Archive for January, 2008

How I stopped believing in democracy

January 31, 2008

The other day I had lunch with an old friend, Erik, whom I hadn’t seen in a few years. Erik is five or ten years older than me, has a philosophy degree from Berkeley, writes Internet standards for a living, and is generally a very stable, responsible and successful guy, unlike of course yours truly. He lives in Germany and is married to a German, and his politics are quite solidly progressive.

I was confident that I had informed Erik of this blog. But I think it got lost in a long email. So I had the rare opportunity of really solidly failing to explain the point of UR.

“It’s a neo-f -,” I said. “Um, no, it’s not really a neofascist hate blog. I just call it that sometimes to shock people. It’s a, what it is, is an anti-democracy blog.”

“An anti-democracy blog. Well, that’s certainly…”

“You’ve got to admit, it’s an under-served market,” I said.

“Well, I’d certainly agree with that.”

“Yeah,” I said. “It was actually about a year and a half ago, I decided I didn’t believe in democracy anymore. It was great. Just like deciding not to believe in God.”

“More like deciding not to believe in God about 250 years ago,” Erik said. He actually said this. I don’t believe I’ve cut a single line from this exchange.

In fact, I had actually never thought of quite it this way. But yes – disbelieving in democracy in 2008 is a lot like disbelieving in God in 1758.

For one thing, you disagree with basically everyone in your society. For another, your thoughts undermine the theory of legitimacy on which your government is founded. For a third, acknowledging your beliefs, let alone evangelizing them, is not exactly an effective way to make friends or influence people. And for a fourth, your original reason for believing in it was that when you were very small, grownups told you that it existed and was good.

Of course, the same could be said for disbelieving in, say, Australia. I am pretty confident that “Australia” is more or less what everyone thinks it is. I am not at all confident that the same can be said for “democracy.” If you share similar suspicions, please feel free to read on.

I had a very peculiar upbringing. I (a) had a father who taught philosophy, then joined the US Foreign Service; and (b) skipped three grades before high school. I was never acculturated in any discernible way into any tradition I could even start to define. My father’s parents were Great Neck communists and my mother’s were Tarrytown Republicans, but both these worlds had been soundly rejected. There was a bit of Whole Foods avant la lettre, but small other trace of general hippieness. It was an almost Socratic upbringing. We didn’t even do Christmas trees. We believed in nothing.

And we never, ever had a TV. That was absolutely unthinkable. But I did read a lot of science fiction – Asimov, Arthur C. Clarke, Harry Harrison, and of course Heinlein. My favorite, though, was the great Hal Clement, who wrote what I still think may be the best SF novel ever. In the pure literary department, there was always a lot of basically negative and unconstructive material sitting around, including Mark Twain, Hunter S. Thompson, Jaroslav Hašek, and that great satirical novel of the ’70s, The Serial.

I hasten to assert, however, that none of this included any kind of anti-democracy agitation. And certainly nothing in any sense right-wing. My parents may not have been hippies, but they weren’t monarchists, either. They were civil servants. When we were in the US, we listened to NPR. When we were outside the US, we listened to the BBC. The thought of tuning to VOA in the latter, or any commercial radio station in the former, was impossibly gauche.

(In retrospect I’m sure VOA was easily as left-wing as the BBC, if not more. But it didn’t matter. The name was enough. And I’ll bet the BBC was probably better, anway.)

As you can see, there is a certain amount of contempt in this perspective. This makes sense, because it’s more or less the perspective of the global ruling class. For example, the only real sport I learned as a kid was squash. When my father was consul in Oporto, we would go to Le Meridien and play squash. At the time this struck me as completely normal. I’m not sure where my father learned squash, but I’m pretty sure it wasn’t in Great Neck. Perhaps they teach it in the Foreign Service orientation class.

I was introduced to America, the real America, in the following manner: I went from being an 11-year-old third-former in an ersatz British public school in Nicosia, to a 12-year-old sophomore in a genuine American public school in Columbia, Maryland. I am still picking little bits of Maryland out of my skull. (Of course, Columbia is not really Maryland proper – hence the name. It ain’t Frederick. But it’s not Silver Spring, either.)

For example, the first thing I remember from my first year in Maryland was something called a “pep rally.” For those of you who did not attend an American public high school, a “pep rally” is basically a straight ripoff of what Albert Speer did at Nuremberg, except that (a) it is indoors, (b) there is not quite as much fire, and (c) there is less saluting, more screaming, and about the same amount of chanting.

If you are an American raising kids abroad and you want to reintroduce them to your country, I highly recommend this sort of shock-and-awe approach. Having to deal with an American high school was not pleasant, but it gave me a certain respect for America: it exists. Once you go to college, you are no longer in the real America. You are in a fortified outpost of future America, which has been planted in the real America to enlighten and assimilate it. Respect is not on the menu.

Perhaps for some distance I should deploy my usual euphemism, “Plainland.” Do you have any idea how weird a country Plainland is? History still exists there. Nowhere else in the world is there any significant political division whose heritage predates 1940. Both Republicans and Democrats worship FDR, but Democrats worship him a little more. My mother’s mother now swears she voted for Kennedy in 1960. I know for a fact that she voted for Nixon. I’m pretty sure they were FDR-haters. Not that the Old Right wasn’t smashed, not that its particles weren’t broken into tinier particles, not that even a trace of it reached me in my formative years. But some atoms survived, and you can tell.

In Europe, forget it. Europe was conquered in 1945, but it was not conquered by Plainland. It was conquered by Georgetown. As I wrote here, the ideas now popular in Europe are obvious descendants of what the most influential people at State believed in 1945. The various so-called “parties” in Europe are mildly-flavored versions of this belief system, which becomes completely homogeneous in the upper elite. Brussels has no politics at all. It doesn’t need it. The situation is under control.

What Europeans call “anti-Americanism” is actually a belief, generally quite sincere, that America is not living up to her own ideals of 1945. “Anti-Americanism” might be better described as “ultra-Americanism,” or perhaps “Georgetownism.” And it certainly has nothing to do with the any pre-1940 negative perceptions of America. There is minimal cultural continuity between Europe before the war and Europe today. All the institutions were purged, all the individuals have finally kicked it. The Dutch who let you smoke weed in their cafes and the Dutch who ruled Indonesia might as well be on different planets. The former are thoroughly ashamed that they are even descended from the latter. And the latter are dead, which is probably a blessing.

So: my first political opinions were, of course, Georgetownist. I remember going to school in Nicosia the day after Reagan was elected in 1984. I was terribly embarrassed. I felt that my country had more or less taken a crap in its pants. To the Georgetownist, America exists so that it can lead the world to democracy and peace. Obviously Reagan did not stand for either of these things. He stood for Plainland and “pep rallies.” Of course I knew little of either, but I had a sense that they were out there, waiting.

Here’s how George Kennan, grand doge of the Georgetownists, expressed this conflict in a 1984 lecture, American Diplomacy and the Military (reprinted in American Diplomacy):

No wonder, in the face of all this confusion, that our greatest mistakes in national policy seem to occur where the military factor is most prominently involved.

But I wonder whether this confusion is not compounded by certain deeply ingrained features of our political system. I am thinking first of all about what I call the domestic political selfconsciousness of the American statesman. By this I mean his tendency, when speaking or acting on matters of foreign policy, to be more concerned for the domestic political effects of what he is saying or doing than about their actual effects on our relations with other countries. In the light of this tendency, a given statement or action will be rated as a triumph in Washington if it is applauded at home in those particular domestic circles at which it is aimed, even if it is quite ineffective or even self-defeating in its external effects. When this is carried to extremes, American diplomacy tends to degenerate into a series of postures struck before the American political audience, with only secondary consideration being given to the impacts of these postures on our relations with other countries.

This situation is not new. We have only to recall Tocqueville’s words, written 150 years ago, to the effect “that it is in the nature of democracies to have, for the most part, the most confused or erroneous ideas on external affairs, and to decide foreign policy on purely domestic considerations.” Nor is this, in essence, unnatural. Every statesman everywhere has to give some heed to domestic opinion in the conduct of his diplomacy. But the tendency seems to be carried to greater extremes here than elsewhere. This may be partly explained by the nature of the constituency to which the American statesman appeals. In the European parliamentary systems, the constituency is normally the parliament – because the ministry can fall from office if it loses parliamentary support. In our country, unhappily, the constituencies are more likely to consist of particularly aggressive and vociferous minorities or lobbies. These, for some curious reason, seem more often than not to be on the militaristic and chauvinistic side, either because there is some particular nation or ethnic group abroad which they want our government to support, or because they like to wrap themselves in the national emblem and beat the jingoist bell as a means of furthering their partisan purposes. American administrations seem to be particularly vulnerable […] to just this sort of intimidation, presumably because they do not want to be placed on the defensive by being charged with lack of patriotism. And the effects of this are ones we have had occasion to note, both in connection with our policies in third world areas, such as Vietnam or Lebanon, and in connection with the problems of arms control and the relations among the great military powers.

If there is any substance to what I have just been saying, then this is simply further evidence for the fact, to which many wise observers besides Tocqueville have drawn attention, that our political system is in many ways poorly designed for the conduct of the foreign policies of a great power aspiring to world leadership. I, in any case, believe this to be true, and I consider that the trend of events in these recent years has revealed deficiencies in this system which even Tocqueville could not foresee.

What are we going to do about it? It would be naive of us to expect, or even to hope, that these features of our governmental system are going to be corrected within our time. To try to correct them abruptly might well do more harm than good. In many respects, they represent the reverse side of the great coin of the liberties we so dearly cherish. And in this sense I see no reason why we should be ashamed of them. If this – our political system with all its faults – is the only way that a great mass of people such as our own, stretching from Florida to Alaska and from Maine to Hawaii and embracing individuals of the most diverse ethnic and cultural origins – if this is the only way such a mass of people can be governed without the sacrifice of their liberties – then so be it; and let us be thankful that such a possibility exists at all, even if it is not a perfect one.

But the one thing we can do, in the face of this situation, is to take a realistic account of this unsuitability of our political system for the conduct of an ambitious and far-reaching foreign policy, and to bear these limitations in mind when we decided which involvements and responsibilities it is wise for us to accept and which would be better rejected. Obviously, a number of the responsibilities we have already accepted, including some of the very greatest ones – NATO and our obligations to Japan, for example – represent solemn commitments of which we cannot divest ourselves at any early date. There is nothing for us to do but to meet these commitments as best we can, recognizing that the peace and safety not just of our country but of much of the rest of the world as well depends on the way we meet them, and trying to place them, wherever we can, above the partisan political interests that every American administration is bound to have. But when it comes to the acceptance of new responsibilities, let us, at long last, try to bear in mind the limits of our national capabilities and the price we are obliged to pay for our liberties. Let us recognize that there are problems in this world that we will not be able to solve, depths into which it will not be useful or effective for us to plunge, dilemmas in other regions of the globe that will have to find their solution without our involvement.

This is not a plea for total isolationism, such as our grandfathers and great-grandfathers cultivated. It is only a request, if I may put it that way, for a greater humility in our national outlook, for a more realistic recognition of our limitations as a body politic, and for a greater restraint than we have shown in recent decades in involving ourselves in complex situations far from our shores. And it is a plea that we bear in mind that the interaction of peoples, just as in the interactions of individuals, the power of example is far greater than the power of precept, and that the example offered to the world at this moment by the United States of America is far from being what it could be and ought to be. Let us present to the world outside our borders the face of a country that has learned to cope with crime and poverty and corruption, with drugs and pornography. Let us prove ourselves capable of taking the great revolution in electronic communication in which we are all today embraced and turning it to the intellectual and spiritual elevation of our people in place of the enervation and debilitation and abuse of the intellect that the TV set now so often inflicts upon them. Let us do these things, and others like them, and we will not need 27,000 nuclear warheads and a military budget of over $250 billion to make the influence of America felt in the world beyond our borders.

I can’t imagine a better presentation of the Georgetownist worldview. Kennan was of course a titan, and he delivered this text as a lecture to students of diplomacy who are no doubt applying it today. It strikes me as completely sincere and thoroughly well-intentioned. It contains many points of actual wisdom with which I even agree. It even criticizes democracy – sort of.

And yet it is a product of 1984. And the last 25 years have left some holes in it which, if you look closely, do not wear well at all. To put yourself in the right mood for picking apart these holes, let’s take a look at this picture.

Notice the light shining through the curtains on the left and the right? What we see here is a badly staged photo-op. Hollywood routinely shoots indoor night scenes during the day, but they generally would put some black Mylar on the windows. For some reason this was not done, and so the comedy is inadvertent.

Think about how many people had to screw up in order for this photo to make it to Time. Maybe only three or four. But it is an invaluable “blooper,” because it shows you something you weren’t supposed to see. The mechanism is visible. The film set appears. Crop an inch off the left and right sides, and you see men meeting by candle-light – perhaps discussing some critical decision, in a time of stress and hardship. Restore the curtain, and you have something much more interesting.

What does this have to do with George Kennan? The people who brought you that photo have the same worldview as Kennan. They are Georgetownists to a T, every one. I guarantee it. So it seems quite reasonable to at least suspect that if they are trying to pull the Mylar over your eyes, so is Kennan. Of course, “Salem Mohammed” is no George Kennan, but even here at UR, we have to crawl before we can run.

Here is the sun behind Kennan’s curtain:

In our country, unhappily, the constituencies are more likely to consist of particularly aggressive and vociferous minorities or lobbies. These, for some curious reason, seem more often than not to be on the militaristic and chauvinistic side, either because there is some particular nation or ethnic group abroad which they want our government to support, or because they like to wrap themselves in the national emblem and beat the jingoist bell as a means of furthering their partisan purposes.

Suppose you heard this, not in 1984, but today. Would it strike you as an accurate description of reality?

The “aggressive and vociferous minorities or lobbies” certainly exist. They march in Dolores Park on a regular basis. What “particular nation or ethnic group” do they support? Um, the Palestinians? Duh. By “national emblem,” Kennan of course means the kaffiyeh. Problem solved.

Not. Actually, if anything, he is thinking of the infamous “Israel lobby.” I think I once saw a pro-Israeli crowd in New York. It was maybe ten or twenty people. Of course, it wasn’t in 1984, either. On the other hand, when I think of “aggressive and vociferous” in 1984, what I think of is the anti-apartheid divestment movement. Was there ever an anti-Palestinian divestment movement? Promising not to invest in companies that do business with Arab states that support Palestinian terrorism? Maybe I just missed it.

Of course, the “particular nations” that Kennan expects his audience to think of – the candles – are the Cuban emigres, the Taiwanese, the South Vietnamese, etc. The “particular nations” he does not expect us to think of – the sun behind the curtains – are the Palestinians, the Cuban socialists, the Maoists, the North Vietnamese, etc. All of which have enjoyed the support of remarkably large and influential “aggressive and vociferous minorities or lobbies.”

Moreover, the second list is much longer. It includes essentially the whole Third World. And the two lists could never be confused with each other. Sending the New York Philharmonic to Pyongyang, in 2008, constitutes engagement. Sending the New York Philharmonic to Pretoria in 1984 would have been something else entirely.

Kennan’s lecture made sense in 1984 because in 1984, Plainlander anticommunism was still a viable political force. If barely. Today, to argue the same case, you would have to come up with some kind of nonsense about anti-terrorist “aggressive and vociferous minorities.” Who are so aggressive and vociferous that they put yellow ribbons on their cars. Have you ever seen or heard any trace of an anti-terrorist, let alone anti-Islamist or anti-jihadist, march, parade, meeting or demonstration? Are our colleges full of anti-Islamofascist Cheneyite activists? The suggestion is laughable, and Kennan would be too smart to make it.

What hindsight shows us is that Kennan was projecting. He and his audience genuinely perceived themselves as beset by a mob of pitchfork-wielding Plainlander peasants. When Dean Acheson, Kennan’s boss and a truly devious and arrogant man, wrote his autobiography, he called his chapter on the Hiss affair “Attack of the Primitives.” I don’t think Kennan would ever be so crude, but the attitude is certainly the same.

But when we step back and take a broader view, we see easily that these “militaristic and chauvinistic minorities” were stronger – in terms of their influence over decisions in Washington – in 1924 than 1934, stronger in 1934 than 1954, stronger in 1954 than in 1964, stronger in 1964 than in 1974, and so on right down to now. With a brief exception, for obvious reasons, in 1944. On the other hand, we could easily take the series back to 1844. North America is not exactly new to militarism and chauvinism.

And where the heck is the John Birch Society today? If the “Primitives” are indeed “attacking,” they are doing an awfully bad job of it. Because they seem to be going in reverse. On the other hand, this state of affairs is not at all inconsistent with the hypothesis that their actions (often quite hostile) are actually best classified not as aggression, but more properly as resistance. “Cet animal est très méchant: quand on l’attaque, il se défend.”

This is how Kennan can sacralize democracy while castigating politics. He has seen, personally, a wide range of problems caused by clumsy attempts to execute a foreign policy which is somehow both Primitive and Georgetownist. He knows perfectly well that, in almost every post-1945 military conflict, Primitives have lined up on one side of the ball and Georgetownists on the other. In fact, he knows that there is a huge nest of Primitives right on the other side of the Potomac. (Perhaps, for balance, we could call them Arlingtonists.)

Kennan’s words are deftly chosen, but he means exactly what he says. He has seen innumerable screwups and disasters, wars and tragedies, caused by this organizational schizophrenia. In fact, in a substantial percentage of postwar conflicts, Georgetownists have been rooting for one side and Arlingtonists rooting for the other. Sometimes rooting isn’t all they do, since the Arlingtonist specialty is, after all, war. So quite a few of these little events could be described, by a malicious and negative person, as civil wars by proxy. Which is – let’s face it – nasty.

It is entirely understandable that Kennan, being more or less the Georgetownist to end all Georgetownists, would believe that, if Washington had followed a purely Georgetownist foreign policy without Arlingtonist meddling, none of these awful things would have happened. As a counterfactual, the point is irrefutable. And also unverifiable. And there’s certainly no shortage of Arlingtonists who believe precisely the opposite.

And, as a wise elder statesman, here is his solution: learn to live with the Primitives now, and do your best to evangelize them out of existence. Win your battle domestically, “elevate” your subjects “spiritually and intellectually,” and you will be able to pursue your Georgetownist visions of global democracy and world peace without a bunch of Birchers carping about homosexual communist “rock music.”

The reason Kennan likes Europe is not just that parliamentary systems are more apolitical – it is that Europe has no organized Primitives. Thanks to its postwar can of whoop-ass, Europe is way ahead of us in its Georgetownist Gleischaltung. Nothing like the Republican Party of 2008 would be tolerated in Europe today, let alone the Republican Party of 1984. (And if you want a real trip, find some of Governor Reagan’s speeches from the ’60s.)

What happened in Europe was that its entire intellectual operating system was reinstalled. There were Arlingtonists in Europe, and not all of them were Nazis. And it wasn’t just Germany that got reprogrammed. Europe has spent the last fifty years abolishing a set of perspectives that constituted the entire mainstream political spectrum in 1900. It is only Plainland that was not completely conquered by the Georgetownists. And it is far more conquered now than it was in 1984.

So we have completely reframed the story that Kennan is trying to tell. Instead of the struggle of a decent public servant against chauvinist demagoguery, we have the struggle of a Machiavellian bureaucrat to govern the world and abolish his enemies. Which of these stories is truer? Neither. Both are completely consistent with the facts. History is always the Necker cube. (It would help, though, if we knew whether Kennan ever owned a long-haired cat.)

And notice one thing that we have not learned about the struggle between the Arlingtonists and the Georgetownists, the Primitives and the Brahmins. We have learned who won and is still winning. We have learned that at least one side is willing to tell a lie or two, or at least shade the truth – hardly shocking in the twentieth century. What we haven’t learned is who was right and who was wrong. In fact, maybe they’re both wrong.

And this is how I stopped believing in democracy. Let’s go back to the God analogy.

What’s amazing about the whole God thing is that people actually used to believe in God. Almost no one believes in God today. The most they are willing to give Him is that he “exists.” Perhaps there is a Heaven and maybe even a Hell. But before you find people who actually believe that God actually uses His alien black-magic superpowers to actually affect events on Earth, you have to scrape pretty deep in the barrel. We are all deists now.

Before this change, there was an entire branch of philosophy called theodicy, whose goal was to figure out how God and evil could coexist. Doesn’t it strike you as completely and utterly obvious that the answer is “they don’t”? Why didn’t all these incredibly smart people – Aquinas and Leibniz and Pascal and so forth – just consider the null hypothesis?

I think the answer is that when you really believe in God, the belief that God is good and makes good things happen is completely woven into your cerebral cortex. If you were to stop believing in God, you would instantly solve the problem of explaining all the evil things that have happened in the world. You would also instantly create the problem of explaining all the good things that have happened. For which your present explanation is that they happened because they were good, and therefore God wanted them to happen.

Similarly, as a kid raised on the IHT and the Economist and other Georgetownist goodness, I had a simple, pretty explanation of the world. There were two kinds of governments: democratic ones and undemocratic ones. The first kind were good and the second kind were bad. History was the story of humanity’s progress from bad, undemocratic governments to good, democratic ones. The rest was all details.

One can certainly arrange the facts in this way. But, first, history is not a list of facts. And second, when we do arrange the facts in this way, we find that we have a number of facts left over, which require additional explanations. Of course these explanations can be assembled. Pretty much any theory of history can explain pretty much any fact. However, the more patches of this sort you have to apply, the more you miss your simple, pretty story.

And there is an even more upsetting observation, which is that the process of explaining why democracy isn’t perfect is remarkably similar to good old theodicy. Perhaps we could call it demodicy – the problem of explaining how democracy can coexist with evil.

Perhaps you’ve noticed that democracy has not exactly worked out perfectly in Iraq. Oh, there were elections. Elections, sure. But after the elections, did Iraq turn into Belgium? Um, no. How can we explain this? Almost any way we want:

  • Democracy cannot be imposed by occupying troops.
  • American troops have committed human rights violations, which makes Iraqis hate us.
  • America supports Israel, which makes Iraqis hate us.
  • Iraqis must overcome their tribal conflicts, which make them hate each other.
  • Iraqis marry their cousins and have low IQs. They are too stupid for democracy.
  • The “oil curse” makes Iraqis want to fight for cheap oil money.
  • Iraq was brutalized by colonialism, from which it is still recovering.

And on and on and on. For each of these we can construct examples, counterexamples, refutations, rebuttals, and in short an entire tangle of scholastic philosophy. Classic demodicy.

Or let’s look at another example: democracy in South Africa. Of course by “democracy” I mean multiracial democracy. It is not okay to have an election in which only white people can vote. It’s actually worse than having no elections at all. It’s a sort of blasphemy, like appointing your horse to the Senate, electing a crack whore as Pope, or giving Pol Pot the Nobel Peace Prize.

Of course this was absolutely huge when I was in college. It was by far the most important thing in the world. I think if God had told the average male student at my college that, if he agreed to remain a virgin for life, democracy would come to South Africa, he would have instantly agreed. And in 1994, a miracle! No virginity required. Even the evil white people voted for it.

Recently, something interesting happened in South Africa. The power went out. Apparently this is not a temporary or accidental development. South Africa will have rolling blackouts for the next few years. Not a small issue in a place where ordinary life as you or I know it depends on extreme security systems and armed response teams. Here is a thread in which people like you and me debate whether or not to flee the country. Here is a sample:

I myself am deciding to leave, but I have other commitments at the moment that don’t allow me to. But in time, I will. I have been involved in crime as well, and almost everyone I know has been touched by crime in some way. It used to be a case when we read articles in the newspapers about crime, now it’s a case of hearing it happening to someone close to you. I myself, have been mugged twice, stabbed 3 times, once in the lung, and hit on the head…while I was a student who just started writing my final exams. Thereafter another incident and I was beaten up repeated and landed in hospital. A close friend of mine was killed while outside a fast food store, waiting for his order. When does it stop? I agree, we are so used to hearing about crime, that it has become the norm. Our country is full of it! There’s no place left in our daily papers to add in all the stories. Killings and rapes are now moved to page 3 or 4. Front page is now set aside for the most gruesome or horrific stories. Shock sells, and it’s getting harder to shock our nation because violent crime is now also the norm. Yet, in countries abroad, where violent crime is not witnessed on a daily basis, a story of a missing dog could easily be placed on the front page. Is there hope for SA? I honestly don’t know. But we are in big trouble. I also was optimistic – but now I realise no one will help us – the government doesn’t give a damn. The corruption and power crises is another story on it’s own. If everyone that could afford to leave – left, what then? Some of my friends, and I have been saving for the past year, not to buy a new car (which will be hijacked and taken away), but to leave. Like the government said…leave if we want…If they won’t help us – we should help ourselves.

I do not witness violent crime on a daily basis. I have never seen a story of a missing dog on the front page. In fact, I have never been stabbed anywhere at all, not even in the lung.

However, I was in a bookstore the other day and found a pile of Napa Journals from May 1940. This was a broadsheet rag put out in Napa, CA. On one, the top headline was that the Nazis had invaded France. There were some other stories of a similar nature. And down near the bottom, but definitely on the front page, the Journal saw fit to inform its readers that the police had arrested a man who was wanted for passing a bad check in Fresno. Hm.

In any case, while poking around for news on the subject I stumbled on a little blog called “SA Rocks.” From its about page:

After reading the incredibly upsetting anti-SA blogs from expats around the world I decided to make a stand. This blog is that stand. I am standing up for all the good in SA. For all the great things that SA citizens do and for all the people who love this country. I love this country and I believe in it and the success that is soon to come.

SA Rocks is not a website dedicated to blindly praising South Africa. I understand that every country has flaws and I do not deny the flaws of South Africa. I do feel that there are enough people who berate our country and it’s time for people to start acting and thinking positively about South Africa.

Indeed. My attention was immediately drawn to this post, which has to be seen in context. This one is good, too. Demodicy in its purest and most desperate form.

I shouldn’t make fun of these people. They really, really don’t deserve what is happening to them. No one deserves to be stabbed, especially not in the lung. But the question remains: did someone make a mistake? Did they do X, when in retrospect they should have done Y? And was believing in democracy part of their motivation for doing X? What does it even mean to believe in democracy, anyway?

Hopefully we have now passed the point of mere skepticism. We are ready to reason in a structured and sensible way. At this point I recommend that you take a break from the essay, and have a beer or two, or other beverage of choice. Have to keep those neurons loose.

There are two pertinent questions. One: what does it mean to believe in democracy? Two: if you don’t believe in democracy, what do you believe in?

As I see it, there are two ways you can believe in democracy. One, you can believe in democracy as an end – that is, as a goal which is good in and of itself. Two, you can believe in democracy as a mechanism by which some other goal can be achieved.

If you believe in democracy as an end in itself, I really cannot help you. You might as well believe in, say, water polo, as an end in itself. It is impossible to reason about ethical axioms.

I think most sensible people who believe in democracy see it as a mechanism. Or more precisely, as a remedy.

Looking at history, they note that there are two kinds of governments: good ones and bad ones. Misgovernment is an extremely dangerous condition, and when we look at democracies we see that they are not, in general, misgoverned. Ergo, democracy, ie the process of holding elections which are basically free and fair in a multiparty state with a free press and all the rest, is a remedy for misgovernment, much as salvarsan is a remedy for syphilis.

Our problem here is that we are thinking empirically, which is to say pseudoscientifically. History is not an experiment, because we cannot control it. If we were testing a remedy for syphilis, we would assemble two groups of syphilis patients who were the same in every possible way, except that one got the remedy and the other didn’t. We cannot do this for democracy. There are no control governments.

Uncontrolled or “natural” experiments produce misleading results. If the way we test our syphilis remedy is just to sell it, then see if the people who buy it do better than the people who don’t, we are simply finding ways to confuse ourselves. Perhaps patients who have mild syphilis are more likely to try the pill those with tertiary paresis. Perhaps it’s not that elections create good governments, but that good governments are more likely to hold elections. By compiling the facts of history and expecting some objective algorithm to magically arrange them in the most plausible narrative, we think we are being scientific. In fact we have only rediscovered artificial stupidity.

Moreover, any such narrative will probably be replete with exceptions, which leads us back into demodicy. Iraq is a democracy and it’s a hellhole. Dubai, right next door, is a monarchy, and it’s about as pleasant as anywhere in the Persian Gulf could get. Why? Again, we can supply as many explanations as may be required.

And worst, we are not really thinking from scratch. We are starting with our conventional proposition, that democracy is a mechanism which produces good government, and trying to disprove it. Imagine if we applied the same algorithm to God.

Instead, let’s start with what we actually do know and try to work forward.

We know that personal influence over the actions of a government, or power, is greatly sought after by members of our species. We know that in a democracy, power is shared equally among the democracy’s citizens, each of whom has one vote. Therefore, since each citizen will favor a government that serves his or her interests, no one has more power than anyone else, and the government they all elect will serve, on average, the interests of all.

This is certainly one theory of democracy. Call it Theory A. Let me share another, theory B:

In all society or government are right to be enjoyed, burdens to be borne, and trusts to be discharged.

Among the rights are the right of property; the right of locomotion; the right to appropriate and dispose of the proceeds of our own labor; the right to worship according to conscience; and the right to protection from from society in the enjoyment of all these rights, and the right to have all the legal processes and remedies provided to make this protection effectual. These are called civil rights, and when we speak of civil equality we mean that these rights belong alike and equally to all citizens, to all classes, to all colors, to all sexes, to all ages, and to all grades of intellect, society, and worth. […]

Among the burdens of society and governments I may mention: working the public highways; providing public buildings; paying the public taxes; defending the public safety, etc, etc. These burdens ought to be borne by all according to fitness and capacity, for these burdens constitute the consideration we pay for the protection we get. Women and children, lunatics and idiots do not work the highways or defend the society with arms, because their positions or capacity forbid; but they are all citizens – or members of the society – and pay taxes. These are called burdens because they are borne, not for ourselves only, but for others – for the public.

Lastly, in every society or government there are trusts to be discharged. Offices are to be filled; laws are to be made, executed and administered, else there could be no rules or process for protection; and agents are to be selected for all these purposes. The whole business of selecting agents to discharge duties, as well as the discharge of the duties themselves, comes under the head of trusts. They are called trusts because they are powers exercised not for one’s own good but for the good of others – for the public. The authority to vote is, therefore, a trust reposed, and the exercise of the authority is the exercise of a trust – the trust of selecting agents to provide and execute the laws by which rights are to be protected. All men are born to rights – which are personal – affecting each person only; but no man is born to a trust – to a power which affects all other members of society. You had as well say a man is born to an office as to say he is born to a vote for that office. So, again, all trusts imply capacity and integrity. No man has a right to be intrusted to discharge a duty affecting others who does not understand that duty, or has not integrity to be trusted with its faithful exercise.

How can the rights of the members of society be safe if the protection for those rights is to be provided or applied by ignorant or vicious agents? And how can ignorant and vicious agents be avoided if ignorant and vicious persons are born to the right to select them?

Rights are personal – born with persons – belong to the person, and affect the person; but trusts are relative – and born with society – belong to society – and are for the good and under control of society. How is any man born with a right to take my rights, or to select another to take my rights?

Suffrage, then, is not a right – it is not a privilege – it is a trust, and a most solemn and sacred trust. It is the trust of preserving society, of securing rights, of protecting persons.

Would you select an ignorant, or vicious, or untrustworthy man as your trustee, or the trustee for your wife or your child in the smallest concerns of life? How, then, would you make a trustee of an ignorant or vicious man to discharge these great duties, on the wise and faithful discharge of which all rights, and all protection, and all things depend?

Obviously, this wasn’t written yesterday. But don’t you find it compelling?

There are two possibilities. Either we can define good government, or we cannot.

If we cannot define good government, how exactly we can agree that democracy promotes good government is entirely beyond me. In practice, what theory A tells us is that good government constitutes whatever democracy produces. Everyone’s interest is weighed, and if its weight does not prevail it’s just too bad. You have brown hair, so the blondes have decided that you will be ground up and put on the rosebushes. We have returned to the theory of democracy as end. And this end is definitely a dead one.

Theory B is much more interesting. It asserts that we actually can agree on what good government is. Good government is government that protects its citizens’ civil rights, minimizes the burdens it imposes on them, and faithfully executes its trusts. Any system for constituting a government that achieves this goal is a good one. Any system that does not is not. As Deng Xiaoping put it, “if the cat catches mice, who cares if it’s black or white?”

Well, I’m afraid that’s just the problem. The author of the above text was Sen. Benjamin H. Hill, of Georgia, in his Notes on the Situation. Senator Hill was many things, but one of them was a Redeemer. And the point of the above passage, which I have carefully elided, was that Negroes shouldn’t be allowed to vote.

So we have a slight problem. If we follow Hill’s argument that suffrage is a trust, we are pointed in a distinctly undemocratic direction. And we can follow that direction farther than Hill himself would be willing to go. Why should all white men be allowed to vote? Surely a pair of testicles and a pallid skin is hardly proof positive that the bearer of this anatomy is a responsible trustee, not “ignorant and vicious”? Surely we can devise a more effective test?

And, if our goal is really just the faithful execution of a trust, why assume that electoral suffrage of any sort is the most effective way to constitute it? Surely the shareholders of Google have entrusted its management with a tremendous trust – $170 billion worth, last time I checked. Surely this is worth as much as Georgia, or at least Georgia in the 1870s. How does Google just skate along without any suffrage at all, whereas Georgia needs elections? And which trust would you guess is more effectively exercised?

On the other hand, if we recoil in horror from Senator Hill and his sheet-wearing buddies, we are left with his arguments. If we can define good government, we can take an engineering approach to designing a system that ensures it. Moreover, we can evaluate the expected results of this system by criteria that are, if not quantitative, at least factual and absolute, rather than ethical and subjective.

Our goal is an animal that catches mice. We can add other requirements as well. Our mouse-catcher must be able to use a catbox. It should be able to purr and sit on a lap. It must not eat the baby. And so on. If what you want is good government, design for good government. If what you want is something else, why? Perhaps you’re part of the problem – there is, after all, a problem, and somebody’s got to be part of it.

And is there any reason to think that democracy – Hill’s kind, or our kind, or Odinga’s kind, or anyone else’s kind – is the output of this sort of engineering process? If not, what possible reason can we have for believing that it is the most effective mechanism for this purpose? Surely the existence of other mechanisms which are less effective is irrelevant. (Also, it is really asking too much to inflict long S’s on people, but I can’t resist a link to Dean Tucker.)

All this is interesting. But does it really get us all the way toward not believing in democracy? I don’t think so.

Daniel Dennett’s new neo-atheist book is called Religion as a Natural Phenomenon. Obviously as an atheist myself I find this kind of material too boring for words, and in fact I bogged down pretty hard in Dennett. But I do like the title, and I think the analogy remains useful.

It expresses an interesting way of persuading people to become atheists. Most people are theists not because they were “reasoned into” believing in God, but because they applied Occam’s razor at too early an age. Their simplest explanation for the reason that their parents, not to mention everyone else in the world, believed in God, was that God actually existed. The same could be said for, say, Australia.

Dennett’s approach, which of course is probably ineffective in almost all cases, is to explain why, if God doesn’t exist, everyone knows who He is. How did this whole God thing happen? Why is it not weird that people believed in Him for 2000 years, but actually they were wrong?

Perhaps the same approach will work in spreading this edgier mental virus^H^H^H^H^H vaccine of ademotism. If democracy isn’t tha shizzle, why does everyone believe in it? How did it get to be so big? Because we have to admit that one very, very simple explanation of how it got to be so big is that it is, indeed, tha shizzle.

Ergo, our goal is to understand democracy as a historical phenomenon. This is getting long, so perhaps we’ll take a good whack at it next week.

In case you wonder why you should care, however, let me drop in the punch line.

There’s something else about not believing in God in 1758. Which is that pretty much the only 18th-century writers that anyone cares to read in 2008 were, if not downright atheists, at least freethinkers of some variety. An enormous volume of writing was published during that century, and almost all of it was devotional or otherwise conventional nonsense. Only specialists read it. Perhaps this is unfortunate, but it’s how it is.

What would you get if you tried to compose a canon of 20th-century writers, whose only criterion for inclusion would be that its members had to express or demonstrate some kind of doubt or skepticism on the value of democracy? Your writers – of fiction, poetry, essays, journalism, whatever – would certainly be in a decided minority. On the other hand, the same could be said for the 18th-century atheists. And if you compared this canon to the stuff that they make freshmen at Stanford read these days, would it be more readable, or less?

How to actually restore the gold standard (or not)

January 24, 2008

I know I promised to give UR readers a break this week, but the ongoing degringolade of our financial system is just too exciting to ignore.

This post is about the mechanics of returning to what people used to call hard money. This is a very difficult problem for which there is no good solution. However, as we’ll see, some solutions are worse than others. If you need a celebrity endorsement, or quasi-endorsement, Brad Setser says: “if nothing else, your plan is creative.” Indeed.

I will not be discussing the question of why the gold standard should be restored. I assume you either believe this is a good idea, or you don’t. If you don’t, perhaps you don’t care. (Perhaps you haven’t looked at the news lately?) Please feel free to come back next week.

First, let’s face it: the dollar is about as far from being “as good as gold” as Hillary Clinton is from being “a major-league hottie.” She needs a lot of work, and I mean a lot. Restoring the gold standard is about as easy as restoring a ’57 Chevy that has been in the same barn since ’68. Assuming of course that the world has been taken over by zombies, and your only tools are a chainsaw, a hammer, and a case of cheap brandy.

On the other hand, just pushing the Chevy down the road into zombie land isn’t going to work too well, either. So why not at least think about trying it? And that, I promise, is the last I will say on the subject. At least for now.

First: there is a simple plan for successfully restoring the gold standard, which any sovereign can apply at any time for any reason, and which will always succeed.

Let’s call it “Plan X.” To restore the gold standard via Plan X, you need exactly two facts: the face value of valid fiat currency you have outstanding, and the grams of gold in your treasury. (If you do not have this information, you are beyond the reach of accounting. Your country is probably about to be overrun by savage tribes. You should be looking for a seaworthy vessel, not trying to fix your monetary system.)

Let’s call the first quantity F and the second quantity G. The new gold price, Pnew, the price of a gram of gold, in cowries or strips of leather or wood chips or whatever your people are putting out these days, is F/G. At least, it is at least F/G. At your discretion, Sublime Pasha, it may be greater. I don’t think I have to point out the advantages of this option.

What makes a Plan X restoration slightly tricky is that whatever Pnew is, there is also a Pold – the present price of a gram of gold. Since Pnew has to exceed Pold or no one can possibly care, and since it offends the Pasha’s dignity for the Armenians to front-run his ass down in the bazaar, Plan X depends on the element of surprise. While it shares this with all monetary policy, the amount of loot a leak can extract in a Plan X gold restoration is effectively infinite and untraceable. Problem.

Thus it is very difficult for an inefficient bureaucratic state, which is indiscreet by definition, to even consider Plan X as a viable policy option. Since an efficiently managed state would never have left the gold standard in the first place, this problem is unsolvable. Moreover, the same problem holds for all feasible restoration plans. The option of just letting Pnew equal Pold is not physically tractable without some serious alien technology. There is not enough gold on Planet Three. You would need to go in for asteroid mining, or something.

Since this problem is not solvable, we will ignore it. Often people are faced with multiple contradictory problems. I’ll bet a lot of them are working 100-hour weeks right now. To even start to deal with a situation like the present financial crisis, you have to at least know why all your impossible courses of action are just as impossible as they seem.

But there is a second problem with Plan X, which is that it is not politically feasible. Ie, if you just apply Plan X, it will leave a very large number of people hatin’ life, and hating you as well. This is not conducive to a successful career in public service. And this is why, I think, people shrink so instinctively from the very thought of restoring the gold standard. They associate it with Plan X, which is too hateful even to mention. In fact, while moral judgments are not my specialty, I don’t think it’s going too far to describe Plan X as outright unethical.

Here is the problem with Plan X.

The monetary base of the United States today – the number of dollars outstanding in the strict legal sense of the word dollar – is about $800 billion. The monetary base is physical currency, plus the balances of member banks at the Fed. (In case you are unfamiliar with the actual structure of the Fed, think of it as a secret uber-bank at which only banks have bank accounts.)

US gold reserves are about 8000 metric tons. Ergo, F/G is about $100 million per metric ton, or $100K per kilogram, or $100 per gram. Since gold today is around $30 a gram, this represents a Pnew/Pold ratio of about 3. (Obviously, all these values are constantly changing.)

So Plan X, if applied to the dollar, would triple the gold price overnight. This seems rather extreme. It suggests that Pnew is way too high. Perhaps, but it’s also way too low. Did I say this would be easy? If restoring the gold standard was easy, someone would have done it already.

The problem is that the monetary base (M0, or F above) is not a particularly important or useful number. It is not in fact a good representation of “the number of dollars in the world.” This is well-known. And there are a variety of other monetary indicators, with snappy little numbers attached, like M1, M2, etc. In Britain they even have M4, which I was sure was a motorway. In any case, none of these numbers is of much interest either. They are all the result of subjective decisions, littered with constants pulled out of thin air, etc, etc. This again is quite well known. No one has done anything about it, because no one can do anything about it.

(The idea that monetary policy can be managed by mathematical models is, in fact, madness. The experiment is neither deductively understood nor scientifically controlled. Fitting models to the past is no substitute: it will always produce a “data mining” effect. If one of these models somehow turned out to be correct, you would have no way of knowing which one it was.)

Why is it impossible to measure the quantity of dollars in the world? Especially in a modern country which is not about to be overrun by savage tribes, and really does keep a handle on its monetary base? A fascinating question, folks.

We can start to see the answer by looking, within the monetary base, at the difference between electronic dollars at the Fed and actual physical bills. These objects could not be more different – one is a magnetic mark on a hard disk, the other is a piece of paper. Why do we lump them together and treat them as the same thing?

They are equivalent because either form is convertible to the other. Any bank can take a bundle of bills to the Fed and exchange it for electronic credits. Any bank can also draw down its electronic balance in the form of print jobs. Both these rights are protected by law, and there is no conceivable scenario on which the Fed runs out of either disk space or paper.

You’ll sometimes hear dollars in the monetary base called “high-powered,” an incredibly weird and confusing locution. Let’s just call them formal dollars. Since these dollars are all valid at present, they are formal current dollars.

The reason it’s impossible to measure the quantity of dollars in the world is that a formal current dollar is only one point in a vector space. Formality and maturity are both variables. Worse, the latter is quantifiable but the former is not. So we are trying to describe an unquantifiable two-dimensional vector as a precise scalar (our F). If this isn’t mathematical malpractice, I don’t know what is.

How do we solve this problem? As usual, by trying to understand it.

Let’s deal with maturity first. Imagine that every dollar bill had a “not valid before” date on it, like a postdated check. Maturity is simply the difference between now and that time. For example, a zero-coupon Treasury bond which matures in 10 years could be defined as a dollar bill which is not valid until 2018. We can call these dollars not current but latent.

Formality is the extent to which an instrument is guaranteed, in practice, by the Fed. A Federal Reserve Note (“dollar bill”) is perfectly formal. A piece of paper which says “Mencius Moldbug promises to pay the bearer one (1) dollar” is perfectly informal. Between these lies a wide range, which cannot be measured or quantified, but is no less important for that.

A Treasury bond is almost perfectly formal – but not quite, since the Fed and Treasury are at least in different buildings. In practice, the financial markets treat Treasury obligations as perfectly formal or “risk-free.” It is probably best to describe them as negligibly informal.

“Agency” bonds – those written not by Treasury, but nominally private companies (GSEs) such as the infamous Fannie and Freddie – are mildly, but not negligibly, informal. The bond market puts a small premium on agency bonds over T-bonds (typically a quarter point or so), showing that they have a small chance of defaulting. This is essentially a political calculation, and financial markets do not hesitate before making political guesses – which is not to say that they are always right. (Note that we cannot use the GSE spreads as quantifications of formality, because there is another variable in the equation – the actual default risk.)

But the most famous kind of informal dollars are the negligibly-informal current dollars we call “checking deposits.” While checking accounts are not as financially important as they once were, most people have one and most everyone understands them.

A checking deposit is actually a loan from you to your bank. This loan has a zero maturity and is continuously rolled over. If you find this hard to grasp, imagine the loan term was one minute. Every minute, the bank automatically returns your money to you, and you automatically lend it back to the bank. If you show up at the ATM and want to withdraw it, you have to wait until the minute is over. Replace a minute with zero, and you have the “demand deposit.”

It would sort of defeat the purpose, but imagine that your checking-account dollars were not electronic entries, but physical bills. They look just like regular dollar bills, except that they are blue, not green, and they have your bank’s name instead of the Fed’s – eg, “Wells Fargo Note.”

A dollar in a checking account is informal because it is a debt, and the debtor is not the mighty Fed but a sordid, corporate bank. The Fed will not just take a blue dollar and convert it to a green dollar. Your bank has to do that, and your bank has to have its own green dollar to exchange for your blue dollar. If it’s out, the Fed will not just give it more.

However, like the Treasury bonds, blue dollars are negligibly informal. Your bank is “insured” by something called the FDIC. This so-called “deposit insurance” is in fact a sham, because the risk of a bank run is not in any way, shape or form an insurable risk. Nor does the FDIC have anywhere near enough green dollars to exchange for all the blue ones. However, although the Fed is not legally obligated to back up the FDIC – just as it is not legally obligated to back up the Treasury – it is a political certainty that it will do so.

We can think of informal instruments, like agency bonds or blue dollars, as an inseparable combination of two instruments: a private debt (eg, your bank’s debt to you, as represented by the blue dollar), and an option written by the Fed. The option pays off if the debt does not – unless, of course, the Fed’s informal loan guarantee turns out to be not just informal, but actually nonexistent.

We are now in a position to understand the horrendous destruction that Plan X would unleash upon society. Since Plan X does not recognize the existence of informal dollars, applying it is equivalent to destroying them, or more precisely destroying their informal Fed option halves. The debt from the bank to you still exists. But will it be paid? Um…

Plan X is easier if we think of it in two phases. In the first phase, we destroy the informal options and set F to the monetary base M0. In the second phase, we exchange every formal current dollar for F/G grams of gold, courtesy of Fort Knox. (There are no formal latent dollars – the Fed issues no such thing.) After we perform the first phase, we can perform the second at any time, so we can analyze them separately.

All the destruction in Plan X comes from the first phase. Call it Plan X(1). Another way to think of Plan X(1) is that (after printing the entire monetary base), we destroy the Fed’s printing press. No new dollars can be created, ever. If this reminds you of the breaking of the assignat plates, you’re not alone:

This system in finance was accompanied by a system in politics no less startling, and each system tended to aggravate the other. The wild radicals, having sent to the guillotine first all the Royalists and next all the leading Republicans they could entrap, the various factions began sending each other to the same destination: Hébertists, Dantonists, with various other factions and groups, and, finally, the Robespierrists, followed each other in rapid succession. After these declaimers and phrase-mongers had thus disappeared there came to power, in October, 1795, a new government, – mainly a survival of the more scoundrelly, – the Directory. It found the country utterly impoverished and its only resource at first was to print more paper and to issue even while wet from the press. These new issues were made at last by the two great committees, with or without warrant of law, and in greater sums than ever. Complaints were made that the army of engravers and printers at the mint could not meet the demand for assignats – that they could produce only from sixty to seventy millions per day and that the government was spending daily from eighty to ninety millions. Four thousand millions of francs were issued during one month, a little later three thousand millions, a little later four thousand millions, until there had been put forth over thirty-five thousand millions. The purchasing power of this paper having now become almost nothing, it was decreed, on the 22nd of December, 1795, that the whole amount issued should be limited to forty thousand millions, including all that had previously been put forth and that when this had been done the copper plates should be broken. Even in spite of this, additional issues were made amounting to about ten thousand millions. But on the 18th of February, 1796, at nine o’clock in the morning, in the presence of a great crowd, the machinery, plates and paper for printing assignats were brought to the Place Vendome and there, on the spot where the Napoleon Column now stands, these were solemnly broken and burned.

Well, it certainly sounds like the right move at the right time. And who can’t resist the idea of sending a few phrase-mongers, not to mention Republicans, to the guillotine?

But the good news is that we are not in a state of revolutionary hyperinflation. At least, not yet. The bad news is that the result of Plan X(1) would be an episode of economic destruction that would make the Great Depression look like a panty raid.

The informal loan guarantees we destroyed may have been informal. But they existed. And people relied on them – just as if they were formal.

For example, by breaking the plates, we eliminated the Fed’s informal guarantee of Treasury debt. Surprise! Over the next 30 years, Treasury is now obligated to fork over ten times as much gold as now exists in the United States – since the Treasury’s debt is about ten times the monetary base.

What do you think is the chance that this will actually happen? Fairly small, I would say. I suspect long-term interest rates, at least as measured by Treasury bonds (which is how they’re measured now) would go from about 5% to more like 50%. If not 500%. The good news is that you could actually buy that house you’ve been saving for.

The bad news is that your savings probably won’t be there. Because they are probably in blue dollars, or something like them. Those debts from various financial entities to you still exist. But the various financial entities don’t. They will instantly face the mother of all bank runs as people with blue dollars rush to exchange them for green.

The Fed’s loan guarantees, it turns out, have been serving an essential structural purpose in our economy. They have been making term transformation stable. The interaction between term transformation and fiat loan guarantees deserves its own Nitropian analogy, but what we do know is that term transformation is not stable without them. Ergo, since it is not stable, it will collapse. The good news is that you might be able to buy a hamburger for ten cents again. The bad news is that you might not have ten cents.

So our definition of F as the monetary base has a great flaw, which is that it does not account for the informal loan guarantees, which are legally meaningless but economically important. As a result, we are simply destroying a large quantity of money – the monetary equivalent of filling your gas tank with molasses. Woops.

There is only one way fix this. Our new plan, Plan Y, has to include informally guaranteed instruments as well. Furthermore, because it includes informal instruments, it has to deal not just with current dollars but with latent dollars (such as Treasury bonds).

How does Plan Y deal with informal dollars? Very simply. It creates formal dollars, and exchanges them for the informal dollars. So, for example, the Fed can buy all the checking deposits that it has guaranteed. Your checking account becomes a green-dollar account at the Fed. The debt from your bank to you is now a debt from your bank to the Fed.

Alternatively, the Fed could just buy your bank at the present market value – ie, nationalize it. This is less financially elegant, but it may be simpler in practice. It also has another advantage, which is that it wraps up the maturity mismatch on the bank’s books. Your bank is almost certainly backing its short-term obligations with long-term receivables. If the Fed refuses to renew the rolling loans that used to be everyone’s checking deposits, the banks will fail. If it lets them roll on for ever, it might as well cancel them. Either way the result is ugly.

There are two ways for Plan Y to deal with latent informal dollars. One is to exchange them for latent formal dollars. The other is to exchange them for current formal dollars.

Perhaps the former could be made to work, but the latter is probably superior. The trouble is that in a world with protected term transformation, we really have no idea what the maturity preferences of investors are. If we assume that they correspond to their current holdings, we run the risk of considerable economic disruption.

The people who have been buying 30-year T-bonds are not, in general, people who are genuinely willing to exchange current dollars for dollars which are not valid before 2038. In fact, considering that we have a system in which maturity transformation is ubiquitous, there are probably a lot of financial players who own dollars which are not valid before 2038, but have contracted to deliver valid dollars in, say, March.

We do not actually know where supply and demand would set the 30-year interest rate. It could be anything. If we assume that it has any relation to the present rate, we will, again, create disruption. If we wanted disruption, Plan X would do just fine.

What we see is that Plan Y is essentially a bailout of the entire dollar financial system. The informal guarantees have spread very far and wide. Our goal, in the first (formalization) phase of the plan, is to find them all and use formal dollars to buy them all out at the present market price. One of the largest sets of informal guarantees is the set of promises the US government has made to itself in the form of Medicare and Social Security, which may give you some idea of the kind of numbers we’re looking at. (Fortunately, entitlement payments are not securitized and thus are not on the balance sheets of term transformers, which means they can be exchanged for latent dollars.)

When Plan Y(1) is complete, everyone’s monthly portfolio statement should show more or less the same number that it did before, and the Fed will enjoy managing many fascinating new assets. F, the final monetary base, will be a precise measure of the number of dollars in the world. And we are free to go through with Plan Y(2), which is precisely the same as Plan X(2): redeeming all dollars for gold.

However, we are no longer increasing the gold price by a factor of 3. The factor is now more like 300. This does not require any more or less secrecy or surprise than increasing it by 3 – in both cases, discipline must be absolute. But it does make us think a little.

Not all the gold in the world is in Fort Knox. If you increase the gold price by two orders of magnitude, you are making anyone who now owns gold extremely wealthy. This happens – people make money, and they make money by being right when everyone else is wrong. Predicting that paper money was unsustainable and the gold standard would live again was not exactly a conformist investment. If you restore the gold standard, you have validated it.

Also, you can tax the hell out of these people. Any restoration of the gold standard should be associated with a high direct tax on gold ownership. If the tax is too high, it will pass the Laffer peak and favor the really crazy antigovernment types who keep their Krugerrands in their flowerpots. 80 or 90%, for example, is probably too high. But 60% probably isn’t.

The new gold zillionaires will certainly compete in some markets and drive up some prices, but it is hard to see how they will much inflate the price of, say, crude oil, or wheat. It’s also worth noting that a lot of the world’s gold, especially the gold that hasn’t been mined yet, is in places like India and Africa, which could sure use a little money. And while no increase in the gold price will produce a giant flood of newly mined gold – people have been trying very hard for a very long time to get gold out of the Earth’s crust – two orders of magnitude will certainly create a lot of jobs, not all of which are menial. Perhaps some of our financial engineers could go back to school and study geology.

On the other hand: once we have executed Plan Y(1), do we really need Plan Y(2)?

After all, our goal in restoring the gold standard is hard money: a completely neutral monetary system, which is not subject to manias and panics, and does not bollix economic prediction by exerting a chaotic, exogeneous, politically charged effect on price levels or business activity. In other words, our goal is to never have to deal with this kind of BS again. Condy Raguet put it well when he said:

Such being the theory of this branch of my subject, I have the satisfaction to state in regard of the practice under it, upon the testimony of a respectable American merchant, who resided and carried on extensive operations for near twenty years at Gibraltar, where there has never been any but a metallic currency, that he never knew during that whole period, such a thing as a general pressure for money. He has known individuals to fail from incautious speculation, or indiscreet advances, or expensive living; but he never saw a time that money was not readily available, at the ordinary rate of interest, by any merchant in good credit. He assured me, that no such thing as a general rise or fall in the prices of commodities, or property was known there; and that so satisfied were the inhabitants of the advantages they enjoyed from a metallic currency, although attended by the inconvenience of keeping in iron chests, and of counting large sums in Spanish dollars and doubloons, that several attempts to establish a bank there were put down by almost common consent.

This is not the only historical example of the delights of monetary predictability. And there is nothing more predictable than a constant. Suppose that, after formalizing the dollar base, we just leave it at that? Why do we need the gold standard? Can’t we just fix the number of dollars in the world, and call it a day?

We can. But we may not want to.

Gold makes a good currency for several reasons. First, because it has some intrinsic uses, it is self-bootstrapping in the classic Mengerian sense. But the dollar is already a currency, so bootstrapping is not a concern. From an economic perspective, fiat currencies work fine. Second, after a few millennia of mining, new gold is extremely hard to come by, so the supply is quite inelastic. (The present gold supply dilutes at well under 2% per year.) Inelastic is almost constant. But constant is even more constant.

So a fixed, formalized dollar supply would create a currency that was actually harder than gold – at least, in a strictly economic sense. The dollar would not be “as good as gold.” It would be better. (If only we could do the same for Hillary.)

This course of action would also have the effect, surely delicious in some peoples’ minds, of sending the gold price back down into double digits. People who hold gold (such as myself) are, in general, holding it as money. If you fix the fiat currency system permanently, you destroy the entire monetary premium on gold. If this course is taken, perhaps its architects could have some pity on us poor economic royalists, and print a little extra to buy back our Krugerrands.

The only problem with a fixed-supply fiat currency is that it has been tried before. It’s one thing to limit the number of dollars in the world. It is quite another to enforce that limit. Congress can pass a law prohibiting the Fed from printing new money. But will it? And next time there is a war, a flood, an indoor rainforest in Iowa, or some other budgetary emergency, won’t it just unpass it? Our F might quite easily become like the Federal debt limit, which is routinely increased. A better idea might be to put it in a Constitutional amendment. But even these can be repealed, or still worse judicially ignored.

As Alan Greenspan once explained, gold as a monetary standard succeeds because it is self-enforcing. The Fed cannot print gold. Congress cannot pass a law which creates it. If the gold standard is really brutally abused, as it was in the 1920s and ’30s, it will turn on its abusers with a vengeance. This is not a bug, but a feature. Gold works because it keeps the government honest. And surely anyone of any political persuasion can agree that honest government beats the converse.

Of course, the main problem with Plan Y, gold or no gold, is that it can’t possibly happen. It is impossible to imagine Washington executing any plan anywhere near this unusual and aggressive. Moreover, the first step is always to admit that you have a problem. Picture that press conference! I can’t, which is why I can’t see this happening.

How to defeat the US government: summary

January 20, 2008

I thought it’d be fun to write a quick summary of the last three posts.

We start with the perception that USG, or Washcorp, is a problem. Its problem is that the interests Washcorp serves seem quite a good match for its own. They do not seem to match the interests of the residents of the territory Washcorp owns, central North America or Plainland. (Using these neutral names helps us separate ourselves from symbolic emotional attachments, which also serve Washcorp’s interest.)

The predictable result of this divergence in incentives is that Washcorp has become quite large, inefficient and intrusive. And it continues to grow. This bothers some of us. If it bothers you, please read on.

The traditional remedy is to persuade Plainlanders to use their collective democratic powers to elect a politician, such as Ron Paul, who promises to restructure Washcorp so that the result does in fact serve their interests. The typical promise is to replace the existing organization, which is the product of informal political evolution, with the formal design specified by the literal text of the Constitution.

There is no reason to think this remedy is effective. There are many reasons to think it is not. Thinking deductively: even if Dr. Paul is elected, the White House’s influence on the executive branch is small, its influence on the judicial branch is only effective after decades of continuous control, and its influence on the legislative branch is nil. (Elections can also replace the Congress, but incumbency rates indicate that this is extremely difficult, and partisan transitions seem to have minimal effect – perhaps due to the iron triangle effect.) Thinking inductively: all previous democratic attacks against the civil service, press and universities have failed, often with high backlash. Of course, if the remedy is ineffective, any energy invested in it serves the interests of Washcorp.

I propose a different strategy: persuading Plainlanders that Washcorp is totaled. It neither serves their interests, nor is realistically reformable. Their only practical option is to liquidate it. The only practical way to liquidate Washcorp is to spin off its 50 local subdivisions, or “states,” by restoring their sovereignty. If the new nations agree to honor Washcorp’s financial obligations, the transition can be relatively seamless. The obvious historical analogy is the liquidation of the Soviet Union, which I think most people would agree was a good thing.

For better or worse, Washcorp remains a democracy. If enough of its voters decide that it is totaled, they certainly have the power to liquidate it. In fact, because Washcorp is far more responsive to direct and instantaneous polls than indirect, periodic elections, sufficient public support for liquidation will probably cause it to liquidate itself. The liquidation of the Soviet Union did not follow elections. It preceded them.

Liquidation has one obvious advantage, which is that if it succeeds it is very hard to reverse. Given the historical evolution of Washcorp as it is today from what it was in 1789, I find this advantage quite compelling. Restoring the Old Republic has a nice sound to it, but the Old Republic developed – not without collateral damage – into what we have now.

It also has an obvious disadvantage. The proposition that Washcorp is totaled strikes most Plainlanders today as even more implausible than the proposition that they need to vote for Ron Paul. It seems impractical to persuade more than a small minority of Plainlanders to vote for Ron Paul. Persuading them to liquidate Washcorp must be even harder.

But is it? If you, dear reader, agree that Washcorp is totaled, you must agree that persuading anyone to agree with this proposition means persuading them to agree with the truth. Furthermore, you must agree that persuading Plainlanders to vote for Ron Paul means persuading them to agree with a fiction. Therefore, we must choose between propagating an unlikely fiction, and an even more unlikely truth.

Both problems are hard. But I suspect the latter is easier.

The fact that Washcorp is totaled is not only difficult to grasp, but extremely large. Clearly, it cannot be explained in a TV ad, or any other superficial means of communication. To succeed, this strategy requires a very high percentage of Plainlanders to accept factual propositions that they cannot verify personally, value judgments that contradict their traditional assumptions, and philosophical arguments that they have neither the capacity nor the training to follow.

But the same can be said of their present belief system. To believe that Washcorp is not totaled, a Plainlander must accept numerous unverified facts, judgments and arguments. This process is called trust. It is perfectly normal and healthy.

At present, most Plainlanders feel that Washcorp is a productive institution which serves their interests, and whose occasional errors are correctable. They believe this not because they have thought the question through themselves, but because they have (quite sensibly) delegated it to credible information sources, whom they trust.

Their error is that these organs – press, universities, etc – are not in fact independent of Washcorp. Indeed, they are arguably the most influential power structures within it. At least if we define influence as control over policy, and we define “within” according to reality rather than symbolism.

If this analysis is accurate, Washcorp can be defeated by the following steps:

One: construct an information source more accurate than Washcorp’s official organs.

Two: there is no two. If the argument above is correct, the rest will happen on its own.

First, if we are correct that Washcorp is pernicious and irreparable, and our information source is accurate, it must produce the same conclusion.

Granted, the proposition that Washcorp is totaled is not an “objective” result. It is neither a pure matter of fact, like the half-life of carbon-14, nor a product of irrefutable argument, like Darwinian evolution. Like any other meaningful conclusion about human society, it depends on facts, arguments, and subjective judgments. It is not a proof, but a perspective.

However, the same can be said of the proposition that Washcorp is not totaled. Since this proposition is false, it is likely to depend on incorrect facts or invalid arguments, and indeed it does. Refuting these will leave the surprised reader unusually open to new judgments.

There is no reason that a new, more accurate source of facts and arguments cannot also supply this demand. The mainstream organs which Plainlanders trust today produce a vast quantity of perspective, which seems objective only because it is conventional. If our new source can break this trust, it can remove the mainstream’s camouflage and compete on a level field.

Therefore, after step one (actually building the new authority), our only problem is to persuade most Plainlanders to accept it as accurate – or, at least, much more accurate than the authorities they presently trust.

Assuming a generally uncensored Internet, this problem solves itself. While most people are not capable of sustained analysis, they are quite capable of assigning personal credibility. If the new authority is genuinely more accurate than the official organs, it will attract the support of the smartest and most credible people in society. As this 1337 attracts followers, the normal forces of intellectual fashion will do the rest.

We are left with step one: creating an accurate information source.

Why do the press and universities produce inaccurate information? The problem is not that their employees are not extremely intelligent, knowledgeable, and even well-intentioned. The problem is that they are also ambitious. Their first deception is always of themselves.

Within the mainstream organs, employees who propagate “progressive” perspectives, which lead Plainlanders to perceive Washcorp as a benign institution whose errors can be corrected, tend to outcompete employees who propagate “reactionary” perspectives, which represent Washcorp as pernicious and incurable. Washcorp creates this Darwinian pressure by subsidizing the universities, supplying the press with informal confidential information (leaks), and forming its policy around the preferences of both (influence). Subsidies, leaks and influence will naturally favor the friends of Washcorp, creating a selective bias. This bias is subtle, but not new. Over time it has produced some quite remarkable perspectives.

Of course, our new authority must be absolutely independent from this system. This means it must ascribe zero trust – neither positive nor negative – to the products of the mainstream. This contradicts Wikipedia’s policies. Thus the new authority – which I’ve called Revipedia – can be expected to contradict Wikipedia. It also has a much harder problem to solve than Wikipedia, because it must examine every question on its merits without trusting authority.

If this problem is solvable, I suspect it can only be solved by deploying the full intellectual capacity of the Internet, and applying it in a structure which is not consensual but adversarial. Revipedia maximizes accuracy and credibility by presenting the strongest arguments, on every controversial subject, from every point of view. Moreover, it presents them separately but comparably, eschewing Wikipedia’s unreadable and easily-gamed “he said, she said” style.

Strong arguments can only be produced by editing. A strong system of adversarial arguments demands editors who not only disagree with each other, but do so in a structured and predictable way. An unedited argument, or one edited by unsympathetic editors, is not an argument but a strawman. It adds no credit to its competition. And the difference can only be discerned if the sympathies of the editors are known.

Thus, strong adversarial arguments can only be constructed by a system of formal factions. Nothing of the sort exists at present, either within the mainstream organs or outside them. While this does not demonstrate that this design can create a public information authority of unprecedented accuracy and credibility, it certainly does not refute the proposition.

Furthermore, if there is an error in the argument above (which is certainly quite complex, and largely deductive rather than empirical), it may follow that Washcorp is actually benign, or that it is pernicious but a strong information authority is insufficient to defeat it. However, this does not imply that such an authority is undesirable. It’s hard to see how it could be.

Since neither Revipedia nor anything like it exists, I conclude that someone ought to build it. I’m afraid my plate is full. But is yours? Imagine being the Jimbo Wales of the next century. It won’t be me. It could be you.

Revipedia: how to defeat the US government, reprise

January 19, 2008

As usual there are many excellent comments, some quite critical, on the last post. (I am particularly impressed with Lugo’s criticisms, although it’s a little unfair because Lugo is whacking me on a subject I punted on – but the observations on the US military are dead right. And TGGP, we love you, but I’m afraid that may have been a typo for “post-sucking moron.” I’m still not quite sure what this means, but draw your own conclusions.)

Reading the comments, however, I don’t think I was clear enough in describing the information warfare project I proposed. People described it as a “think tank.” This is nowhere near what I meant. So let me break the every-Thursday schedule, and put up next week’s post today.

Think tanks (such as Cato or LvMI) are all very well. Perhaps we can see them as replacements for the sclerotic university system. It is an unfortunate consequence of the post-1945 Bushian Gleischaltung of the American university that think tanks cannot actually train students, and this is by no means their only defect. However, the thinkiverse does supply a small, but quite useful, dose of intellectual variety to today’s Wal-Mart of ideas.

However, a think tank is not actually a project. A think tank sponsors thinkers. It hires them because it thinks they are smart and knowledgeable, and their interests and perspectives coincide with their goals. What it does not do, in general, is tell them what to do. Its work is not designed to produce anything like a product. Or if it is, the product is simply the set of all the papers produced by all the thinkers. This may be useful, but it cannot be coherent.

The administrators of a think tank are not in any sense project managers. They are support staff. All they do is give the thinkers a place to think. (And, presumably, write said thoughts down.) And a think tank does not have an objective. It has a mission – quite a different thing.

Take LvMI, for instance. I’m sure most of the folks at LvMI would be quite delighted to see the last of old Washcorp. However, is defeating the US government the objective of LvMI? Not at all. It has no objective. Rather, its mission is to sponsor Austrian economists and libertarian philosophers, who get a chilly reception in the normal groves, either because they are cranks and whiners, or because they are in possession of inconvenient truths. (Mises and Rothbard spent most of their careers in the academic equivalent of broom closets.)

Perhaps, like me, you are a software engineer. I have never worked at Microsoft, but I have a pretty good idea of how Microsoft works. If I were to be hired at Microsoft, I would be hired in one of two very different departments. One is product development, which gives us glorious gazillion-line cathedrals of code such as Windows and Word. The other is MS Research, which is basically the CS equivalent of a think tank. Ie, it hires PhDs who don’t want to teach or can’t get a good teaching job, and sponsors their research.

MS Research employs a lot of smart people and I’m sure it’s produced something useful, although I can’t think of any examples offhand. (Okay, I know one – ClearType – though subpixel rendering is hardly Edison’s lightbulb.) If the lack of a PhD did not clinch it, I’m sure that after reading this MS Research would not touch me with a ten-foot pole. Since I would not touch MS product development with a ten-foot pole, I don’t think there is a fit. But I digress.

In any case, what I’m imagining is squarely on the product side. It demands not just sagely thought, but actual management. We are not used to thinking of sages as people who can work as part of a team. I’m afraid most sages are not used to thinking this way, either. But I have seen it done and I know it can be done. And if you don’t trust me, trust the Manhattan Project.

Let’s call the product Revipedia. The purpose of Revipedia is to be like Wikipedia, except that it serves as a reliable source on all topics, no matter how technical or controversial, and no matter how detached from reality the centrist mainstream may be.

If Revipedia can be built, there are two possibilities. Either (a) it will confirm that the centrist mainstream is significantly detached from reality, or (b) it will confirm that it is not. Washcorp, by actively supporting that mainstream, not to mention deprecating and ridiculing its competition, has staked its legitimacy on (b). So (a), if accepted by a sufficient subset of Washcorp’s subjects, is sufficient to defeat it.

In other words, (a) by definition convicts USG of the crime of Lysenkoism: propagating a fallacious interpretation of reality as a mechanism of political control.

This is a capital offense. There is no way for a government, or any institution for that matter, to excuse or apologize for Lysenkoism. Like cancer, it must be excised completely. When in doubt, throw it out. There is no good reason for an official monopoly whose modus operandi includes the propagation of misperceptions to continue to exist. If the institution performs other functions which are indeed useful or even essential, it is still probably easiest to liquidate it, and build a replacement from scratch.

Replacing organizations is simple. Purging individuals or subunits from existing ones is impossibly time-consuming, tendentious and pointless. If you wanted to convert Tony Soprano’s mob into an actual, legitimate waste management company, what would you do, start by replacing Paulie Walnuts with some guy from McKinsey? When in doubt, throw it out.

Note the difference between institutional mendacity and its far more benign political cousin. Ebola and the common cold are both viruses. There the analogy ends.

Politics is modular by definition. If LBJ or Nixon or Bush or any other democratic politician lies to the American people and gets caught, the latter have a straightforward mechanism by which to replace him with some other lying jackass. This is not a perfect cure for political mendacity, but at least keeps the problem under control. When we combine this with the fact that the entire system greatly exaggerates the power of politicians to affect actual policy, we can see that political lies are little more than a cosmetic defect.

But if the New York Times and the Washington Post and the Wall Street Journal, every other serious newspaper, every TV station, every public school and every major university, and of course every department of Washcorp proper, choose to present their subjects with bogus information, we have a much more serious problem. Because there is no way you can go to your little voting booth and register your disapproval of these fine institutions. D’oh!

Moreover, if this is the case, we should not expect these institutions to correct themselves. Since any detection of Lysenkoism is delegitimizing, since it is grounds for not merely “reforming” but in fact liquidating the institutions responsible, no one has any conceivable incentive to own up. The optimal strategy is stonewalling – simply because no one can gain anything by defecting, and joining the cranks, whiners and malcontents.

If you believe that this can’t happen, or that if it does happen any appearance of the truth will quickly outcompete any conceivable fiction, you believe in (b). That is, you believe that the centrist mainstream is basically providing you with an accurate perspective of reality. Is this the case? Vamos a ver.

Let me share my own small piece of experience in the matter. I know exactly when I lost my faith in the mainstream. It was in August 2004, during the Swift Boat affair. I was perhaps something of a neocon at that time, and so I was plugged in to the vast right-wing conspiracy. At least, I was a regular reader of Power Line, as I still to some extent am.

Reader, there are two links in the above paragraph. I guarantee that if you follow both of them, you will end up in different realities. One of them is real. The other is the Truman Show. Do you have an opinion as to which is which? I do. (If your faith in La Wik remains strong, scroll to the end of this section, then read this. And remember who still refuses to release his military records.)

But this is all after the fact. Because I was plugged into the vast right-wing conspiracy, I was reading about the whole affair, in exceedingly gory detail, well before the counterspin started. I have been reading unauthorized information on the Internet for well over half my life, and I think I am pretty good at distinguishing between reality and crap. And the simple explanation – that Kerry is a blowhard who told tall tales about his sailor days – struck me as compelling.

So I wondered: how will they handle this? What happens when, three months before a presidential election, it comes out that one of the two candidates has publicly prevaricated about his military record? Obviously he will have to drop out of the race. But who else will the Democrats select? And how will they select him? Will they hold an emergency convention? Or will it just be Edwards? I supposed it would probably just be Edwards.

Althouse, whom I don’t think I was reading at the time (and still don’t – she is a fine writer and has much to say, but she twitters), knew better:

So it seems that Kerry’s idea for how to deal with this huge Swift Boat Veterans problem is to churn up a swirly mass of impressions and imputations and then hope that he is the one who looks clean in the end. The Kerry people seem to be hoping that people are too dim to understand that a group of Bush supporters could operate independently or conspiracy-minded enough to think they all coordinate behind the scenes in plain violation of the law. There is a separate point Kerry has made that Bush should openly denounce the ads and that his failure to do so signifies a willingness to reap the advantages they bring him. That’s the clean point, but it has been made, and it apparently hasn’t done well enough, because we now see the campaign boat steering over the border into right-wing-conspiracy land.

And there it has remained. I never dreamed that the Kerry campaign would be crazy enough to just plain stonewall. I certainly could not have imagined that it would work.

At least, for some values of the word “work.” Kerry lost, of course, in a close race. Perhaps the SBVT affair made the difference. But perhaps it actually helped Kerry. Who knows?

But what I mean by “work” is that the Kerry strategy, just as Althouse describes, has entered public memory as the truth. At least, among most thoughtful, reasonable Americans. (Most thoughtful, reasonable Americans voted for Kerry.) And certainly among most professional historians. (Almost all professional historians voted for Kerry.) It has not just entered La Wik and the history books. Via “swiftboating,” it has actually entered the English language.

Mindboggling! And this is a tiny, tiny detail in history. Almost nothing turns on it. (Except, of course, the small question of whether you can trust the Computer.) But how confident does this make you – say – that what you know about Joseph McCarthy is accurate?

Click that link, too. It’s interesting. I have read the Evans book. I can’t really recommend it, mainly because it is a work of polemic, not of history. Evans did a lot of archival work and his notes, I’m sure, will be of use to any real historian who wants to study the period. But his subtitle rather gives the game away. I trust his results as far as they go, but I don’t trust Evans to include any bit of evidence he might find that would suggest to the reader that McCarthy was, in fact, a major-league asswipe.

Since I strongly suspect that, whatever the truth of his “fight against America’s enemies,” McCarthy was a major-league asswipe, I remain unsatisfied. Evans’ book does convince me quite effectively that McCarthy’s enemies were at least as unscrupulous as anything you’ve ever heard about McCarthy himself – eg, from La Wik. From what I know of Washcorp, this is hardly a surprise. (And if the subject interests you, you may enjoy this reviewer exchange.)

The McCarthy drama is a far bigger, far more complex story than anything involving John Kerry. And, as we see, it remains quite debatable. How about, say, the Civil War? Lately I’ve enjoyed some of the writings of Charles Francis Adams, James Randall, Claude Bowers, William Dunning, and Benjamin Hill on the period. I believe I’ve previously recommended Edgar Lee Masters, Albert Beveridge, and of course John Burgess. Suffice it to say that the mid-to-late 19th century as described by these gentlemen has little or nothing in common with the reality purveyed by La Wik or other reputable contemporary sources. And yet they were there – or at least knew people who were. Talk about the Old Reckoning

And this is just history. We have not even started on economics. Or the art of government. Or human biology. Or climatology. Heresies abound! Are they right? Are they wrong? Who the hell can tell? Quit trusting authority, and you are alone on a black sea in a black night. The truth is out there. But you have not a thousandth of the time, money, or mind you would need to find it on your own.

And every one of these fields, and many more, affect the profit and power of Washcorp. Because you vote, your judgment of them matters. And as we have seen over and over and over again, Washcorp has motive, propensity and opportunity to manage that judgment in directions favorable to itself. Nor does such management require any central planning or “conspiracy.” All it would take is a thumb on the scale in the marketplace of ideas. Which does not, of course, prove that any such thumb exists.

The other day I was bowled over by a simply stupendous book: Chronicles of Wasted Time, the autobiography of Malcolm Muggeridge. (Only the first volume, The Green Stick, is essential.) Please allow me to quote at length from this book. It is not famous. It should be. Page 19:

‘I desire to set before my fellows the likeness of a man in all truth of nature, and that man myself,’ Rousseau begins his Confessions, and then proceeds to construct a vast, serpentine edifice of lies and fantasies. The hazards in the way of telling the truth are, indeed, very great. Seeking it, one can so easily become enmeshed in lies; ‘A truth that’s told with bad intent / Beats all the lies you can invent,’ Blake wrote. Every man the centre of his own universe; insensibly, we sub-edit as we go along, to produce headlines, cross-heads, a story line most favourable to our egos. How indestructible, alas, is that ego! Thinking to have struck it down once and for all, I find its hissing cobra-head lifted again, deathless.

Yet even so, truth is very beautiful; more so, as I consider, than justice – to-day’s pursuit – which easily puts on a false face. In the nearly seven decades I have lived through, the world has overflowed with bloodshed and explosions whose dust has never had time to settle before others have erupted; all in purportedly just causes. The quest for justice continues, and the weapons and the hatred pile up; but truth was an early casualty. The lies on behalf of which our wars have been fought and our peace treaties concluded! The lies of revolution and of counter-revolution! The lies of advertising, of news, of salesmanship, of politics! The lies of the priest in his pulpit, the professor at his podium, the journalist at his typewriter! The lie stuck like a fish-bone in the throat of the microphone, the hand-held lies of the prowling cameraman! Ignazio Silone told me once how, when he was a member of the old Comintern, some stratagem was under discussion, and a delegate, a newcomer who had never attended before, made the extraordinary observation that if such and such a statement were to be put out, it wouldn’t be true. There was a moment of dazed silence, and then everyone began to laugh. They laughed and laughed until tears ran down their cheeks and the Kremlin walls seemed to shake. The same laughter echoes in every council chamber and cabinet room, wherever two or more are gathered together to exercise authority. It is truth that has died, not God.

I often wonder how, in such circumstances, it will ever be possible to know anything at all about the people and the happenings of our times. Such masses and masses of documentation! Statistics without end, data of every kind, eye-witness accounts, miles and miles of film, video abounding. Surely out of all this, posterity, if so desiring, will be able to reconstruct us and our lives. But will they? I think of Sidney and Beatrice Webb [Muggeridge married Beatrice’s niece] down at Passfield, patiently collecting and collating every scrap of information they could lay hands on about the Soviet regime. Travelling about the USSR to the same end. As experienced investigators, so rigorous and careful. And the result? – a monumental folly, a volume of fantasy compared with which Casanova’s Memoirs, Frank Harris’s even, are sober and realistic. Or I think of the messages of Our Own Correspondents, here, there and everywhere, and of all the different factors which shape them and slant them and confection them. I remember the yellow ticker-tape piling up in my office at the Washington National Press Building, and delving into it to pull out a nugget to whisk off on my own account to New York and London. Will this be much help to posterity? I doubt it. Comment is free, but news is sacred, was C.P. Scott’s great dictum for The Guardian. Yes, but whose news?

This Life’s dim Windows of the Soul
Distorts the Heavens from Pole to Pole
And leads you to Believe a Lie
When you see with, not thro’, the Eye.

There never have been such adepts at seeing with, rather than through, the eye, as the purveyors of Scott’s sacred news; inducing their readers, all too willingly, to believe a multitude of lies.

Or, again, I think of a camera crew on the job. Sound recordist and cameraman umbilically linked as they back away from their commentator, sedately walking and communing; their producer anxiously hovering behind to prevent them from stumbling and falling. Moving with a kind of pas-de-deux step, rather like a matador approaching his bull. Are they holding a mirror up to nature? Cinema vérité or falsité? Where’s the plastic grass? Or, as I once saw written on a can of film – surely the perfect celluloid epitaph: ‘Dawn for dusk.’ The eye is the window of the soul; film an iron-shutter, says Kafka. On the day that Harold Wilson became Prime Minister for the first time, I happened to be in Chicago, and stood in Michigan Avenue with a camera crew and a microphone asking passers-by what they thought about him and our change of government. To my great satisfaction, I was unable to find anyone, old or young, black or white, smart or stupid, who had heard of the event or cared anything about it. Behind where I was questioning them, up above the Tribune Building, there was one of those devices whereby news flashes by in fiery letters. Every minute or so it repeated: DOUGLAS-HOME RESIGNS… HAROLD WILSON NEW BRITISH PREMIER… A fine background to cut to! In Moscow when the great purges were on, some moon-faced Intourist, trying in good liberal style to be fair to both sides, asked one of the British newspaper correspondents there – A.T. Cholerton of the Daily Telegraph – whethe the accusations against the Old Bolsheviks were true. Yes, Cholerton told him, everything was true, except the facts. It fits, not just the purges and Moscow, but the whole mid-twentieth-century scene. Perhaps some astronaut, watching from afar the final incineration of our earth, may care to write it across the stratosphere: Everything true except the facts.

Yet again, supposing a wish on the part of posterity to know what some of our great ones were really like. John F. Kennedy, say. In the archive, trainloads of material. Photographs and profiles without end; abundance of tape, both video and sound. We can show you him smiling, walking, talking. On stage and off, as it were; relaxing with his family, addressing the nation, eating, dozing, praying. We have his jokes, we know the books he read; you can see and hear him delivering his great speeches, or fooling with his kids. You can pretty well see him being assassinated; you can see his assassin being assassinated. What more do you want? Isn’t that the man, the whole man, and nothing but the man? Well, not quite. It’s like a nightmare I once had. I was calling on someone I loved dearly; the door open, the kettle boiling, a chair drawn up to the fire, spectacles laid beside it. But no one there. Maybe upstairs. With growing anxiety I climb the stairs. Not in the bedroom, though clothes are scattered about; not in the bathroom, though it’s still moist and misty from a bath recently taken. Downstairs again; really terrified now. Maybe gone to post a letter. To exercise the dog. Listening for every footstep, starting at every sound, the tension becomes unbearable, and I wake up. In the same sort of way, the methods of representation include every detail, leaving out only the person to be represented. In a sense, they’re too perfect. Simulation becomes what it simulates; the image becomes the man. In Kennedy’s case, even his signature was done for him by a machine which so exactly reproduced the hand signing his name that experts cannot distinguish between the real signature and the mechanical ones. In the excitement and distress of the Dallas tragedy, no one remembered to turn the machine off. So the President went on signing genial, ‘personalized’ letters after he was dead.

In this Sargasso Sea of fantasy and fraud, how can I or anyone else hope to swim unencumbered? How see with, not through, the eye? How take off my own motley, wash away the make-up, raise the iron shutter, put out the studio lights, silence the sound effects and put the cameras to sleep? Watch the sun rise on Sunset Boulevard, and set over Forest Lawn? Find furniture among the studio props, silence in a discotheque, love in a strip-tease? Read truth off an autocue, catch it on a screen, chase it on the wings of Muzak? View it in living color with the news, hear it in living sound along the motorways? Not in the wind that rent the mountains and broke in pieces the rocks; not in the earthquake that followed, nor in the fire that followed the earthquake. In a still small voice. Not in the screeching of tyres, either, or in the grinding of brakes; not in the roar of the jets or the whistle of sirens; not in the howl of trombones, the rattle of drums or the chanting of demo voices. Again, that still small voice – if only one could catch it.

Typically when I start to write this way it means I’ve had a glass of wine, or three. But I still think it’s pretty good. Trust me – the book has actual content, as well.

Revipedia is not, of course, a magic oracle. It is a tool to help you, the curious and intelligent person, find that still small voice. Here’s how it works. It’s really quite simple.

Revipedia – or at least my idea of what Revipedia should be – is best seen as a cross between Wikipedia, Climate Audit, and Uberfact.

According to most scientists, 98% of the facts in Wikipedia are true. Studies have shown that 90% of the rest are accidental errors, vandalism, or other mistakes of the sort that La Wik is designed to correct. Thus precisely 0.2% of Wikipedia pages are contaminated with Lysenkoism, ie, politically constructed distortions derived from “sacred news.” Sadly, this is more than enough.

Of course, since Wikipedia is not at all immune to Conquest’s second law (every organization not explicitly reactionary tends to become progressive), and since all serious and effective Lysenkoism in the modern era is progressive, this percentage will tend to increase. Now that La Wik is much more than a toy, she wields real power. And power attracts reptiles.

Wikipedia is not a toy, but it succeeded because it started as a toy. It established a pool of amateur, dilettante administrators who, by and large, were foolish enough to care only for the truth. This is very nice, and I personally have found it quite useful. But it is not sustainable.

Banal as these old chiralisms are, the fundamental difference between the modern left and the modern right is that the left is the party of victory, and the right is the party of defeat. In the history of the last two centuries, it is almost impossible to find any issue on which the right has stood and won. Even the exceptions, such as the revival of capitalism in the last few decades, have served the greater interests of the left. Without Thatcher, there could be no Blair. There was no future in the Winter of Discontent.

“Conservatism,” so called, is a bargain that trades personal success for substantive destruction. It produces jobs for quacks, each with some patent remedy against the wind of change. No such remedy has ever worked, but the Laetrile market is eternal. And perhaps conservatives have helped here and there in holding us back from Niagara, or at least shored up the barrel staves. In exchange, however, they have deceived us about the true nature of power in our society. Your mileage may vary, but I find this bargain dubious at best. The unfortunate truth, in my extremely dodgy opinion, is that the only way our civilization can survive leftism is to abolish it completely – along with the political structures that inevitably spawn it. This is not a conservative attitude but a reactionary one, and I see no choice but to accept the label.

So, to a reactionary, Wikipedia is a dangerous ally indeed. However, given the 98% of it that is true, and the vast quantity of human labor that went into constructing that 98%, Revipedia needs to bootstrap as a Wikipedia mirror. When you use Revipedia, every page that has no Revipedia revision just redirects to La Wik. Of course it appears marked as such, to indicate its generally low trust level.

(Note the difference between a mirror and a fork. A mirror remains live and propagates updates, ideally instantaneously. Sadly, not only does La Wik lack any proper data API, provide no diffs but only dumps, and only on a ridiculous every-two-months schedule, she actually goes out of her way to block live mirrors. Perhaps there are some good reasons for this. I can also think of plenty of bad ones. Her image dump is also broken, which is simply unacceptable. Probably the easiest way to fix this would be to fix La Wik herself, if she cares to be fixed. Hey, I said this would take real money.)

Furthermore, when it creates its revised pages, Revipedia tries wherever possible to use the Wikipedia namespace. For example, imagine what the GNXP crowd would do to the scientific racism page, or Climate Audit to the temperature record of the last 1000 years, or LvMI to fractional-reserve banking. Of course, if needed Revipedia can create de novo, but La Wik would have to be very tricky to sustain Lysenkoism based only on devious categorization. Sharing the namespace also helps limit fork conflicts, which are always a problem.

But anyone can edit Wikipedia, right? So why don’t they do what they want to do now? Who needs this Revipedia thing?

Yes, anyone can edit Wikipedia. (Annoyed by a particularly horrendous Gouldian fiction, I myself slipped a reference to Gray & Thompson 2004 into the “scientific racism” page, where it looks rather odd but seems to have lasted – knock on wood.) In practice, however, most serious editing in Wikipedia is done by Wikipedians, who by definition are people with the patience to withstand and win edit wars. Most of us are not Wikipedians and will never be Wikipedians. It appears to be quite the time sink.

And once more, as that last link points out: Wikipedia is founded on the principle that an open system can produce quality, neutral encyclopedic content. This “principle” may well be true, and it has certainly proved more or less true up till now.

However, it is fatally dependent on the policy of no original research. Which is a perfectly good policy, except that it in turn is fatally dependent on the policy of reliable sources. Which leads us straight to the arms of the foe:

In general, the most reliable sources are peer-reviewed journals and books published in university presses; university-level textbooks; magazines, journals, and books published by respected publishing houses; and mainstream newspapers. As a rule of thumb, the more people engaged in checking facts, analyzing legal issues, and scrutinizing the writing, the more reliable the publication.

This second sentence is especially fascinating. It is perhaps the principal erroneous belief of modern democracy. If you believe that the more people believe X, the more likely X is to be true, you are a demotist by definition. Demotists distrust anything individual, but especially individual decisions, which they hate like the Devil hates garlic. The universal organizational panacea of 20th-century society is the committee. No wonder its buildings were so ugly.

Against this great tide of consensus, I have only two words: one is groupthink, and two is this word. And if you think Citizendium is an even better idea, follow these two links. Paging Dr. Lysenko! Trofim Lysenko to the white courtesy phone? I Risch my case.

So the goal of Revipedia is clear: produce a coherent picture of reality by selective, external revision of Wikipedia. Revipedia does not edit – it audits. It digs as deeply into the facts as is needed to demonstrate the truth. It supplies whatever subjective perspective is necessary to convey the whole truth of the matter. It takes nothing for granted, and it has no mercy.

By its very nature, auditing is not an open and unstructured process. If nothing else, to survive Conquest’s second law, Revipedia must be explicitly reactionary. Since the masses fear and loathe reaction and reactionaries, the masses are not welcome.

However, there is a small problem: to defeat Washcorp, we must capture the support of the masses. Obviously, Revipedia is no private club – anyone can read it. But can anyone write it?

Yes. But in Revipedia, the distinction between editorial staff and mere users is clear. Nothing that presents itself as a truth machine can possibly succeed without some sort of crowdsourcing. But inviting the masses is one thing. Surrendering to them is another.

At first, the only people who will care about Revipedia are other reactionaries, who will simply be happy to have a place to go where everyone agrees with them. As long as they are edited by reactionary administrators, to prevent any progressive slippage, these readers will be just as valuable as Wikipedia’s, and the community will grow in the same way – although it will, of course, be much smaller. Reaction is not for everyone. At least, not at first.

So Revipedia is still much like Wikipedia. But its source policy is very different.

First, no source which does not provide open, online access is meaningful. A “link” to an ISBN number is garbage. You might as well say “I read it somewhere.” If the source is not freely available, it cannot be publicly scrutinized and it cannot contribute to an audit. Not only is this policy essential to any fair pursuit of truth, it benefits from the avalanche of pre-1922 content that Google has blessed us with. This lends a wonderful reactionary bias to the whole effort. 1922 is actually quite progressive by the standards of 1822, but it will do.

Second, no source is trusted on the basis of authority, either personal or institutional. It can only be judged on its own merits. So what if people come to you with crackpot physics? I can’t recognize crackpot physics, but any decent physicist can. There is no substitute for administrators.

Third, all sources need to be mirrored, so that links don’t break. Disk space is cheap. Truth is expensive. As I said: real money.

And finally, as Revipedia becomes influential, it will develop enemies. This is good. Adversaries are both a sign of success and a necessity for eventual victory. Revipedia greets them with flowers, and invites them to contribute.

But not, of course, without identifying themselves as such. Contributors to Revipedia come into two broad, voluntary alignments: friends and opponents. Within these parties, an uberfactious design can create an arbitrarily deep and complex hierarchy of cults and clans.

The presence of adversaries is essential to the production of truth. It demonstrates that all claims are tested. When you look at a Revipedia page, you can click a tab and see any or all hostile responses. Adversaries can and should develop editorial and administrative structure to make their responses as effective and convincing as possible. A situation in which edited content competes with illiterate drive-by peanut-gallery taunts is not a fair fight.

Ideally, in a healthy and successful ecology, the original Revipedia admins become just one faction among many. Like any other faction, they may splinter. Progressives, Scientologists, creationists, Moonies and other nutjobs all come with their own revisions of reality. As long as an authentic reactionary perspective is available, it needs no special distinction. The truth has a still small voice of its own. If you can only hear it, you’ll find yourself listening.

As usual, I’ve registered the domain and will give it to anyone who is seriously interested.

How to actually defeat the US government

January 17, 2008

(This is part 2 of my letter to Ron Paul supporters.)

In part 1, we established that electing Ron Paul, even if it was possible, is not a practical way to convert USG into a libertarian institution. This is because the policies of USG are not set by its politicians, but by its permanent civil service, which tends to prevail in any conflict between the two.

The permanent civil service is much larger than it looks. It is best defined as everyone involved in setting and implementing USG’s policies. When we realize that this includes the press, the universities, and the NGOsphere (the brilliant Richard North of EU Referendum, one of the few bloggers who really understands how the modern state works and has not been psychically shattered by the awful truth, describes a typical rat’s nest of EU NGOs here), we start to realize why the battle plays out as it does.

Civil servants defeat politicians because no politician or political appointee can harm any civil servant’s career. Since civil servants, in the broad sense defined above, command numerous levers of public opinion – such as, um, the schools, the universities and the press – the converse is not the case. The result is that politicians either become housetrained or lose their jobs, or subsist in tiny backward niches whose voters couldn’t give a damn what the Times thinks. (Eg, Ron Paul’s district.)

An excellent way to describe any system is to outline its fringes. A fine example of an entity on the fringe of the Polygon, but still within it, is the Cato Institute. Somewhere I had gotten the idea that Cato accepts government funds, but in fact it does not – its main sponsor is, of course, billionaire Charles Koch. (I thank Will Wilkinson for the correction.) But when you compare Cato’s homepage to that of the liberal Brookings Institute, a classic Beltway bandit, I think you can see how I was confused. I think an alien who understood English could eventually figure out the substantive difference between Cato and Brookings. But it would have to be one pretty sharp alien.

When we look at the homepage of the Ludwig von Mises Institute, which will be on the Orange Line just as soon as the Metro extends out to Alabama, we can see the difference. The purpose of LvMI is to propagate ideas. The purpose of Cato is to impact policy. Ie: to wield power. Power, of course, can be wielded for good as for ill. But Tolkien knew something about that.

I like Brookings’ motto: Quality, Independence, Impact. If anyone in Washington would sacrifice the third for the first two, ten others are ready to take his place. Impact is the true currency of DC. The social status of a Beltwayite corresponds directly to his impact. I suspect this is the real reason that LvMI is in Alabama: it has no impact, and hence no power. And its employees would constantly feel humiliated and scorned, like nerds at a jock party. This might not affect LvMI’s mission, but it would be distracting. Besides, Alabama is really cheap.

What Cato sacrifices for its impact is that the set of ideas it can propagate is, by any serious historical standard, enormously narrow. As we’ve seen in l’affaire Paul, the great fear that haunts the Catonians at night is the fear of losing their legitimacy. Their impact would go with it. DC has no pity for cranks and crackpots. The result is a school of thought that can fairly be characterized as pro-government libertarianism.

Sadly, we have no reason to think that this Schlesingerian “vital center” has any correlation whatsoever with reality. The center defines itself in political terms, not intellectual terms. It is the belief of the average voter. Since the civil service invests most of its energy in managing public opinion, also known as manufacturing consent, the outcome is quite clear. As the center drifts inexorably leftward, fueled by nothing more than the raw personal ambition of a thousand thousand Brookingsites, the likes of a Cato must drift with it – or be excluded from the policymaking process. Cato has minimal cognitive independence, unless of course it confines itself to today’s goodthink.

This is why we see the level of raw hatred and arrogance that the Orange Line Mafia aims at its redneck rivals. Progressives can be debated with. Paleoconservatives are dangerous cranks who must be ostracized. Cato regularly features progressive essays on its Cato Unbound series. You will never see an LvMI paleo there – let alone a real live racist, like Jared Taylor – and if you did the progressives would vanish at once. As would the impact. The invisible procession, going by.

Whereas the cranks over at lewrockwell.com – and there is a lot of serious craziness and pure stupidity that appears there, on a daily basis – can think and say whatever the hell they want. Defend the Confederacy? Why not? Probably no one at Cato wants to defend the Confederacy. But in their hearts, they know that even if they wanted to, they couldn’t. And this has got to burn.

I mean, how long has Jeff Davis been dead? What sensible person could possibly care? How can you carry around an emotional attachment to a 150-year-old war? Talk about lunacy.

The really sad thing is that the Orange Liners can only feel like they have impact because DC, being utterly sclerotic and impossible to change, has defined impact down to levels derisory to anyone outside the bubble. On Cato’s impact page, they list precisely one success: school vouchers in Washington, DC. Well, knock me over with a feather. But really, by Beltway standards, this is not bad for 30 years and 100 million dollars – especially when the product you have to push is an inherently nasty and pointless one, like small government. It’s hard to sign people up for abolishing their own jobs.

So the whole Cato disaster provides yet another example of a strategy which cannot possibly succeed in reforming USG. The Cato-LvMI divide has been described as the Stalin-Trotsky split of libertarianism. The ugly truth is that neither “Stalinist” Orange Line libertarianism nor “Trotskyite” Ron Paul Revolution has any chance of affecting USG in any significant way.

The stunning, yet obvious answer is that we have no reason at all to think that USG can be reformed in anything like a libertarian direction. It is a highly stable system in which all changes tend to be expansive. It shares this quality with all institutions controlled by their own employees.

In the immortal words of Arthur Conan Doyle, when we have eliminated the impossible, we are left with the improbable. Therefore, if USG cannot be reformed by either political or institutional methods, it cannot be reformed at all. If despite this we consider it harmful, we have accepted the need not to reform it, but to defeat it.

The fundamental case for defeating USG is that USG was established to serve the interests of its citizens. If you are a US citizen, you agree that USG as it is does not serve our interests, and you agree that it cannot be reformed to do so, you are at least ready to support defeating it. And any means whose collateral damage does not exceed the disservice done by USG are acceptable. This is a straightforward strategic problem, and we can solve it as such.

First and foremost, you can support defeating USG without wishing for a state of wild, Somalian anarchy in North America, because we are lucky enough to have a backup system of government: the states. The obvious and straightforward result of defeating USG is to dissolve the Union (as Michael Rozeff proposes here) and return sovereignty to the 50 states. Probably the existing military should be retained as a continental defense force. Otherwise, independent states can relate to each other much as the US and Canada do now.

There are an enormous number of details to be resolved in any such proposal. In general, the states should assume the financial obligations of USG, even its informal “entitlements” – no one’s Social Security or Medicare need be cut off. Central institutions will be necessary for a few years to ensure an orderly liquidation. To be safe, these should probably be located outside the watershed of the Potomac, and they should probably transition ASAP to an employee set untainted by service with USG or its various tentacles.

Is there any guarantee that state government will be more libertarian than Federal government? None at all (unless we go all the way to neocameralism). But state governments in a decentralized North America would at least be subject to serious jurisdictional competition. They would be free to compete for desirable citizens on the basis of good customer service. This should put a serious boost of genuine market energy behind libertarian government.

Said product is not one most people think they want now. But I suspect that seeing it would change their minds. If you are a libertarian or anything like it, and you believe that ten years after the abolition of Washington there would be even the slightest shred of affectionate nostalgia for the old Potomac beast, I think you have a serious case of cognitive dissonance. I am quite confident that the reaction would be: “why did we put up with that for so long?”

If you are not so confident, any transition plan could include a ten-years-later referendum on restoring DC – from NRO to HUD, from DEA to NSF, etc, etc, right down to the offices and positions. Of course any such restoration would have to retrieve its employees from the productive sector, where they might find that they actually enjoyed their work. But these, too, are details.

I won’t try to outline a transition plan in this post. Even just how to deal with the US dollar is a problem that deserves its own essay, if not its own blog. I hope you’ll just accept the lesson of history that change happens, and that it often looks just as inevitable in the past tense as improbable in the future.

The critical problem is: can we make it happen? And if so, how?

Of course we have to consider the possibility that defeating USG is simply impossible. Perhaps the thing is just eternal. In that case, far better to roll over and think of England.

Still, history does not record any eternal regimes. Nor does it record any regimes that saw themselves as anything but. If UR has convinced its readers of anything, I hope it has convinced one or two people to actually believe in history, at least as more than a series of horrid crimes gradually vanquished by reason and prosperity.

On the face of it, defeating USG seems even harder than reforming it. After all, we are looking at a country full of people who swore a sacred oath to USG, five days a week, for the twelve most formative years of their lives. What kind of superpowers would we need to defeat that? (I love the Bellamy salute. Note how, in this picture, the hand seems to be creeping around to the more anatomically-natural Roman position. Thank you, Arthur Lipow.)

But so what? The same people believe in Social Security, the FDA, and aid to Nepal. Why should it be easier to change their minds partially, than totally? If all you have is bare hands, is it easier to slice a watermelon, or to smash it?

Here at UR, we deal with the sacred-oath thing by shifting our words slightly. Instead of USG, we use the slightly more neutral name Washcorp. This reminds us that USG is no more than a corporation in the strict sense of the word, ie, an organization with a virtual identity. In a slightly more outré move, we translate the old Viking word for USG’s continent as Plainland, its subjects thus being Plainlanders. Thus rather than trying to free the US from the evil clutches of USG – an almost oxymoronic task – we are trying to free Plainland from Washcorp.

Perhaps you remember how confused you were in high school when you read Hamlet, and found Claudius being called “Denmark”? Did a little lightbulb go off in your head when you realized how nice it is for a monarchy, if its subjects use the same word for both king and country? And when you saluted the flag that morning, which were you feeling? Warm ties of love and loyalty to Plainland, or warm ties of love and loyalty to Washcorp? It’s these little Jedi mind tricks that hold the whole thing together. They’re small, but they add up.

So all we have to do is liquidate Washcorp. Corporations are liquidated every single day. Hundreds of corporations are in liquidation as we speak. Typically this happens because they are bankrupt – an adjective hard to define in an entity whose liabilities are denominated in its own scrip, but one I often hear applied to Washcorp.

But there’s one big difference between liquidating Washcorp and liquidating Enron, which is that Enron didn’t have the most powerful armed forces in the history of the world. To defeat Washcorp, we need to defeat its military. There are a number of plausible strategies for doing so. And none of them involve hunting rifles, Patrick Swayze, or IEDs.

Clearly, to destroy Washcorp, we must capture it first. And one of the patterns we’re seeing is that the methods which work for a revolutionary capture of the state do not work for a reactionary capture of the state. This pattern is very consistent, and I’m pretty confident that anyone who ignores it is making a tremendous mistake.

For example, one way to see the Cato Institute is to see it as a sort of libertarian Fabian Society. Did Fabian or Gramscian tactics work as a method for socialists to capture the 19th-century liberal state? Spectacularly. But they worked because they attracted a legion of smart, amoral careerists who saw the near-infinite power and plunder that the hypertrophied state would create. Cato has no such promise. All it has is Koch, and his wallet is finite. Libertarianism does not create jobs.

We see the same pattern when we consider guerrilla warfare against Washcorp, either of the classic Maoist rural form, or the newer urban-guerrilla (“terrorist”) approach, or simply the strategy of building ominous and threatening paramilitary militias. These strategies work for leftist revolutionaries because they are essentially criminal in nature, and leftism – whose Yeatsian passionate energy is inseparable from its capacity for pure plunder – is fundamentally a criminal movement.

For example, in the early ’90s, after the Soviet Union collapsed, it became clear to many Americans that Washington was no picnic, neither. I don’t know that anyone took to the hills a la Patrick Swayze – unless you count Eric Rudolph. But perhaps you remember the militia movement of the period, which of course died a pathetic and probably well-deserved death after the Oklahoma City bombing.

As you may remember, no one at the New York Times asked “why do they hate us?” about Timothy McVeigh and his ilk. There was no sudden outpouring over the grievances of agro-Americans. The general national consensus, with which I basically agree, was that the Oklahoma City bombers were sick, crazy rednecks and they deserved to die. The militia movement sensed this feeling, it realized that it had no chance of victory, and it faded away.

Terrorism proper is only half of an effective strategy for seizing power. The other half is an information campaign that convinces the victims of terrorism that they can alleviate it by making concessions, typically in the form of money, power, or both. This brings the terrorists closer to their objective, which recruits more terrorists. The final result is a criminal state, led by the former terrorists – who are now, of course, statesmen.

(This pattern is the origin of most of today’s Third World governments. The political side of the campaign was, of course, our good friends the progressives. The result… do we need to go there? Not today, perhaps.)

And when we look at reactionary terrorist movements in the postwar era, such as the OAS or the AWB, we see the same pathetic Timothy McVeigh pattern. The OAS has quite arguably been proved right – Arab rule in Algeria has been a murderous catastrophe. The AWB is perhaps in the process of being proved right. So what? They both got their asses kicked. Like all failed reactionary terrorists, they made the mistake of aggravating the true authorities without having the power to destroy them. As Machiavelli pointed out, if you strike at a king, aim to kill.

Prewar reactionary terrorists, such as the Nazis and Fascists, succeeded because they formed an alliance with the rotting remnants of the ancien regime. The ancien regime is no more. Case closed. Stormfront kids, I love you for your passion. But really, why bother? Perhaps you could put all that energy into, like, getting a job, or something.

If libertarians controlled the press, schools and universities, libertarian paramilitary movements would be practical and effective. After every bomb went off, the Times could whine about how the root cause of libertarian terrorism is high taxes and Orwellian antiterrorist measures, yadda, yadda. On the other hand, if libertarians controlled the press, schools and universities, libertarian paramilitary movements would be unnecessary.

We are left with exactly one time-honored reactionary military measure: the military coup. Since in all states the military is the final court of appeal whether they like it or not, a coup (contra Arnold Kling) is always an option, whatever your form of government.

Perhaps through a sort of vestigial anti-Latin prejudice, there is nothing Plainlanders – in or out of the military – fear and loathe so much as a coup. On the other hand, if you read a lot of milblogs, which I do, you’ll start to notice that there is nothing Plainland warfighters fear and loathe so much as Washcorp. And they are especially unhappy about the center of its central nervous system, ie, the official press. Since in all states the military is the final court of appeal whether they like it or not, this has some potential.

The Plainlander military caste is fundamentally a red-state institution. I wouldn’t say that progressives in the military are as rare as conservatives at State, but it might be close. What makes this situation not at all volatile, at present, is that the Washcorp military, besides its excellent command discipline, has a strong tradition of conflating Plainland and Washcorp. (I believe the composite is known as America – apparently there’s some sort of colorful “flag” thing. Like a logo, but you can print it on cloth and run it up a pole. A sort of 18th-century version of Blue Force Tracker.)

As someone with no conservative heritage whatsoever, my impression is that most conservatives, while basically sensible, are quite confused about the nature of the modern state. It is hard for me to avoid the conclusion that this confusion primarily serves the interests of their enemies. Perhaps I am right and perhaps the problem will be rectified. However, I don’t see any sign of this happening.

For the most part, it’s simply pointless for anyone who is not part of the military to think at all about military coups. If the generals want to act, they will act. They won’t tell anyone, and they won’t ask anyone. And they will probably act only under quite dire circumstances, which it is simply puerile to wish for.

That said, there are some interesting options that could be facilitated by the Internet. For example, suppose someone managed to set up an external site which could verify the identity and rank of military personnel, but keep it anonymous. The result would be an uncensored forum in which soldiers and sailors could speak honestly about their feelings and concerns.

If this platform was scalable enough to hold an actual democratic election in which only military personnel could vote, it’s quite possible that the outcome of this ballot would have a rather definitive effect on the course of Washcorp. For producing truth, justice and competent government, elections are not much. For organizing large numbers of otherwise independent actors for concerted collective action, let’s face it – they’re the shizzle.

However, this strategy is impractical at present and may never be practical. It is best reserved for the back, back burner. I mention it only because I can imagine very hypothetical situations under which it might work.

This leaves us with the good old-fashioned way of seizing power – convincing people to vote for you. But how is this different from the Ron Paul Revolution? Allow me to explain.

As I’ve said before, Washcorp is best understood not as an electoral democracy, but a massarchy. A massarchy is a state in which power is held by those who manage public opinion. The difference between massarchy and electoral democracy is that in a massarchy, the permanent government (ie, civil service) maintains a higher degree of legitimacy than elected politicians. The latter are thus essentially decorative and disposable.

Massarchy works because, with modern broadcasting and polling, the tools available to the civil service for both influencing and measuring public opinion are much more powerful and sensitive than anything in the political system. In the 19th century – at least, the early 19th century – politicians actually purported to change the voter’s mind on substantive issues with their speeches and debates. Needless to say, the beliefs of the normal modern voter are either installed via the schools and the press, or (in some cases) transmitted through peer networks which are incredibly jammed with bogus misinformation, conspiracy theories, etc.

Under massarchy, civil servants have an additional advantage: they can anticipate future public opinion, because the leftward drift of opinion has been so consistently predictable. (Gay rights, for example, is an excellent metric.) It is very easy for a civil servant in 2008 to simply organize his career around the plausible political center of 2018 or even 2028. Not so easy for a politician!

So it’s no wonder that the popularity of the permanent government is so high that no pollster even bothers tracking it. Civil servants proper are simply expert professionals who carry out the policies of their masters, the politicians, who are elected by the all-knowing public, whose opinions are right and cannot be inquired into. Nothing to see here. Move right along. The press comes in for a little more flak, especially since first the AM airwaves and then the Internet opened up, but it certainly has power to compensate. As for the universities and schools, who is against science, the arts and letters, or education? No one. There is no opposition. Politics is harmless and contained.

Elections are still informative for one reason: they measure not simple opinion, but motivation and organizational power. A poll will not do this. For example, the fact that Republicans didn’t really care for Rudy Giuliani is a fascinating product of the Presidential election. If you had been sure of this a year ago, you could have made quite a bit of money on the prediction markets. What the early polls were indicating was just name recognition, which is often a good indication of popularity, but prone to remarkable errors. The sad fate of Big Rudy tells us nothing about public opinion on any substantive issue. In theory, however, I suppose it could.

Washcorp is also quite capable of bending when it has to. When 9/11 made the White House (which is of course inherently temporary) and DoD (a hotbed of subversive grumbling) unexpectedly popular, we saw a short bull market in hawkishness not just in Congress, but also even in the press (remember Judy Miller?), State Department, etc.

This is easily explained by the theory that the primary goal of everyone in Washington is to attain as much power as possible, and retain it for as long as possible. When public opinion shifts, Washcorp shifts with it. In 19th-century Britain, figures who adopted this strategy were called trimmers. Unfortunately, now that everyone (except for Ron Paul) is a trimmer, there is no real use for the word.

This sort of unromantic view of the democratic system is absolutely critical if you want to employ what I think is the only practical strategy for defeating Washcorp: capturing public opinion and turning it against Washcorp itself. Trimming is no defense against this attack. If Washcorp trims, it agrees to commit suicide. If it does not, it loses its invulnerability to attack through the electoral system, and electing politicians who will kill it becomes a viable strategy.

In other words, the only way to actually defeat the US government is for the attacker to actually beat it at its own game: manufacturing consent. Everything else is a waste of time.

So: to liquidate Washcorp, convince as many Plainlanders as possible – certainly a majority, and ideally a substantial majority – that Washcorp is not acting in their best interests, that in fact it is fundamentally parasitic, and that it needs to be liquidated.

In my opinion, this is nothing but the truth. This helps. It certainly makes the job easier. But the fundamental nature of the task is military, in the Clausewitzian sense. Truth has certain natural advantages over fiction. It has other natural disadvantages. When your product is the truth, you probably don’t want to contaminate the message with fiction. When your product is fiction, you are free to add any useful embroidery.

My point is that the goal is to get from point A to point B, and anyone who believes that the truth just does this on its own is reading the wrong blog. If the truth is always victorious on its own, it would already have been victorious, and since it has not been, my view of Washcorp cannot be the truth. Either way you are barking up someone else’s tree.

So let’s say that you have the resources of Ron Paul’s war chest (what is it, $20 million? I hope this hasn’t all been spent – I’d like to think it could end up at LvMI), and your goal is to manufacture enough consent to liquidate Washcorp.

What would you do? Buy TV ads, for Ron Paul perhaps? Complete liquidation may not be exactly the Ron Paul platform, but surely it’s close enough for government work. Perhaps if you start by selling Dr. Paul, you can move on to the more aggressive message.

The idea that any of the “moneybomb” take is being spent on TV ads disturbs me. Short of hand-lettered signs on telephone poles, it’s the worst strategy I can think of. Advertising may get you a small amount of name recognition among particularly uninformed voters. These are not the people who are going to vote for Ron Paul, and even if they are they are not the people you want. Inch-deep support is worthless.

For an intelligent and thoughtful person, going from the official press or TV to Ron Paul – let alone to liquidating Washcorp – is not a decision that could possibly be influenced by a 30-second spot. Or even a 5-minute spot. It is not quite at the magnitude of a religious conversion, but it comes close.

Most people are not intelligent and thoughtful – anything but. But they know that government is serious business, and they know enough to get their views on government from people they see as intelligent and thoughtful. For most Plainlanders today, this chain terminates in the official press, which as we’ve seen is an essential organ of Washcorp. D’oh.

Wikipedia’s reliable source policy is typical:

In general, the most reliable sources are peer-reviewed journals and books published in university presses; university-level textbooks; magazines, journals, and books published by respected publishing houses; and mainstream newspapers.

What security does this policy provide against political corruption? Absolutely none. What it says is: trust the authorities. The computer is your friend. These are not the droids you’re looking for. The tap water is perfectly safe. The procedure is for your own good. Etc.

It is not La Wik’s goal to replace or challenge the “mainstream.” In fact, I’d say that it is sensible and conservative to not even try. Short of Uberfact, I don’t see how it could even be attempted. And the fact that we could not imagine a Wikipedia without these “mainstream” information distributors, which of course are informal arms of the State, should alert you to the scale of the problem. Imagine what this paragraph would look like in a modern Third Reich or Soviet Union. Besides being written in German or Russian, how else would it differ? If you remain confused, perhaps this fine article about Putin’s new textbooks will enlighten you.

From the adversarial perspective, the best way to think of Washcorp is as a cult. It so happens that this cult is hundreds of years old, and almost all Plainlanders believe in it. In fact, they accept it so uncritically that they believe there is nothing to believe in. Their natural response to anyone who shows up at their door – or on their TV – and tries to deprogram them will be to think that it is in fact this person who is trying to suck them into a cult. All cult members believe everyone in the outside world is crazy. And vice versa. This is quite normal.

Who is the cult? The only test is the truth. One of the things I’ve been trying to do here at UR is construct a set of case studies in how Washcorp systematically (and quite unconsciously) propagates and maintains fictional perspectives of reality among Plainlanders, to a point at which the very existence of the massarchy is dependent on these fictions.

If you are a new reader, perhaps the just-unearthed Crick letters are a simple way to shake your faith. Washcorp is relatively flexible. It can adjust to many changes in public opinion. But imagine what it would take to adjust to a world in which Crick and Watson were right. Frankly, I can’t even begin to fathom it. The gold standard is a trifle by comparison.

I think it’s pretty obvious that if all – or even any – of my conclusions in these matters are true, liquidating Washcorp in a timely and orderly way is not optional. After water and food, stable government is the next human essential. If you disagree, perhaps Jello Biafra has a lesson for you. If Washcorp’s security really is based on lies, so is yours. If this doesn’t make you uncomfortable, perhaps you are some kind of weapons expert. I’m afraid I am not.

The problem is that I am not an authority on anything. I am just some dude with a weird fake name. If you are smart enough to reason through my arguments and decide whether you agree with them or not, you plus everyone like you could elect a dogcatcher in Nome. My blog template looks like ass. My posts are unedited and highly rambling. And I am sure I have made many factual errors which don’t involve the Cato Institute.

If you really want to defeat Washcorp, you need to do much, much better than this. You need a real institution with real money and a real staff. Your goal is to be more credible than the official story. You cannot do this with one person.

You need to build a Web site that anyone with a screen and a mouse can click on, and get an accurate understanding of reality, including all the bits of history, government, economics, science and current events that Washcorp doesn’t want you to know. With a 5-minute overview for casual readers, and enough depth that a PhD with a standard Washcorp education will come away at least gritting his teeth.

You need to hire Steve Sailer and Michael Totten and Greg Cochran and Hans-Hermann Hoppe and Steve McIntyre and Jeffrey Rogers Hummel and Razib Khan and Michael Yon and Jörg Guido Hülsmann. Or at least people who are at least as smart, at least as knowledgeable, and at least as expressive as the above.

You need to produce a coherent corpus of authoritative information, a la Diderot, not just a random jumble of essays. You need to crowdsource, but not without editorial control, so that Conquest’s Second Law does not do its thing. You need a place that anyone who speaks English can go to find out what is actually going on in the world, and update that knowledge every day. And above all, you need to be right. The task of replacing Washcorp’s pile of nonsense with some other pile of nonsense is simply not solvable.

And then you need to wait ten or twenty years. Because this stuff doesn’t happen overnight. Your accurate description of reality has to become more fashionable than the official “mainstream” truth. Fortunately, the latter is extremely boring, chock-full of pretentious cant and intentional obfuscation, and often transparently self-contradictory. But you also have to be more fashionable than all your “alternative” competitors (see under: Alex Jones), which is definitely nontrivial. Too bad. It has to be done.

The way to defeat a massarchy is to create and propagate a credible alternate reality that outcompetes the official information network. Fifteen years ago, the propagation part was almost impossible. Today it is trivial. All that’s left is the creation, and I bet it could be done in half Cato’s budget. Bored billionaires of Plainland, you have nothing to lose but your Washcorp. Why not give it a shot?

Questions for Arnold Kling, Megan McArdle, Will Wilkinson, and all other Beltway libertarians

January 16, 2008

A fascinating new blogger who calls himself Former Beltway Wonk pops up with a handy new term, the Orange Line Mafia. (Note to FBW: James Kirchick’s name contains two Cs.)

“Mafia” is perhaps a little harsh. And surely the implication, which FBW in all fairness does not make but perhaps implies, that l’affaire Paul was in some way coordinated – perhaps at some Dupont Circle version of the Bada Bing – is incorrect. When sharks do their shark feeding frenzy thing, it’s not like there’s some shark capo in the background telling them where and when to rip off hunks of flesh. The only coordination signal is blood in the water. And as we’ve seen, your nose for that – at least when it comes to Blut und Boden in its amelanistic morph – needs no sharpening.

But I like the Orange Line tag. I fear it will stick. And so, dear ladies and gentlemen, given your rather vehement views on the Ron Paul controversy, I am curious as to how you might answer the following questions. Please feel free to respond to all, none, some, or more.

1. Which is worse, racism or socialism? Why?

2. Can you imagine living in a world in which socialism was politically incorrect? In other words, in which any comment which even hinted that socialism might be a good idea instantly reminded the listener of the Holodomor, and exposed the commenter to social ostracism, professional destruction, civil and perhaps criminal liability?

3. Define “crimethink.” Do you find this concept useful? Do you believe that it should apply to racism, socialism, neither, or both?

4. Which government was worse: the Soviet Union under Stalin, or the Republic of South Africa under P.W. Botha? Why?

5. Who knows more about human genetics? You, or Francis Crick? Discuss.

6. Do you believe that intellectuals, such as yourself, should write and debate under the theory that American public opinion is generally right until proven wrong? How do you reconcile this with the fact that American public opinion generally sees libertarians, such as yourselves, as a bunch of freaks, cranks and nutcases? Do you consider changing this perception the primary objective of your efforts? Does this ever conflict with just saying what you think? And if so, which wins?

7. Do you find the term “Beltway libertarian” at all pejorative? If so, with what term would you prefer to describe yourselves? Would “responsible libertarian” do? If so, do you find anything odd in the fact that so many responsible libertarians work for the US government or institutions it sponsors?

8. Do you agree or disagree with this quote from Georgi Arbatov?

I pay tribute to the courage and fearlessness of those who, like Andrei Sakharov, risked taking an uncompromising stand… These people were heroes, even martyrs. And if they had not done what they did, I think the changes in our country would not have gone forward so quickly. But had it not been for the many hundreds and thousands who worked inside the system, fought routine skirmishes, tried to stop the pressure of Stalinist conservatism, and defended and promoted the ideas of democracy and peaceful economic reform, the process of revitalization would not have been possible at all.

9. Do you expect that, if the present American system of government is ever defeated by a libertarian movement, you will find yourself, like Arbatov, perceived as a “spokesman at best and toady at worst for the regime”? Or do you expect to be praised and feted for your work inside the system?

10. Do you ride the Orange Line to work?

[Update: Arnold Kling, who did take a couple bites of the whale but I have to admit doesn’t really fit the profile, supplies his answers. Wilkinson’s are in the comments.]

Not Ron Paul!

January 10, 2008

Yes, I’m sorry, we are suspending actual content here at UR for a brief Ron Paul fest. If you are itching for more monetary red meat, I cross swords here with a friendly Australian banker, and discuss the silver market here, courtesy of the great financial ninja Macro Man.

Also, I will be travelling this week and even more unavailable than usual. Please don’t hesitate to send me email anyway. I will answer it all. At least at some point.

An open letter to Ron Paul supporters (part 1)

January 10, 2008

Ron Paul is wonderful. He is the best thing to happen in American politics in my lifetime. I will vote for Dr. Paul. I think anyone eligible should do likewise.

But I have some questions for my fellow Paulistas.

Suppose Ron Paul is elected President. What makes you think that President Paul can fix the US Federal Government?

What makes you think that any President can fix the US Federal Government?

What makes you think that the US Federal Government can be fixed at all?

And if you don’t think it can be fixed, what do you hope to achieve by voting in its elections?

Obviously, it all depends what you mean by “fix.” But obviously, if you support Ron Paul, you think said institution, which down on the Potomac oft assumes the snappy name of USG – not to be confused with U.S. Gypsum, maker of fine Sheetrock – is in desperate need of an extreme makeover.

When Barry Obama talks about “change,” he’s talking about a whole new brand of lipstick, a deep restoring facial and maybe even a few collagen shots. With Dr. Paul, the bone saw is a given. We’re probably looking at a full maxillary reconstruction, a few rounds of chemo, and perhaps a silver nose, like Tycho Brahe’s. Assuming all goes well, our new Old Republic, meticulously recreated from 200-year-old dental records, will resemble the present USG about as much as the latter looks like U.S. Gypsum.

All the better, you say. If your problem is an invasive sphenoid tumor, your solution is not blush and mascara. Our beloved Republic is sick. Deeply sick. She needs the procedure. And in Dr. Paul, the man, the hour and the rongeur have met.

But have they?

At this point the soothing, Grímaesque voice of the moderate mainstream libertarian may be heard, suggesting that Dr. Paul is unelectable. Ergo, it will not help to vote for Dr. Paul, because Dr. Paul will not be elected, and your precious vote will be wasted. Rather, if you want to work for real change, you should work within the system.

Of course, there are only so many desks at the Cato Institute to go around. But if you make your small voice heard, maybe there will be more. Who says libertarians can’t have their own Beltway patronage machine? Uncle Sam beams down benevolently on friend and foe alike. As in Orwell’s classic, the two are never far from common ground.

Needless to say, here at UR we have no truck with these shills – who remind me most of the type of house dissident, like Georgi Arbatov, that flourished so in the later Soviet period. But yes, if I had to bet, I would bet that Ron Paul will not be elected in 2008. I don’t think he will even win the Republican nomination.

But would I, realistically, rule it out? Fashion is fickle. Even intellectual fashion. And in a democracy, intellectual fashion rules. The age of viral politics is upon us. Is all that stands between Dr. Paul and the White House the right YouTube spot or two? Who the hell knows. Frankly, kids these days baffle me. And even if Dr. Paul doesn’t win this year, there will be other years and other Ron Pauls – as Todd Seavey points out.

(I’m not even going to start on this Nazi crap. I refer you to my post on the subject. Anyone who starts playing the Kevin Bacon game with Ron Paul and Hitler, or anyone and Hitler, is required to submit to the same experiment with Stalin and Mao, and is specifically enjoined from using the term “McCarthyism” for so long as they may live. You fuckers. You really don’t have any shame, do you?)

So, again: even if Ron Paul – or someone like him, in 2012 or 2016 or 2020 – is elected, will he be able to fix USG?

Dr. Paul has described his program very eloquently and straightforwardly. He wants to restore the Constitution of 1789. Or at least this is how he describes it, although probably a better match for the actual Paul platform would be the Constitution of 1889. But no matter. Next to the present situation, the difference is small.

Let’s assume our goal is to achieve this result. We would like to convert USG into something which at least bears some vague resemblance to the structure described in the Constitution of 1789, plus of course its duly ratified amendments to the present date, interpreted according to their original public meaning.

Obviously, no one person can achieve this goal. We, the set of people who would prefer this state of affairs to the present state of affairs, will have to act collectively. The question is: is voting for Ron Paul, or someone like him, an effective collective strategy for producing this result – assuming we have sufficient votes to elect Dr. Paul as President?

Actually, this is not a question for me. I know the answer. At least, I think I know the answer. Perhaps I am wrong, but if so I feel quite confident in my error.

And so my actual question is about you – my fellow Ron Paul supporters. Are you voting for – and even better, donating to – the Paul campaign because you seriously believe that, if Dr. Paul is elected, he will actually be able to carry out his extreme-makeover bone-saw program?

If so, let me put it as gently as possible. You have no idea what you’re up against.

But why should you believe me? Perhaps I am just another enemy of freedom. Surely there are many such, and perhaps I am one. So let’s start by looking at what we can agree on.

Since we are Ron Paul supporters, we agree that USG is not, in fact, the organization described by the Constitution of 1789. You have all heard Dr. Paul’s spiel. I see no need to repeat it.

In other words, USG operates under an unwritten constitution. To Americans, this sounds paradoxical, sacrilegious, or both. In fact it is perfectly normal.

Under an unwritten constitution, there is one sovereign legislative institution which holds the ultimate power of government, and whose authority cannot be legally disobeyed. The law is whatever this body says the law is. In the UK, this institution is Parliament. In the US, it is the Supreme Court.

USG’s unwritten constitution consists of a series of Supreme Court precedents, many of which date to the 1930s – Footnote Four is perhaps the best example. These are simply laws expressed as judicial decisions. Generally they are very vague and broad. Then Congress writes its own laws within these boundaries. Generally these are quite vague and broad. Then the various agencies and other arms of USG write regulations within the boundaries defined by Congress. Generally these are quite detailed and specific. And this is how the sausage is made. If you don’t like it, you can, of course, petition the Supreme Court. If this isn’t legislative sovereignty, what is?

Of course, USG is peculiar in having a written Constitution to go with its unwritten one. This has required our rulers to bend their decrees sinuously around the text of this ancient document, an exercise which at least serves to remind us of Mr. Swift’s Tale of a Tub. As for the claim that Americans are free whereas Britons live in chains, because we have a written Constitution and they are subject to their rulers’ every passing whim, I will have to respectfully disagree. I have never lived in Britain, but I gather the main difference is that they drive on the other side of the road.

Written constitutions were an experiment. The data are in. The experiment has failed. If Dr. Paul would prefer USG to return to the Constitutional interpretation of 1789, or 1889, or 1926, or whenever, he of course is free to say so. And I agree. Certainly, compared to the USG we have today, the structure of 1789 strikes me as quite appealing.

But why should we assume that, if Dr. Paul managed to return the US to the Constitution of 1789, it would stay that way? We once had a Constitution of 1789. Then stuff happened. And now we don’t. Does this sound like a success to you?

Let’s call this the first crack in the “convince everyone to vote for Ron Paul” strategy for fixing USG. We are still assuming that President Paul can perform the surgery. But will the wound stay closed? And will it heal properly? Does the Constitution of 1789 protect us at all against the possibility that the tumor will just grow back? Perhaps quite a bit faster than it took to grow in the first place?

What we’re questioning here is the commonly held, but thoroughly fallacious, concept of limited government. I agree that limited government is desirable. I see no reason at all to believe that it is implementable. Note the curious use of the passive voice in this construction. How can a sovereign authority limit its own power? If it decides to change its mind and take the power back, who exactly will stop it?

For me, 200mpg carburetors, penis enlargement pills, and written constitutions which limit the power of the State are all in the same category. I think they would be great to have. I will believe that they exist when I not only see them working, but understand how it is that they can possibly work. I recognize that both these tests are very difficult. If you want to start by passing just one, my inbox is always open.

One sad effect of this mania for government-limiting constitutions is that it has obscured the previous meaning of the word constitution, which is actually much more useful. In normal 18th-century English, the constitution of a government (or any other institution) just meant its persistent organizational structure. The term was not prescriptive, but descriptive.

For example, John Adams’ Defence of the Constitutions of the United States – well worth a read, by the way – uses the word in this good old descriptive sense. An actual defense of the constitution of the present USG would strain the powers of Lucifer, let alone John Adams. But I would still find it quite interesting to read. Of course, you would need the constitution first.

For example, our written, prescriptive Constitution says nothing at all about the press, except of course that it shall be free – whatever that means. But is it really possible to construct a descriptive constitution of USG without mentioning the official press? The Times and the Post alone are institutions at least as influential and durable as many formal government agencies. Their powers – such as the right to publish leaks – are thoroughly embedded in both law and custom. If they are not even mentioned in the constitution, how descriptive can it be?

And when we ask ourselves what President Paul can do to fix USG, which document should we consult? The written Constitution of 1789 (plus amendments), or the descriptive constitution of 2008? Unfortunately, the latter does not exist, but it is our only option. If the Constitution of 1789 determined the answer, would we need a President Paul?

Therefore, let’s consider the powers of the President, in the actual USG as it actually exists.

Sometimes I get the impression that many voters actually believe that the President is in some sense “the leader of his country.” As though he was Adolf Hitler, or something. If you are operating under this illusion, it is probably too much for me to dispel, but I will try anyway.

Under the actual constitution of the actual USG as it actually exists today, the President is a relatively minor official whose duties are primarily ceremonial. The office is not yet utterly impotent, like the British monarchy. But give it a century or two.

Suppose the product of a Presidential election actually was “the leader of his country.” While the term “country” in political discourse is spectacularly meretricious, oscillating between (a) a partition of the planet’s surface, (b) a set of humans or at least hominids, and (c) a sovereign corporation or “government” which exercises sovereign power over (a) and (b), clearly the concept of a “leader” makes no sense in the first context, is too scary for words in the second, and can be understood only in the third.

Thus a “leader” of USG would be a corporate executive, ie, a CEO. This sounds like we are on the right track, because we know there is some association between the President and something called the “executive branch.” Perhaps, if Dr. Paul was elected President, we could think of him as the CEO of USG?

Not a chance. We have slipped away from our actual descriptive constitution, and instead find ourselves back in high-school civics class, reciting pablum.

A CEO of a normal private organization (company, nonprofit, etc) controls four aspects of the company’s operations: budget, policy, structure, and personnel. He or she sets the distribution of funds between units of the institution; tells its employees what to do and how to do it; configures lower-level management structures; and can hire and fire individuals at will.

Forget Ron Paul for a moment. Imagine if we elected not Dr. Paul, but Steve Jobs, as President of the US. He wouldn’t take the job, but imagine if he did.

President Jobs would find himself in a rather unaccustomed position. He could not reallocate funds between agencies, or even between departments, or even between programs. He could not change any organizational structure. He could not tell anyone what to do. He could not fire, promote, or demote any of his employees. What could he do? Look dignified and come across well on TV.

And indeed, this is basically the task of USG’s so-called “President.” His most important function is to pretend to be in charge. And this is the one function in which the entire executive branch, plus of course the White House proper, will enthusiastically assist him.

For a good look at what George W. Bush actually does, I find this page invaluable. If you are anything like me, your eyes will immediately be drawn to the Executive Order of October 20, 2007: “Protection of Striped Bass and Red Drum Fish Populations.”

This is a fine example of the petty whims by which Chimpy Bushitler, notorious fascist and fanatical angler, rules our nation. Bushitler and his notorious, Goeringlike henchman, Dick McDick, when they are not torturing nuns, spend all their time out on the Chesapeake, fishing for striped bass, red drum, and other brackish, white-fleshed piscids. So Bushitler and McDick, spitting in the face of our economically vital seafood industry, have taken striped bass and red drum off America’s dinner table, reserving these delicious fish for themselves and their well-heeled sportfishing cronies. Just another day in the Republican reign of terror, kids.

Right. What actually happened? Why did this pearl drop from the President’s pen? Because someone put it in front of him, and he signed it.

As I’ve mentioned a couple of times, I come from a civil-service family. Horrible as it may seem, I was raised and educated on your tax dollars. And if there is one modern production which everyone who I have ever met who had ever been involved in government considers an accurate portrayal of the actual thing as it actually is, it is, of course, Yes Minister. (If like me you are allergic to canned laughter, the scripts are available as a book, which is perfectly readable. But see below.)

The one mystery about YM for me was how the people who wrote it found out. Surely it is not possible, even at the BBC, to be both a senior civil servant and a TV screenwriter. Since, as Lao-Tzu put it, those who talk don’t know and those who know don’t talk, the existence of this show, isolated example though it is, struck me as implausible. Yet there it was.

As with so many of my childhood conundrums, the Internet has resolved this for me. The principal source for YM is the posthumously-published diaries of Richard Crossman, who was housing minister in the ’60s under Harold Wilson. (I can only shudder at the concrete horrors for which he must be responsible – at least, nominally responsible.) As a glance at the first page of his diary will confirm, Crossman simply is Jim Hacker. Other personalities are also quite recognizable.

My edition (abridged, and 750 pages) begins with this entry:

Thursday, October 22nd
I was appointed Minister of Housing on Saturday, October 17th, 1964. Now it is only the 22nd but, oh dear, it seems a long, long time. It also seems as though I had transferred myself completely to this new life as a Cabinet Minister. In a way it’s just the same as I had expected and predicted. The room in which I sit is the same in which I saw Nye Bevan for almost the first time when he was Minister of Health, and already I realize the tremendous effort it requires not to be taken over by the Civil Service. My Minister’s room is like a padded cell, and in certain ways I am like a person who is suddenly certified a lunatic and put safely into this great, vast room, cut off from real life and surrounded by male and female trained nurses and attendants. When I am in a good mood they occasionally allow an ordinary human being to come and visit me; but they make sure that I behave right, and that the other person behaves right; and they know how to handle me. Of course, they don’t behave quite like nurses because the Civil Service is profoundly deferential – ‘Yes, Minister! No, Minister! If you wish it, Minister!’ and combined with this there is a constant preoccupation to ensure that the Minister does what is correct. The Private Secretary’s job is to make sure that when the Minister comes into Whitehall he doesn’t let the side or himself down and behaves in accordance with the requirements of the institution.

It’s also profoundly true that one has only to do absolutely nothing whatsoever in order to be floated forward on the stream. I have forgotten what day it was – indeed, the whole of my life in the last four days has merged into one, curious, single day – when I turned to my Private Secretary, George Moseley, and said, ‘Now, you must teach me how to handle all this correspondence.’ And he sat opposite me with his owlish eyes and said to me, ‘Well, Minister, you see there are three ways of handling it. A letter can either be answered by you personally, in your own handwriting; or we can draft a personal reply for you to sign; or, if the letter is not worth your answering personally, we can draft an official answer.’ ‘What’s an official answer?’ I asked. ‘Well, it says the Minister has received your letter and then the Department replies. Anyway, we’ll draft all three variants,’ said Mr Moseley, ‘and if you just tell us which you want…’ ‘How do I do that?’ I asked. ‘Well, you put all your in-tray into your out-tray,’ he said, ‘and if you put it in without a mark on it then we deal with it and you need never see it again.’

This is the default existence of every politician and political appointee in the modern Western system of government. They simply empty their inboxes into their outboxes. The civil service, which by definition is permanent and cannot be touched by anyone who is contaminated by the deadly stain of “politics,” takes care of the rest. As long as you believe in democratic centrism, this system makes perfect sense.

Of course, life is only easy politicians who are aligned with the civil service. Learning that the inspiration for Jim Hacker MP was a hard-line Old Laborite makes perfect sense to me – the left is always, in every case, the party of the institutional civil service. Crossman’s interactions with his “nurses” are comical because they are basically on the same side. If he decides to stop trying to swim and just float, he is unlikely to be horrified by the results. If he manages to flail around and actually get something done, they are unlikely to be horrified.

There are no Ministers or Private Secretaries in DC. Crossman’s opposite number in Washington, especially Washington today, would be surrounded by a small platoon of so-called “sched Cs,” known to the punters as “political appointees.” There are a couple thousand of these jobs, which are listed in a wonderful little volume called the Plum Book. From the Beltway’s viewpoint, the primary purpose of your vote this November is to decide who shall consume these plums, “so sweet / and so cold.”

My mother was a GS-15 at DoE, working on budget and policy for renewable energy, in the Clinton administration. The other day I asked her about the sched Cs. “They get very nice offices,” she said. “And they can do pretty much whatever they want. They’re encouraged to find something and work on it.” A legion of little Jim Hackers. Here in America, everything comes in a bigger box.

Of course, the politicians have another option. They can try to fight. Sometimes this is done by the so-called “Republicans” among them. Perhaps you have seen stories in the press that indicate that some elected mannequin or other is trying to “politicize” the operations of some responsible and professional arm of USG. This indicates that someone is struggling. Of course, the classic example of an American politician who really went to war with the civil service was old Tailgunner Joe, and we all know what happened to him.

The basic strategy of the civil servant, when attacked by a politician or political appointee, is to make his attacker or the attacker’s political sponsor look bad in the press. Since politicians cannot be elected without the cooperation of the press, this strategy always works. Since the press is effectively part of the civil service (if the news desks at the Post, the Times, and CNN were reorganized into a Department of Journalism, perhaps not unlike the BBC, the lives of reporters would hardly change at all), this game is always “on.”

(I seem to recall a case recently in which a government employee was penalized for disclosing confidential information to the press. What do you think? Was he a career civil servant, or a sched C? No prizes to the winner.)

The issue is not exactly new. Here is Carlyle, from his Latter-Day Pamphlet #3 (1850):

A mighty question indeed! Who shall be Premier, and take in hand the “rudder of government,” otherwise called the “spigot of taxation;” shall it be the Honorable Felix Parvulus, or the Right Honorable Felicissimus Zero? By our electioneerings and Hansard Debatings, and ever-enduring tempest of jargon that goes on everywhere, we manage to settle that; to have it declared, with no bloodshed except insignificant blood from the nose in hustings-time, but with immense beershed and inkshed and explosion of nonsense, which darkens all the air, that the Right Honorable Zero is to be the man. That we firmly settle; Zero, all shivering with rapture and with terror, mounts into the high saddle; cramps himself on, with knees, heels, hands and feet; and the horse gallops–whither it lists. That the Right Honorable Zero should attempt controlling the horse–Alas, alas, he, sticking on with beak and claws, is too happy if the horse will only gallop any-whither, and not throw him. Measure, polity, plan or scheme of public good or evil, is not in the head of Felicissimus; except, if he could but devise it, some measure that would please his horse for the moment, and encourage him to go with softer paces, godward or devilward as it might be, and save Felicissimus’s leather, which is fast wearing. This is what we call a Government in England, for nearly two centuries now.

The Parvuli and Felicissimi of Carlyle’s time were giants next to the absurd nonentities who are trying to keep themselves on the horse today. And now it is more like four centuries. Everything else is pretty much the same, though.

So what do you think would happen to Ron Paul if he tries to stay on Carlyle’s horse? I’m afraid there are exactly two possibilities. I believe Dr. Paul is an honorable man, so we need only consider the first, which is that he will fight the system and actually try to downsize DC.

Of course, beyond his ability to block Congressional legislation (a courtesy Senate rules grant to every single Senator – people in DC who can stop things from happening are a dime a dozen), his power to nominate Supreme Court justices (who must still be confirmed by the Senate; and note also that Republican Presidents chose seven out of the last four conservative Justices), and his nominal command of the armed forces (whom he can at least order to stop whatever they are doing right now and come home; but so can Barack Obama), President Paul will have no power whatsoever.

But don’t worry. He will still have the power to make a fool of himself – at least as portrayed in the eyes of the press. His popularity will descend into the single digits. The result will be that Americans will consider libertarianism “discredited” for at least the next twenty years. Except for the same kinds of diehards who support him now, everyone who voted for Ron Paul in 2008 will realize, by 2012, that they were swept up in a wave of craziness, they had no idea what they were thinking, and they will certainly never think it again.

In other words, the problem with believing in Dr. Paul is that Dr. Paul is a candidate in a democratic election. To vote for him and believe you are doing something meaningful and important, it is necessary to believe not just in one thing – Ron Paul – but in two: Ron Paul and contemporary American democracy.

Obviously, when Paulistas talk about the press and its vicious vendetta against Dr. Paul, we can see that they have no illusions about their enemies. Their illusion is strictly confined to their friends, or those they imagine to be their friends. They huddle round the belief that the American electorate will come to its senses in a great flash of political light, and that once they come to their senses they will remain there. This Damascus experience will be triggered simply by the realization that America is a libertarian country, was founded as such, and has remained as such deep in the American heart.

Excuse my French, but this is crap. Americans are like everyone else. They believe what they’re told to believe. They respond to superior authority. For the last 75 years, they have been told that the State is their mother and father. Or possibly both. And now, they deploy the official “we” with gay abandon. Even I have a tough time removing this malignant pronoun from my tongue, and I do try. Americans simply cannot imagine life except in the warm arms of their official universal uberparent.

If you’re trying to save the old libertarian America, you’ve arrived on the scene a little late. Electing Ron Paul is like showing up at an autopsy with a live human liver. Yes, it’s true – the patient did die of liver failure. But that was a week ago. I suppose it can’t hurt to try and put the thing in, but I really doubt it will do any good.

Anthony Howard, the editor of my Crossman edition, describes Crossman’s struggle as a Fabian who also happened to believe in democracy. One might as well be a Catholic who also happened to believe in anal sex, and the permanent cognitive dissonance is characteristic:

The most familiar charge brought against Crossman even while he lived was that of ‘inconsistency’. Yet in one area, from the days when he was a young Oxford don, he was as constant as the Northern Star. His first, and favourite, book Plato Today wrestles with the problem of to what degree British parliamentary democracy is a sham, a fraud or a hoax: and it was a question that Crossman continued to tussle with until the day he died. It made him a highly unusual, not to say unorthodox, politician (his fellow practitioners of the craft being more generally noted for conveying complacency rather than betraying disquiet about a system that at least had had the merit of recognizing their own talents). Crossman, however, as well as possessing ‘the bump of irreverence’ that he was much given to boasting about, had throughout his career a passionate – and at times inconvenient – commitment to the notion of making democracy actually work. His haunting doubt – and this is as apparent in his last public lecture as in his first book – was that in some way the British electorate was being fobbed off with what Plato called ‘the noble lie’: in other words that the British voter, while encouraged to believe that he was part of a self-governing democracy, was in effect – through the device of so-called ‘representative institutions’ – enduring government by oligarchy. The guilty secret at the heart of the British governmental system, Crossman came increasingly to believe, was that it was deliberately designed not to give ordinary people their heads but rather to tame the demon of democracy before it did too much damage.

Indeed.

Of course, as regular readers of UR are aware, the demon is most definitely a demon. Taming it is the most important function of modern governments. There was a time in American history when the President was actually the CEO of the executive branch, more or less. At least, he controlled personnel. This was called the spoils system. It cannot be said to have worked – in any sense of the word. And limiting it to what is now the Plum Book was the great achievement of the reformers of the 1880s.

So we have established the following facts:

  1. Ron Paul is unelectable (being a Nazi and all).
  2. If Ron Paul is elected, the civil-service oligarchy will crush him like a bug.
  3. The only thing worse than civil-service oligarchy is actual democracy.

What is the alternative? Is there any alternative? Or are we all just doomed? Tune in next week for the stunning, yet obvious, answer.

A straightforward explanation of the present financial crisis (part 1)

January 3, 2008

Perhaps you’ve noticed that some funky stuff is going down in the financial markets.

Most normal people seem to understand finance the way I understand physics. I understand that, if you’re holding a brick of lead and you drop it, it will hit your foot. I seem to recall that the brick will accelerate at 9.8 meters per second squared. Apparently this has something to do with general relativity. Perhaps if I boned up on it for a year or two, I could gain some vague understanding of GR. But I am happy to leave it to the physicists.

If you think of finance this way, I’m afraid you have been misinformed. First, finance is not a science. Secondly, finance is not intrinsically complicated. And third, unless you are a physicist, your life will be pretty much the same whether you understand relativity or not. “You may not be interested in war,” Trotsky once said, “but war is interested in you.” The same is surely true of finance.

A better way to think of our present financial system is to compare it to Microsoft Windows. Windows is indeed complicated. It is astoundingly, brilliantly, profoundly complicated. If there is anyone in the world, even at Microsoft, who understands all of Windows, he or she must have a brain the size of a basketball. (One would think this individual would have at least been photographed at some point.) It took them six years to ship Windows Vista, and I really have no idea how the hell they did it.

But Windows is not intrinsically complicated. It is a time-sharing kernel with a graphical user interface. A smart undergraduate can write an time-sharing kernel, with basically the same functionality as Windows, as homework in a semester. The same can be said of the GUI, which is perhaps a bit more code but is certainly less complex. (I wouldn’t have the same student write both. I do feel this would be a little much.)

Windows is complicated because it is both ancient and mature. It has been around for a long time (20 years), and it has been used to solve just about any problem an OS could conceivably solve. Including quite a few that it has no business at all in solving.

Exactly the same can be said of the modern financial system. The difference is that Western finance is ten times as old as Windows. If not twenty or thirty. The result is that, as with Windows, people can spend their entire lives trying to understand a single small corner of it – say, real estate, or commodities, or bonds, or whatever. To actually understand all of modern finance, you would need a brain the size of a beachball. This would certainly attract notice, and you might have some trouble getting laid.

Learning Windows (or Linux, or OS X, or whatever – they are all humongous) is an awful way to understand operating systems. You can put as much work into it as you want, and all you will learn is a tiny scrap of the basketball. So even the people at Microsoft who work on Windows all day do not have degrees in Windowsology. They learned OS the same way I did: by studying the principles, which are not at all complex, and then writing a toy OS.

Unfortunately, if there is any equivalent of the toy-OS approach in finance or economics, I have not run into it. But this is UR, and we never let a small problem like this stop us.

Certainly the closest thing to a toy economics is the Austrian School. But when you read the Austrians, you are still getting a good dose of Windowsology. Even a very thorough Austrian treatment, like Rothbard’s, exists to describe the financial system as it is, not as an undergrad would build it. Worse, the founding treatise of the modern (Misesian) Austrian school dates to 1912, and the Austrians have spent most of the century since just fending off their many enemies. So you are actually getting a sort of Hapsburg Windowsology. It is an entertaining task to try to map Mises’ terms to the contents of today’s WSJ, but I can’t say it’s especially easy or productive.

So I thought I’d give the toy-OS method, which (thanks to Conrad Roth) I call nitroeconomics, a spin in explaining what’s up with all these SIVs, CDOs, and of course those famous subprime loans. Ideally, the less you know about finance, economics or accounting, the better. If you do have some understanding of this area, please try to suppress it.

Of course our toy financial system will exist only in our shared imaginations. However, we do need to imagine building it, because we are assigning the task to our imaginary undergraduate. One easy way to do so is to set our actors not in the real world, but in a virtual world.

This is kind of cool, because as everyone who hasn’t been living in a cave for the last ten years knows, virtual worlds really do have real economies. (Here is one blog, unfortunately quite Windowsological, devoted to virtual economics.)

Unfortunately, the virtual worlds that exist today tend to have very primitive financial systems (think Windows 1.0). They are more focused on killing orcs or chatting with giant inflatable penises or whatever, than options and equities and mortgage-backed securities. And what they do have tends to be copied from the “big room,” which gives us more Windowsology.

Nitroeconomics (if you want to sound more scientific you can call it synthetic economics) is different. It is set in the virtual world of Nitropia, which doesn’t exist but easily could. Orcs and inflatable penises are no strangers to Nitropia – there is no economics without fun – but the main point of the place is that it has a financial system which is simple and makes sense.

We can use nitroeconomics to understand real situations in the real world, such as the subprime crisis, with a simple three-step process. First, we set up a scenario in Nitropia which (we claim) is analogous to the real-world scenario we’re trying to understand. Second, we figure out what would happen in Nitropia. Third, we connect this back to the real-world result. While the process is certainly nontrivial and offers great latitude for error, it is also a lot easier than Windowsology. Especially if you know nothing about Windows.

The first cool thing about Nitropia is that it has no financial system at all. Unlike other, inferior virtual economies, it does not distinguish between “money” and other virtual objects. A monetary token in Nitropia is an object like any other – a magic sword, an inflatable penis, or whatever. A player in Nitropia who has a lot of money just owns a lot of these tokens. There is no special, separate “bank balance.”

Today I am going to carefully skip over the issue of what “money” is, and why some goods are “money” and others are not. This is a fascinating question and we will return to it. However, the answer does not help us understand the subprime crisis.

Rather, I will just declare by personal ukase that the monetary token in Nitropia is the cowrie. Cowries have the following properties:

  • Every cowrie is identical to every other cowrie.
  • Any number of cowries can be trivially stored or carried.
  • To remain alive, a Nitropian must eat one cowrie a day.
  • Cowries are not (directly) useful for any other purpose.
  • Nitropia contains a fixed number of cowries – 2^32 or 4,294,967,296.
  • Eaten cowries reappear at a random point in Nitropia.

In other words, the cowrie system is a closed-loop financial system. You probably understand intuitively why this is ideal. But we’ll certainly return to the subject.

Nitropia is divided into two parts: Nitro City, where Nitropians hang out and chat with their inflatable penises, and the Dungeon of Yendor, which is infested with orcs and other monsters, but also contains magic swords and other useful trinkets. At the beginning of time, all cowries are in Yendor, so Nitropians need to kill if they want to eat. A small, monsterproof door in Nitro City leads down into Yendor.

The second cool feature of Nitropia is a frictionless market. The market only works in Nitro City – there is no coverage in Yendor, so to speak. In Nitro City, any Nitropian can teleport any object (cowries, magic swords, inflatable penises, etc) instantly to any other Nitropian. There are no delivery or other transaction costs.

Moreover, Nitropians can solve the ancient who-gives-first problem by conducting specified exchanges, in which all goods are as described or no trade takes place. And Nitropians of an especially geeky bent can upload trading bots which make automatic trades, allowing them to design any market mechanism whatsoever.

So we’ll assume that for every object O, there are market bid and ask prices in cowries. The ask price is the minimum number of cowries that anyone who has an O will accept in exchange. The bid price is the maximum number of cowries that anyone who wants an O will pay. For common objects, ask and bid will probably be close. Of course, prices change all the time with the rich, complex and constantly-changing lives of Nitropians.

The third cool feature of Nitropia is a system of formal promises, in which Nitropians can promise to perform some action in future. Promises in Nitropia are transferrable objects, just like cowries or magic swords. The beneficiary of the promise is the holder of the object. Thus for any promise there is a promisewriter and a promiseholder.

A common standard promise is a promise to deliver some quantity of cowries Q, at some maturity time M. We call one of these promises a ticket. The difference between the present time N and the maturity time M is the term of the ticket.

Promises in Nitropia are automatically enforced. If a Nitropian writes some promise and fails to deliver, she is said to choke. When a Nitropian chokes, her account is liquidated. All goods in it are sold on the open market. All promises written by the liquidated Nitropian are cancelled, prorated by the current ask price of the promised good, and refunded to the promiseholder from the proceeds of the liquidation sale.

Nitropians who write promises can also accept restrictions. A restriction, also automatically enforced, is a promise with no beneficiary. For example, a promisewriter may promise to stay out of Yendor (for obvious reasons). Restrictions may also include disclosure of any and all information about the promisewriter, including objects possessed and other promises written. In general, restrictions are useful because a promise from a Nitropian who accepts certain kinds of restrictions may well sell for more cowries. More on this subject later.

Okay. We now know enough about Nitropia to understand the subprime mortgage crisis, or at least its simplified Nitropian equivalent.

The cause of the crisis is a pernicious bit of financial engineering called term transformation. If Nitropians are behaving sensibly, they will avoid term transformation. Nitropians are just people, however – fat, lonely, pasty-faced people with no life outside their computers – and we can’t be too surprised when they do non-sensible things. Why high-powered jock traders on Wall Street were playing the term-transformation game is another question entirely, and we’ll save it for another day.

To understand term transformation, we first need to understand the market for tickets.

To understand a market for any good is to understand why it costs what it does. Since all prices are set by supply and demand, we need to know the motivations of the buyers and sellers. Of course, the seller of a ticket can be its original writer, or someone else who bought the ticket and now wants to sell it again. But for simplicity, we’ll start by assuming the only participants are the ticketwriter and the initial ticketholder.

We’ve defined a ticket so that there are only three variables: the term to maturity, the quantity of cowries to deliver, and the identity of the ticketwriter. The identity of the ticketwriter determines the probability that the ticketwriter will choke before delivering the cowries.

Assume for the moment (we’ll un-assume it in a minute) that no ticketwriters choke. For these magical risk-free tickets, which cannot exist in nature (unless Nitropia’s sysadmin changes the rules), we have only two variables: quantity and maturity.

We can eliminate the quantity by dividing the current market price P of the ticket (in cowries) by the delivery quantity Q of the ticket (in cowries). This gives us a nice unitless number, P/Q. What can we say about this number?

I assert that for any ticket of any nonzero term, P/Q will be less than 1.

Suppose P/Q is greater than 1. Then the ticket buyer will be exchanging P cowries at time N for Q cowries at time M, where P>Q and M>N. But, since cowrie storage is free, she would do better by just holding onto her P cowries until M. If P/Q is 1, she won’t lose, but she won’t gain either. Why bother? Since all exchanges require both buyer and seller, none will happen.

We can define P/Q as the discount of the ticket. Then we can use the continuous interest formula to normalize this to an interest rate or yield, which by Nitropian convention is specified not per year, but per day. (Life is fast in Nitropia.)

For any ticket, if we know any two of discount, yield and term, we can compute the third. Thinking in terms of yields rather than discounts does not eliminate the term variable. But it lets us ask a very interesting question: in the Nitropian ticket market, how will the yields of tickets with different terms compare? (Remember, we are still assuming that no ticketwriters choke.)

The answer is that yields at longer terms will be higher. This is not as easy to show as the fact that there will be no negative yields. But it’s worth working through.

To understand why longer terms mean higher yields, we have to consider the reason that Nitropians buy and sell tickets in the first place. We are assuming that these instruments will even exist. But why should they? Why is there a market for tickets?

A ticketwriter is promising to deliver Q = (P + X) cowries later, in exchange for P cowries now. She cannot fulfill this promise without engaging in some activity which is profitable. Please note that this is not a value judgment. It does not make the activity good or bad. It just means that it takes in P cowries now, and produces P+X cowries at M = (now + T).

(In fact, the ticketwriter will only write the ticket if she expects her activity to produce (Q + Y) cowries, because otherwise she makes nothing at all on the deal. Everyone’s gotta eat.)

The ticketbuyer is exchanging P cowries now for Q = (P + X) cowries at M. His motivations are simpler. He always has the alternative of just storing the P cowries until M. But, if he uses the ticket instead, he will get X more cowries.

So we have both buyer and seller, and the transaction happens. But what yield does it happen at? The yield is defined by the discount, which is defined by the price of the ticket, which is set by supply and demand among buyers and sellers. Contra most medieval thinkers, there is no just or righteous interest rate, derived from the Bible and the eternal laws of God. If we want to know what the cowrie yield is, we have to actually instantiate Nitropia. And, like any price, this yield may change over time.

And even at any one time in the Nitro City market, there is not just one yield. There may be different yields for different terms. In other words, there is a yield curve. We are now ready to see why this curve slopes upward – ie, yields at longer terms are higher.

How do you actually turn a profit in Nitropia, anyway? Not that the ticketbuyer cares at all how this feat is accomplished – but there is one obvious productive process. Nitropians can descend into Yendor, kill monsters, and relieve them of their cowries and other good stuff. Of course, the monsters fight back, so there is no sure thing. And in order to fight monsters, you need weapons – magic swords, inflatable penises, or whatever.

So the ticketseller might use P, the cowries she gets for selling a ticket, to rent a magic sword, with which she descends to level 15 of Yendor, clears out a nest of foul orcs, confiscates their cowrie stash, and returns to Nitro City, where she returns the sword and pays off her ticket.

The trick is that all this takes time. Unless you find a way to hack the Nitropia servers, there is no such thing as an instantaneous profitable process.

So we can ask: in Nitropia, what will the yield be for a one-second ticket? Unless someone can figure out a way to turn P cowries into P+X cowries in one second, the yield will be zero. Thus (as we saw) no one will write any such tickets. And if there is some way to profit in one second, we can always imagine an epsilon term which is shorter. Thus, the Nitropian yield curve intercepts zero term at zero yield – regardless of the details of Nitropia.

We can generalize this observation by noting that there are always more kinds of longer productive processes than shorter ones. If you want to descend to level 417 of Yendor and take on the evil dragon Angstrom, it will take you three weeks round-trip. Whereas if all you are doing is heading down to 113 to knock off some random ogre, you can do it in a week.

But a ticketseller can construct the equivalent of one three-week dragonslaying expedition by stringing three one-week ogre-whacking trips back to back. Because it takes three weeks to slay a dragon, there is no way for the profitable process of dragonslaying to affect the market for one-week tickets. The converse, however, is not the case.

There is no law that says that dragonslaying has to be more profitable than ogre-whacking. However, if it is not at least as profitable as ogre-whacking, no one will slay dragons. If ticketbuyers still want three-week tickets, ogre-slayers will sell them three-ogre tickets. The short-term yield is a floor for the long-term yield. The Nitropian yield curve can be flat, but it cannot invert.

In theory, there might be no profitable processes at all in Nitropia. For example, suppose there are no cowries or goodies at all in Yendor. The yield curve will start at the origin and remain there. In practice, any world complex enough to be any fun at all, virtual or real, will have long-term processes that are more profitable than their short-term counterparts. Because any short-term process can produce long-term tickets but the converse is not the case, there will be more sellers at later maturities, and the extra competition will push up yields.

Now it’s time to relax the unrealistic assumption that killing monsters is risk-free. Obviously, it is anything but. Monsters have teeth and claws, they bite and scratch, they shoot fireballs and crush your bones in their huge armored pincers. If you never return from Yendor, not only do you not fulfill your promises, you have no assets to liquidate. The monsters keep it all.

This is tricky because, suddenly, comparing tickets written by different monster-hunters is comparing apples to oranges. Wall Street seems to have real trouble with this concept, but assessing risk is always a matter of subjective opinion. How do you know whether a hunter will return? You don’t. How do you know her probability of returning? You, um, guess.

So you guess. Let’s say you think your ticketseller has a 97% chance of coming back. Then, the expected value of her ticket is not Q, but (Q * 0.97). This simply lowers the price P that you are willing to pay for the ticket. So that we can calculate objectively, we still define the discount as P/Q. The risk of choking simply appears as a higher yield.

But wait. For most of us, a 97% chance of Q is not at all the same thing as a 100% chance of (Q * 0.97). Risk tolerance is subjective and nonlinear. This creates a market for risk dispersal.

If you, the ticketbuyer, want a 100% chance of (Q * 0.97), there is no way to achieve it. Uncertainty cannot be converted into certainty. However, you can produce a much more desirable probability distribution by buying not one ticket from one hunter with a 97% chance of returning, but 100 slices of 1/100th of a ticket from each of 100 hunters, each of whom has a 97% chance.

A tricky transaction! At this point you, the ticketbuyer, are tempted to just let your cowries sit around “under the mattress.” But there is an alternative. You can buy one ticket from a ticket balancer, who in turn deals with 100 ticketbuyers and 100 ticketselling hunters.

The balancer does not hunt herself. She does not go anywhere near Yendor. She buys 100 tickets of Q cowries with one-week terms from hunters who she estimates have a 97% chance of returning. She then sells 100 tickets of (0.97 * Q) cowries to risk-averse buyers. Since the buyers are risk-averse, by definition they accept lower yields than she pays the hunters, and she profits. As described the balancer’s risk of choking is quite high, but maintaining a small buffer of, say, (10 * Q) cowries will make it very low, due to the law of large numbers.

What does a ticketbuyer need to know in order to buy a ticket written by a balancer? He needs to know that (a) the balancer will not wander into Yendor and get knocked off by an orc herself, and (b) the balancer holds enough tickets with sufficient expected value, plus some buffer, to have a high probability of delivering on the tickets she has written. There are no risk-free tickets in Nitropia, but a balancer can reduce risk to an arbitrarily low epsilon, of course at the price of lower yield.

Thus, the balancer must submit to restrictions and disclosures in order to write tickets which are perceived as low-risk. Rather than forcing every buyer of her tickets to do his own “due diligence,” she will probably hire an auditor who will inspect her restrictions and disclosures, and testify to her credibility. The auditor is then responsible for maintaining its own credibility in the eye of the public ticketbuyer.

Okay. This concludes our discussion of normal, healthy finance in Nitropia. (Note that we have not mentioned equity, ie, stock. Our “tickets” are bonds, zero-coupon bonds to be exact. Briefly, a more sophisticated financial system would replace our one-size-fits-all liquidation procedure with different priorities of tickets, where high-priority tickets are paid off early if the ticketwriter chokes, and thus earn lower yield. Stock is a sort of zero-priority ticket for especially funky hunting expeditions whose return is wildly unpredictable. Its holders get no fixed payment at all, just whatever’s left over after everyone else is paid. Which could be huge, or it could be nothing at all.)

Now it’s time to transform some terms. Term transformation (this vice goes by other names which are easier to Google, but let’s keep the suspense for a little while) happens when a ticket balancer buys tickets which mature later than the tickets she writes.

At first, term transformation seems to make no sense at all. Then it makes perfect sense. Then you see what a truly awful idea it is.

Recall that in our explanation of ticket balancing, our balancer bought 1-week tickets from hunters who were going on 1-week expeditions, ie, whacking ogres. She then sold 1-week tickets to her buyers, and the whole thing worked out perfectly. Her hunters, or at least most of them, came back with the cowries, which she promptly delivered. No sweat.

Suppose that instead of ogre-whackers, our balancer dealt with 3-week dragonslayers. Remember, since the Nitropian yield curve slopes upward, the yield on dragonslaying is higher than the yield on ogre-whacking. In other words, dragonslaying is more profitable per week than ogre-whacking. Not because dragons are wealthier than ogres, though they are. But just because if it wasn’t, no one would bother slaying dragons.

Thus, term transformation is an obvious way for the balancer to pocket a little extra scratch. She is still paying 1-week yields, but she is earning 3-week yields. But, um, there’s a problem – when her ticketholders come back in a week, what does she say? “Um, we’ve had, some, um, bad weather. Also the ogres are unexpectedly recalcitrant. Also, um, actually, I was just heading out. Can I call you tomorrow? I’m sure we’ll get this whole thing cleared up.”

This might fly in the real world. But not in Nitropia, whose ice-cold, iron-hard law is enforced not by mere flesh, but merciless and inexorable software. As soon as the balancer breaks her first promise, she is locked out of her account and her assets go straight to the block. Ouch.

So how can term transformation happen? It seems that we are trying to teleport cowries not through space, but backward through time. Even in Nitropia, there is just no way to convert tomorrow cowries into today cowries. Besides, as we’ve seen, balancers need to be audited, and even if our balancer is so foolish as to think she can pull cowries magically out of the future, no auditor could conceivably agree.

We cannot understand term transformation without looking at the motives of the buyer. After all, the auditor exists only because the buyer demands this service. If the buyer accepts that term transformation is good and sweet and true, surely the auditor will agree.

First, we notice that, since the balancer is after all earning a higher yield from her dragonslayers, she can pay a higher yield to her customers. What will probably happen in practice is that she will split the profit with them. So the balancer wins and the ticketbuyers win. In fact, since term transformation creates a higher demand for long-term tickets, thus driving down the yield (if not quite to ogre-whacking levels), the dragonslayers win, too. Everyone wins. It’s a win-win-win situation. At least if we can solve this pesky liquidation problem.

Second, we notice that liquidation is not as bad as it seems. Especially in Nitropia, where the process is fully automated and demands no ridiculous, periwigged judicial official. What matters to the ticketbuyers – and hence to the auditors – is that they get their cowries. And, since the liquidation process has plenty of assets (the dragonslayer tickets) to sell, there is no reason at all to think that the ticketbuyers will take a haircut.

Quite the contrary, in fact. Remember that, to deal with the vagaries of monster-hunting, any balancer must maintain a small cowrie buffer to get on the good side of the law of large numbers. With this buffer, plus the proceeds from selling the dragonslayer tickets on the open market, the ticketbuyers may even profit when the balancer chokes.

Of course this makes no sense. Liquidation cannot be profitable. If liquidation is profitable, there is no need to liquidate. Ergo, the balancer herself can just sell the dragonslayer tickets, using the proceeds to redeem the tickets she has written. She has thus earned a week of dragonslayer yield, not ogre-whacker yield, and has still come out ahead. Everyone still wins.

Thus, the auditor doesn’t need to worry at all about the term of the balancer’s assets. The auditor can just verify that the total present market price (in cowries, of course), of these assets meets or exceeds the number of cowries that the balancer is obligated to deliver. As long as this criterion, which we can call scalar solvency, is met, there is no problem.

Furthermore, this idea that the balancer’s customers all show up after a week and start pounding on the doors, demanding their cowries, is not at all realistic. We have spent a considerable amount of effort in understanding the motives of ticketwriters. We need to think more about the end buyers.

Why do buyers buy one-week tickets, rather than three-week tickets, even though the latter produce a higher yield? It can only be because they feel they might need their cowries in one week, rather than three.

Perhaps they will. But perhaps they won’t. The future is full of uncertainty. If buyers knew what they would exchange their cowries for next week, it’s very likely that they would just exchange them now. They lose a week’s yield, they gain a week’s use of an inflatable penis. But Nitropians hold cowries and/or cowrie tickets, rather than magic swords or inflatable penises, because they are not sure what they want to buy in the future, or when they want to buy it. And because cowries cost nothing to store, they are a good choice for a rainy-day fund.

So it’s very likely that the balancer’s ticketholders, when they get their cowries back in a week, will simply want to buy another week’s ticket. The rainy day has not arrived. The cowries go back in the kitty. We call this rolling over the ticket.

Rolling over is really quite convenient for everyone concerned. If all her buyers roll over, as they may well, the balancer does not have to sell any dragonslayer tickets before their time. She can make this even easier by stipulating that, by default, her tickets roll over. If one of her customers really wants his cowries after only a week, the request will of course be satisfied promptly and courteously. If all the customers demand redemption, there will perhaps be a little more of a Chinese firedrill as dragonslayer tickets are sold, but the balancer maintains a comfortable margin of scalar solvency, so again, everyone’s ticket is redeemed.

Furthermore, now that we’ve made term transformation work so well, what is this whole week thing about? The number no longer bears any resemblance to anything. We have long since given up on the ogre-whacking. The ogre-axes have been beaten into dragonswords. Surely, rather than insisting that her customers wait a whole week whenever they want their cowries, she can shorten the term – say, to a day. Or an hour. Or…

In fact, the magic of term transformation has solved a problem that we didn’t think was solvable at all. It has produced a yield on a zero-term ticket. As we adopt automatic rollover and we adjust the term of the balancer’s tickets down to epsilon, term transformation creates a fabulous new construct, the demand ticket.

A demand ticket is an instrument that pays the bearer a quantity Q of cowries on demand. It is just like holding cowries, only better. Because until you actually demand your cowries, your demand ticket produces a yield. And no mere in-and-out orc-mugging yield, either. But the maximum, bona fide, long-term, dragonslaying yield.

Sometimes the dragon wins, of course, and we do have to subtract that. And the balancer, like everyone, needs to eat. But overall, term transformation produces a win for everyone. The end buyer gets maximum yield and total flexibility, the balancer gets more of a taste, the auditor still has to audit, and the dragonslayers get more investment at better rates. Perhaps the ogre-whackers aren’t too happy, but they just have to bring their game up to the point where it’s as profitable as dragon-slaying. If that can’t be done, perhaps the ogre ecosystem could use a bit of a rest, anyway. And aren’t we, the brave hunters of Nitropia, stronger and better men and women if we pit all our sinews against that noblest of beasts, the dragon?

Alas. If only it was true. If term transformation really did work, not just Nitropia but indeed the real world would be a cleaner, shinier, happier place. (I’m afraid it’s quite inarguable that if the Americans and Europeans of 1908 could see their countries now, they would be both amazed at the achievements of science and engineering, and appalled at how shabby, filthy, ugly and dangerous their great cities had become. If you can’t imagine what this could possibly have to do with term transformation, I understand. But I will get there.)

So what is the problem? What could possibly be the problem?

In the above defense of term transformation, which I do hope is not a strawman – I really did throw in every argument I have heard or can think of, and if readers know of others they should feel free to append – there are a few subtle, but extremely fatal, holes.

First, let’s introduce the concept of financial hygiene. Financial hygiene is a lot like regular hygiene. If you are the only one who goes around licking doorknobs, you are unlikely to catch diseases from doorknobs. But if you find yourself licking doorknobs, it’s probably not an idea you (being a sensible person) came up with yourself. Which means that other people are probably doing it too. Sooo…

Financial hygiene is a criterion for prudent herd behavior. A strategy is financially hygienic if the strategy works just as well whether a whole herd adopts it, or just a maverick individual. As we’ll see, term transformation is to hygienic finance as a pile of oil-soaked rags is to a sanitary napkin. Term transformation is a great idea – so long as no one else is doing it.

We’ll start by going back to our magical risk-free tickets. What’s truly amazing is that term transformation is so dangerous that even when all tickets are risk-free, it can detonate instantly and without warning. Mind you, risk does not make the problem any better. In fact, it makes it much worse. But first things first.

With risk-free tickets, we no longer need the services of our balancer. Instead, ordinary ticketbuyers can transform their own terms. This does not make the problem worse, but it makes it easier to see.

In Nitro City, where all transactions are frictionless, why in the world would anyone hold cowries? If long-term tickets are risk-free, keeping your cowries “under the mattress” – even for a millisecond – is just throwing away cowries. Just hold the longest-term tickets, with the highest yield, until you are ready to spend your cowries. Then, instead of exchanging cowries for an inflatable penis, exchange your long-term tickets for cowries, and immediately exchange the cowries for the penis. With this strategy, you are always earning maximum yield.

Or will it? It’s not clear that the yield will be all that great. After all, when everyone is buying long-term tickets, how much can they yield? And let’s not even start on the consequences for the dragon ecology. Presumably the beasts are apex predators, after all.

But there is a worse problem. The problem is that when you buy a ticket of term T, you are signalling the market that you intend to exchange cowries now for cowries at now + T. This demand is naturally satisfied by a dragonslayer who commits to the opposite exchange.

If this is not really the transaction you intended to perform, you are sending a false signal. When you send a false signal, you should not be surprised to get an ugly result. When you send a false signal as part of an entire herd which is sending the same false signal, you should be surprised not to get an ugly result.

Our fallacy in designing this wonderful edifice of term transformation was to assume that it is possible for an unlimited number of parties to signal a market in one direction, without affecting the market price. In other words, we were committing the most common error in economics, by assuming an objective or absolute price. Of course there is no such thing. All prices are set by supply and demand, and if you add sellers to a market without adding buyers, the price will go down.

Let me slip briefly into the language of normal, Windowsological finance. To buy a ticket of term T is to lend for a period of term T. To sell a ticket of term T is to borrow for that period. And these same terms apply whether or not you are the original buyer or seller of the ticket.

So, when you buy a ticket of term T, but you really intend to be able to use your money at T/2, or T/6, or whenever the heck you feel like it or need to, you are assuming that you will be able to find another lender at T/2, or T/6, or whenever, who will acquire your loan. For example, an equivalent transaction is to write your own ticket at T/6, with a term of 5T/6, and sell it. You keep the original ticket, and use its proceeds at T to pay off the ticket you wrote. (Don’t try this at home, kids.)

If everyone who lends at term T really intends to lend at term T, then a few individuals whose plans turn out differently will have no problem in correcting their mistake. Peoples’ actions may differ from their plans, but they are likely to at least cluster symmetrically around them.

However, if every single Nitropian who lent at N for term T really intended to lend (for an extreme and unrealistic example) at T/6 – when N + T/6 rolls around, the market for 5T/6 tickets will become um, well, kind of nasty. There will be quite a few sellers, and no buyers at all. In the Nitro City ticket market on N + T/6, for tickets maturing at T, the yield will be immense. And the price will be derisory.

This is the opposite of financial hygiene: financial contagion. Our herd of Nitropians all thought they could earn a dragonslayer yield on an orc-hunter schedule. Well, they did earn a dragonslayer yield – until the market opened at N + T/6. Then they saw a picture that looked rather like this. And they suddenly realized that they had no yield at all, but massive losses. And all this with 100% risk-free tickets.

The example of everyone selling at N + T/6 is slightly exaggerated. But it’s less exaggerated than you might think, for a couple of reasons. First, the whole point of a rainy-day fund is to have a stash of cowries for a rainy day. And a rainy day, by definition, rains on everyone. Second, when the curve starts to head for Antarctica, everyone who has those N + T tickets sees the light and wants out ASAP.

This is called a panic. Historically speaking, the association between financial panics and term transformation is about as solid as the association between smallpox and the smallpox virus. Although I suppose you do have to have the smallpox virus to get smallpox, whereas panics can in theory be caused by any widespread error in planning that mimics term transformation. For example, the sudden discovery of an asteroid that was about to hit Nitropia at N + T/2 would certainly have a rather dramatic effect on the yield curve. On the other hand, if there are any cases of financial panics in history that were not associated with term transformation, I am not aware of them. Perhaps readers will be so kind as to enlighten me.

Now let’s put the risk and the balancer back in, and see how it changes the game. Not for the better, as you can imagine.

If you scroll back up to our rosy explanation of how well term transformation works, you can see how the same error infects the case with risk and balancer. At every step of the process, we were assuming that another buyer can be found for the ticket, at the same pleasant prices.

Of course this is not so at all. The balancer just adds a layer of indirection to the same basic process of breakdown and panic. The result is an even more spectacular trainwreck. In a way it’s almost beautiful, unless of course you’re in it.

Using the familiar logic of financial hygiene, we can assume that in a market where term transformation is active, our one poor balancer will not be the only agent performing risk dispersal for the dragonslayer market. Rather, we need to consider the entire category of balancers in this space as the herd.

The panic can start in many ways, but the simplest is a wave of redemption in demand tickets. There is no way to predict this wave, because by replacing true tickets with demand tickets, the term-transforming balancers have essentially jammed a price signal. They have no idea what the future pattern of demand ticket redemption will look like, either within their own customer base or across Nitropia as a whole.

To redeem the demand tickets they have written, the balancers must in turn sell dragonslayer tickets. Of course this drives the dragonslayer yield up and the price down.

The result is that the balancers enter scalar insolvency. The total market price (in present cowries) of the tickets they own, plus their cowrie buffers, no longer exceeds the sum (in present cowries) of their current obligations. So the owners of their demand tickets will take a haircut. They strive to avoid this in the usual way, by withdrawing ASAP. The early bird gets the worm. Flap, bird, flap!

But to even calculate this haircut, to liquidate the balancers and pay their creditors, more dragonslayer tickets need to be sold. So the price drops even further. Eventually, someone realizes that ordinary, vanilla, untransformed, financially hygienic demand for cowries at N + T continues to exist and puts a floor under the market, and there are buyers again. If there is still a Nitropia to buy them in.

This nasty, nasty process is a feedback loop between the dragonslayer tickets, the institutions that own them, and the customers to whom they are obligated. It can be triggered by any unexpected pattern of selling, anywhere in the circle. For example, if dragonslayer attrition rates start going up from 3% to 5% to 7% to 15% to 20% – perhaps because demand for dragonslayer tickets has been so high that all kinds of completely unqualified warriors decide to rent a sword and descend into Yendor in search of dragons – the same thing will happen.

Next week, we’ll look at how unhygienic finance in the real world, and just how and when it got to be so popular. Clearly, what we have here is a case of regulatory failure. Is this another piece of Reagan-era napkin economics, coming back up to haunt us like a bad burrito? Did Hillary do it, with her cattle futures? Or is it one of those New Deal things? When will it not be all FDR, all the time, here at UR? If you don’t know, please take a ticket and come back next Thursday. (And do avoid the comments if you truly cherish your suspense, because I assume someone will spill the beans.)

Poem for the new year

January 1, 2008

De rerum natura: this is why a cypress,
Grown on a windy rock, will find its trunk
Curved to the shape of a long-shanked fishhook,
A straight line shot sideways from the ground

To swing hard sunward just before it peaks.
The young bark, lime green with fertilizer,
Cries fiat lux and lines between two points,
And learns quick; in a foot you’ll see him turn

His further son to that simple child’s course,
Hoisted human for a sail, pissing off the wind,
That hits head on: and pivots mast from roots
To divide his own airflow by sine of theta,

For that old thing which to name is to invite,
As you notice with a chance to get acquainted,
Comes with teeth and claws more brown than red.
Whatever she eats, it changes color as it dries.