I may be late to the party, but is this Moldbug in 2006 predicting the 2008 recession? I don’t know enough about finance to understand the details of the conversation, but CPDOs seem to be a play on credit default swaps, so Moldbug is obviously playing the prophet here.

The Big Short oversold the narrative that NO ONE SAW THIS COMING. Plenty of people saw it coming, but their voices were drowned out by the bulls, and, in fairness to Michael Lewis, it is true that only his protagonists actually bet their money on the housing bubble bursting.

At any rate, here’s Moldbug’s comment in full, posted 30 December 2006. 


The big picture in CPDOs is that they are a classic example of government failure. Nothing like a CPDO could possibly exist in an unregulated economy. Of course, that doesn’t mean the best choice for this far-from-unregulated economy isn’t to find some way of regulating the damn things out of existence. But fortunately this is not my job.

CPDOs exist because NRSROs exist. Rating agencies (Moody’s, S&P) are not private actors. They are granted enormous official authority. Imagining the market price of NRSRO status, sold with no questions asked – for example, to a company which could shake down its clients for ratings – is one way to conceive of the scale of this delegation of power.

In a transparent, professional system of government such as ours, authority of this kind must never be personal and arbitrary. Old John Moody, perhaps, could tell his customers that Joe’s Railroad was a shoddy outfit run by notorious shysters, whose bonds shouldn’t be touched with a ten-foot pole no matter how many payments they’ve made. If his successors rate JRX, they have to justify their result with some serious math. Nothing else would be compatible with “nationally recognized” status.

As Mises pointed out in the ’20s, excessive dependency on calculation is the general flaw in central planning. The planners are constantly being forced to calculate things that cannot possibly be calculated. Credit default probabilities, especially aggregate spread projections, are a classic example.

So Moody’s can’t issue a report saying that these CPDO things just don’t smell right. It can’t call Stratfor, get a ballpark number on the chance of an Israeli-Iranian war, and factor that into the probability of a generalized credit panic. It has to do what it does – run the things through its models. Which predict, as usual, future results from past performance.

And it’s not just that Moody’s has to do this. It’s that it can do this. Because it is effectively a government agency, it has transferred all of its risk for this behavior to the state. It is Uncle Sam that will take the hit if the models fail, and rightly so. Moody’s only existential risk is failure to comply with its own properly approved policies and procedures.

Fortunately, Uncle Sam is perfectly capable of insuring the risk of the models. He can, after all, print more dollars. Which will then be used to buy bonds – keeping those spreads svelte. Moreover, with this same mechanism, he can stimulate the economy, keeping the people who actually have to make their payments flush.

This is a perfect example of an expansionary ratchet. It is a political mechanism that causes immediate pain if the presses are stopped. Hyperinflation happens because the political cost of a liquidating recession exceeds the political cost of continuing around the spiral. Systems that increase sensitivity to default, like the system that the CPDO is gaming, make the spiral harder to escape.

In other words, the more CPDOs are outstanding, the more stress the financial system will suffer in the case of a sharp credit spread widening that overpowers the “stabilizing” reaction when the CPDOs automatically react by selling protection. The CPDO machine sets up a critical point, below which it is a “stabilizing” feedback loop that causes spreads to converge (as CPDOs gear up), and above which it is a thoroughly destabilizing one, that causes them to diverge (as CPDOs max out and fail).

It is, in other words, major “bubble skin.” The lovely old metaphor of a bubble, which really just means “disequilibrium,” can easily be extended to other materials than the usual soapy water. If your bubble is made out of latex, for example, it can get much bigger and sustain a much higher internal pressure. It is harder to pop, but it makes more noise when it does.

With CPDOs, and ultimately with the power of the printing press, the bubble is the size of the Hindenburg, its interior could easily be mistaken for the atmosphere of Jupiter, and its walls are Kevlar and nanotubes. As Steve says, it is very hard to break.

And it is very important to note that it is not just the personal whim of “bulimic CBs” that supports it – it itself enforces exactly that bulimia. The bubble skin is not really the critical point of the CPDOs. It is the fact that CBs cannot allow spreads to reach that critical point.

For all the hawkish talk, they will accept any level of consumer price inflation first. It is much easier to tweak the index again (maybe it could just be the GCPI, the Game Console Price Index, measured in triangles per second per dollar) and suffer the occasional human-interest story in the Times or Post about how the man on the street thinks prices are too high, despite the fact that there is no inflation.

So fasten your seatbelts, everyone. If I am even close to right, there are no brakes on this thing, and we are headed north in a hurry. It may be a happy 2007 indeed.

Nick Land’s latest musings on independence, dependence, and connectivity got me thinking about networks.

Briefly, Land recasts the Left/Right dichotomy not in terms of individualism and collectivism but in terms of comparative independence and dependence. While the Left, he writes, is “enthused” by inter-dependency but merely “accepts” a degree of comparative independence, the Right, in reverse, is enthused by independence but accepts a comparative degree of inter-dependency.

Independence, Land continues, is a rough synonym for sovereignty. I would add that independence is a rough synonym for power. Minus independence, I cannot do or get what I want. Of course, power is always constrained (by the laws of physics if not by other humans), so a degree of dependency or inter-dependency is always there to constrain independence. Land’s point is that some ideologies will emphasize one constraint over the other. Do we emphasize inter-dependence and admit a degree of independence here and there? Or do we emphasize independence and admit a degree of inter-dependence here and there?

Wendy Chun, a media professor at Brown, provides the ultimate Left emphasis on inter-dependence in her book Programmed Visions. In the book’s conclusion, Chun attempts to define freedom as an immersion in larger human collectives, arguing that true (political) freedom may in fact rightly curtail “economic and civil freedom” by undoing the “autonomous subject.” She illustrates her point with a story from an individual who, taking part in a mass protest in the Philippines, was at first frightened by but eventually at one with the throngs of humanity surrounding her:

I was caught in the thick waves of people far from the center of the rally. I could barely breathe from the weight of the bodies pressing on my back and sides . . . After what seemed like an eternity of extremely small movements, slowly, slowly, there appeared a clearing before me. I was grateful not because I survived but because I experienced the discipline and respect of one for the other of the people—there was no pushing, no insulting, everyone even helped each other, and a collective patience and giving way ruled.

. . . The night deepened . . . While resting on the sidewalk, I felt such immense pleasure, safe from danger, free, happy in the middle of thousands and thousands of anonymous buddies.

Thus the individual found safety and happiness amidst an anonymous mass of humanity that operated upon a principle of “giving way.”

Taken in a moral direction, the story might illustrate a pseudo-Buddhist parable on the importance of abandoning one’s ego so that others might live and that all might live together in peace. However, taken in a political direction—which is where Chun takes it—the story illustrates an ideological emphasis on inter-dependence that only allows a small degree of independence to exist within the confines of (and only when subordinated to) that larger system of dependence.

Being immersed in a massive crowd—whether or not it’s orderly—is for me a vision of hell, but for Chun, it becomes a metaphor for the philosophical ground of political freedom at the expense of independence. Someone like me, who would be darting for the nearest exist, the nearest way out of that crowd, is, in Chun’s estimation, subverting larger political freedoms through my insistent obsession with independence.

. . . However, the problem with everything I just said is that—if you look back at it—independence seems to be just a synonym for that old canard, “individualism,” though I think Land is trying to move us away from that canard by casting independence as a synonym for sovereignty and an antonym of dependence. So let’s reorient the story and its object lesson a little and totally undermine what Chun is trying to do with it.

The individual in the crowd, we read, feels safe and at peace with the crowd only once it has given her a way through or made room for her . . . that is, she finds freedom in the crowd only once she has been given space and granted a place of independence. Presumably, what she does in that space is up to her, so as long as what she’s doing doesn’t invade other spaces, she is also granted a place of sovereignty. Maybe she wants to invite some other people into her space; she’s not a rugged individualist, after all. (She will probably not invite everyone into her space, though, because then it’s not her space anymore; she’s not an idiot, either.)

The mass of humanity is a given. How we divide that humanity in space—and I’m thinking here both in literal geographic terms as well as more abstract political terms—determines our ideology.

Network theory gives us some basic terms:


Given the mass of humanity, we have three ways to divide it: one node rules and subordinates all the other nodes—a centralized network; all nodes are clustered discriminately into autonomous communities—a decentralized network (or, more commonly, a scale-free network); or all nodes are in equal connection—an ordered network.

In the centralized network, independence and sovereignty are granted only to one node, be it a person (i.e., monarchy) or a small elite (i.e., oligarchy). In a decentralized network, local clusters are granted independence from other local clusters, and sovereignty exists only locally; it does not expand outward (i.e., patchwork governance). In an ordered, lattice-like network, sovereignty is nonexistent—a function of the fact that hierarchy is nonexistent—and every node is equally not subordinated. Chun would have us believe that every node in this network would therefore be free, but by that same token, every node is equally positioned to control every other node (i.e., the world is just as easily its own tyranny as its own utopia).

Chun, I imagine, wants a political system that embodies an ordered, lattice-like network. No hierarchy, no clustering, no radical differences in node connection (or degree). The ordered network is the Leftist, inter-dependency ideology personified.

Given the networks above, we might also posit that differences among Right-wing political ideologies is partially reducible to a preference for centralized or decentralized sovereignty networks. Is there one ring to rule them all? Or does each ring only work among its own people? Is true independence granted to a privileged elite? Or does independence simply mean a freedom from other communities, a freedom from other ways-of-doing-things.

I have simplified network theory quite a bit here, but it gives us a starting point by which political ideology—and, in particular, independence and sovereignty—can be explored through network visualizations. One major point I’ve left out is centrality, particularly betweenness centrality, which, in a decentralized network, denotes those nodes that control the movement from one cluster to another. I’ll save centrality measurements for another post because I’m still not quite sure how they map onto this political metaphor.


America is the problem that the USA was designed to solve, the door that the USA closes, the proper name for a society born from flight.

With apologies to its oft-cited counterpart, “Lure of the Void” is, in my view, the most profound of Nick Land’s Shanghai essays. In fact, I think “D.E.” is better understood as the prologue to “Void” rather than “Void” being the epilogue to “D.E.” Read it. Then read it again. Then, for Earthbound context, read everything on dynamic geography (or patchwork governance), entropy (also entropy export), and the degenerative ratchet.

Lure of the Void (.docx) (.pdf)


Harriet Tubman To Appear on $20 Bill.


The supremacy of physical cash is by no means clear . . . In fact because of its prevalence in the modern monetary system, it would be dangerously destabilizing to regard electronic money as somehow “inferior” to physical cash. Five dollars in e-money must be equal to five dollar bills. Anything less would undermine the electronic money that is used for the vast majority of transactions and makes up almost all liquid savings. So provided that the bank still permits money to be withdrawn in electronic form, refusing to allow physical cash withdrawal cannot break the law.

This is where identity politics always gets you: to the last place power resided but never to the place where it resides. Putting a black woman on the $20 bill at the same  time cash is being placed on suppression watch is The Last Psychiatrists’ “Roanoke” principle in action. Power is fleeting. Race/gender politics is the smokescreen it leaves behind so you can’t follow it.

This is one of those stories that should be legend, but for some reason, I hadn’t heard of it until today.

Italian woman decides to hitchhike through the middle east wearing a wedding dress to promote peace, to prove the essential peacefulness of Islamic society, and to demonstrate the fundamental compatibility of the Muslim and European worlds.

She barely gets into Turkey before being gangraped and murdered.

It’s a tragic story, and I’m not making light of it. No one “asks for it,” not when it comes to rape and certainly not when it comes to murder. But her story illustrates an important lesson that our elites need to re-learn: reality does not care about you and it certainly does not care about your ideals.

Tragically, this woman was killed by her ideology. Death by utopianism. It would be exponentially more tragic to watch whole civilizations die by the same method.

Once upon a time, a monetary system’s unit of account was trusted to value goods, assets, and liabilities because said unit was tied to or backed by something finite and intrinsically valuable.

After Bretton Woods, the American dollar is backed by nothing. It is its own standard of valuation, allowed to exist as such because the people who say so work and live in big buildings guarded by men with guns.

In the electronic age, however, American dollars—the green, rectangular strips of paper with dead presidents on them—have amusingly and ironically come to be a new sort of intrinsically valuable item. Not everyone accepts the swipe of a debit or credit card, but everyone accepts those green rectangular strips of paper, from L.A. to Moscow. And these strips of paper are not only intrinsically valuable but they are, in some sense, in finite supply. American dollars can thus be understood—and often are understood by the public—as a new (debased) form of gold; electronic transactions are representative currency, each debit card swipe or electronic deposit representing some number of green papers with dead presidents on them.

Inevitable, then, that the electronic age would necessitate the removal of cash from the world monetary system, just as the removal of gold was necessary in 1973. The total politicization of money—which is necessary for infinite neoliberal growth—cannot suffer any unit of account in finite supply.

Thus the neoliberals are already musing that one outcome of negative interest rates may be a punitive tax on cash or, at some point, an inability to convert “dollars” into green slips of paper at all, just as today it is impossible to convert dollars into gold.

Martin Sandbu writes at Financial Times:

But what really matters is what the public wants to do. JP Koning nicely explains the “hot potato effect” of pushing central bank reserve rates below zero: banks will bid down rates on other assets in the financial system as they try to swap reserves for cash. Ultimately, they will be forced to lower rates on deposits below zero as well, so that customers will have to pay to keep their money on deposit. This is where the liquidity trap is really supposed to snap shut: will there not be a run for cash as depositors refuse to pay banks to hold their money?

But consider two things. First, it is not as if depositors as a class actually have a legal right to convert all their money to cash as it is. You cannot present a debit card at the Bank of England and demand cash. Indeed, even your own bank limits how much cash you can withdraw, as Frances Coppola has pointed out. Just read the fine print of your account terms of service.

And how could private banks honour mass withdrawals of cash even if they wanted to? No law provides for the central bank to swap client deposits for cash; only central bank reserves. And despite the huge growth of reserves in recent years, these still amount to only a fraction (about one-fifth in the UK) of bank deposits. So, to honour customers’ demands, banks would have to borrow more reserves from the central bank, which could impose terms as onerous as it wished.

And Frances Coppola at Forbes:

Of course, those who think that the only real money is the green paper in your wallet (or better, shiny yellow metal) will no doubt claim that refusal to allow deposits to be converted into physical cash is a denial of fundamental property rights. But the legal position on this is opaque to say the least. Is paying for a meal in a restaurant with a bank card “less good” than paying for it with physical cash? On the face of it, there is no difference: the nominal amount is the same in each case. If the restaurateur has to pay a fee for accepting a card payment, then cash is more valuable to him – though if accepting cards means he gets more business, electronic money may still be worth his while. But if the restaurateur can accept bank debit card payments for nothing but has to pay a fee to deposit cash into a bank account, then electronic money is worth more. Anyway, the convenience of electronic payments directly into his account may still make this form of money more valuable to him than cash, which has to be physically taken to the bank during the working day: time is money for a busy restaurateur. And the convenience of making payments with a bank card rather than carrying around wads of cash may be attractive to the restaurateur’s customers. The supremacy of physical cash is by no means clear.

In fact because of its prevalence in the modern monetary system, it would be dangerously destabilizing to regard electronic money as somehow “inferior” to physical cash. Five dollars in e-money must be equal to five dollar bills. Anything less would undermine the electronic money that is used for the vast majority of transactions and makes up almost all liquid savings. So provided that the bank still permits money to be withdrawn in electronic form, refusing to allow physical cash withdrawal cannot break the law.

This could have far-reaching consequences. The monetary policy of the last few years has been hampered by the supposed existence of the “zero lower bound”, at which (it is assumed) everyone would opt for physical cash instead of bank deposits and bonds. We already know that the lower bound (if it exists) is actually slightly below zero, since it is the point at which the cost of negative rates on deposits and bonds starts to exceed the cost of holding physical cash (vaulting charges, theft risk and so on). But if investors simply cannot obtain large amounts of physical cash because banks won’t issue it to them, the slightly-below-zero lower bound cannot bind. In which case negative rates could be very negative indeed and no-one would be able to do much about it. There would be no need to abolish or tax cash, as Citi’s Willem Buiter suggests. It could simply be ignored. Welcome to the negative-rate universe.

The “dollars” in your bank account mean something, we feel, because they are convertible into a finite, intrinsically valuable resource: gold once upon a time, and now, green slips of paper that will allow you to buy commodities in every country on the planet. But there are clearly forces and individuals at work that would like you not to be able to convert dollars into anything—they would like to see “dollars” existing only invisibly on a bank’s server, not circulating materially, freely, and thus less susceptible to any unwanted market feedback. 



Spengler and Israeli Defence Minister Moshe Yaalon both agree that partitioning Syria (I would include Iraq) is the best option.

“Unfortunately we are going to face chronic instability for a very, very long period of time,” [Yaalon] said. “And part of any grand strategy is to avoid the past, saying we are going to unify Syria. We know how to make an omelette from an egg. I don’t know how to make an egg from an omelette.”

Ram Ben-Barak, director-general of Israel’s Intelligence Ministry, described partition as “the only possible solution”.

“I think that ultimately Syria should be turned into regions, under the control of whoever is there,” he told Israel’s Army Radio, arguing that Assad’s minority Alawite sect had no way to heal its schism with the Sunni Muslim majority.

“I can’t see how a situation can be reached where those same 12 percent Alawites go back to ruling the Sunnis, of whom they killed half a million people there. Listen, that’s crazy.”

And the money quote, from Yaalon:

Referring to some of the warring sects, Yaalon added: “We should realise that we are going to see enclaves – ‘Alawistan’, ‘Syrian Kurdistan’, ‘Syrian Druzistan’. They might cooperate or fight each other.”

Spengler believes that they will fight each other regardless but that the fighting will be less violent and less likely to spread to more strategically important regions if Syria is partitioned into ethnic –stans.

As I wrote a few days ago, partition is necessary in Syria (in Iraq as well), but it’s only half of what needs to occur if the goal is regional stability. The other half is that each –stan needs to participate in a larger corporate governing structure. On its own, Kurdistan, Druzistan, Alawistan, or Assyristan simply does not have the resources—material or demographic—to sustain its own development. On its own, each –stan is destined to become addicted to international welfare, a protectorate in all but name. What is needed is for each ethnic state to be satisfied with its own regional moral rule, so that together they might devise ways to pool their economic resources: a corporate board, representing each state, that controls taxation, international trade, and infrastructure development but absolutely nothing else.

The idea is pure fantasy, I admit. The massively exogamous, out-breeding Northern and Western Europeans haven’t found a way to do it, so there’s no chance the consanguineous Persians and other inbred Islamic Central-Asians are going to do it (inbred used here in a purely descriptive, non-pejorative way). But Syria and Iraq are both in ruins, they’ve hit rock bottom as nation states, so these are natural regions in which to test the idea of patchwork, corporate-oriented governance.