By Bron Suchecki, on May 10th, 2010
Surfing around I found this excerpt from the history of American Express interesting:
During the summer of 1914, approximately 150,000 American tourists were stranded when war engulfed Europe, many without access to funds. Banks had ceased to pay against foreign letters of credit or any other form of foreign paper. Panic-stricken travelers lined up inside and outside the offices of American Express in whatever city they happened to be visiting. American Express was able to cash all travelers cheques and money orders in full, enabling quick passage home for thousands. Many of those remaining were able to book passage home soon after a decision by American Express and a consortium of nine U.S. banks to ship $10 million in gold to Europe so that local banks could once again honor foreign drafts.
During 1938 and 1939, as the prospect of another world war loomed over Europe, there was still a sizable group of longtime American Express managers and employees who had worked for the company 25 years before, during World War I. Their past experiences – and their advance planning, in this instance – helped the company survive World War II. Even before the official declaration of war, American Express had mounted extensive preparations to protect its financial and real estate assets, including its principal offices in Berlin, London, Paris, Rome and Rotterdam. Throughout Europe, American Express offices continued operating until the last possible moment in countries about to be invaded – often long after American embassies and consulates had been ordered to evacuate.
The history is interesting not for the reminder that in war fiat is worth nothing, but that AMEX had an organisational memory of WW1 that enabled them to prepare for WW2. The two events were close enough that those who had experienced the first were still employed and had not retired.
I think that what is necessary for an organisation (which is really just a collection of individuals) to see the need for “advance planning” is not experience of a crisis, but experience of the period prior to a crisis. Only then can one see similarities between the period that preceded a crisis and one’s current situation and thereby identify the potential for a future crisis.
I also think that what is important is direct experience. One has to have personally experienced the pre-crisis environment – it makes for a strong imprint on the mind. Indirect experience is not the same. Reading the history of a period that draws parallels to now does not have as powerful a call to action. Words on a page can also be rationalised away.
For example, do you think giving Paul Mylchreast’s 4th May Thunder Road Report history of the US and Sterling crises during the Johnson and Nixon administrations in the 1960s and 70s (pages 24 to 35) to someone in their 30s raising a young family will result in them buying gold? It is too distant and academic.
I would also argue that the minimum age for direct experience of economic/financial events to really register would be no younger than say 20 years old. This means that the youngest person to have experienced the 1970s and punishing inflation and a real gold bull market is now 60 years old. Anyone younger than that would probably not really “get it”, at a visceral, emotional level that only direct experience can give.
My only “economic awareness” memory of the 70s would be my father suggesting I invest the $200 worth of Christmas and birthday money I had squirreled away up to my then 10th birthday into State Rail Authority of New South Wales bonds at 15% (my father was a train driver and they were offered to staff first). Getting a $30 cheque each year for 5 years seemed like a good deal. I remember being disappointed that I didn’t hold out longer, because subsequent bond series peaked at 18%, if my memory is correct.
That is the extent of my experience of inflation, as a 40 year old. It makes me reflect on where I would be now if I had not made that fateful decision in 1994 to take a job with the Perth Mint. It is likely that my economic literacy would be negligible, my awareness of the potential for inflation and the role of gold as a wealth preserver in an investment portfolio, zero. 
By Eldon Mast, on May 10th, 2010
The U.S. added 290,000 jobs in April, the biggest increase since March 2006, with broad gains throughout the economy.
Most of the net new jobs came from the private sector — excluding temporary Census workers — non-farm jobs rose by 224,000, the Labor Department said on Friday.
In addition, payroll data for the prior two months was revised to show that 121,000 additional jobs were created than initially reported. The Labor Department said 230,000 jobs were created in March, instead of the original figure of 162,000, and the February measure was revised from a loss of 14,000 to a gain of 39,000.
As we speculated back in November 2009, net jobs growth began around Christmas and hiring has now netted new jobs in the first four months of the year. The additions reverse nearly two straight years of net job losses.
The string of employment growth represents the best four-month performance for jobs increases in 10 years. The return to jobs growth following a recession is perhaps one of the swiftest on record in the U.S.
Many naysayers scoffed at our linear trending charts claiming that a return to substantial jobs additions by spring 2010 was too optimistic. The reality is that the positive trend toward strong jobs creation continues — with summer projections for U.S. labor market improvement firmer than ever.
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By Ajay Shah, on May 7th, 2010
Pratap Bhanu Mehta in the Indian Express on the problems of getting to an effective State.
Can the courts help get us out of the mess that is Indian labour law? A report in the Indian Express says that the courts are inclined towards penalising striking workers of Indian Railways for the pain they have caused commuters of Bombay. Similar principles can help put the fear of large financial penalties upon political parties contemplating disruptive activities also. As an example, the courts have stopped the Shiv Sena from producing noise pollution at Shivaji Park in Bombay.
Anne Applebaum gets a taste of India (on Slate).
Integrating into the world economy is about removing government-induced barriers to movement of ideas, goods, services, capital and people. It involves a lot of little pieces – such as reducing the hassle of getting a visa to come to India. [also see]. It involves better connecting up with Bangladesh and India. It involves getting away from a deeply ingrained notion that the colour of the skin matters, that Indians and foreigners should be treated differently. See this editorial in the Financial Express on the capital controls against FDI by foreigners in the business of cigarettes.
DNA forgot to show the author’s name for this excellent piece titled Make RBI/MoF’s forex market interventions more transparent. Ila Patnaik in the Financial Express on the choice between inflation control and exchange rate targeting.
Rajkamal Iyer and Jose Luis Peydro have a column on voxEU where they talk about contagion with weak banks in India. Interesting new derivative contract launches: box office futures approved at CFTC, and futures and options on cheese launched at CME.
The nice new McKinsey report on India’s urbanisation.
Vikas Bajaj in the New York Times on Walmart’s work in Indian agriculture.
A great animated image showing the growth of information for one Indian town (Ludhiana) on Open Street Maps (OSM). Till late 2007, there’s nothing there, but after that, almost every month we see the data growing. [back story]
M. R. Madhavan on new laws in higher education, in the Indian Express. Jessica Wallack in the Financial Express on the Right To Education Act. Richard Levin of Yale on universities in Asia.
Reading in a digital age by Sven Birkerts on The American Scholar.
On Poland’s sorrow: the speech that Lech Kaczynski was to read at Katyn. I was astounded and delighted when Russia announced that it would start opening the archives on Katyn. For the first time, I see the Putin regime in a slightly less pessimistic way. Roger Cohen in the New York Times says that Poland is an inspiration to all of us: a piece that every Indian and Pakistani must read. And read Nina Khrushcheva on Project Syndicate.
Wen Liao in the Financial Times on the analogy between the problems of Bismark’s Germany and what China faces today. The phrase ‘great chain of production’ that she uses seems reminds me of the phrase ‘Greater East Asia Co-Prosperity Sphere’ used by Japan in the 1930s. Also see Jonathan Holslag on Project Syndicate about the limitations of China’s charm offense.
There’s quite a bit of concern about China’s economy: See Gordon G. Chang in World Affairs Journal, and Takatoshi Ito on Project Syndicate.
Laszlo Bruszt, Nauro F. Campos, Jan Fidrmuc and Gerard Roland give us fresh insights into why India evolved as we did after 1947, and what will happen in China when the communist regime collapses.
Cory Doctorow in Publishers Weekly on the dangers that publishers face by cooperating with closed systems like Apple’s iPad or Amazon’s Kindle. A great deal of information and creative output is being produced today in the form of video files. I was not aware of this earlier: there are terrible patent problems hobbling this field. It is as scary as some corporation owning the English language.
Harald Hau on how financial markets in the crisis: he thinks it was more about missing markets than market failure.
William Kerr and Ramana Nanda on what governments can do to fuel entrepreneurship.
Malcolm Gladwell has a great story in New Yorker magazine on spycraft. I have a one track mind: it made me think about monetary policy.
Did you know that women have the power to shake the earth? [Statistical testing scheduled for 26 April]
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By Claus Vistesen, on May 7th, 2010
… and markets unwind [1] (click for better viewing)
It thus appears that those hoping that that the market turmoil would be confined to Europe were proven wrong today as global stocks entered a veritable rout most likely triggered by the lack of any sort of meaningful action by part of the ECB.
Global stocks extended the biggest three-day drop in more than a year, the euro sank to the lowest since March 2009 and Greek, Spanish and Italian bond yields surged on concern European leaders aren’t doing enough to halt the region’s debt crisis. Oil slid, while Treasuries rallied.
The MSCI World Index lost 2.8 percent at 2:22 p.m. in New York to extend its three-day plunge to 5.9 percent, the biggest since March 2009. The Standard & Poor’s 500 Index dropped 3.1 percent to a two-month low and is down 6 percent over the past three days. The euro sank to as low as $1.2613 as 10-year bond yields soared at least 0.22 percentage points in Spain and Italy and investors demanded 1.63 percentage points to own the Spanish debt instead of benchmark German bunds, the most in 13 years. Greece’s two-year note yield topped 16 percent, a record. The 10-year U.S. Treasury yield fell to 3.41 percent.
European Central Bank President Jean-Claude Trichet held interest rates steady at a record low of 1 percent today and said it didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that it would take such measures. The euro maintained losses even as Greece’s parliament approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its 110 billion ($140 billion) bailout.
“The ECB can fix this instantly by doing what the Fed has done — instantly providing liquidity by buying bad fixed-income instruments and paying cash in U.S. dollars,” said David Kovacs, head of quantitative strategies at Turner Investment Partners in Berwyn, Pennsylvania, which manages $18 billion. “The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk assets.”
Please note that I am not saying that the ECB has to start buying government bonds now, but clearly the helping hand it extended earlier this by scrapping the collateral rules for Greek sovereigns (and thus in effect other distressed EMU sovereigns as well) was not deemed enough and as markets today were warming up to some form of concession by the ECB that they would have to scrap that old playbook of theirs entirely, they did … well just the opposite.
As a result everyting risky took a solid beating with global equities plunging around the globe (well Canada may be the exception c.f Alphaville, but still …). Also in FX land the action heated up. In this way, the EUR/USD is currently trading below 1.26 (and counting) and other traditional risk/carry trade plays have been taken to the dump. One notable example here is the AUD/USD which has moved from 0.92-0.93ish to 0.88ish in only one week and another is the EUR/JPY fiddling with 113 at the moment which is truly astonishing. Today, BNParibas released the ominous call that the Euro will be trading on par with the Greenback in Q1-2011 to which my response is simply; that late!
So, where do we go from here? Well, the theatricals on Wall Street and elsewhere are of course just that, but as the we are about to close the book on a week where the debt crisis brought its first real human casualties the stakes are being upped not least in the context of European policy makers where today’s message that … (quote: Tullet Prebon’s Lena Komileva)
… The ECB went for a “safe haven” approach focused on defending its independence, its inflation-fighting credibility and the euro as a store of value.
Well, it just won’t cut it and at this point it really does not matter whether you are a deflationist or an inflationist or whether you believe the Greek people (or perhaps those in Spain or Portugal) should burn in h’ll for their irresponsibility. The stakes have been raised and while I believe a Greek debt restructuring/default has been inevitable all along it now carries the risk of leading to a new and alltogether more sinister batch of “inevitable outcomes”; it is called contagion and we are right in the middle of it. You better have that playbook ready!
—
[1] – Although this suggests something else may be brewing.
By B.P.T., on May 7th, 2010
At 8:30 AM EDT the Employment Situation report for April will be announced, and the consensus for non-farm payrolls is an increase of 200,000 jobs compared to a gain of 162,000 in March, the consensus for the unemployment rate is that it will decrease by 0.1% to 9.6%, the consensus average hourly earnings rate is an increase of 0.2%, and the consensus for the average workweek is 34.0 hours. These figures have been improving gradually over the last few months, along with all other employment reports.
At 3:00 PM EDT, the Consumer Credit report for March will be released. The consensus estimate is that there will be a decrease of $3 billion in the consumer credit available from February to March, after an unexpected drop of $11.5 billion in February.
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By Rok Spruk, on May 6th, 2010
Urska Zagar posted two very interesting empirical articles (here and here) about the connections between corruption, economic freedom and economic welfare. The first two indicators are qualitative while the third one is rather easily measurable. In a sample of 50 advanced, developing and least developed countries, she found a positive and robust correlation between corruption perception and GDP per capita, meaning that higher GDP per capita, on average, reduces the scope of corruption. The relationship between corruption and economic development is in fact even more intriguing than empirical figures suggest.
The impact of corruption on economic growth is an important theoretical and empirical theme in the economic literature. In this theoretical and empirical post, I will briefly review the main literature on corruption and development and discuss the empirical studies.
I would firstly refer to the article by Rodrik, Subramanian and Trebbi (2002) where the authors discuss the primacy of institutions for economic development over the exogenous factors such as geography (link). There has been an extensive amount of literature on the role of geography in economic development. The empirical strategy is quite simple. Usually, the basic equation includes the list of explanatory variables such as distance from equator, the percentage of land used for agricultural production and so forth. For example, the basic equation might take the following form:
log(GDP)=b1+b2(Dist)+b3(Land)+b4(Dummy_SubAfrica)+e
where GDP stands for GDP per capita, Dist for distance from equator, Land for the percentage of fertilized land and Dummy_SubAfrica is a dummy variable, taking the value of 1 if a country is located in the Subsaharan Africa and 0 if otherwise. In addition, e represents stohastic error unexplained by the selected predictors.
However, the basic problem with geographic approach to explaining economic development is that the approach does not, by itself, distinguish between the endogenous features of economic development. In regressing GDP per capita on the distance from equator, the empirical estimates usually result in a modestly negative correlation between the two variables. However, the distance from the equator cannot itself explain the nature of economic development and its significance over time mainly because of its low predictive power in explaining the evolution of institutions and governance.
An interesting approach has been incorporated by Acemoglu, Johnson and Robinson (2001). They incorporate a historical and institutional perspective in the empirical framework of the explanation of economic development. The authors used mortality rates of colonial settlers to explain the institutional quality. They further argue that where settlers encountered few health hazards compared to European settlement, they established solid institutions, strong enforcement of property rights and a robust system of law. In other areas where health hazards frequently occured, colonizers focused on the extraction of natural resources and showed little or no interest in building high-quality institutions. Rodrik, Subramanian and Trebbi (2002) further estimated the impact of geographic variables, institutions and openness on macroeconomic variables.
The main findings in their study were the following. First, each degree distance towards equator, on average, reduces the income per capita by 0.94 percent. The geographical location by the equator is also negatively related to capital per worker (-1.68), human capital per worker (-0.25) and total factor productivity (-0.32). Second, the quality of institutions is a very good measure of the economic welfare. In their panel, the authors found that each additional improvement in the rule of law, on average, leads to 2.22 percent increase in income per capita. The result is statistically significant at 1 percent. The improvement of institutional quality is both positively related and statistically significant when capital per worker, human capital per worker and total factor productivity are regressed on the institutional quality.
Back in 1997, Peterson Institute published an extensive study, searching the causes of corruption (link). The author estimated that the highest cost of corruption in regressing a series of macroeconomic variables on corruption index is lower education expenditure and a decrease in private investment. The estimate of the total macroeconomic cost of corruption is a difficult and daunting empirical task.
The main causes of corruption are mostly endogenous and related to the institutional evolution ranging from legal origins, colonial historical variables to the public sector efficiency variables. In search of the grain of truth, it should be noted that capturing the stylized effect of corruption of economic growth and development requires an interactive empirical approach. In other words, it would be impossible to establish “cause-and-effect” connection between corruption and development indicators without extracting a large amount of historical data and regressing it on the key endogenous variables.
Clearly, the role of geographical characteristics should not be neglected. However, the primacy of institutions in explaining the contemporary patterns of economic development is rather undisputable. Daron Acemoglu recently wrote an in-depth article on the distribution and explanatory factors regarding world poverty (link) where it clearly stressed the lack of institutions of human capital in the evolution of world poverty. When discovering the true causes of corruption, there should nonetheless be a clear and distinct rationale underlined by the evolution of institutional quality over time as the most significant measure in explaining the evolution, causes and effects of corruption on economic development.
By Richard Daughty, on May 6th, 2010
John Nadler at Kitco.com had a recent column with the terrific title “Who You Gonna Call? Mythbusters!”
When I read that, I began to sing the song to myself! “Something strange, in the neighborhood. Who ya gonna call? Mythbusters! Something weird, and it don’t look good. Who ya gonna call? Mythbusters!” Wonderful!
Of course I was impressed with the cleverness of Mr. Nadler, as it is perfect that he would use a line from Ghostbusters theme song to introduce a commentary with a gold theme and about the whole stinking economic situation, and I wish I had thought of it, especially since I now can’t get the theme song out of my head. “Who ya gonna call?” Hahaha!
My happy mood was briefly spoiled by a moment of paranoia when I thought that he was referring to me and how I am a big fraud just because I don’t know what I am talking about, and I stopped singing long enough to sarcastically think of a rebuttal, probably in the, “Where the hell have you been, Nadler? Everybody already knows that I am an idiot! Hahaha! The joke’s on you!” vein.
Thankfully, he was not referring to that at all, but instead is about one of the “myths”, which is that “gold is in a bull market”, as he cites as evidence “an online opinion poll conducted by Commodity Online, a majority of the respondents have hinted at a possible fall in gold prices in the near future, and better earning opportunities will come knocking on the door.”
And note that this was no absurdly small sample size, carefully crafted to confirm a preconceived notion, like that infamous time when I deduced, from a sample size consisting of a single incident, that all American supermarket managers were idiots after that one time when I was particularly incensed at inflation in prices and demanded to see the manager at the grocery store.
With a flourish, I pointed to my register receipt and commandingly said “$147.53!”, whereupon I turned and pointed dramatically to the pitiful few bags of groceries in the shopping cart before continuing, in a voice both loud and irritating, “You’re charging me $147.53 for that little pile of food, you little moron? This is an outrage! You and all your filthy retailing ilk are raising, raising, raising prices until we scream in outrage, and which shows, once again, how you had better have gold and silver to offset the inflation in prices that is killing us all – killing us, I tells ya! – as a result of the government’s gargantuan deficit-spending and the Federal Reserve accommodating that insane amount of borrowing-and-spending by, unbelievably, creating the insane amounts of money with which people, mostly the Federal Reserve, can buy their stupid bonds!”
Then I asked him, pointblank, “Are you buying gold, silver and oil? Are you? Huh? Are you, punk?”
Well, he just stood there with his eyes bugging out, looking at me, speechless, which I took to be a “no”, which is why I extrapolated, as I said, from this one sample that all managers were idiots, and why I said, “Then you’re a moron!”
I later realized I was wrong in having such a small statistical sample, and I was wrong in calling him a moron, because the prices are not his fault, and thus it is wrong of me to blame him, and the only reason that I blame him is because the Federal Reserve won’t talk to me and wife and kids are whining, “Blame somebody else for awhile, because we are sick of it!”
No, this was a huge sample, and was “A sample size of 21,600 respondents selected from across the globe”, and it came up with the surprising fact that “93%, or 20,100, of the total sample size opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets.” Wow! 93%!
Now many of you may look at this and say, “Hahaha! The idiot Mogambo is wrong about the necessity of buying gold, and probably everything else, too, and this proves he is an idiot just like we have all been saying all these years!”
To these 20,100 people I reply that their forecast is, seemingly paradoxically to them, actually comforting news to me in my extreme, yet otherwise normal (considering the circumstances) opinion that We’re Freaking Doomed (WFD), and that gold will soar as the dollar, and all paper currencies, fall in purchasing power, thanks to such massive over-creation of money, in that it is an inescapable Cold, Hard Fact (CHF) that the majority of investors investing in a market must lose money so that a minority of investors can make a profit, and they will lose either nominal money (because their shares went down in price), or by inflation (in that their shares may have gone up by double, but the general prices of everything went up by triple), or both. Probably both.
And so I stand up Proud And Loud (PAL) to say, with a wry smile of Mogambo Arrogant Self-Assurance (MASA), that if you are not buying gold, silver and oil in response to such monetary and fiscal insanity, then I not only laugh at you, but Laugh In Scorn (LIS) at your screwing up something so easy, so easy that one is compelled to squeal girlishly in delight, “Whee!”
Gold Bulls Bust Myths originally appeared in the Daily Reckoning.
By B.P.T., on May 6th, 2010
The monthly Chain Store Sales report will be released today. This report on sales in chain stores gives a look at the health of stores that make up about 10% of all retail sales.
The Monster Employment Index for April was released today, and the index moved up 8 points to a value of 133, which was the biggest jump in the last 3 years, and is yet another sign that the job market is improving.
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 445,000 new jobless claims last week, which would be slightly less than the number reported last week, and would continue the trend of slightly improving employment statistics.
Also at 8:30 AM EDT, the Productivity and Costs report for the first quarter of 2010 will be released. The consensus is that non-farm productivity increased 2.6% in the last quarter, after an increase of 6.9% in the last quarter of 2009, and labor unit costs declined 1.0%, following a decrease of 5.9% in the previous quarter.
At 9:00 AM EDT, Treasury Secretary Timothy Geithner will testify before the Financial Crisis Inquiry Commission on the shadow banking system.
At 9:30 AM EDT, Federal Reserve Chairman Ben Bernanke will speak to the Chicago Federal Reserve Bank 46th Annual Conference on Bank Structure.
At 10:00 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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By Claus Vistesen, on May 5th, 2010
Well, well … it seems that the Europe may be important after all or at least that the Greek malaise may be spreading. The EUR/USD at 1.29ish, the AUD/USD looking towards 0.9ish, and all things risky in equity land seems to be entering the room of pain …I will leave it to Mr. Bloomberg for now;
Asian stocks fell, extending the biggest slump in global equities in three months, while the euro and oil dropped on concern Europe’s debt crisis is spreading. Yield premiums on corporate bonds widened the most in 13 months.
The MSCI Asia Pacific excluding Japan Index dropped 1.9 percent to 410.11 as of 12:31 p.m. in Hong Kong. The euro extended declines after weakening below $1.30 for the first time since April 2009. The extra yield investors demand to own company debt instead of U.S. Treasuries climbed 4 basis points as investors shunned higher-yielding assets, while rates on Australian 10-year notes dropped 10 basis points to 5.65 percent. “Investors have clearly shifted their focus from strengthening corporate earnings and an improving macroeconomic backdrop to the problem of sovereign debt,” said Nader Naeimi, a strategist at AMP Capital Investors Ltd. who helps oversee $90 billion for the Sydney-based mutual-funds manager.
More than $1.1 trillion was wiped from the value of global stocks yesterday amid growing expectations that the 110 billion euro ($143 billion) rescue package for Greece will need to be extended to Spain and Portugal. Stocks declines accelerated after Spanish Prime Minister Jose Luis Rodriguez Zapatero called the speculation “complete madness.”
The MSCI World Index of 23 developed nations dropped 0.2 percent after losing 2.6 percent yesterday, the most since Feb. 4, almost eliminating this year’s gains. The MSCI gauge for emerging markets fell 1.3 percent and is now down 1.1 percent for 2010.
Contagion ‘Sword’
All 10 of the industry groups in the MSCI Asia index declined, with more than 18 stocks falling for each that gained. China’s Shanghai Composite Index declined 1.5 percent and Taiwan’s Taiex lost 2.8 percent. Markets in Japan, South Korea and Thailand are closed today.
Futures on the Standard & Poor’s 500 Index fell 0.2 percent. The gauge declined 2.4 percent yesterday. “There is no dispute that risk appetite has come right off with the European worries,” said Prasad Patkar, who helps manage $1.7 billion at Platypus Asset Management Ltd. in Sydney. “Damage caused by contagion is so firmly etched in people’s mind from the dark days of the financial crisis that no one wants to be caught long risk whilst this sword is hanging over our heads.”
So, is it back to the good old risk off (buy the USD) trade here or will there perhaps be real divergence between European and ROW equity/risk performance. Inquiring minds would love to know …
By Trace Mayer, on May 5th, 2010
The transition from the Industrial Age to the Information Age is resulting in a sea change between protection and extortion. As the world gets increasingly complex the result is a diminishing ability to extort while at the same time tools of protection are getting cheaper and more powerful. The arbitrary walls are coming down. 
SPECIALIZATION
I was sitting in trial today observing Bill Rounds, co-author with me of How To Vanish.com, as he was questioning a witness. This particular case is an example of complex business litigation that has been up and down the appellate ladder many times. The subject matter is fairly esoteric and even worse the law is unsettled. While unrelated to the case, the plaintiff is a world renown surgeon.
During questioning by Bill’s opposing counsel a funny scene happened. Bill stood up and the judge remarked, “Sustained.” The court reporter stopped and asked, “Was there an objection?” The judge replied, “No, but Mr. Rounds stood up and the coming objection is sustained.”
INCREASING COMPLEXITY
Those 5-8 seconds in the court transcript are but the faintest traces of an incredibly complex thinking process that the two attorneys and judge understood and applied which was backed by hundreds of pages of code and cases. Yet, I am almost sure that neither the surgeon nor the jury even knew there was a virtual ping-pong match being played.
But for the attorneys and judge the surgeon’s work is equally incomprehensible. And the work of engineers, architects, computer scientists, etc. are equally indecipherable to those outside the circle. Such is the modern world that is multiplying in complexity.
Everywhere complexity is increasing from the tadpole in the pond to the manmade computer operating system. But manmade complexity that is beneficial for humanity takes work. Bridges do not design and build themselves. As humanity has progressed so likewise has the economy from hunting and gathering to plows and silos to railroads, satellites and spaceships.
But all this time there have been malefactors and nefarious individuals that seek to destroy and wield violence like a dagger focused on the economy’s heart seeking coercion instead of consent. After all, the power to destroy and inflict pain, while immoral, is power nonetheless. A power wielded by those sadists who enjoy terrorizing innocents.
PROTECTION AND EXTORTION
The irony of government is that it attempts to provide protection through extortion. And like the blackmailer or extortioner the government’s ability to tax depends on the same vulnerabilities as extortion or the Godfather’s offer that can not be refused. As the Industrial Age progressed so likewise the nation-state rose because the assets created were larger and thus the need for protection was greater. After all, the capitalists either paid off those who could leverage violence against them for extortion or paid a military force capable of defending with brute force any attempted shakedown.
But the relentless advance of technology is blunting the sharp edge of violence’s dagger. Protection is being made easier to provide while extortion is being made more difficult to carry out profitably.
Why is this? A basic mathematical law: multiplying is easier than dividing. A simple example is that 3*3*7*11*13 is much easier to solve than reducing 9,009 to its prime components.
Or another example would be encryption. I like the open-source Truecrypt and in June 2003 the US National Security Agency reviewed and analyzed the design and strength of AES-256 encryption finding it sufficient to protect classified information up to the Top Secret level.
In effect, with this free tool I can spend ten seconds encrypting a text file that can take years of focused processing power to decrypt. And just for fun perhaps it only reads “Haha if someone wasted the resources to decrypt this!” But why transmit sensitive personal or business information without such protections? After all, recently 30,000 Hotmail passwords were compromised in a security breach and posted on the Internet. An ounce of prevention using free encryption software can be worth a pound of cure repairing a stolen identity.
PROTECTION IN THE INFORMATION AGE
During the Industrial Age the leverage violence could exert was much greater and is being greatly reduced in the Information Age. Thus the scale is tipping in favor of protection and away from extortion with its attendant allocation of scarce resources through bureaucracy. The digital infrastructure is allowing the previously unseen but highly complex range of systems to be perceived; Facebook is a prime example.
Then that perception is being harnessed in extremely productive ways through multiplication; as a result the economy is following economic law and moving away from inflexible command and control systems towards spontaneous adaptive mechanisms. But government systems still dragoon resources from higher-value complex uses to lower-value primitive uses. As Frederic Lane wrote on page 383-384 of Venice, A Maritime Republic:
Every economic enterprise needs and pays for protection, protection against the destruction or armed seizure of its capital and the forceful disruption of its labor. In highly organized societies the production of this utility, protection, is one of the functions of a special association or enterprise called government. Indeed, one of the most distinctive characteristics of government is their attempt to create law and order by using force themselves and by controlling through various means the use of force by others.
From machines to microchips, factory to laptop, mass production to small teams or even the lone entrepreneur the gigantic institutions of the Industrial Age are being reduced to smaller and smaller parts. As the Information Age advances the risk of violence decreases because as the scale of an operation declines so likewise does its potential for sabotage or blackmail and the increased location independence afforded by the Internet multiplies the inherent safety an asset or individual enjoys. Despite Sulter’s proclamation at 2:08, “I want this country to realize that we stand on the edge of oblivion. I want everyone to remember *why* they need us!” But we, humanity, do not need them even if they think they can clean up some oil.
CONCLUSION
For those who rely on coercion instead of consent the transition to the Information Age is being particularly harsh to their immoral business models. They are now opposing both natural and economic law. The financial elite and political elite of America and Europe are now beginning to infight. This is resulting in the State losing legitimacy in the eyes of the masses.
While the time frame is likely far into the future, first the European Union will collapse and later the United States. But this is not uncharted territory but instead a trend of the nation-state collapsing under its own weight which started with the Berlin Wall and Russia. To avoid being collateral damage I elucidated several tips in chapter six of The Great Credit Contraction.
My next book, which I have co-authored with Bill Rounds, is currently with the publisher and hopefully will be available within a couple months. It will magnify the suggestions from chapter six and I think many will find it tremendously useful. As an old Chinese proverb says, “Of all the thirty-six ways to get out of trouble, the best way is – leave.”
DISCLOSURES: Long physical gold, silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
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