Musings Report #6 2-9-13 How our understanding of the world expands: insight and complexity
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How our understanding of the world expands: insight and complexity
I am experiencing one my occasional periods where my understanding of global dynamics has taken a leap forward, and it has made me wonder what sets up an advance in understanding, where suddenly one's previous grasp suddenly seems superficial and lacking in insight.
Jean-Paul Sartre characterized this expansion of our understanding as "totalization;" we expand beyond the boundaries of our previous grasp and totalize our knowledge in a new and larger framework.
I think there are at least three components to this process:
1. The hard work of contextualizing the new knowledge and understanding the precise dynamics being explained.
In music, this might be a new and previously unknown chord progression. To the beginner with little context of previously acquired expertise, the progression is a new and discrete bit of new knowledge; it stands alone. To the more knowledgeable musician, the progression will share features with other progressions or traditions. The experienced player will naturally want to try improvising over the progression.
In history and economics, a new understanding of a specific time and place must be contextualized to gain its full meaning: how does the narrative/dynamic relate to classical capitalism, Marxism, history, cultural movements, and so on.
There are two aspects to this: one is the necessity for hard work to truly understand what is being presented, as opposed to a superficial reading that never enters one's long-term store of knowledge. This requires study and concentration.
The second is the necessity of having a comprehensive context of existing knowledge. The person with a wide knowledge base will "see" much more in a brief essay than a beginner to the subject because he/she can not just read between the lines but extend the consequences and conclusions into related areas.
2. Insight. We are all familiar with the "a-ha" moment when something resolves into insight or we suddenly understand how something works. This typically happens after the new knowledge has been studied and absorbed.
3. A deepening grasp of complex dynamic interactions. This is the process of leaving naive, simplistic reductions behind. For example, it was popular in the era I attended college (the mid-1970s) to say, "It's all economics," as if this reduction was insightful in all cases. Yes, economics is important, but to say that it explains all human aspirations and actions is hopelessly inadequate.
My recent readings (Wallerstein and Arraghi) have opened new doors of understanding world economic systems and Great Power hegemony.
For example: to Machiavelli's two components of power, coercion and consent, Arraghi adds a third that is key to capitalism: control over the means of payment. Those who control the means of payment control the entire system.
In the modern era, we can understand this to mean the reserve currency, the one currency accepted everywhere for payment of all debts. That is the U.S. dollar. If we combine this insight with those drawn from Triffin's Paradox, we understand why China, Japan, Germany or indeed any exporting nation cannot issue and impose their currency as the universally accepted means of exchange: in order for the world economy to have enough of the currency to grease trade and payment of debts, the issuing nation must export vast sums of their currency, meaning they must run a massive structural trade deficit and create credit to loan to exporting nations.
Hegemony, then, is not within China's grasp for the fundamental reason that they import currency as a result of their trade surpluses. There will never be enough yuan in other trading nations' hands to transact global trade. Furthermore, the same can be said of the yen and the euro, neither of which is exported in sufficient quantity.
If we extend these insights, we realize it is not the U.S. that is dependent on China, Japan and Europe to buy its debt, it is China, Japan and Europe who are dependent on the U.S. for both the reserve currency and a market for their exports. You cannot separate the dollar and the U.S. market for others' exports.
Many people would like to see the dollar die or be replaced, but if we understand these two basic points, we understand why no other currency can replace the dollar and no exporting nation can replace the U.S. domestic market for exports. It is possible to exchange bills of exchange or gold, but history suggests that precious metals have intrinsic limitations in terms of how much trade can be generated.
Simply put, importers owning gold will end up sending it all to exporters and then their ability to buy vanishes, freezing trade. This is what happened in the Western trade with India and China until Spanish gold and silver from the plundered New World gave Europe a new supply of precious metals. But as I have noted elsewhere, the gold stagnated in the vaults of the Emperor and various feudal lords, leaving China and India with a hollow and ineffectual form of "wealth."
The massive expansion of trade in the 1990-2012 period arose precisely because the U.S. exported enough dollars to enable an unprecedented expansion of trade. This benefited more than America--a key aspect of hegemony.
This is only one aspect of global hegemony within the global economy, but even this one bit informs our forecast and understanding. Is the global financial system increasingly vulnerable? Undoubtedly. Do we need a new paradigm of wealth creation and global stability? Yes. Our best bet on designing a better system is to understand the current one as profoundly as we can.
Market Musings
Here is an interesting chart (from break point trades) of a Fibonacci time sequence extended from the start of the great Bull rally in March 2009. These kinds of forecasts have to be taken with a grain of salt, of course, but it is nonetheless interesting to counter the widespread confidence in the New Bull Market with inputs that suggest the extreme in complacency and confidence may be setting up a bit of a top.
Breath is deteriorating at the same time cash on the sidelines has reached lows and sentiment readings remain elevated. Now if only we knew whether Goldman Sachs' trading desk was getting heavily short here, we'd know if the market was going to suddenly experience an "unexpected" downdraft.... Venezuela's sudden devaluation of its currency might generate some shock waves as well.
What I am doing: sold my calls, bought some SDS (ETF bet the market will decline here) and some puts on high-flying housing-related names.
What I would do if I were managing $1 billion: leverage 4% of my portfolio into a bet the market will decline for at least 7-10 days.
From Left Field
Interesting 1936 auto assembly line film (9 minutes) (via Michael H.) It amazes me that people who have no intention of ever working at such a boring, inhuman job often pine publicly for a return of "manufacturing" of this labor-intensive sort.... it isn't going to happen, and perhaps instead of bemoaning it we should welcome its eradication by robots and software.
Thanks for reading--
charles
