Musings Report #1 01-05-13 Whatever Cannot Reform Itself Disappears
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Whatever Cannot Reform Itself Disappears
I wish I could identify a source of enduring optimism for 2013, but I keep stumbling over the one dynamic that matters: the inability of the global Status Quo to reform itself, i.e. undertake fundamental, systemic reforms. This inability has many facets but only one root: political sclerosis caused by entrenched, vested interests seeking to protect their perquisites and power.
If I had to summarize the purpose of my writing, I would say it is to condense immensely complex forces and interactions into a coherent narrative.
Here is my summary of the Status Quo:
An economy that is controlled by the government is one in which political power, not the market, controls the distribution of national income. Politics is the arena in which the national income is distributed. The primary contestants are entrenched, vested interests seeking to protect their perquisites and power.
A government in which political power is for sale to the highest bidder puts the wealthy at an extreme advantage, as they have the means to buy political power to conserve and expand their share of the national income.
In order to do the bidding of the financial Elite, the political Elite redistributes enough national income to the bottom 50% and retirees to buy their complicity.
A nation in which political power is for sale is one in which the rule of law is bent to serve those with power.
That the relentless advocacy of one’s own interests magically creates a common good is the core of our secular faith; what if this is false?
In Nature the ability to reform is called adaptation. Organisms and species that are unable to adapt when selective pressure is applied vanish from the Earth. Humans and human organizations are no different; individuals and organizations that are unable to respond to selective pressure with successful self-reform/transformation will also fail and disappear.
The political and financial Status Quo is incapable of true reform, because real reform threatens the perquisites and power of entrenched vested interests, what I call fiefdoms.
The other dynamic I have described in previous Musings is what I call the Rising Wedge Model of Breakdown: entrenched interests within organizations only know how to expand, and this leads to ever-higher minimum levels of funding and headcount. Reform is rendered impossible because the organization breaks down once funding dips below the lofty minimum.
If we combine these three dynamics--the relentless, single-minded advocacy of self-interest; a multiplicity of political "third rails," i.e. constituencies and fiefdoms that are politically untouchable, and the Rising Wedge Model of Breakdown, we understand why the Status Quo is incapable of reforming itself.
That leaves breakdown as the only possible endpoint.
On a slightly optimistic note, the Status Quo still has enough resources to put off the eventual breakdown and collapse for a few years. I expect an initial crisis to emerge by 2015 that is resolved with the usual politically expedient half-measures. The sigh of relief that "everything's been fixed" may last two to three years to 2017-18, and then the ultimate crisis will gather force until it is beyond half-measures, likely in the 2021-22 timeline.
Market Musings
Here we go again, with another sharp rally to start the year, based on the passage of politically expedient half-measures and optimistic (and suspect) economic data from around the world. Ideally, from the short side perspective, the rally will quickly reach new extremes in sentiment (put-call ratio, McClellan Oscillator, etc.)
Since things are rarely ideal for traders, we may see a slow grind up that never reaches a tradable extreme.
Expectations for positive announcments are high; Europe is supposedly "fixed," China is supposedly growing robustly again, the U.S. fiscal cliff is history, Japan's new government will "do whatever it takes" (famous last words) to spark inflation, etc. In this environment, any negative data could have an outsized negative impact on markets that have habituated to permanent Central Bank intervention.
Can intervention reverse every downturn? Perhaps the best answer is "Yes, until it doesn't." The more meaningful question might be, "What happens when central bank intervention fails to save the markets?" A loss of faith is difficult to reverse.
From Left Field
One Year After Quitting My Job--self-employment has worked well for this fellow; not sure if his success is easily duplicated. What I notice is the diversity of his income stream and his willingness to try stuff that may not create much income. Adaptation and selection...
Uh,right: 15 Things overachievers do (via Maoxian) The sort of perky, mordant list that gets lots of page views; a few gems in here--I agree publishers no longer add value, but books are not quite as dead as this blogger claims...
Thanks for reading--best wishes for a healthy and prosperous 2013--
charles
