Tag: money

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On Nassim Taleb’s Ten principles for a Black Swan-proof world

http://www.ft.com/cms/s/0…?nclick_check=1

Nassim Taleb‘s latest from the Financial Times titled Ten principles for a Black Swan-proof world provides a brief insight into what Taleb believes caused our current financial crisis and what might prevent a similar crisis going forward.

I’ve excerpted those principles below (pushing the fair-use envelope a bit, perhaps). All italics are NNT’s.

Before delving into Taleb’s ten, I’d like to suggest that NNT’s principles can be (and should be) boiled down to more simpler structural problems/observations. Taleb’s folksy expressions make for useful analogies, but they needlessly complicate some simpler realities:

  • Government-made negative externalities [1, 2, 7] — Legal constructs like corporations and limited liability companies are exploited to offload risk to the public. This subsidizes risks resulting in agents (CEOs, Managers, etc.) taking more and more chances with other people’s money. This is related to the principle-agent problem, which Taleb indicts in [4]. The Ponzi aspect of all of this is intrinsically tied to our leveraged financial system, which is inextricably tied to our centralized, fiat-“money” banking system. To me, this is the biggest point that I’ve yet to see Taleb make — centralized fiat currency is a fragile entity that is inherently leveraged (out of thin air) but can be used to build complex systems of finance. This won’t tend to break early (as we’ve seen). To kill the leverage you have to kill the source of it, which is our centralized non-robust banking system!
  • The Authority Complex [3, 4, 6, 9] — we need a great deal more skepticism in our system and we should not have such centralized power. The problem here is the authority complex — the so-called experts all pontificate to the “ignorant” masses. The masses are too busy or too confused by the magical words of the experts to deduce that the experts don’t know what they are talking about. And like any good con, the con-artistsexperts are able to trick the masses into giving them all the power. I would argue that NNT’s #9, which more or less argues that we should question authority and not trust experts, completely negates NNT’s #6, which suggest that we should be protected from ourselves. Well who is going to protect us when we can’t trust the would-be protectors? That is a problem.
  • Robust complex systems have simple base units that scale [5, 8, 10] — This is the biology angle that is exemplified by metabolic rate scaling over 27 orders of magnitude. A robust system requires simplicity at it’s base. Accounting is a good example of this. Accounting can get incredibly nuanced and complex but can always be brought back to debits and credits. The simplicity of this fundamental rule still enables incredibly complex book-keeping, but puts a governor on the system. You can’t make up assets without creating corresponding credits to the books.

    Compare this to our non-simple, non-robust banking system that holds as it’s core principle the notion of stability in prices and jobs while allowing for unlimited credit (money creation). Not simple.

    Simplicity lends itself to ease of understanding and puts a governor on shenanigans. It’s this fundamental simplicity that enables massive scalability and the emergence of complex systems that are robust.

I’m afraid I might have gotten overly complex in the above. I think what Taleb wants is an organic financial system, one that starts from real economic transactions between human beings and scales upwards from there. Thus, the solution is pretty simple. The base unit is the individual. Fictitious business entities that exist apart from owners are made illegal. No systemic credit structures, which fundamentally follows from the base unit being limited to the individual. This is because such a system would have decentralized banking that would evolve out of whatever needs such an organic economy would require.

This would be the (completely free) market solution, which incidentally most closely mimics biological systems. After all, where in biology do you see stuff created out of thin air (like Corporations or fiat currency)?

And life has been getting along fine for untold millions of years with a simple base units that are the molecules that make up DNA.

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. …

2. No socialisation of losses and privatisation of gains. …

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. …

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. …

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. …

6. Do not give children sticks of dynamite, even if they come with a warning . … Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. …

8. Do not give an addict more drugs if he has withdrawal pains. …

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. …

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. …

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

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Another Call for a Gold Peg from QB Partners

http://www.ritholtz.com/b…/adults-wanted/

Gold!
Creative Commons License photo credit: Martin Deutsch

As somewhat of a goldbug, I can’t help but enjoy reading the following updated article (See the original gold peg call from QB Partners posted in December 2008) from Paul Brodsky and Lee Quaintance, who run investment fund QB Partners. The article is posted on Barry Ritholtz’s Big Picture.

Gold at $3K/oz would be pretty incredible for current precious metal holders. Gold at $9,000? That is hard to imagine.

Yet if history is any guide, when we start seeing gold make a serious run up and everybody starts diving into the asset class, we could easily see some unbelievable prices reached.

The rebuttal is that all of this deleveraging will result in deflation, which will take down commodities and gold. With the Fed pulling all the stops, I don’t see that happening. They’ll overshoot on monetary policy (as always) and the resultant rice in prices will mean hell to pay (to buy anything!).

In our papers last year we established that an equilibrium price of gold (our “Shadow Gold Price”) would be something north of $9000/oz today. We used simple, Bretton Woods-model math (Federal Reserve Bank liabilities divided by US official gold holdings). To save the US and European banking systems and stabilize western economies we believe the US dollar peg to gold should be implemented at a much lower conversion price than its equilibrium price. The following actions should be taken:

1)The Fed announces a public tender for any/all outstanding private gold holdings at $3,000/oz.

2)The Fed prints Federal Reserve Notes (aka US dollars) to fund these purchases

3)As once privately-held gold flows into the Fed, the Fed’s balance sheet de-levers in gold terms

4)The Fed would soon own enough gold to credibly support the newly-designated peg

5)The Fed would also purchase the “people’s gold” currently held by the Treasury Department at the $3,000/oz clearing auction price (Treasury is carrying gold on its books at $42.22/oz.)

Bang – the soundness of the dollar suddenly becomes unquestioned because it has scarcity value. Its hegemony is protected and its status as global reserve currency is solidified.

A three-fold increase in the gold price should be enough to guarantee that the “free market” would drive asset prices up to the point that all toxic and opaquely-marked paper is once more reserved by banks at ratios greater than one. The loss that JP Morgan et al would suffer in their gold/silver short positions (yes we know about those) should be more than offset by the move to Par in all their respective paper assets. In fact, given the current interest rate structure of sovereign yield curves, we would argue that most dubiously-priced paper held by banks would be valued well in excess of Par, as credit spreads would collapse to reflect sharply higher asset collateral coverage ratios.

On an ongoing basis, the Fed would hold public auctions (as a buyer/seller) to maintain the $3,000/oz. peg. The gold market would become the new outlet for the Fed’s open market operations. Other economies would have to follow suit and devalue their currencies to preserve trade relationships (particularly net exporters to the US). This would be a huge transfer of wealth to the US, particularly from China and Japan. No doubt the US would have to negotiate terms with these exporters.

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“Making money is that easy . . . You make it yourself, with your friends, as you create value for another.”

http://hplusmagazine.com/…on/2009-spring/

An interesting, brief article in H+ magazine titled Hacking the Economy by Douglas Rushkoff speaks to times long gone — centuries ago when barter was the common means to transact locally and centralized currency was scarcely used at all. The author explains that the aristocracy effectively compromised this system by pushing centralized currency, which was “a way to extract value from the periphery and bring it back to the center.”

Whether things occurred as simply as Rushkoff describes is up for debate. Governments (via banks or perhaps its vice versa!) have long been incentivized to centralize the management of currency. Currencies throughout history have been based on gold and silver (as they are scarce, divisible, and uniform). However, via centralization’s corrupting influence (i.e. no checks and balances), the central monetary authority has always slowly but steadily debased the currency spurring inflation and leading to all sorts of unfortunate consequences — the most noteworthy of which is robbing the common man of his wealth.

In our modern days, we’ve gone completely to a credit-based society whereby all money is based on the assumed credit of the centralized authority. Dollars don’t represent gold or silver (though they once did). I won’t go into further detail on this here, but you should check out Rothbard’s What has Government Done to our Money? (Buy it off amazon or grab it free in pdf or audio off mises.org).

What I like about Rushkoff’s concise piece is how it makes two fundamental conclusions, both of which I happen to agree with:

  1. Centralization tends to result in perverse systems — i.e. our productive hours don’t lead to our own wealth. Money is made simply by moving electronic balances around. Finance replaces production in society (I.e. the United States’ FIRE economy).
  2. Money is easy to make. Money is merely efficient barter. No matter what happens to the general economy, the dollar, the yuan or yen or gold or silver, trade will continue on. You just better hope you have some assets to barter around, and if you don’t, you can always get creative and find things that you can trade.

Here’s a summary snippet of Rushkoff’s article found on page 37 / 38 of the online magazine. The rest of the magazine looks fascinating and I only wish I had the time to skim all its pages!

The economy we live in is a rigged game, established around the time of the Renaissance in order to promote the welfare of earlychartered corporations and the monarchs who gave them license to monopolize world business. Until that time, there were many kinds of money in use simultaneously. People used centralized currency to conduct long-distance transactions, and local currency to transact on a more day-to-day basis. . . .

Like most innovations of the Colonial era, centralized currency is a way to extract value from the periphery and bring it back to the center. . . .

A majority of the money earned under our current currency system is earned by people who don’t actually do anything. As such, all this speculation is a drag on the system. Speculators just bet on various companies’ ability to pay back what they have borrowed. . . .

The way out — as I see it — is to begin making our own money again. I’m not talking barter, but local currency. Money is just an agreement. And the more a community trusts one another, the more effi ciently the moneys they develop can function. We can create units of currency based on anything . . .

Thanks to the current economic meltdown, a restaurant in my town called Comfort has been unable to secure a loan from the bank to expand. Instead, John the owner has turned to us. We are buying “Comfort Dollars” at a rate of 1 US dollar for every $1.20 worth of restaurant food. So if I invest $1000, I get $1200 to spend at the restaurant. I get a 20% return on my investment, and — since he’s paying in food — he gets money a lot cheaper than he can borrow it through the bank.

Plus, I have a reason to promote his restaurant, invest in my town, and extend the good will. everybody wins.

Making money is that easy. You don’t get it from a corporation or a bank. You make it yourself, with your friends, as you create value for one another. This is the ultimate hack in a society addicted to the market: pretend it doesn’t even exist, and go about your business.

(H/T boingboing via Ritholtz)