Annual Reading of the Declaration of Independence: Renewal

As I conducted my annual reading of the Declaration of Independence, I was struck by the thought, “What would Thomas Jefferson write today if he were revising this document?”

Well, I have no idea. So I worked on what I can- how would I revise it? So I did. Before you read it there are a few caveats:

  • I focused on what I know- finance and economics. There is scant technology in the original so this is largely not discussed. The current document gives voice to my concerns regarding the current global economic condition.
  • I sought to edit the original document and insert/excerpt as little language as possible.
  • I avoided the issues related to the current public dialog on security, privacy and surveillance. I deeply believe these are very important, but I wanted an undiluted message communicating a critical issue of our time.

Dedicated to the economic well-being and abundance of people everywhere.


IN CYBERSPACE, July 4, 2014 (238 Years after the Political Declaration of Independence of the United States.)

The unanimous Declaration of the collection of Economically Independent Agents across the planet

When in the Course of human events, it becomes necessary for people everywhere to dissolve the economic bands which have connected them with another, and to assume among the powers of the earth, the separate and equal economic station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of humankind requires that they should declare the causes which impel them to the economic separation.

We hold these truths to be self-evident, that all humans are created equal, that they are endowed by their Creator with certain unalienable Economic Rights, that among these are Equal Access to Economic Entrepreneurship, An Unbiased Economic Landscape and the pursuit of Economic Well Being.–That to secure these rights, Governments and Economic Systems are instituted among People, deriving their just powers from the consent of the governed, –That whenever any Form of Government or Economic system becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government or Economic system, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Economic Well Being and Economic Growth.

Prudence, indeed, will dictate that Governments and Economic Systems long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses including concentration of wealth in the hands of a select few, legislation and politics dominated by economic funding and special interests, unchecked power of corporate interests and economic access to those in positions of political or economic privilege, pursuing invariably the same Object evinces a design to reduce them under absolute Economic Despotism, it is their right, it is their duty, to throw off such Government and Economic System, and to provide new Guards for their future security.–Such has been the patient sufferance of these global citizens; and such is now the necessity which constrains them to alter their former Economic Systems including global transactions of trade and state controlled currencies. The history of the present Economic system such as was crafted and evolved since after World War 2 is a history of repeated economic injuries, economic injustice and economic control, all having in direct object the establishment of an absolute Economic Tyranny by a minority controlling Wealth over these people of the world. To prove this, let Facts be submitted to a candid world.

  • The current Government and Economic System has evolved into one of highly centralized control over the majority of the Earth’s Wealth and Resources and Capital flows. This is universally acknowledged to increase economic risk and stifle economic activity and growth.
  • The current Economic System has evolved into one of strict control of capital flows and economic activity through state controlled currencies.
  • The current Economic System has evolved into one whereby Economic Resources are concentrated at unprecedented levels such that economic activity for society at large is at risk. Wealth concentration at current levels is an unsustainable economic system for pursuit of Economic Well Being and is completely unpredictable under stress.
  • The current Economic System has Centralization of Economic Resources thereby creating an unprecedented Economic Risk to the economy of the world.
  • The current Economic System has evolved into one of centralized control of capital among a small cartel of banking and corporate interests thereby subjecting the world to unprecedented economic risk through contagion during times of economic stress.
  • The current Economic System has evolved into one of riskless (arbitrage) profits for those controlling capital. This is a fundamental violation of free market principles. Whereby those controlling capital have profited from a highly advantaged economic position and taken unreasonable risks resulting in their economic ruin being averted solely through extraordinary use of public capital. There have been no legal or economic costs associated with this economic abuse.
  • The current Economic System has evolved into one whereby those controlling capital have been found to perpetrate economic abuse through market manipulation of key economic resources and metrics such as LIBOR, Gold and others. For this, there are no legal or economically relevant consequences.
  • The current Economic System has evolved to grant even more economic privilege to those currently holding it most. Access to Economic opportunity is fundamental and necessary for a vibrant global economy.
  • The current Economic System has evolved into a symbiotic relationship between legislators and their economic donors resulting in the passing of Laws of immediate and pressing importance to donors to economic detriment of broader society. This stifles economic competition and stilts the emergence of innovation in businesses, entrepreneurship and technology.
  • The current Economic System has evolved into one of privilege for the privileged and has neglected to pass other Laws for the accommodation of large districts of people seeking economic growth and well-being. The current donor-patron system of legislation fails to address the economic interests of the greater majority of people in the world. These people of the world often have either never been granted the right of Representation in Legislature or have lost it, a right inestimable to them and formidable to economic tyrants only.
  • The current Economic System has called together bodies of Economic Privilege at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of forging these bodies of Economic Privilege into informal systems of political and economic influence that maintain their economic dominance.
  • The current Economic System has leveraged the unequal economic access to legal representation repeatedly, for opposing with manly firmness any legal challenges to the Economically Privileged invasions on the rights of the people.
  • The current Government and Economic System has evolved for a long time, to cause others to not be elected that represent the economic interests of the lower economic strata; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the vast majority of people of the world remaining in the mean time exposed to all the dangers of economic distress from without, and continued economic erosion within.
  • The current Government and Economic System has endeavored to prevent immigration reform, except for the interests of Corporate patrons. Resulting in the obstructing of Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and thus limiting access to economic opportunity.
  • The current Government and Economic System has erected a multitude of New “Security” Offices, Policies, Secret Legislation, and aggressively conducts active, deep surveillance, and sent hither swarms of Security Officers to harass and surveil our people, and erode our economic competitiveness.
  • The current Government and Economic System has kept among us, in times of peace, Standing Armies of Governmental, Private and Corporate Intelligence without the Consent of our legislatures.


In every stage of these Oppressions We have as a whole failed to adequately Petition for Redress in the most humble terms: Our failure to Petition Effectively have been answered only by repeated injury. A People that bear up under Economic Tyranny without refusal, become thus marked by every act which may be inflicted by an Economic Tyrant, is unfit to be a free people.

We are this day called to Petition Effectively by economic activism in line with the principles of:

  • Equal Access to Economic Entrepreneurship
  • An Unbiased Economic Landscape
  • Economic Well Being
  • Liberation for Control via State Owned and Controlled Currencies

Nor have we been wanting in attentions to the current Government and Economic System. We have warned them from time to time of attempts by their neglect of legislature that they extend an unsustainable economic risk over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their oaths to the Constitution of the United States, or native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these acts of Economic Tyranny. They too have been deaf to the voice of economic justice and of consanguinity.

We, therefore, the Citizens of the Global Economic Community of Humankind, Decentralized, Unassembled, appealing to the Economic and Political Leaders of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of this World, solemnly publish and declare, That these Citizens of the Global Economic Community of Humankind are, and of Right ought to be Economically Free and Independent Economic Agents; that we are Absolved from all Allegiance to trade strictly by State Controlled Currencies, and that Economic Repression via Control of Currency and Capital, is and ought to be totally dissolved; and that as Free and Independent Economic Agents, they have full Power to conduct Commerce, conduct Trade of Goods and Services. Make Contracts, establish Commerce, and to do all other Acts of Economic Activity, Growth and Entrepreneurship, and Things which Economically Independent Agents may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.


This is Getting Complicated

Overnight, it seems that China has decided to speak publicly on its US debt holdings.(article here) China’s Premier Wen Jaibao was quoted as being “a little bit worried” about his country’s US debt holdings. This seems a fair statement given the past year and a half where we have seen the US government pour nearly $10T into what seems a bottomless pit of bad debt, corporate rescues, and bankers in trouble- by no one’s fault but their own. (The real bummer of being a banker in financial trouble is that you have no recourse to say, “I couldn’t have known.” Because if bankers do not know, how do they give us financial advice?)

 Unfortunately, all that I can say to Premier Jaibao is, “Join the club.” Now I do not mean that disrespectfully, but rather say it in solidarity. In fact, I will go out on a limb and speculate that he may have said this only because it reflects a widely held opinion. He could lose credibility if he did not say this.

An important difference between Premier Jaibao and myself is that I am not holding $1.95T USD in reserves. From a financial viewpoint, it seems irresponsible to hold such an undiversified portfolio. However, considering the undercurrent of a teetering superpower being confronted by an ancient culture that is once again an emerging superpower, and you have the brewings of political intrigue not seen since the cold war. It is a mix of international finance, political economy, international security and power. China’s holding of US debt gives it a strategic advantage in many ways. On the other hand, China’s economy and its national reserves are symbiotically enmeshed with the US economy- also seen as its strategic rival.

Figure 1. China’s USD Foreign Currency Reserves (in USD B)

getting-complicated-chin-fx-reservesSource: Chinability (

Frankly, I am not sure if I should turn to Henry Kissinger or Dr. Phil for help analyzing this relationship. However, a couple of things I am pretty sure about are that the struggle for international power remains with us today and in the foreseeable future; and the US China relationship will only get even more complicated going forward.

The road to inflation is paved with good intentions…

On December 26th, 2004, an earthquake with a magnitude greater than 9.0 struck off the coast of Sumatra, Indonesia. Apparently it was the second largest earthquake ever recorded. One of the consequences of the earthquake was that a massive Tsunami was generated that killed hundreds of thousands of people. Measuring by lives lost and the scope of damages, it was one of the largest tragedies of our times.

There are several accounts and some video footage showing that prior to the Tsunamis strike, the sea retreated from the shore leaving vast areas of land previously covered with sea, exposed for the first time. Unaware of the danger, some people strolled out into the unexplored terrain. Of course once the wave rolled in, they were in serious trouble and had farther to run in order to avoid the wave. I am not a geologist or oceanographer but I understand that is how Tsunamis can manifest. All the water races away from the shore and then returns with a fury of… well, a Tsunami.

I am left wondering as I read article after article explaining the various stimuli(?) tallying now into almost $10T, are we headed into a financial equivalent of the Boxing Day Tsunami? If you replace the ocean with capital flows and the Tsunami being inflation, then I cannot help but draw an analogy. In fact, that is what some of my favorite analysts are saying in this Bloomberg article. In the article, it cites a commentary by PIMCO (you can read the note here) which states, ‘PIMCO believes that the policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years. Breakeven inflation rates currently reflect expectations of nearly 3% deflation over the next five years. This is not PIMCO’s outlook and suggests that TIPS are significantly undervalued relative to nominal Treasuries. Although we expect growth to contract in 2009, government stimulus may reflate the economy as soon as 2010 and beyond that.’

In other words, PIMCO is saying  ‘get ready, all this stimulus may create inflation next year.’ There are several other well known pundits sounding the same warning. In a closed system, it is impossible for one action to not impact the entire system. And given that ‘decoupling’ has been shown as an ideal rather than a reality, I think it fair to start viewing the global economy as a closed system. The effects of the US’s massive stimulus programs combined with other economies worldwide following in lockstep, will be be manifest. The unknown is ‘in what way?’ Perhaps it will be a benign outcome and we will once again return to a ‘trees growing to the skies’ economy. But somehow, that seems like almost magical thinking that is too good to be true.

While the current situation is dire and the actions being taken by governments worldwide seem logical, there are always unintended consequences. It is fair to say that this financial crisis has plunged us into unexplored financial territory. Let us then recognize the risks we accept as we grapple with the current problems in front of us on a pragmatic basis. Let’s not be those caught unawares strolling into the fresh shoreline while a Tsunami races toward us.

What’s it all about Alfie?

Someone asked me recently, “If this is capitalism in its purest form, then what does that mean?”

What a great question I thought. If we have been free-market, unregulated capitalists and realize that it has given rise to a financial crisis of mass (wealth) destruction what does that tell us about our political economy? And as a follow up, does it mean that we are at a turning point in our political economy? That sounds like a big deal to me. So big, that it is hard to write about.

And I know that we have tripped over ourselves many times in the short economic history of humankind, yet life somehow went on. Yet I also realize that every system has a point of irreversibility. No system is so robust it cannot be broken. If there is one take away from history, it is that no person, or organization, or company or government is irreplaceable. As Keynes said so bluntly, “In the long run, we are all dead.”

I have no idea what the long range implications of this fiscal crisis are for our political economy. Nor do I think any intellectually honest “expert” has any concrete predictions on the consequences of action or inaction. But I do sense that we are in the land of “fat tails” – where the dragons are… and predictability is nonexistent.

When Good things Happen to Bad People. Or Alternately, the Ultimate Fighting Match between Friedrich Nietzsche and Adam Smith.

Much has been written regarding the problem of why bad things happen to good people. However, recent events have highlighted an irony within the current structure of capital markets… often, good things happen to bad people.

In normal times, most of us wake up, go to work (if we still have a job), live within our means, save for retirement and the kids school, give a little to charity, take care of our families and otherwise seek to do no harm as we go about our path in life.

However, there are those that ascribe to what I call the “pirate model” of capitalism. Cull together your “crew” and take what you can, when you can and the only law is not getting caught. These folks have geared up, sailed the open sea of deregulated capital markets driven by quippy mottos such as “eat what you kill.” And they will look you straight in the eye with great charm and tell you it is a “dog eat dog world” and they will rob you if they are able. And indeed they have. 

What is so striking to me about these pirates is their utter lack of an inner compass. How is it that AIG could have gone cap in hand to the US taxpayer one week and the next, indulge in a $440,000 spa and party? Easy. With no inner, moral framework, you simply do what comes naturally. Such is the nature of pirates.

And lest we single out AIG executives, let’s not forget the steady, systemic march of failed corporate executives, politicians and their tales of excess and outrageous abuse all the while testifying that they are “shocked” at the consequences or “surprised that their models failed.” A key component of the vacuous, moral nature of the capital markets pirate is a complete lack of contrition. If you have no right or wrong and simply exist to get richer than the other person, how could there be such a thing as responsibility or guilt? You were ultimately being compensated for seeking to build shareholder wealth – yes? What other role does an [executive, trader, investment banker, stock analyst, regulator, investor] play other than to enrich and be enriched? 

Fortunately, there is a circuit breaker. Simply put, not everyone can abuse the capital markets system without the capital markets breaking down. What would happen to shipping if everyone (including shippers) was a pirate? What we are seeing first hand is that the pirate model requires that the majority of participants serve as prey to the few that seek to hunt them. When everyone is a pirate, then everything goes to hell in a hand-basket. Heck– credit markets could seize up or something like that…

I often wonder what Adam Smith would say if he saw the current world economic system. It is a marvel that has brought about progress on an unprecedented level. Consider what has happened since the Wealth of Nations was published. I for one believe it will continue to do so in future millenia. I believe that liberal economics is bigger than the petty pirates we now contend with.

However, in the short term, I cannot help but remember that Adam was a professor of moral philosophy before he became the father of modern economics. As an aside, Adam Smith was not a Christian and it is uncertain what his religious beliefs were- if any. Thus proving that having an inner compass is not exclusive to the explicitly religious. Adam’s first work was the Theory of Moral sentiments- published 17 years before the Wealth of Nations and updated throughout his life. Perhaps Adam really was onto something there. 

First, do no harm

Watching our choleric Secretary of Investment Bankers Treasury and his professorial Federal Reserve sidekick, Ben Bernanke, grope for solutions to the market’s gyrations has left me with a sense of morbid fascination. I deeply appreciate the immense challenges and their efforts to calm markets and address a poorly understood credit freeze. However, as I consider the regualtory lurches reflecting all the grace of frankenstein breakdancing, I cannot help but wonder what are the longer term impacts of these crisis driven steps?

The reason I raise this issue is that I recall it was regulatory intervention into capital markets that was a major contributor to arriving at this point. It was lax regulatory policy in credit combined with excess liquidity that were central contributors to widespread credit abuses and inflated asset prices.  Are we simply enabling those that are drunk in market excess and pushing off the crisis to another time? And if so, how much will it be amplified?

Central to the proper functioning of capital markets is the concept of price discovery. This is the process whereby market participants find a trading price that resolves a complex mixture of intrinsic value, liquidity, speculation, and pragmatic needs to hold or sell a financial asset. When this price discovery mechanism is upset, it requires later, larger reactions in order to attain normalization of price discovery. By avoiding the pain today, are we setting ourselves up for deeper, more consequential market problems later? My great worry in this absurd, black comedy that our financial regulators are conducting is the question, “Are we now caught in a market intervention positive feedback loop requiring successively stronger measures in order to keep an asset bubble inflated because the pain of correction becomes successively more dangerous?” 

And while I make light of the concern, I am not deluded about the compelexity or subtlety of the markets. I remember well the lessons of Long term Capital Management- the best and brightest among us are not (yet) able to master the complex system of market dynamics. From my vantage point, each time we seek to avoid the economic discipline of market corrections by interventions, it reappears later in a deeper, steeper and more consequential correction.  

Value Creation is the Crux of Capitalism

Yet another missive today on the fallout from the housing bubble. This time it is the IMF waxing prosaic on the debacle.

I have looked at purchasing a house several times this century and each time I have come away from the excursion with the uneasy feeling that there was something fundamentally wrong with the economics of housing. I could not emotionally reconcile what I perceived to be the intrinsic value of the asset with its price. It just wasn’t right to me.

Today, as I read a blurb regarding the housing market’s indeterminate duration for recovery, it suddenly struck me that the housing bubble is not the disease- it is merely a grave symptom. The “disease” that threatens the U.S. economy is a lack of value creating activity as the primary organizing principle in our economic lives.

Instead, we have slowly, unwittingly become conditioned to be consumers. In my mind, it is this fundamental and subtle shift that threatens our economic health at its core- now and in the future.

If we have lost our ability to be entrepreneurs, then we have lost ability to innovate and adapt to changing economic conditions. We have stepped off of the course that has led to mankind’s greatest advances since we joined into communal societies thousands of years ago. By not participating in the entrepreneurial process we have abdicated our right to infuence our circumstances and gain wealth through delivering products and services that others value.

Instead of the hard and risky path to financial wealth through entrepreneurship, an alternate vision was offered. It was an illusory view that all that is required to consume more was to somehow, anyway, get a hold of a house.

So the cycle was:

  • little to no down payment on a house
  • add water, mix and wait
  • enjoy appreciation of the house by refinancing and extracting capital while gaining equity
  • buys cars, flat-panel TVs, iPods, iPhones, boats, etc…
  • repeat

Somehow, in all of this, we forgot that to gain wealth, we actually need to produce something with our talents. And while arbitrage opportunities do appear to arise from time to time and persist long enough to really irritate financial economists, they inevitably end and we revert to the intrinsic value of things. Which brings us to today.

The question is, “do we return to the fundamental value creating activity of entrepreneurship?”

The answer to this question on a large scale will determine if the markets correct (albeit painfully) and then move on, or whether we remained trapped in the mire for an extended period.