiency. Likewise, if you believe that the Italian government is utterly unable to collect taxes, you may find it difficult to explain why this is the only place on earth where any citizen has a personal tax number which must be reported on every invoice.

It is true that each and every Italian citizen violates some law at any given time. The reason for this is not a bizarre anthropological inclination against law and order, but a legal system cunningly designed to make it impossible to abide fully with the law. Such system allowing the authorities to go after you whenever you start being a nuisance, it is necessary for anyone to belong to a political network which will be of critical assistance in many circumstances: finding a job, avoiding a fine, obtaining a market, just name it.

Political networks are the very essence of the Italian society. They have little to do with ideology, although (minor) differences can still be noticed between right and left. Tens of millions of Italians, for instance, are or have been “communists”, including a large majority of artists (an essential profession in the Peninsula), intellectuals and journalists, and communists have participated in dozens of governments. None of them are bolsheviks. Being a communist simply means you belong to a certain network (often since your birth), and you dislike Berlusconi. You can be a billionaire, an aristocrat and a dandy, you are still a communist as long as other communists are the first people you call when you are in trouble, and vote for the left.

These various networks interact under the form of mutual checks and balances. This is why the Italian constitution favours proportional elections instead of majorities, and protects regional powers from federal authorities. No one is allowed to be dominant or dominant for very long, and no government can take the country into dramatically different directions. Cabinets succeed each other at high speed (61 governments since 1945) and Italy is nevertheless stable, being ruled on a day to day basis by a bureaucratic elite, formed of members of all networks, closely connected to the corporate world, unions and/or to the Church, with a Pro-European tilt and a strong Western commitment. When something important needs to be done, such as cleaning up a gigantic public debt to adopt the European currency, or reducing the influence of the Mafia, it gets done.

Although it would take a lifetime for a foreigner to fully understand Italy, this highly sophisticated democracy remains one of the richest and most pleasant countries to be in, and is a threat to no one. Instead of analyzing its mysteries or bothering about the name of the next Prime Minister, count Italy as an ally, open a bottle of Chianti, walk slowly in the streets of almost any village, and enjoy!

This is also how the world goes.

Poor Shivas, Happy sports fans

Most or may be all the women I know have a deteriorated image of themselves. When I say all, I do not mean the ones who could find some reasonable motive for doubting from themselves, after for instance a big emotional shock, reversal of fortune, or professional blow. I mean all, including the “Shivas”, these modern deities using their multiple arms to be at the same time at the peak of an impressive career, and great mothers, reliable friends, athletes, bright, healthy, community aware, politically enlightened, wonderful lovers and/or perfect wives.

The situation is quite different for men. Even the laziest, ugliest, most stupid, uneducated loser can have an excellent opinion of himself. Don’t worry, boys, I am not giving names. But how to explain this privilege?

The main reason, I believe, is the intense propaganda any woman is subject to from the age of 2 until her death. Dr Goebbels never dreamt of a budget close to the ones L’Oreal or Armani mobilize each year for brainwashing the entire female gender. Take the 20 most beautiful girls on the planet. As they are still not good looking enough, do spend fortunes editing the best pictures major artists have taken of them. Now invest billions in persuading women by all possible means that is they do not end up looking like this handful of supernatural women, their life is irrevocably doomed. Unless, in way or another, they adapt their own figure and very existence to these extraordinary criteria, no one will ever want or love them. They will be ridiculed and abandoned.

The simple and mundane goal of such psychological warfare is of course limited to selling perfumes, lipsticks, leather and apparel. The impact, however, is deep and far reaching. As it is utterly impossible for any of them, including the models , to really look like such icons and happily identify with them, any woman feels miserable in front of what she inevitably feels as the outcome of her own failure. Courage being one of the undeniable female qualities, few leave the battlefield before the end of a lifelong fight. Most submit to everlasting half-starvation and money-bleeding, purchasing unlimited numbers of shoes at outrageous price. Rare are the ones who accept early defeat, making the opposite choice of obesity and self-neglect.

Another implication of the fashion propaganda is to increase the dependence of women. Confronted to the material consequences of the related expenses, even the most autonomous ones are mechanically tempted by male subsidies. Mass prostitution exists in several places (Japanese school girls or Russian students as I am told). In the Western world, things for being less blatant are not ideal. Even when no monetary exchange is directly or indirectly performed, fashion demands that success be measured in the other sex’s eye. Not a good sign for a pursuit of self-reliance.

As if such public health and social equality issues were not sufficient to ensure pervasive ill-being, the female population is also placed into a double-bind between fashion system and sex-liberation. No matter how much energy she spends in conforming to all the norms of propaganda, and how dependent she thus becomes in her relationship with men, a woman is also supposed to achieve identical professional goals. Once she has overcome discrimination in the responsibilities she can obtain, often by accepting lower income, she still has to prove she can overwork herself at the office while fulfilling all duties of traditional motherhood. Survivors of one combat often fall in the next. And the rare super-heroes, who have succeeded everywhere, now fear their fifties as their final ordeal. Heavy schedules and the prospects of menopause are not favourable to keeping one’s mate faithful. Competing younger women are a danger by themselves, particularly in a society where feminism has liberated men from their ancient responsibilities. “We have spend wonderful years together, my darling, now time has come to part, I will always love you, let’s be friends, I trust you are strong, and wish you the very best for the rest of your life” is the speech that comes next, and yet soon turns into sheer hatred after the courts have performed their malefic duties and children started to show resentment.

Fashion industries have decided to expand by making the male population their next targets. Forecasts indicate men will spend even more than women in creams and clothes by 2020. They are, however, protected by a wonderful system in a society that does everything to reassure its males. TV sports culture, by all means not the only instrument to this purpose, is a good example. Take an imbecile, with absolutely no personal talent in any sport, sit him in front a TV set, sell him a six-pack of beer, and show him the most remarkable athletes you can possibly find. The man is already satisfied. Now train your athletes for a team sport which can take the appearance of a battle. Give these guys the best available coaches. See how the imbecile starts jumping, screaming, making all kind of noise, convinced as he is that HE knows better! HE has the right tactics; HE can value the players better than anyone; HE can tell; He is the man! If you repeat this at least once a week for at least 16 years, your imbecile is armoured forever against any concern for his self-esteem. When he encounters other men visibly more talented or successful than he is, his opinion of himself remains totally unaltered. This guy is gorgeous? No problem, he must be gay! This other guy is a genius? How boring, he surely doesn’t know anything about what’s good in real life! The third one made a fortune? No worries, just another unreliable bastard! The last one is an actual champion in a sport? Yeah, he has nothing better to do! Girls find you disgusting? Who cares about these sluts?

All right. That’s for sex equality at the dawn of a new millennium. What can I say other than:

This is how the world goes?

Whatever happened to Democracy?

When considering democracy it’s always a good thing to remember the Greeks, at least to measure how different we are from them. Their notion of democracy was twofold. In the strictest sense, it meant direct government by the people, a regime strongly disapproved by all ancient philosophers (in fact, probably the only thing they would unanimously agree upon). No matter how attached we are to the word of democracy, most of us partake in the old consensus. We prefer elections to direct government which is now limited to juries and referendums of minor scope. The reason direct government is disliked are basically the same than they were before: masses are prone to hysteria, lynching and mass murder, as we were reminded in our lifetime by Red Guards and by Red Khmers. Although, according to their very definition, elections produce elites, our oligarchies (government by the few) are placed under the control of the popular vote. This is the essence of the so called “mixed regime” that the very wise Aristotle always recommended.

The second sense of democracy, and the most important, is equality before the law, a concept that Greeks called “isonomy”. The presence or absence of isonomy is much more critical than any other aspect for the evaluation of a regime. The constitutional form of government (presidential or not, republican or not, federalist or not) is a mere technicality compared to it. We are (really) equals before the law or we are not, courts (efficiently) protect the weak from the strong and the individual from the State or do not. That is the question, or at least the main one.

There was a short period of time when the Western world could claim a clear superiority in both its “isonomy” and its technology. Is it still the case today and, if it is, for how long? Recent trends hardly allow any optimistic prognosis. The judicial system, the very key to actual “isonomy”, is turning mad. The Ancients used to say “too much law kill the law”, and they were right. We have too many laws, almost impossible to understand and enforce. One should add “too many legal fees give it the final blow”. Where is justice when you may have to spend more to obtain justice than what you can expect from it? Where is it when defenders can buy their peace out? As if all this was not threatening enough, governments can now escape the most basic constraints; in such a way that the more we fear our enemies the less protected we are from our own protectors. Privacy is no longer a reasonable claim, when even your turned off cell phone can be used as a microphone against you by the authorities. Waterboarding as a regular technique of government is the last symbol of what habeas corpus has become.

In theory, public opinion could react and citizens could demand a return to more respect. But how is public opinion now formed? This question needs to be discussed in another sad post.

This is unfortunately how the world goes.