The Dollar - Ripe for the Picking

In recent times, there have been several popular books about events that cause significant change.  If you've read The Tipping Point by Malcolm Gladwell or The Black Swan by Nassim Nicolas Taleb, then you already have some understanding of how some events can be predicted even when the timing is elusive.

Since the United States abandoned the gold standard in 1971, the U.S. dollar has been based exclusively on  the faith and credit of our country.  Initially, the dollar maintained some pace with our gold reserves and people had confidence that the value of the dollar was backed by tangible assets.

Since that time, the global economy has changed dramatically.  The once powerful U S of A finds itself buying many of life's necessities and niceties from foreign economies.  Our trade deficit continues to climb even as we loan money to other countries.  Every country on the planet has substantial amounts of debt both public and private.

Were all this debt to be fully reconciled, we would all quickly learn that the global economy isn't solvent.  It is based entirely on debt and there isn't enough money in the world to pay it all off.  Again, this is not a distribution problem.  We have created a fiction with no controls to ensure its stability.

So, what does ensure its stability?  Answer: belief!  As long as we all believe that the global economic system is sound -- it is!  This brings us to the tipping point and black swan events.  What would it take to destroy our belief in the system?  In all likelihood, not much.  It is impossible to predict who, how, or when such an event might occur.

When it does, the evidence to support the claim will be overwhelming.  It already is.  Banks are over-leveraged, personal debt is high, and even gold is now being leveraged with metal funds sporting minimal reserves of actual supporting gold and silver.

There are powerful forces attempting to ensure that our economy remains stable.  When the interest rates were dropped to zero, the Federal Reserve lost its main lever for controlling the economy.  As a result, they switched to buying debt (quantitative easing).  The problem with this is the Federal Reserve actually doesn't have any "reserves."  When they buy things, they pay with money they print (they are after all the only ones who can print money).  Quantitative Easing I and II were both designed to stimulate the economy by pumping huge amounts of new money into the economy.

What is the effect of putting so much money into the economy?  The history on this action has not yet been written.  If it does not end in disaster, will the Fed do it again?  How much money can be pumped into an economy before disbelief sets in?  In all likelihood, we will find out eventually.  When that day comes, I hope you've made yourself Antifragile.  You'll need to read Taleb's sequel to The Black Swan to find out what I mean by that.

Technology: The Job Killer!

Once upon a time, there was an argument that technological breakthroughs actually created jobs.  The argument was so compelling and replete with empirical evidence that most people accepted this as a fact.  The automotive industry created millions of jobs as did the modern textile industry.  The industrial age was good to the average worker.

Then came the information age.  Technological breakthroughs came fast and furious.  The industry was born out of nothing and it created plenty of new jobs.  When a few people started to suggest that maybe some of this new technology was stealing jobs from humans, Those responsible for the health of the economy trotted out the old argument that technology creates more jobs than it eliminates.

That may have been true at one time, but technology has reached a tipping point.  With so much of our manufacturing capability being highly automated, new breakthroughs aimed at "increased productivity" are really targeted at maximizing the use of capital -- and I don't mean human capital.

Let's not kid ourselves.  Technology doesn't need a vacation.  It doesn't need time off for a sick kid or a death in the family; and its maintenance contract is undoubtedly far cheaper than the healthcare for the workers it replaced.  Technology that replaces people almost always increases the efficiency of capital.  This is the embodiment of maximizing profits -- the goal of any economic endeavor.

So, as robotics and mechanical systems have gotten more sophisticated, more and more blue collar labor jobs have been replaced with technology.  What about sales jobs?  Well, now we have integrated voice response systems, interactive websites and stay tuned for chat-bots that are almost impossible to tell from a human.  We may still need good salespeople, but not near as many of them as we once did.

 "Get an advanced education," is the cry of our beloved leaders.  Just be careful which path you choose because those jobs aren't safe anymore either.  There are now artificial intelligence algorithms that can write world class classical music, diagnose disease better than most clinicians, and invent new interesting chemical substances faster than any chemist.

Our government hides the truth from us in their unemployment numbers.  Many families have given up on two incomes.  Many children continue to live with their parents well into their twenties and even thirties.  Our economy is being hollowed out by technology.  If you don't think your job is in jeopardy, just keep watching.  New technology is coming to get ya!

Pretty soon, business owners will hire employees just to keep them company.  People won't need to do any work.  They can just watch it being done by technology.

Trajectory: Transparent Distributed Networks

History has a strange way of showing up after it becomes obvious.  Sometimes, events are spontaneous, like 911 and other times they are gradual like the industrial revolution.  One thing should be clear by now, history is speeding up.  The time between major social evolutionary stages is shortening.  This compression helps us see around the corner a little bit better.

The Internet hasn't been around that long, but its effects have been profound.  Many people sense that the Internet is responsible for a fundamental shift in our reality, but it's hard to grasp exactly what that shift is all about.  There are so many aspects to life on the Internet that the big picture gets muddled.

Nonetheless, many of those who are attempting to tease out the big picture are starting to converge on a common theme.  The Internet is driving two fundamental changes that are inextricably tied together and seemingly inevitable: transparency and decentralization.  Let's start by looking at each of these separately.

Transparency

In the age of the smartphone and Google Glass, everyone has a camera with them at all times.  They are able to provide full audio visual capture of just about any event -- public or private.  This makes secrets increasingly difficult.  Furthermore, sites like Facebook, Reddit and Digg make it easy for anything of significance to "go viral" within hours or even minutes of the event.  Whether from groups like Wikileaks and Anonymous, or individuals such as Edward Snowden, no secret can be too well kept.

Our love affair with secrets and privacy runs long and deep.  Yet, we are increasingly opening our lives to each other and this trend sees no signs of abating.  Technology will continue to evolve to make surveillance of every aspect of our lives easier and more accessible.  Drawn to its ultimate conclusion, it is not impossible to imagine a time when our very thoughts will be linked through some future incarnation of the Internet.

Decentralization

One of the other gifts of the Internet is built into its initial design.  The Internet was originally conceived as a communications network for military applications that could not be destroyed by attacking a central point.  This design has allowed anyone with a persistent connection to publish their own content.  One of the initial uses of this capability was music file sharing.  The music recording industry quickly came face-to-face with the full force of decentralization.  Without some central authority to pursue, they were forced to find ways to add value in order to get people to pay for music they could easily get for free.

Recently, the crypto-currency Bitcoin has emerged as another decentralized powerhouse.  Again, anyone with a computer can become part of the Bitcoin ecosystem.  In addition to being decentralized, Bitcoin is also transparent.  Its underlying algorithms are available for all to inspect.  Governments don't like Bitcoin.  Were it to become a standard global currency, it would eliminate their ability to manipulate it.

The latest edition to decentralized structures is Ethereum, which promises to go beyond crypto-currency to provide an open decentralized platform for creating any type of contract between multiple individuals.  Systems like this will allow any individual with a good idea to start a distributed ecosystem that is free from centralized control or interference -- even by its creator!

What Does it All Mean?

Governments have always been controlled by a few rich and powerful people.  In the past, socialism has been attempted to counter this trend, but it has always been corrupted by the powerful few due to lack of transparency.  The Internet and associated technologies offer a means to truly democratize decision-making.  Rather than basing choices on the whim of people, algorithms can be created that are decentralized and transparent that allow them to be optimized for the greater good.

This may seem idealistic.  One could easily argue that any system is corruptible.  Maybe so.  However, with transparent distributed systems, corruption is more difficult due to the risk of exposure caused by transparency and the logistics of co-opting widely distributed systems.  When attempts to do so inevitably fail, algorithms can be modified to eliminate future threats along the same lines.  We already do this with our computer operating systems and anti-virus software.

What if we could all purchase a power plant for the price of a car that would provide us with all the energy we would ever need?  What if we had autonomous flying vehicles that required no navigational infrastructure other than the ability to communicate with the vehicles around them?  What if we had a 3D printer (i.e. replicator v1.0) that could make many of the items we need?  And, what if we all got our food from our own garden and local farmers?  Do you see the pattern here?  Technology enables us to be increasingly independent.  

The less we rely on corporations and governments, the less power they have over us.  As their power diminishes, so does their relevance.  Ultimately, they will need to redefine themselves or fade into the dust heap of history.  If there is one great irony it is that a government funded program and a few huge corporations may be the primary enablers of their own demise.

A Driver's Lament

For most of my career, I've had a long commute.  I've put a lot of miles on a lot of cars and I've seen drivers of all types from timid drivers who go too slow to road ragers that would wish everyone into the corn field if they could.  What strikes me as most interesting is the juxtaposition of two very different spaces and how they affect people.

Unless you're using Zip Car or some such service, you probably own your own vehicle (or the bank does).  When you get into your car, you are in your own private space.  Your things are around you, your music or radio station is playing.  It's like a little piece of home on wheels.

Meanwhile, your vehicle is on a public road.  Public means that it is a shared space for all to use.  The idea of a public space carries very specific social meaning to us.  There are certain behaviors that are simply unacceptable when one is in a public space.

What makes driving unique is the private bubble containing us while we operate within a public space.  I have observed that many people exhibit private behavior patterns when they drive.  Behaviors which I have a hard time imagining they would exhibit if they weren't in a car.  For example, when was the last time you walked up to the front of a long line (queue for you Brits) and just stepped in front of the first person?  Unless you are a bona fide  sociopath, the answer is likely "never."  Yet, how often do you see someone zooming past cars piled up in the only remaining lane in front of a lane merge during heavy traffic?

Somehow, the private space of the vehicle causes many people to forget their manners.  The great irony is that the line-cutters anger others into doing the same.  The result is a pile-up at the choke point that would not even be there if everyone got into the only open lane before traffic began to constrict.

We see antisocial behavior in cars all the time.  People double park and then go to a meeting or to their offices or to the mall and behave like perfectly normal human beings who understand the rules of public behavior.  Maybe we need a new public relations campaign.  The slogan could be:

DRIVING IS A PUBLIC ACTIVITY.  ACT LIKE IT IS!

Capitalism With Limits Part 2

In my last post, I finished by leaving lots of money in the hands of government.  The challenge with governments is they encourage the consolidation of power.  Unfortunately, those who seek power are usually the first to be corrupted by it.  Our government is no exception.  We are not drawn to great leaders.  We are drawn to charismatic orators who have a knack for appeasing the largest number of likely voters.

If government is to succeed in supporting people, it must become more distributed.  Distributed structures are much more difficult to corrupt.  Transparency is only a good start towards making shared systems work.  They must also be based on algorithms.  Bitcoin is a good case in point.

There are lots of powerful people out there who would like to see Bitcoin fail.  Why?  Because is is a currency with no central control.  It operates on an algorithm that is available for anyone to understand.  It's functioning is transparent.  There are no backroom boys pulling levers to affect its supply or demand.  It is not subject to fiscal policy or monetary policy or the whims of governmental meddlers.

Governments already use algorithmic controls for things like traffic. Projects like Google's driverless car show that algorithms can be used for highly sophisticated problems.  The system is both adaptive and heuristic.  So, to conclude, creating transparent algorithmic solutions to any governmental management problem is within our technological reach.

This begs the question: what is the optimal distribution of wealth?  The following chart from the Center on Budget and Policy Priorities tells the tale:

After the great depression, lots of personal wealth was wiped out.  The result was unprecedented equality in income distribution.  The U.S. economy has never been stronger before or since. However, the insidious nature of capitalism to concentrate wealth once again took hold.

In 2006, we were due for another reset, but the government forestalled the inevitable by printing money -- lots of money.  This works for us because oil, still the #1 source of energy, is traded in dollars.  So, there's little incentive for anyone to see the dollar tank.  This won't be the case as we move away from an oil based economy -- another good reason to step up domestic oil production.

Back to my wealth distribution algorithm.  Clearly, we have data to support at least a starting point for good calculations.  By creating a system of distribution based on math rather than power struggles, we can ensure a vibrant economy.  But, what about jobs?  Clearly, the most efficient use of capital is to invest in the reduction of humans -- the most expensive asset a business has. We cannot expect the capitalistic markets to support work for all citizens.

Fortunately, our aging infrastructure needs lots of help to bring it into the 21st century.  There are lots of jobs available.  They just aren't commercially viable.  With all the new-found wealth in the hands of government, these infrastructure projects could be funded.  People who can't find jobs in the commercial sector will work for the infrastructure sector.  Of course, this means deciding once and for all which parts of our society constitute "infrastructure."  Some things should be easy: roads, power grids, water and waste.  Others may be more difficult to decide: space exploration, transportation and mail delivery.

What seems clear is that our aging infrastructure is bankrupting our country, the commercial markets are not creating enough jobs for full employment, 99% of the population are fighting rising costs and diminishing income, and those in power are doing nothing about it.

A redistribution of power means a redistribution of wealth.  The United States is a very wealthy place, if we can build a controlled and sustainable form of algorithmic sociocapitalism here, maybe the rest of the world would follow suit.  This will be essential if we are to keep capital from seeking environments where extreme greed is tolerated.

Capitalism with Limits

I was watching a movie the other day and one of the characters said the top 84 wealthiest people in the world control more economic power than the poorest three billion.  I don't know if that's true, but if the chart on the left is accurate, it's probably not far off.

We talk a lot about growing income disparity in the United States, but the insidious nature of the global economy is that income disparity is now a global problem that cannot be solved by national initiatives.

If one government attempts to choke off the wealth creation abilities of certain individuals, they will simply seek residence elsewhere.  There will always be some country willing to allow individuals to accumulate as much wealth as possible.  Our history as a species has retold this story many times.

1. A society is born
2. Everyone feels good about it and everyone pitches in to make it work
3. Society prospers and life is good
4. A powerful wealthy class emerges
5. The power class consolidates power and wealth at the expense of all others
6. All the others finally get fed up with their condition and the disparity with the power class
7. Revolution!

This story is so common in our history that it is far more difficult to find examples of smooth transitions of power.  If you're looking for a smooth transition that doesn't involve an external colonial power, the search will be even more difficult.  Why?  People with power never seem to want to lower their standing for the greater good.  They always believe in their own legitimacy, no matter how stacked the system may be in their favor.  

Is it possible to have an effective redistribution of wealth without a revolution or other form of massive social upheaval?  Maybe.  I have a simple idea that just might work.  It would require a global treaty, but it could be implemented by individual countries.  The basic premise that one must accept before seeing the value of this idea is simple:  taxation is ultimately a form of wealth redistribution.  When kings taxed the peasantry, they were redistributing wealth to themselves.  In the U.S. we use tax money to pay government workers, contractors and welfare recipients. 

So, if the tax code can be used for that purpose, why not be clear about it?  To make this work, we eliminate corporate taxes.  We eliminate the current income tax code and replace it with a progressive tax rate.  The rate is progressive, but based on income ranges.  The dollar amounts would need to be worked out, but it might look something like this:

• $0 - $20k/yr. = 0%
• $20k - $50k = 12%
• $50k - $100k = 25%
• $100k - $250k = 40%
• $250k - $1m = 60%
• $1m - $10m = 80%
• +$10m = 100%

Again, these numbers are just an example, but the concept is simple.  Your effective tax rate goes up on incomes a higher levels.  So, nobody (even rich people) pay taxes on their first $20k of income.  If you make $50k, you will pay no taxes on the first $20k, but you will pay 12% on the next $30k.  Eventually (whether it is $10m per year or $50m), there needs to be a point at which income is maxed out.  The system has given all it can to one individual.  Live with it!

Not fair, you say?  Here's what isn't fair: people with lots of money have a steady stream of opportunities to use their wealth to increase it.  People without wealth must be creative, hardworking and persistent; and then there's no guarantee of success.  No, the world is not fair.  Why should it be more fair for rich people?  Their power has corrupted them into believing that they have legitimacy to decide the fate of society writ large.  If history is a good judge, they will eventually discover that power is ultimately granted by the masses and it can be taken away by the same.

Of course, giving the government all that money is concentrating power elsewhere.  This is another problem.  One which I will discuss in my next post about infrastructure and welfare.

Capitalism: Heading for a Cliff

Throughout human history great civilizations have come and gone.  Why is it that we have been unable to establish societies that can be sustained indefinitely?  I believe the answer is simple.  We have always been dominated by a few powerful people who dictate the structure of "the system."  No matter how bad things get for the masses, those in power will remain the last to suffer.

Eventually, when the masses have suffered enough, they will revolt.  Unfortunately, when the masses revolt, there is little left but death and destruction until gradually a new system emerges from those who are strong enough to seize power...and the cycle begins again.  Just look at what is happening in countries like Syria and Ukraine.

So, why is capitalism doomed?  The principle of capitalism is simple:  people make or do things and other people buy them.  For the economy to be solid, more people must buy more stuff.  For that to happen, we must NEED more stuff.  The problem with more stuff is that it requires more energy and more material -- two things our little rock in the universe cannot sustain indefinitely.  We are wrecking our planet with our current strategy.

I have an old pair of wing tip shoes that still look great after more than 30 years.  My newer shoes are lucky to last a 10th of that.  We need obsolescence to continually prime our system.  This problem is compounded by the fact that automation is reducing the number of jobs required to make and do things.

So, we can either wait for the revolt, or we can hope that our leaders will cede their power in the name of the greater good.  Good luck with that!  Our current government does almost nothing.  Instead of getting more aggressive about attacking our social problems, our leaders offer us polarization and gridlock, even though we all need essentially the same things.

I have some ideas about what to do about it.  More on that later.