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.

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.

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.

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

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?

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)

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.

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.

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.

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.