Simplify and survive

Kunstler:

Let me tell you exactly what is going on "out there." The so-called developed world is watching two giant forces race each other to put an end to business-as-usual for industrial civilization. These two forces are the catastrophe of debt and predicament of oil supplies. They had been running neck-and-neck for a few years, but now the catastrophe of debt is pulling slightly ahead. But even this is an illusion because these two forces are actually hitched in tandem, with the rickety cart of civilization bouncing perilously behind them, and whatever one of these forces does will affect the other. Bad debt will eventually cripple the global oil industry's ability to perform, and the failures of the oil industry will only amplify the killing force of debt. It's that simple.

And the simple moral of the story is that the only sane thing America can do is simplify itself, de-complexify its dangerously hyper-complex organs of daily life. I've stated them before but, briefly, this means simplifying the way we do farming, commerce, transportation, inhabiting the landscape, schooling, medicine, and banking. Everything we do to add additional layers of complexity to these already tottering systems will guarantee an eventual orgy of blood and material destruction to this land. Everything we do to prop up the unsustainable instead of reconstructing the armatures of everyday life will make American life a nightmare in a very few years ahead.

Wish he'd explain the how behind "Bad debt will eventually cripple the global oil industry's ability to perform" (inebriated by the exuberance of his own verbosity, as Disraeli said of Gladstone?) but he's trying to see into the heart of the matter.

Survival

In a Dublin talk last week, Dmitri Orlov bears out my repeated theme of diversity, dispersion and disconnection - the way in which efficiency and survival are at odds. It's also a theme of James Howard Kunstler. Even Rob Kirby's latest post refers to a "financial ecosystem" and asserts that the concentration of power at the top threatens the structure.

Big changes are on the way. Jesse reports on how the world is weaning itself off the dollar; the Contrarian Investor notes how China is cornering the market in rare minerals vital to modern technology.

There is a power struggle - a host of power struggles - going on. The good news is that life goes on, too. The bad news is that not everybody makes it.

Don't be the doughboy this time.

Libertarianism, individualism - or survivalism?

If we insist that "we're all in the same boat", we shall all drown, because the one boat will sink. Those who hope to preserve civilization must accept that it is likely to sink into chaos in much of the world. The survival of some elements of civilization will require lifeboats that can be constructed only from communities, regions, perhaps nations, that are not now in overshoot. To preserve civilization at least some of these must choose to stay out of overshoot, establish independence in the production of food, energy, materials, and crucial manufactured goods, and defend their borders against the migrations that will tend to spread overshoot everywhere.

More here.

I've argued before now that we may need to move away from the "efficient" way to do things, towards the survivable way - click on the label below for some notes on what I call "Diversity, dispersion and disconnection."

"Efficiency" vs. survival

"...we have to build back into the system Resiliency. This means that each region has to work to become largely energy, food and financially self sustaining and that each region needs to network into the others. In effect we shift from an efficient machine to a resilient network."

Robert Paterson, as quoted by London Banker.

Like I keep saying, it's about diversity, dispersion and disconnection - please click on the label below for my posts on this subject.

It's not about money; it's about democracy

It's the interconnectedness that's pulling us all down: the centralisation of money and power has made us vulnerable. As I said in December:

I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.

Life on Earth has survived because it is not like a clock. Mechanistic systems must fail sometime, and the larger they are, the greater the damage they will cause.

After all this is over, we will need to refresh democracy and its controls on those who seek power, in whatever form. Bertrand Russell's book "Power" suggested that it comes in three forms - political, financial and religious, if I recall - and the American Constitution was devised to bell these cats; except, it seems, insufficient attention was given to the potential of money to destroy the community.

Diversity, dispersion and disconnection

Karl Denninger continues his heroic (it's always lonely out in front) campaign to call the banks and the regulators to their reckoning. As he points out, we're all tied together, and instead of making it better, that makes it worse, as non-Americans will find out:

The dollar will bounce around before starting to take off. So far, we've not seen people figure out the "rest of world will be f***ed", but if you think the exchange rate problems won't lead to that, you're sadly mistaken. Beware.

The bigger they are, the harder they fall

Michael Panzner refers us to a Financial Times article on the (overdue) dwindling confidence among our youngster trading community. The piece includes this paragraph:

Unlike past housing crises, the banking sector is far less well equipped to cope with the fallout because of the wave of banking consolidation in the last decade. [...] This means the pain has become concentrated among a small handful of institutions, all of whom play a crucial role in keeping all markets liquid.

I recently quoted this Contrary Investor article, which includes a graph of the ballooning exposure of American banks to credit default swaps (CDS), under which arrangement everybody insures everybody else. The risk is 99%+ concentrated into only SIX banks.

Who benefits from such concentrations? I commented on Panzner's site:

Concentration of finance into an ever-smaller number of giant banks is inherently dangerous. You reduce the risks of small hazards, but you increase the potential damage from a Black Swan / fat tail event. Systemic safety is in diversity, dispersion and disconnection.

There is increasingly a conflict of interest between those who benefit from concentrations of power and wealth (think of the bonuses and cushy jobs), and the general populace. Wasn't the US Constitution itself specifically designed to prevent such concentrations?

In my view, the sub-prime contagion is not only spreading to other sectors of the economy, but beginning to call into question how big government, high finance and monstrous companies impact on the fundamental values of our (systematic and real in the USA, ramshackle and sham here in the UK) democracies.

It seems to me that small-scale democracy-cum-economy is not only an historical reaction to the centralist authoritarianism of George III (who meant well, I am sure), but a kind of imitation of Nature, which has endured the most massive disruptions (a planet encased in ice, or burning from a massive meteor strike) because of my alliterative trio of survival traits: diversity, dispersion and disconnection.

Small is beautiful

J R Nyquist argues that internationalism is used as a cover for expansion by aggressive states, and the nation-state is our stoutest defence.

I think this links in with our domestic EU in-or-out debate, on which the allegedly Conservative British MP David Cameron has recently been making flirty noises. I say "flirty" because although the headline talks boldly of tearing up the un-referendum-ed Constitution, the leader of the Opposition says "We think the treaty is wrong because it passes too much power from Westminster to Brussels." How much is enough?

Perhaps some will say mine is a typical reaction from a little Englander, but originally that term meant an opponent of imperialism. Well, I'm used to ignorant brickbats. It was Philip Toynbee who - his son told me - called me a Colonel Blimp while I was still at school, I think because I had dared to ask him about the significance of colour in Lorca's poetry. What I gathered from this experience was: never ask a posh leftie for an explanation, he'll only look down his egalitarian nose at you. (I haven't met his daughter Polly, though.) Intriguingly, though the term "little Englander" is said to date from the 1899-1901 Second Boer War, there is an 1833 German dictionary-cum-phrasebook (published in Grunsberg) called "Der kleine Englander ober Sammlung". I do hope the title wasn't intended to have a pejorative tinge, but you can never be sure with the Germans - they do have a wry sense of humour.

The relevance of all this, aside from the asides? I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.

Little boxes

In India, where many people cannot read, you sign for the State pension by thumbprint. This seemed like a secure system, until a man was caught with a tobacco-tin full of thumbs.

It would have made no difference had it been a tin of cloned credit cards. You don't need to know what's in the box, or how it works; you need to know what it does, and who it's for.

Once you start thinking along these lines, things get so much clearer. For example, you don't have to be a "quant" like Richard Bookstaber, to know that derivatives are about risk. More precisely, they're for increasing risk.

Supposedly, a derivative reduces risk; but if you look at its use, it's a box that tells lenders and gamblers how far they can go. Seeing the fortunes that can be made in high finance, there is the strongest temptation to push the boundary.

My old primary school had a lovely little garden behind it, where we played at morning break. One game was "What's the time, Mister Wolf?". You went up to the "wolf" and asked him the time; he'd say nine o' clock; to the next child he'd say ten o'clock and so on, until he'd suddenly shout "Dinner time!" and chase you. Obviously, the game was not about telling the time.

So it is with financial risk models that service the need to maximise profits: always another trembling step forward. There's only one way to find out when you've gone too far.

But what if you could ask the time, and know that someone else would end up being chased? I think that explains the subprime packages currently causing so much trouble.

The bit I don't understand is why banks started buying garbage like this from each other. Maybe it's a case of the left hand not knowing what the right hand is doing, since these organisations are so big. Or maybe it's that everyone has their own personal box.

Then there's credit default swaps, and other attempts to herd together for collective security. They don't work if the reduction in fear leads to an increase in risk-taking. United we fall: no point in tying your dinghy to the Titanic's anchor-chain.

In fact, I think this opens up a much wider field of discussion, about efficiency versus survivability. In business, economics and politics we might eventually find ourselves talking about dispersion, diversity and disconnection.