The Murderer Next Door: Why the Mind Is Designed to Kill

Posted on April 15, 2014 by

THE MURDERER NEXT DOOR: Why the Mind Is Designed to Kill, David M Buss

http://www.amazon.com/Murderer-Next-Door-Mind-Designed/dp/0143037056

[pp. 36-44] THE COMPETITIVE LEGACY OF OUR ANCESTORS

Every breath we take we owe to our ancestors-an unimaginably long and unbroken line of forebears who managed to survive all of the Darwinian “hostile forces of nature.” We tend to think of evolutionary competition as the “survival of the fittest,” as the struggle of animals to survive the challenges presented by a harsh environment. Those who failed to find food or avoid predators, those who succumbed to disease or became riddled with parasites, hit the evolutionary dust. This much is obvious.

What is less obvious is that the process of evolution by natural selection is played out through generations, and the key to the long-term outcome is reproductive competition. The winners in evolutionary terms are not only those who themselves survive, hut those who manage to reproduce most successfully: those who have the most heirs who are healthy and go on to have heirs of their own. This competition to reproduce successfully is a key driving force in our lives, and the competition can he quite fierce. In each generation, there are a fixed number of reproductively viable women and men available to mate with. The dating market makes it quite clear that some mates are much more desirable than others. As the saying goes, all the good ones are taken. Each man and woman is ultimately in competition with other men and women for “shares” of the ancestry of the next generation.

We are all obviously descendants of those who succeeded in this reproductive competition. As the descendants of those who succeeded, we modern humans carry with us the remarkably beneficial components of body and designs of mind that helped our ancestors prevail.

The fierce evolutionary competition that has shaped us leads, if we will follow, to a theoretical insight both subtle in nature and profound in implication. Analysts of human nature have either failed to recognize it or have recoiled from its disturbing implications. In the intensely competitive game of reproductive competition, through the eons murder has been a remarkably effective method of achieving evolutionary success. Of course, as we became civilized, all human societies developed laws against murder, and in our contemporary lives, murdering carries the threat of harsh punishment. So murder is now a more costly strategy for defeating mating rivals than it must have been in our distant past. Through the long years of human evolution, however, killing would have been a highly effective means of vanquishing rivals and ensuring that the mate we selected passed on our genes and not another’s. From a man’s perspective, killing a rival’s mate strips him of an invaluable and possibly irreplaceable reproductive resource. Killing his children can snuff out his genetic future entirely. Vanquishing an entire group of rivals through mass murder or genocide opens new vistas for the killers and their children to flourish.

It may seem coldhearted to talk about killing as adaptive or murder as advantageous, but if we consider the nature of reproductive competition humans have faced over the long time spans of our evolution, then we can appreciate just what an edge in that evolutionary competition killing would have provided. The benefits of killing, in an evolutionary sense, must be momentous and manifold, because, on the other side, the negative reproductive consequences of being killed are so profound.

No newspaper is likely to carry the headline “Scientists Discover That It’s Bad to Be Dead.” We know this. Getting murdered, however, turns out to be far worse, evolutionarily, than we have probably realized.

Bear with me as I play out the many aspects of this critical insight. To start with, being killed cuts off all avenues for the unfortunate victim’s genes to be passed on. Never again will a male homicide victim court, attract, or seduce another woman. Never again will the victim make love with his wife. All potential sexual encounters with strangers, all potential liaisons with mistresses, are forever terminated. Every future act of mating, and hence every future opportunity for reproduction, is permanently extinguished. But that’s merely the beginning.

The victim’s wife, if he has a partner, now becomes eligible for mating with other men. No longer can the dead man fend off former friends or current enemies who attempt to charm her. Another man may now sleep in his bed, caress his wife’s skin, and impregnate her. All of his mating losses become potential reproductive gains for other men. But the costs of getting killed get worse still.

The homicide victim’s children now become frighteningly vulnerable. The victim is no longer around to help raise them and see them through life’s countless hurdles. He can no longer protect them from beatings, sexual abuse, or homicide at the hands of strangers or stepfathers. His children also risk losing his wife’s parental attentions if she remarries, which may get rechanneled to children she has with her new husband.

To compound these costs, given the calculus of evolutionary competition, the murder victim’s losses become potential gains for eager competitors. His elimination from the status hierarchy opens a niche for a rival to ascend. The children of his antagonists will thrive in competition against his children, who now become hampered by their father’s death. His entire kin group is weakened and made vulnerable by his death. In short, the costs of getting killed cascade to one’s children, grandchildren, great-grandchildren, and the victim’s entire extended family: Simultaneously, the victim’s costs become his rival’s benefits in this ruthless competitive struggle. The eternity of darkness that comes with premature death may he accompanied by the abrupt end of an entire genetic line.

If this view of the competitive motives behind human nature seems severe, consider the following story from a study of the Ache Indians of Paraguay, South America, one culture that may provide a glimpse into what our ancestral culture was like.

Among the Ache, meat is a scarce and prized resource. Although gathered berries, nuts, and plant foods are shared only within families, the Ache share meat from the hunt communally. Hunters deposit their kill to a central “distributor,” who then allocates portions to different families, based largely on family size. Good hunters enjoy great status, and groups strive to keep good hunters happy, but, surprisingly, skilled hunters do not garner a larger share of the communal meat. They benefit from their greater-than-average contributions in two ways. First, the group provides extraordinary health care and solicitude to the children of good hunters. These children enjoy being groomed and tended-group members take the time to feed them, remove splinters from their feet, and nurse them to health when ill. Second, skilled hunters are highly attractive to Ache women. It’s not uncommon for an accomplished hunter to indulge in a mistress or two on the side. These benefits, however, cause conflict.

One day a fight broke out between two Ache men, a skilled hunter and an average hunter. The conflict arose over a woman-a sexual infidelity discovered by the less adept man, who challenged his rival to an ax fight. The husband lost; he ended up dead, felled by the blade of his more athletic rival. Within a matter of days, the group convened to decide the fate of the dead man’s thirteen-year-old son. The fact that he now lacked a father meant that he would he a net drain of resources on the group. The group made a decision. The dead man’s son must die. The death of the father, in short, caused the group to kill the son. There’s a lesson here-dead men can’t protect their children. This case starkly demonstrates the costs of murder for the victim’s kin.

So it’s astonishingly bad to be dead. And on the flip side, it’s also astonishingly advantageous to get a rival out of the way. Consider just a few of the specific benefits our ancestors could have secured by killing other human beings:

* Preventing injury, rape, or death to oneself, spouse, or kin

* Eliminating a crucial antagonist

* Acquiring a rival’s resources or territory

* Securing sexual access to a competitor’s mate

* Preventing an interloper from appropriating one’s own mate

* Cultivating a fierce reputation to deter the encroachment of enemies

* Avoiding investment in genetically unrelated children (stepchildren)

* Protecting resources needed for reproduction

* Eliminating an entire lineage of reproductive competitors

Of course, many of us never come close to killing someone, and that’s true for several reasons. One is that, as we’ve become more civilized as a species, we’ve developed more and more effective deterrents against murder, both through our legal systems and through our cultural conditioning-though, as we found in our study of homicidal fantasies, most of us do contemplate the idea of murdering at some point in our lives. Another force inhibiting us from committing murder comes from our evolutionary heritage. As the motivations to murder evolved in our minds, a set of counter-inclinations also developed. Killing is a risky business. It can be dangerous and inflict horrible costs on the victim. Because it’s so had to he dead, evolution has fashioned ruthless defenses to prevent being killed, including killing the killer. Potential victims are therefore quite dangerous themselves. In the evolutionary arms race, homicide victims have played a critical and unappreciated role-they paved the way for the evolution of antihomicide defenses.

Thanks to these antihomicide defenses, it’s often far too costly to kill. In attempting to kill, you become vulnerable yourself. The intended victim’s friends and relatives might rush to his defense. From the killer’s perspective, even if he survives and succeeds in carrying out the kill, he risks ostracism or banishment. We usually don’t want killers in our midst, and neither did our ancestors, although in a confrontation with a hostile group, killers come in quite handy.

That we have such a rich repertoire of defenses against killers actually provides compelling evidence that murderers have been among us for a long enough time to have sculpted the human mind. just as our prominent fears of snakes betray an evolutionary history in which snakes posed a hostile threat to survival, our well-honed defenses against murderers reveals an evolutionary history in which homicidal humans have threatened survival.

Because of the deterrents and the dangers involved with murder, most potential killers opt for alternative solutions in contending with a rival. One strategy is to form alliances with others in a group-a tribe, a social group, at the workplace-attempting to form a critical coalition to oust the rival. A second is to befriend the rival, currying his favor, making him part of your coalition. A third is to denigrate the rival to others in an attempt to lower his reputation in their eyes, weakening his position and making him more vulnerable to displacement. A fourth strategy is to lie like a snake in the grass, hiding your time until a rival stumbles, and then making your move. And as you bide your time, a rare opportunity may arise. You may suddenly find all the stars aligning in a unique configuration. The costs of killing unexpectedly dwindle; the benefits abruptly loom large. Perhaps you happen upon your rival alone and unawares. Perhaps you can kill without being discovered. Perhaps you can actively arrange to create all of these conditions. You suddenly find yourself with the means, the motive, and the opportunity. And you seize the moment. Your psychological circuits for homicide become engaged.

Let’s step away from our own species for a moment so we can be more objective, and examine our close primate cousins the chimpanzees. Chimps and humans diverged from common gorilla ancestors roughly seven million years ago. Nonetheless, humans and chimps share roughly 99 percent of their genes. This means that, of the three billion base pairs strung out on the strands of our DNA, as many as ninety-nine out of every hundred are exactly identical. The differences, of course, are as important as the similarities. Humans are bipedal and have evolved language, and women have relatively concealed ovulation. Chimps brachiate (travel from branch to branch through trees) and communicate without language, and the females have periodic estrus with bright red genital swellings visible from a hundred feet. Nonetheless, because they are our closest primate relatives, observing their behavior can sometimes shed light on our own.

Consider an observation by anthropologists who were following a chimpanzee troop around the jungles of Tanzania. One sunny afternoon, eight chimpanzees, all males but one, roamed the border of their home range. Although they usually stayed within their home range, perhaps the chimps felt emboldened by the size of their group, protection afforded by numbers. Not far across the border, they detected a lone male. A chimp named Godi sat peacefully beneath a tree, eating ripe fruit in solitude. Godi, a member of the Kahama community, usually traveled with his group of six other males. This day he happened to be alone.

The second he saw the rival group, a jolt of adrenaline surged through his veins. He dropped his food, sprang to his feet, and bolted through the forest in the direction of his Kahama comrades. But the surprise ambush gave his attackers a timely advantage. His pursuers gave chase and surrounded him. In a flash, Godi was captured. Humphrey, one of the lead chimps, grabbed Godi’s leg, yanked him to the ground, and pounced on top of him. Using his full weight of 110 pounds, Humphrey pinned him to the ground. Godi struggled, but was no match for Humphrey and his six male compatriots, each of whom carried the strength equivalent of four Olympic athletes at the peak of conditioning. With Godi rendered helpless on the ground, the others now launched an assault. In a frenzy of screaming, they bit, pounded, and jumped on their helpless victim.

After ten minutes that seemed like an eternity, the attackers finally stopped. They left behind a body battered and bleeding from dozens of wounds. Godi did not die immediately, but he was never seen alive again. The killer chimps had seized a rare opportunity, perhaps one that would not come along again for many months.

We often think of human warfare as formal battles between declared enemies, but in traditional foraging societies, killing more often takes the form of a raid not unlike that witnessed among the chimpanzees. Anthropologist Napoleon Chagnon, who spent years observing the lives of a group of native peoples in Venezuela called the Yanomamö, observed one such raid.

The night before the raid, a man named Kaobawa stirred the men into an emotional frenzy. He began to sing, “I am meat hungry! I am meat hungry!” Another man screamed, “I’m so fierce that when I shoot the enemy my arrow will strike with such force that blood will splash all over … his household.” At dawn the next morning, the women presented the raiders with a large cache of plantains as food for their raid. The men covered their faces and bodies in black paint for concealment. The mothers and sisters of the warriors offered parting advice, such as “Don’t get yourself shot up.” The women then wept, fearful for the safety of their men. The trek to reach their enemies was long and took several days. At night, the raiding party built fires to keep warm, but on the last night, this luxury had to be eliminated for fear of alerting the enemy.

Back at the home camp, the women grew nervous. Unprotected women risk being kidnapped by neighboring tribes, and even allies cannot be trusted.

The raiding party broke into two groups, each consisting of six men. This grouping allowed them each group would lie in wait toto retreat under protection: two men from to ambush potential pursuers. They struck. The attacking party managed to shoot one of their enemies with a poison-tipped arrow. The raiders then fled. One of the raiders was wounded as they escaped to their home camp, but he survived to go on a future raid. The foray had been a success. They killed one member of the enemy group and escaped with their lives, just like the chimps of Tanzania.

Killing, of course, is ordinarily not a first-line solution, even when your own life is on the line. When threatened by a weapon-bearing intruder who has broken into your home, you would be as likely to hide or flee as to go on the attack. The ancient phrase “fight or flight” captures two of the most important defenses available to us. The shields we’ve developed to stop killing have evolved alongside the mental mechanisms that provide the impulse to kill. Unfortunately, the process of coevolution, whereby new adaptations have developed to counter those defenses, has created a vicious cycle from which there is no escape. Even as we’ve developed defense mechanisms, we’ve also developed ever-more-effective means of killing.

Typically, coevolutionary arms races occur between two different species of which one is predator and the other prey, or between parasites and hosts. As predators pick off slower and less agile prey, the remaining prey and their descendants evolve to be faster and more skilled at evading capture. Then the prey’s improved evasion abilities create greater selection pressure on the predators-the slow predators fail to eat and so die off, and the faster ones give birth to a higher percentage of speedy progeny. Each increment in the skills of one species leads to increments in the abilities of the other. The two species are locked in an endless escalating cycle from which neither can escape.

Coevolutionary arms races also occur within a single species, and this remarkable process has occurred in our species with the evolution of homicide strategies and murder-prevention defenses. As natural selection fashioned defenses against getting murdered by other humans, it simultaneously created more intricate killing strategies to evade these defenses. As potential victims evolved to detect homicidal intentions, potential killers evolved the ability to deceive and surprise victims, to disguise their homicidal designs. Our ancestors evolved to live in groups that afforded defense against marauding males. At the same time, they evolved recruitment tactics designed to increase the size of their killing coalitions.

One time-honored recruitment tactic for increasing coalitional size that we’ve read about in the news lately is to exploit men’s desire for women. Mohamed Atta, one of the main architects of the 9/11 terrorist attacks, was unlucky in love. His recruiters instilled in him the belief that he would spend his afterlife surrounded by “women of Paradise” (from an assassins’ manual found in Atta’s luggage), “youths of never-ending bloom,” and “companions with big beautiful eyes like pearls within their shells . . .” (from the Quran, about the rewards of becoming a martyr). The promise of prestige and the pledge of young women are powerful methods of coalitional recruitment. From the inner-city gangs of New York and Los Angeles to religious jihads, men are motivated to kill to gain these rewards. A relentless coevolutionary arms race in the human struggle for life, liberty, and the pursuit of progeny continues today.

Can this evolutionary-competition theory of murder really account for the motivations for murder in our present times? As I will reveal in the rest of the book, this theory does a remarkable job of accounting for the statistical patterns we find in who kills whom and for the multiple motives for murder. The more I analyzed the psychology of killing in cases of actual murder and in homicidal fantasies, the more striking was the realization that so many murders follow from the intense pressures of mating-a topic explored in the next chapter.

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Marc Faber

Posted on April 14, 2014 by

‘Buy farmland and gold,’ advises Dr Doom.

2010. business.timesonline.co.uk

The world’s most powerful investors have been advised to buy farmland, stock up on gold and prepare for a “dirty war” by Marc Faber, the notoriously bearish market pundit, who predicted the 1987 stock market crash. The bleak warning of social and financial meltdown, delivered today in Tokyo at a gathering of 700 pension and sovereign wealth fund managers. Dr Faber, who advised his audience to pull out of American stocks one week before the 1987 crash and was among a handful who predicted the more recent financial crisis, vies with the Nouriel Roubini, the economist, as a rival claimant for the nickname Dr Doom.

Speaking today, Dr Faber said that investors, who control billions of dollars of assets, should start considering the effects of more disruptive events than mere market volatility. “The next war will be a dirty war,” he told fund managers: “What are you going to do when your mobile phone gets shut down or the internet stops working or the city water supplies get poisoned?” His investment advice, which was the first keynote speech of CLSA’s annual investment forum in Tokyo, included a suggestion that fund managers buy houses in the countryside because it was more likely that violence, biological attack and other acts of a “dirty war” would happen in cities. He also said that they should consider holding part of their wealth in the form of precious metals “because they can be carried”.

One London-based hedge fund manager described Mr Faber’s address as “excellent, chilling stuff: good at putting you off lunch, but not something I can tell clients asking me about quarterly returns at the end of March”. Dr Faber did offer a few more traditional investment tips, although their theme fitted his general mode of pessimism. In Asia, particularly, he said, stock pickers should play on future food and water shortages by buying into companies with exposure to agriculture and water treatment technologies.

One of Dr Faber’s darker scenarios involves growing military tension between China and the United States over access to limited oil resources. Today the US has a considerable advantage over China because it has free access to oceans on both coasts, and has potential energy suppliers to the north and south in Canada and Mexico. It also commands an 11-strong fleet of aircraft carriers that could, if necessary, secure supply routes in a conflict situation. China and emerging Asia, meanwhile, face the uncertainty of supplies that must travel from the Middle East through winding sea lanes and the Malacca bottleneck.

American military presence in Central Asia, Dr Faber said, may add to the level of concern in Beijing. “When I tell people to prepare themselves for a dirty war, they ask me: “America against whom?” I tell them that for sure they will find someone.” At the heart of Dr Faber’s argument is a fundamentally gloomy view on the US economy and its capacity to service a growing mountain of debt. His belief, fund managers were told, is that the US is going to go bankrupt.

Under President Obama, he said, the country’s annual fiscal deficit will not drop below $1 trillion and could rise beyond that figure. Arch bears have predicted that US debt repayments could hit 35 per cent of tax revenues within ten years. Dr Faber believes that the ratio could easily hit 50 per cent in the same time frame.

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Gordon Long Extend & Pretend

Posted on April 14, 2014 by

Gordon Long has interesting ideas about what’s going on and how to invest accordingly.  I don’t agree with all that he writes, but what he has to say sure is interesting and a good overview of the incredibly widespread corruption across the board.

EXTEND & PRETEND:  An Accounting Driven Recovery

EXTEND & PRETEND:  Manufacturing a Minsky Melt-Up!

EXTEND & PRETEND:  Gaming the US Tax Payer

EXTEND & PRETEND:  Is the US Facing a Cash Crunch?

EXTEND & PRETEND:  Uncle Sam You Sly Devil!

EXTEND & PRETEND:  Shifting Risk to the Innocent.

Extend & Pretend: Its Either RICO Act Or Control Fraud

EXTEND & PRETEND:  Confirming the Flash Crash Omen

EXTEND & PRETEND:  A Guide to the Road Ahead

EXTEND & PRETEND: A Matter of National Security

 

In case I’ve missed any, here’s the sidebar from Long’s website:

Stage 1 Comes to an End!
A Matter of National Security
A Guide to the Road Ahead
Confirming the Flash Crash Omen
It’s Either RICO Act or Control Fraud
Shifting Risk to the Innocent
Uncle Sam, You Sly Devil!
Is the US Facing a Cash Crunch?
Gaming the US Tax Payer
Manufacturing a Minsky Melt-Up
Hitting the Maturity Wall
An Accounting Driven
Market Recovery

 

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We’ve been “Bankalized” Banks rule and always will

Posted on April 14, 2014 by

Ilargi Nov 8, 2010 I read an article Ashvin Pandurangi, our by now greatly valued roving reporter, sent me, entitled “Plutocracy Now”. Ashvin writes about that first notion I was pondering: the nationalization of US banks, though for him it’s not about Bank of America, but the Fed. He concludes it can’t be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can’t nationalize the banks, because they have long since “bankalized the nation”.

Not that I don’t find the efforts and arguments interesting. I just don’t think the authors necessarily place sufficient emphasis on the amount and level of political clout and power the financial industry has accumulated over the past few decades. Or indeed the past 100 years for that matter. Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it’s just that fewer people seem to realize it, but that’s not too comforting, is it?

Ashvin Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

The nation has been bankalized, something we’ve only figured out after it was too late. That means the road to taking over the banks is closed; we’ll be pumping money into them for quite a while to come.

===========================

Oct 30, 2010
A Paralyzed Fed Defers Decision On Monetary Policy To Primary Dealers In An Act That Can Only Be Classified As Treason
by Tyler Durden – Zero Hedge

Below are the 18 banks that, in a completely separate vote, will henceforth rule America, regardless of what particular puppets end up in the Congress and Senate:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets Corporation
RBS Securities Inc.
UBS Securities LLC.

As if there was any doubt before which way the arrow of control, and particularly causality, points in America’s financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed.

It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things:

* That the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD’s decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed,

* That the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly,

* That the PDs will most likely demand the highest possible amount, using Goldman’s $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise.

This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

It also means that the Fed has absolutely no confidence in its actions, and, more importantly, no confidence in how its actions will be perceived by the market which is why it is not only telegraphing its decision to the bankers, but is having its decision be dictated by them, an act so unconstitutional it would be seen as treason in any non-Banana republic!

This is the last straw confirming that the only ones left trading the market are the Fed and the PDs, passing hot potatoes to each other, and the HFTs, churning the shit out of everything else to pretend someone is still trading.

And the saddest conclusion is that this is the definitive end of US capital markets: not only is the Fed’s political subordination a moot point, but the Fed, and the middle class’ purchasing power via the imminent dollar destruction that is sure to follow as the PDs seek to obliterate their underwater assets by raging inflation, is now effectively confirmed to be a bitch of Lloyd Blankfein and his posse.

The official explanation for this unprecedented incursion by the banking crime syndicate in US monetary policy is as follows:

Avoiding Disruption

Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting large-scale asset purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.

“Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.

The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.

Fill in the blank: the Fed has essentially given PDs the option of $250BN, $500BN or $1 trillion in monetization over six months. It is now absolutely clear that the PDs will pick the biggest number possible… which incidentally amounts to $2 trillion per year, and is precisely what Goldman’s downside case was, as we presented previously.

The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and $1 trillion.

Of course, since a $2 trillion purchase over 1 year means the Fed will have to monetize every single bond issued, the SOMA limit will have to be raised, another prediction we made months ago:

The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.

“Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,” analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.

How about $500 billion?

And, incidentally, since the “independent” Treasury will be forced to issue more debt to fill all the demand for $2 trillion over the next 12 months, as there is not enough debt in the pipeline to fill $2TN worth of demand and prevent the entire curve pancaking at zero (i.e., the 30 year yielding precisely 0.001%) it also means that the government will be forced to come up with more deficit programs, which also means that primary dealers will now also determine US fiscal policy.

Which begs the question, why is anyone pretending that the political vote on November 3 matters at all?

Posted in Banking | Comments Off on We’ve been “Bankalized” Banks rule and always will

Jeff Rubin: Oil and the End of Globalization

Posted on April 14, 2014 by

Jeff Rubin: Oil and the End of Globalization

Nov 8, 2010. ASPO-USA

Much of the article has been snipped below:

It is easy to see how sub-prime mortgages blew up Wall Street; it is a little more challenging to see it as the author of the global recession.

  • Why were there economies that had no sub-prime mortgages that experienced even deeper recessions than the United States?
  • Why did those economies go into recession even before the US economy went into recession?
  • Maybe, just maybe, there was something more important going on–more important to the global economy than Wall Street or sub-prime mortgages, like $147 barrel oil, for example.
  • If we know anything about watching the global economy in the last 40 years, we know this: feed it cheap oil, and it runs very smoothly. All of a sudden, give it expensive oil, and it stops in its tracks.

Every major recession in the post-war period has oil’s fingerprints all over it.

  • The 1973 first oil shock led to what was then the deepest post-war recession, at the time. The second OPEC oil shock led to no less than two recessions: 1979 and 1982.
  • And then when Saddam Hussein invaded Kuwait, and left half of its oil fields on fire, and oil spiked to the then unheard-of price of $40 barrel, lo and behold, the industrialized world again fell into recession.

Oil prices went from about $30 barrel, at the beginning of 2004, to almost $150 barrel by 2008. Even inflation-adjusted, that price increase was over double the price increase of either the first or the second OPEC oil shock. If they had led to devastating recessions, why would not the biggest oil shock of them all, be the obvious culprit for what has been the deepest recession to date?

There are many ways in which oil shocks create global recessions.

  • First, the transfer of income. When oil went from $30 barrel, to about $147 barrel, over $1 trillion of income was transferred from the industrialized oil consuming world to OPEC. Now, that was not neutral for the economy, because the savings rates from which money was coming from, like the United States, was virtually 0%, meaning that consumers spent everything they made. And where the money was going to, places like Saudi Arabia, or Kuwait, or the United Arab Emirates, had savings rates of almost as high as 50%, so it certainly was not demand neutral.
  • High price also create recessions by crowding out non-energy expenditures. Two years ago, when gasoline cost us $4 gallon, low-income Americans were paying more to fill their tanks than they were to fill their stomachs.
  • But by far, the most important mechanism, the most important path, by which oil prices cause recession is through their impact on inflation, and their impact on interest rates.

There is no shortage of people to blame for the subprime mortgage crisis. The real culprit behind subprime mortgages was the very low cost of capital and 0% interest rates. All the greed in the world could not do what the Fed’s easy money made possible. The subprime mortgage rates were created by interest rates and the subprime mortgage market was pricked by interest rates. Everybody would agree with that. What people don’t seem to ask is, “Why did interest rates go from 1% to 5.5% from 2004 to 2006?”

Any central banker will acknowledge that your borrowing cost is a mirror image of your inflation rate. We had 1% federal funds’ rate in 2004, because we had a 1% inflation rate. All of a sudden, in 2006, inflation was over 5.5%, the highest it had been in America, since, coincidentally, 1991, when we just happened to have the last oil shock. All of a sudden, money wasn’t free any more. All of a sudden, you weren’t getting credit cards in the mail any more that you never applied for. And all of the sudden, people who held negative amortization sub-prime mortgage rates had to start paying 7% or 8%.

If interest rates hadn’t risen, that wouldn’t have occurred. Why did inflation move up? Virtually all of the increase in inflation came from one component of the US consumer price index basket–the energy component. By the end of 2006, energy inflation was running at 35%, because of one price: the price of oil. The price of oil went from $30 barrel, which incidentally, every oil analyst at the time said it was going to stay at that level, to over $70 barrel. If oil had stayed at $30 barrel, inflation would never have spiked; neither would have interest rates. All of those good folk in Cleveland would probably still be there, in their homes financed by 0% interest rate sub-prime mortgages. Lehman Brothers and Bear Stearns would probably still exist, and I’d probably still be the chief economist at CIBC.

But that is not what happened. Why did oil prices go up to $147 barrel? Somewhere where virtually every economist said it could not go. Well, there were two reasons that economists said that oil prices could not get into triple digit range, and that was the cherished principles of supply and demand. First, the theory of the upward sloping supply curve–higher oil prices would bring new supply, just like it did after the OPEC oil shocks, where oil gushed from Prudhoe Bay and the North Sea. And not only did that break OPEC’s strangle-hold on the market, but sent oil prices tumbling down.

But there are no more Prudhoe Bays or North Seas to tap. Tar sands and deep water oil did bring new sources of supply, but only at prices we couldn’t afford to burn.

What about the cherished principle of demand? Would not triple digit oil prices quash demand? Well, it did, in certain places. It did in the United States, Canada, Japan, and Western Europe. Fifteen years ago, if those economies suddenly cut back their appetite for oil, oil prices would have fallen, because 15 years ago, those countries would have accounted for almost 75% of world oil consumption. Today, they account for 50%. Tomorrow, they will account for less than half.

Where do you think oil demand has been growing the strongest? Many of you will probably be saying China, and indeed it has. It’s grown from around 2 million barrels a day, to about 9 million barrels a day. But I know a place where the demand for oil is growing even faster than in China. And it is the same place your politicians have told you your supply is coming from in the future. Last year, OPEC and two non-cartel producers, Mexico and Russia, consumed 14 million barrels a day. That is almost two Chinas.

What makes OPEC so thirsty for its own fuel? In Venezuela oil is 20 cents a gallon, 40 cents in Saudia Arabia.  And it’s 40 cents a gallon, whether oil costs $20 barrel, or whether oil costs $150 barrel. What’s the coolest thing to do in Dubai? Ski, of course. Skiing in an area where it’s hot enough to fry an egg on the pavement uses up a whole lot of energy. So the question isn’t really how much productive capacity that OPEC has. How much export capacity is the real question, and every year it’s less and less, because every year, more and more is consumed at home. So chances are, your future oil supply ain’t coming from OPEC, and chances are, it ain’t going to be cheap.

Now sure, oil prices fell to $40 barrel during the recession. And for many folk, that was evidence enough that it never had any business being in triple digit range in the first place. But what a lot of those folk forget is that in the last recession, world oil demand actually fell. It fell for the first time since 1983. Such was the severity that the recession was.

Peak oil is not a problem if the economy that it is powering is shrinking. Peak oil is only a problem if the economy we are in is starting to grow. The first thing you know about an economic recovery is that economies start burning more oil. The next thing you know about an economic recovery is that oil prices start rising. Where is oil trading today? It is trading at over $80 barrel. With the exception of Germany and Canada, every other economy in the G7 is still miles below the level of GDP that they were at before the recession began.

And yet, where oil is trading today, turn the clock back to three years ago, and that would have been a world all-time record high. Now, it is where oil trades in the shadow of the deepest global post-war recession. Where do you think oil prices are going?

I will tell you where I think oil prices are going. Even in this most anemic of economic recoveries, we are going to see triple digit oil prices.

Our rendezvous with triple digit oil prices is not in 10 or 15 years; it is in 10 or 15 months. So instead of trying to turn cow-shit into high octane fuel, we are going to have to learn to get off the road, and that is just what happened. In 2009, there were 4 million fewer cars on the road than there were the year before. In the next ten years, 40 million North Americans will be taking the exit lanes. The question is, “Will there be a bus to get on?” Instead of giving $40 billon to General Motors, what we should have done is spend $40 billion on public transit, so there would be a bus to get on.

In a world of triple digit oil prices, all of the sudden the economy’s speed limit changes. And that is one of the problems that we have here in America, is that we don’t recognize that our economy’s speed limit has changed. What the economy could grow at when oil was $20 to $30 barrel is a whole different speed limit than what the US economy can grow at when oil is $80 to $150 barrel.

And that is something that I don’t think the Administration recognizes. President Obama cannot get cheap oil. He can get expensive oil. We can build a pipeline from the Canadian tar sands down to the Gulf refineries, and we can get oil. But in order to get the kind of oil that will be required, that will require the triple digit oil prices that we can’t afford to pay. Trying to prime the economy with fiscal stimulus is not a substitute for cheap oil. It won’t make the economy grow any faster. It will just make the deficit that much bigger.

Worse than that, triple digit oil prices will not only take millions off the road, it will send our economy right back into recession. We can’t do a whole lot about triple digit oil prices.

 

Posted in Energy Markets | Comments Off on Jeff Rubin: Oil and the End of Globalization

Foreclosuregate

Posted on April 14, 2014 by

Back-Office Blues 

Nov 8, 2010. James Surowiecki. The New Yorker.

In the late 1960s, Wall Street was crippled by an unlikely nemesis: unfinished paperwork. Thanks to a booming stock market, trading volume had soared in the course of the decade; between 1960 and 1968, the number of shares traded daily quadrupled. This should have been wonderful news for brokerage houses—more trades mean more commissions—but it ended up wrecking many of them instead. Because brokerages were slow to add workers and update back-office operations, they were literally buried beneath all the new business—offices were full of stock certificates, and trade documents were stacked halfway to the ceiling. Amid the chaos, dividend checks went unsent, trades were credited to the wrong accounts, and fraud spread; hundreds of millions of dollars in securities were stolen. And since the firms often didn’t process trades quickly enough, billions of dollars’ worth of transactions a month were simply cancelled. In 1968, the stock market started closing one day a week to let firms catch up on their work, but the brokerages’ bookkeeping woes caught up to them first, and more than a hundred firms went under. It took years—and the passage of an investor-protection bill—for the crisis to abate.

You’d think the Street would have learned its lesson. Instead, it’s now threatened by an even bigger back-office crisis: Foreclosuregate. Banks, faced with a flood of delinquent mortgages resulting from the bad loans they made during the housing bubble, have done exactly what the brokerages did forty years ago: they’ve cut corners. They’ve foreclosed on homes without having the proper documentation, and relied on unqualified people to sign affidavits attesting to things they didn’t know—so-called “robosigners.” In a few cases, they seem to have actually tossed people who didn’t have mortgages out of their homes. As a result, federal regulators and attorneys general in all fifty states are now investigating. And, in the weeks since the scandal first erupted, other issues have appeared, calling into question the legitimacy of the way mortgages were packaged and sold, and raising the possibility that the banks might have to buy back piles of bad mortgages. Forecasts of “catastrophe,” “Armageddon,” and “apocalypse” have now become routine.

There’s no doubt that it’s a brutal mess. The banks have been servicing mortgages and chasing delinquents with the same carelessness and indifference to due process that they demonstrated when they underwrote and securitized the mortgages in the first place. A foreclosing bank should be able, at a minimum, to produce the original mortgage note to demonstrate that it has the right to foreclose. But many banks have been unwilling or unable to do so. The same goes for other documentation: in a study of seventeen hundred cases of foreclosure in bankruptcy, Katherine Porter, a law professor at the University of Iowa, found that necessary documents were missing in more than half of them. Servicing mortgages well means hiring and training lots of workers to help customers, modify loans, and insure that documents are in order. But that costs money, and since mortgage servicing is already a low-margin business, banks have preferred to do things on the cheap, which is an open invitation to trouble, including fraud. To those responsible, a bit of sloppy paperwork probably seemed like no big deal, but when you’re talking about taking away people’s homes paperwork and due process should matter quite a bit.

All the same, the widespread proclamations of Armageddon seem overblown. The banks’ behavior has been appalling, but the crisis probably won’t be fatal for them, however much some of them might deserve that. Criminal charges are likely, and justified. And judges are already looking more skeptically at banks’ legal claims. But we aren’t going to see a Jubilee for debtors. The actual debts are almost all real, and the records of most of them presumably exist somewhere. So some financial institution will eventually end up with the right to foreclose, even though getting there will be expensive and time-consuming. And while banks may suffer considerable losses—having to spend tens of billions of dollars to buy back mortgages that violated the warranties they made to investors—forcing them to do this will take a long time, and enable them to spread the pain out over years. Nor is the uproar going to lead millions of homeowners to stop paying their mortgages. Predictions of catastrophe are understandable—the memory of the banking crisis is fresh, and it seems like poetic justice—but we’re probably not going to see apocalypse redux.

Indeed, there’s a chance that in the long run the banks’ travails could make things better for the economy, not worse. For a start, all the sand in the gears of the foreclosure mills will make it easier for delinquent borrowers to stay in their homes—not so bad an outcome, in economic terms, as the banks would have us believe. There are eleven months of existing-home inventory for sale right now; dumping another million foreclosed homes onto the market hardly seems economically essential. More important, making foreclosures tougher to get and more expensive to process could push banks to get serious about modifying mortgages, which at this point is the best route to getting the housing market back in reasonable shape. Up to now, it’s often been easier and cheaper for banks to foreclose, and mortgage servicers commonly make more in foreclosure than in modification. But being forced to follow the law before foreclosing, and having the threat of criminal investigation over their heads, may change that calculus. (More government pressure wouldn’t hurt, either.) The back-office crisis of the nineteen-sixties compelled Wall Street to do a better job of protecting and serving investors. It’d be fitting if Foreclosuregate ended up doing the same for homeowners.

Other articles about foreclosure scandal:

Oct 13, 2010. The Second Leg Down of America’s Death Spiral   Gonzalolira blog.

 

Posted in Mortgages | Comments Off on Foreclosuregate

Automaticearth World View

Posted on April 14, 2014 by

Here is an updated distillation of our worldview.

The Resurgence of Risk, which appeared at The Oil Drum Canada in August 2007 provides the background to how we came to be in our present predicament. It is by far the longest of the primers, and its purpose is to explain in some depth the nature of our credit bubble, the role of ‘financial innovation’, the distinction between currency inflation and credit hyper-expansion and the mechanism by which value disappears as a bubble deflates.

For further explanation of the ponzi nature of bubbles, the spectrum of ponzi dynamics underlying many economic phenomena and the implications of this for where we are headed, see From the Top of the Great Pyramid.

This ties in with an earlier piece from The Oil Drum Canada, Entropy and Empire , detailing the progression of hegemonic power from empire to empire, as each rises, over-reaches, falls and passes the mantle on to its successor.

The political picture is further developed in Economics and the Nature of Political Crisis, with a more specific look at Europe in The Imperial Eurozone (With all That Implies).

When bubbles reach their maximum extent, they invariably deflate. Our explanation as to why this is inevitable can be found in Inflation Deflated, followed by, The Unbearable Mightiness of Deflation, a rebuttal to inflationist Gary North. An Interview with Stoneleigh provides a more recent and more comprehensive piece on deflation and its consequences.

We dispute classical economic theory and the received wisdom as to the nature of markets. Markets are not objective, mechanical and rational as the Efficient Market Hypothesis would have you believe. Our explanation of markets as human phenomena grounded in destabilizing positive feedback can be found in Markets and the Lemming Factor (with kudos to Robert Prechter, who has been developing the hugely important theory of socionomics for many years).

We have a number of articles on specific aspects of our current crisis. Our view of real estate can be found in Welcome to the Gingerbread Hotel. Employment is covered in War in the Labour Markets.

The Special Relativity of Currencies and Dollar-Denominated Debt Deflation address our view of currency inter-relationships and the value of currency relative to available goods and services.

Our view of the intersection between peak oil and finance can be found in Energy, Finance and Hegemonic Power  and Oil, Credit and the Velocity of Money Revisited, and our view of the future of power systems is explained in Renewable Power? Not in Your Lifetime  and A Green Energy Revolution?.

Our take on the future for gold can be found in A Golden Double-Edged Sword, and our view of -global- trade is covered in The Rise and Fall of Trade.

Our predictions for the future in a nutshell are available in point form in 40 Ways to Lose Your Future .

Our prescription for facing the future is presented in How to Build a Lifeboat .

This is our attempt to convey what we as individuals can hope to do about it for ourselves, our families and friends. We cannot avoid living through a Greater Depression, but we can take action, and, being forewarned, we can hopefully avoid many pitfalls. We can attempt to avoid becoming part of the herd that is determined to throw itself off a cliff.

Finally, our most theoretical piece, Fractal Adaptive Cycles in Natural and Human Systems, connects ecological and socioeconomic cycles through an analogous framework, drawing together the work of CS Holling, Robert Prechter and Joseph Tainter. The big picture is of crucial importance as we have reached, and passed, the pinnacle of a golden age. We are moving into an era of uncertainty and upheaval such as none of us have hitherto experienced but all of us must try to navigate successfully.

We at The Automatic Earth will continue to provide what assistance we can with that process. The TAE world tour continues, with a view to turning virtual communities into real ones. By popular demand, we will shortly be making available a recording of one of these presentations. Watch this space.

Posted in Other Experts | Comments Off on Automaticearth World View

Ashvin Pandurangi on social disorder and the military

Posted on April 14, 2014 by

The Debt-Dollar Discipline: Part III – Future Reorganization

Dec 13, 2010. Ashvin Pandurangi

[giant snips and rearrangement of material]

Machines of societal oppression, whether they are equipment or computerized devices, cannot continue to function at their current rates of activity without access to increasing amounts of net energy. Currently, there are no forms of renewable energy or technologies of energy efficiency in place which could realistically offset the terminal declines in net energy faced by global society. The time after which a wide-scale implementation of such energy infrastructure becomes impossible is approaching very soon, if it has not already passed.

It is significantly likely that developed societies will re-organize at much smaller scales of economic and political activity, in which states, cities and local communities become more important to the “individual” than regional blocs or even nations. People will be forced to rely on their immediate environments as a means of acquiring basic goods and services. The mechanisms of discipline and control, if they exist at all, will only be able to operate within a localized range for limited purposes.

This scenario should not be taken lightly, however, because it will certainly involve a transitional period rife with disorder and violence. These symptoms are especially likely if there is an initial period of physical conflict between governmental power structures and their resistant populations, which should be expected. Although the increasingly impoverished citizenry of the world obviously outnumber the disciplinary elites by a large factor, these elites have a not-so-secret weapon to combat many of the obstacles mentioned above.

The roots of discipline can be traced back to the army, which, throughout history, has disciplined its soldiers to be obedient, self-regulating and deadly efficient by implementing strict restrictions on their movement through time and space. Everything about a soldier’s existence in the barracks is tightly controlled through confined quarters, strict daily schedules, drill exercises, required conduct, etc. Although modern global society is publicly characterized as a place of diplomacy and peaceful negotiation, it has actually retained the most deadly military forces with the most deadly weaponry to match.

The U.S. military, for example, may eventually face a legitimacy crisis of its own, but the unwavering loyalty of its commanders and soldiers should not be underestimated. The structures of command within the military are kept almost entirely under the purview of the executive branch, and this design will make it difficult for elements of popular dissent to infiltrate its operations. After all, it is only natural that the institution to first, and most powerfully, implement disciplinary principles within human civilization should be the last to lose that disciplinary character.

In this sense, military institutions and arsenals provide the last line of “defense” for desperate power structures battling the scarcity of vital resources and the chaos of popular dissent.

The U.S. has already strategically positioned its military throughout the Middle East, which is obviously the most oil-rich region in the world. When availability and expense begin threatening the U.S. share of global oil production, these forces can be readily mobilized to secure production facilities and trade routes.

It is also most likely the case that detailed plans are already in place to institute martial law on the American population in the event of disciplinary break down. A program called “Unified Quest 2011”, consisting of war games, seminars, workshops and conferences, is self-described as being “the Army Chief of Staff’s primary mechanism to explore enduring challenges and the conduct of operations in a future operational environment”. It would be naive to assume that American states and cities are not some of the “future operational environments” that they are preparing to conduct operations in. The government, of course, will insist that it is simply maintaining stability and doing what’s best for its citizens, but the crucial question is whether the masses will voluntarily submit.

The U.S. citizenry is the most heavily armed in the world (90 guns per 100 people, and they may refuse to submit without a fight. The American people were more than willing to relinquish many of their Constitutional rights after 9/11 for the sake of perceived security, but this time the circumstances will be drastically different. There will be millions of painfully destitute people, who possess rapidly diminishing faith in their government’s ability to aid or protect them, and have precious little to lose from active resistance. During the chaotic, unpredictable release of a complex system, even the best laid schemes of disciplinary governments and their military forces could go awry.

Posted in By People, Social Disorder | Comments Off on Ashvin Pandurangi on social disorder and the military

Why do people fall for Ponzi and other schemes?

Posted on April 14, 2014 by

Fooled by Ponzi (and Madoff). How Bernard Madoff Made Off with My Money 

Dec 23, 2008. Stephen Greenspan. Skeptic.com

There are few areas of functioning where skepticism is more important than how one invests one’s life savings. Yet intelligent and educated people, some of them naïve about finance and others quite knowledgeable, have been ruined by schemes that turned out to be highly dubious and quite often fraudulent. The most dramatic example of this in American history is the recent announcement that Bernard Madoff, a highly-regarded hedge fund manager and a former president of NASDAQ, has for several years been running a very sophisticated Ponzi scheme which by his own admission has defrauded wealthy investors, charities and other funds, of at least 50 billion dollars.

In my new book Annals of Gullibility1, I analyze the topic of financial scams, along with a great number of other forms of human gullibility, including war (the Trojan Horse), politics (WMDs in Iraq), relationships (sexual seduction), pathological science (cold fusion), religion (Christian Science), human services (Facilitated Communication), medical fads (homeopathy), etc. Although gullibility has long been of interest in works of fiction (Othello, Pinnochio), religious documents (Adam and Eve, Samson) and folk tales (Emperor’s New Clothes, Little Riding Hood), it has been almost completely ignored by social scientists. There have been a few books that have focused on narrow aspects of gullibility, including Charles Mackey’s classic 19th century book, Extraordinary Popular Delusion and the Madness of Crowds (most notably on investment follies such as Tulipimania, in which rich Dutch people traded their houses for one or two tulip bulbs).2 In Annals of Gullibility I propose a multi-dimensional theory that would explain why so many people behave in a manner which exposes them to severe and predictable risks. This includes myself — I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level.

Ponzi Schemes & Other Investment Manias & Frauds

Although my focus here is on Ponzi schemes, I shall also briefly address the topic of investment manias (such as the dot.com bubble) and other forms of financial fraud (such as various inheritance scams). That is because they all involve exploitation of investor gullibility and can all be explained by the same theoretical framework.

A Ponzi scheme is a fraud where invested money is pocketed by the schemer and investors who wish to redeem their money are actually paid out of proceeds from new investors. As long as new investments are expanding at a healthy rate, the schemer is able to keep the fraud going. Once investments begin to contract, as through a run on the company, then the house of cards quickly collapses. That is what happened with the Madoff scam when too many investors — needing cash because of the general U.S. financial meltdown in late 2008 — tried to redeem their funds. Madoff could not meet these demands and the scam was exposed.

The scheme gets its name from Charles Ponzi,3 an Italian immigrant to Boston, who in 1920 came up with the idea of promising huge returns (50% in 45 days) supposedly based on an arbitrage plan (buying in one market and selling in another) involving international postal reply coupons. The profits allegedly came from differences in exchange rates between the selling and the receiving country (where they could be cashed in). A craze ensued, and Ponzi pocketed many millions of dollars, most from poor and unsophisticated Italian immigrants in New England and New Jersey. The scheme collapsed when newspaper articles began to raise questions about it (pointing out, for example, that there were not nearly enough such coupons in circulation) and a run occurred.

The basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions (especially when dealing with matters they don’t fully understand) on the behavior of other humans. This mechanism has been termed “irrational exuberance,” a phrase attributed to former fed chairman Alan Greenspan (no relation), but actually coined by another economist, Robert J. Schiller in a book with that title. Schiller employs a social psychological explanation that he terms the “feedback loop theory of investor bubbles.” Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up. In Schiller’s words, the fact “that others have made a lot of money appears to many people as the most persuasive evidence in support of the investment story associated with the Ponzi scheme — evidence that outweighs even the most carefully reasoned argument against the story.”4

In Schiller’s view, all investment crazes, even ones that are not fraudulent, can be explained by this theory. Two modern examples of that phenomenon are the Japanese real estate bubble of the 1980s and the American dot.com bubble of the 1990s. Two 18th century predecessors were the Mississippi Mania in France and the South Sea Bubble in England (so much for the idea of human progress). In all of these cases, the thing that kept the mania going was the thought “when so many leading members of society believe in and seem to profit from a course of action, how can it possibly be risky or dangerous?”

A form of investment fraud that has structural similarities to a Ponzi scheme is an inheritance scam, in which a purported heir to a huge fortune is asking for a short-term investment in order to clear up some legal difficulties involving the inheritance. In return for this short-term investment, the investor is promised enormous returns. The best-known modern version of this fraud involves use of the internet, and is known as a “419 scam,” so named because that is the penal code number covering the scam in Nigeria, the country from which most of these internet messages originate. The 419 scam differs from a Ponzi scheme in that there is no social pressure brought by having friends who are getting rich. Instead, the only social pressure comes from an unknown correspondent, who undoubtedly is using an alias. Thus, in a 419 scam, other factors, such as psychopathology or extreme naïvete, likely explain the gullible behavior, as seen in a profile of such a highly-trusting victim, nicknamed “the perfect mark,” by Mitchell Zuckoff.5

Two historic versions of the inheritance fraud that are equal to the Madoff scandal in their widespread public success, and that relied equally on social feedback processes, occurred in France in the 1880s and 1890s, and in the American Midwest in the 1920s and 1930s. The French scam was perpetrated by a talented French hustler named Therese Humbert, who claimed to be the heir to the fortune of a rich American, Robert Henry Crawford, whose bequest reflected gratitude for her nursing him back to health after he suffered a heart attack on a train. The will had to be locked in a safe for a few years until Humbert’s youngest sister was old enough to marry one of Crawford’s nephews. In the meantime, leaders of French society were eager to get in on this deal, and their investments (including by one countess, who donated her chateau) made it possible for Humbert — who milked this thing for 20 years — to live in a high style. Success of this fraud, which in France was described as “the greatest scandal of the century” was kept going by the fact that Humbert’s father-in-law was a respected jurist and politician in France’s Third Republic and he publicly reassured investors, who included the cream of French society.6

The American version of the inheritance scam was perpetrated by a former Illinois farm boy named Oscar Hartzell. While Therese Humbert’s victims were a few dozen extremely wealthy and worldly French aristocrats, Hartzell swindled over 100,000 relatively unworldly farmers and shopkeepers throughout the American heartland. The basic claim — as described by Jay Robert Nash7 and Richard Rayner8 — was that the English seafarer, Sir Francis Drake, had died without any children, but that a will had been recently located (in one version, in a church belfry). The heir to the estate, which was now said to be worth billions (from compounding of the value of loot accumulated when Drake was a privateer plundering the Spanish Main), was a colonel Drexel Drake in London. As the colonel was about to marry his extremely wealthy niece, he wasn’t interested in the estate, which needed some adjudication, and turned his interest over to Hartzell, who now referred to himself as “Baron Buckland.” The Drake scheme became a social movement, known as “the Drakers” (later changed to “the Donators”) and whole churches and groups of friends — some of whom planned to found a utopian commune with the expected proceeds — would gather to read the latest Hartzell letters from London. Hartzell was eventually indicted for fraud and brought to trial in Iowa, over great protest by his thousands of loyal investors. Rayner noted that what “had begun as a speculation had turned into a holy cause.”

A Multidimensional Theory of Investment & Other Forms of Gullibility

While social feedback loops are an obvious contributor to understanding the success of Ponzi and other mass financial manias, one needs to also look at factors located in the dupes themselves that might help to explain why they fell prey to the social pressure while others did not. There are four factors in my explanatory model, which can be used to understand acts of gullibility but also other forms of what I term “foolish action.”9 A foolish (or stupid) act is one where someone goes ahead with a socially or physically risky behavior in spite of danger signs, or unresolved questions, which should have been a source of concern for the actor. Gullibility is a sub-type of foolish action, which might be termed “induced-social.” It is induced because it always occurs in the presence of pressure or deception by one or more other people. Social foolishness can also take a non-induced form, as when someone tells a very inappropriate joke that causes a job interview or sales meeting to end unsuccessfully. Foolishness can also take a “practical” (physical) form, as when someone lights up a cigarette in a closed car with a gas can in the back seat and ends up incinerating himself. As noted, the same four factors can be used to explain all foolish acts, but in the remainder of this paper I shall use them to explain Ponzi schemes, particularly the Madoff debacle.

The four factors are situation, cognition, personality and emotion. Obviously, individuals differ in the weights affecting any given gullible act. While I believe that all four factors contributed to most decisions to invest in the Madoff scheme, in some cases personality should be given more weight while in other cases emotion should be given more weight, and so on. As mentioned, I was a participant — and victim — of the Madoff scam, and have a pretty good understanding of the factors that caused me to behave foolishly. So I shall use myself as a case study to illustrate how even a well-educated (I’m a college professor) and relatively intelligent person, and an expert on gullibility and financial scams to boot, could fall prey to a hustler such as Madoff.

Situations

Every gullible act occurs in a particular micro-context, in which an individual is presented with a social challenge that he has to solve. In the case of a financial decision, the challenge is typically whether to agree to an investment decision that is being presented to you as benign but that may pose severe risks or otherwise not be in one’s best interest. Assuming (as with the Madoff scam) that the decision to proceed would be a very risky and thus foolish act, a gullible behavior is more likely to occur if the social and other situational pressures are strong and less likely to occur if the social and other situational pressures are weak, or balanced by countervailing pressures (such as having wise heads around to warn you against taking the plunge).

The Madoff scam had social feedback pressures that were very strong, almost rising to the level of the “Donators” cult around the Drake inheritance fraud. A December 15, 2008 New York Times article described how wealthy retirees in Florida joined Madoff’s country club for the sole reason of having an opportunity to meet him socially and be invited to invest directly with him.10 Most of these investors, as well as Madoff’s sales representatives, were Jewish, and it appears that the Madoff scheme was seen as a safe haven for well-off Jews to park their nest eggs. The fact that Madoff was a prominent Jewish philanthropist was undoubtedly another situational contributor, as it likely was seen as highly unlikely that such a person would be scamming fellow Jews (which included many prominent Jewish charities, some of them now forced to close their doors).

A non-social situational aspect that contributed to a gullible investment decision was, paradoxically, that Madoff promised modest rather than spectacular gains. Sophisticated investors would have been highly suspicious of a promise of gains as spectacular as those promised almost 100 years earlier by Charles Ponzi. Thus, a big part of Madoff’s success came from his recognition that wealthy investors were looking for small but steady returns, high enough to be attractive but not so high as to arouse suspicion. This was certainly one of the things that attracted me to the Madoff scheme, as I was looking for a non-volatile investment that would enable me to preserve and gradually build wealth in down as well as up markets.

Another situational factor that pulled me in was the fact that I, along with most Madoff investors (except for the super-rich) did not invest directly with Madoff but went through one of 15 “feeder” hedge funds that then turned all of their assets over to Madoff to manage. In fact, I am not certain if Madoff’s name was even mentioned (and certainly, I would not have recognized it) when I was considering investing in the (three billion dollar) “Rye Prime Bond Fund” that was part of the respected Tremont family of funds, which is itself a subsidiary of insurance giant Mass Mutual Life. Thus, I was dealing with some very reputable financial firms, which created the strong impression that this investment had been well-researched and posed acceptable risks.

The micro social context in which I made the decision to invest in the Rye fund came about when I was visiting my sister and brother-in-law in Boca Raton, Florida and met a close friend of theirs who is a financial adviser who was authorized to sign people up to participate in the Rye (Madoff-managed) fund. I genuinely liked and trusted this man, and was persuaded by his claim that he had put all of his own (very substantial) assets in the fund, and had even refinanced his house and placed all of the proceeds in the fund. I later met many friends of my sister who were participating in the fund. The very successful experience they had over a period of several years convinced me that I would be foolish not to take advantage of this opportunity. My belief in the wisdom of this course of action was so strong that when a skeptical (and financially savvy) friend back in Colorado warned me against the investment, I chalked the warning up to his sometime tendency towards knee-jerk cynicism.

Cognition

Gullibility can be considered a form of stupidity, so it is safe to assume that deficiencies in knowledge and/or clear thinking often are implicated in a gullible act. By terming this factor “cognition” rather than intelligence, I mean to indicate that one can have a high IQ and still prove gullible. There is a large literature, by scholars such as Michael Shermer11 and Massimo Piattelli-Palmarini12 that show how often people of average and above-average intelligence fail to use their intelligence fully or efficiently when addressing everyday decisions. Keith Stanovich makes a distinction between intelligence (the possession of cognitive schemas) and rationality (the actual application of those schemas).13 The “pump” that drives irrational decisions (many of them gullible), according to Stanovich, is the use of intuitive, impulsive and non-reflective cognitive styles, often driven by emotion.

In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case.

The real mystery in the Madoff story is not how naïve individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, ranging from the adviser who sold me and my sister (and himself) on the investment, to the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff’s investment algorithm (along with other aspects of his organization) was a closely guarded secret difficult to penetrate, and partly (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going, for themselves and their clients, to entertain the idea that it might all be about to crumble.

Personality

Gullibility is sometimes equated with trust, but the late psychologist Julian Rotter showed that not all highly trusting people are gullible.14 The key to survival in a world filled with fakers (Madoff) or unintended misleaders who were themselves gulls (my adviser and the managers of the Rye fund) is to know when to be trusting and when not to be. I happen to be a highly trusting person who also doesn’t like to say “no” (such as to a sales person who had given me an hour or two of his time). The need to be a nice guy who always says “yes” is, unfortunately, not usually a good basis for making a decision that could jeopardize one’s financial security. In my own case, trust and niceness were also accompanied by an occasional tendency towards risk-taking and impulsive decision-making, personality traits that can also get one in trouble.

Emotion

Emotion enters into virtually every gullible act. In the case of investment in a Ponzi scheme, the emotion that motivates gullible behavior is a strong wish to increase and protect one’s wealth. In some individuals, this undoubtedly takes the form of greed, but I think that truly greedy individuals would likely not have been interested in the slow but steady returns posted by the Madoff-run funds. I know that in my case, I was excited not by the prospect of striking it rich but by the prospect of having found an investment that promised me the opportunity to build and maintain enough wealth to have a secure and happy retirement. My sister, a big victim of the scam, put it well when she wrote that “I suppose it was greed on some level. I could have bought CDs or municipal bonds and played it safer for less returns. The problem today is there doesn’t seem to be a whole lot one can rely on, so you gravitate towards the thing that in your experience has been the safest. I know somebody who put all his money in Freddie Macs and Fannie Maes. After the fact he said he knew the government would bail them out if anything happened. Lucky or smart? He’s a retired securities attorney. I should have followed his lead, but what did I know?”15

Conclusion

I suspect that one reason why psychologists and other social scientists have avoided studying gullibility is because it is affected by so many factors, and is so micro-context dependent that it is impossible to predict whether and under what circumstances a person will behave gullibly. A related problem is that the most catastrophic examples of gullibility (such as losing one’s life savings in a scam) are low frequency behaviors that may only happen once or twice in one’s lifetime. While as a rule I tend to be a skeptic about claims that seem too good to be true, the chance to invest in a Madoff-run fund was one case where a host of factors — situational, cognitive, personality and emotional — came together to cause me to put my critical faculties on the shelf.

Skepticism is generally discussed as protection against beliefs (UFOs) or practices (Feng Shui) that are irrational but not necessarily harmful. Occasionally, one runs across a situation where skepticism can help you to avoid a disaster as major as losing one’s life (being sucked into a crime) or one’s life savings (being suckered into a risky investment). Survival in the world requires one to be able to recognize, analyze, and escape from those highly dangerous situations.

So should one feel pity or blame towards those who were insufficiently skeptical about Madoff and his scheme? A problem here is that the lie perpetrated by Madoff was not all that obvious or easy to recognize (in fact, it is very likely that Madoff’s operation was legitimate initially but took the Ponzi route when he began to suffer losses that he was too proud to acknowledge). Virtually 100% of the people who turned their hard-earned money (or charity endowments) over to Madoff would have had a good laugh if contacted by someone pitching a Nigerian inheritance investment or the chance to buy Florida swampland. Being non-gullible ultimately boils down to an ability to recognize hidden social (or in this case, economic) risks, but some risks are more hidden and, thus, trickier to recognize than others. Very few people possess the knowledge or inclination to perform an in-depth analysis of every investment opportunity they are considering. It is for this reason that we rely on others to help make such decisions, whether it be an adviser we consider competent or the fund managers who are supposed to oversee the investment.

I think it would be too easy to say that a skeptical person would and should have avoided investing in a Madoff fund. The big mistake here was in throwing all caution to the wind, as in the stories of many people (some quite elderly) who invested every last dollar with Madoff or one of his feeder funds. Such blind faith in one person, or investment scheme, has something of a religious quality to it, not unlike the continued faith that many of the “Drakers” continued to have in Oscar Hartzell even after the fraudulent nature of his scheme began to become very evident. So the skeptical course of action would have been not to avoid a Madoff investment entirely but to ensure that one maintained a sufficient safety net in the event (however low a probability it might have seemed) that Madoff turned out to be not the Messiah but Satan. As I avoided drinking a full glass of Madoff Kool-aid, maybe I’m not as lacking in wisdom as I thought.

Stephen Greenspan is a psychologist who is Clinical Professor of Psychiatry at the University of Colorado. His website is www.stephen-greenspan.com.

References
  1. Greenspan, S. 2009. Annals of Gullibility: Why We are Duped and How to Avoid it. Westport, CT: Praeger.
  2. Mackey, C. 1841. Extraordinary Popular Delusions and the Madness of Crowds. London: Richard Bentley.
  3. Zuckoff, M. 2005. Ponzi’s Scheme: The True Story of a Financial Legend. Random House: New York.
  4. Schiller, R. J. 2000. Irrational Exuberance. Princeton, NJ: Princeton University Press, p. 66.
  5. Zuckoff, M. 2006. “The Perfect Mark: How a Massachusetts Psychotherapist Fell for a Nigerian e-mail Scam.” New Yorker, p. 6.
  6. Spurling, H. 2000. La grande Therese: The Greatest Scandal of the Century. New York: HarperCollins.
  7. Nash, J. R. 1976. Hustlers and Con Men: An Anecdotal History of the Confidence Man and His Games. New York: M. Evans & Co.
  8. Rayner, R. 2002. “The Admiral and the Con Man.” New Yorker, April 22 & 29, pp. 150-161.
  9. Greenspan, S. 2009. “Foolish Action in Adults with Intellectual Disabilities: The Forgotten Problem of Risk-Unawareness.” In L. M. Glidden (Ed.), International Review of Research in Mental Retardation. Vol. 36 (pp. 147–194). NY: Elsevier.
  10. Urbina, I. 2008. “A Palm Beach enclave stunned by an inside job. The New York Times, December 15, pp. B1, B3.
  11. Shermer, M. 1997. Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time. New York: W.H. Freeman.
  12. Piattelli-Palmarini, M. 1994. Inevitable Illusions: How Mistakes of Reason Rule Our Minds. New York: Wiley.
  13. Stanovich, K. E. 1999. Who is Rational? Studies of Individual Differences in Reasoning. Mahwah, NJ: Erlbaum.
  14. Rotter, J. B. 1980. “Interpersonal Trust, Trustworthiness and Gullibility.” American Psychologist, 35, 1–7.
  15. Zitrin, P. S. 2008. E-mail communication. Boca Raton, FL, December 15.
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Sovereign Default predictions

Posted on April 14, 2014 by

Martin Weiss on why there will be a sovereign default someday:

Diversification across asset classes didn’t help in the 2008 crash. Stocks fell. Most bonds fell. Real estate fell. Commodities fell. And most currencies fell, with only risk-aversion trades working. all those obligations were simply transferred from PRIVATE balance sheets to PUBLIC ones. So now, instead of private institutions like Citigroup or Bank of America at risk of failure, entire SOVEREIGN COUNTRIES are tumbling towards bankruptcy! And this time, there’s no institution or government on the planet big enough to bail them out!

Now here’s the kicker: I believe Phase I was just a dress rehearsal — a prelude to an even deeper financial crisis! I say that because the private market credit crisis wasn’t allowed to play out fully. Governments the world over stepped in, backstopping, guaranteeing, propping up, and otherwise bailing out private institutions that should have collapsed.

The Pattern

  1. Government spends everything it has
  2. Government borrows all it can from its people
  3. Government borrows still more from foreign countries & banks
  4. Government debt so high panicky political leaders turn on their own people. They confiscate wealth

Matt Mushalik: Links Between Peak Oil and Financial Crisis; also Updated Graphs

Feb 1, 2009. A comment by WNC Observer on this post. theoildrum.com

My guess is that a US sovereign default is probably not in the cards anytime before 2015, and may not be avoidable anytime much past 2025 or so because:

1. I’ve long felt that 2012/13 was going to be a time period when something pretty serious happens. It is pretty obvious from the present megaproject data that by then, new capacity coming on line starts to fall significantly behind what is needed to replace depletion. Given present oil prices and economic conditions, it is also very likely that we are not going to be seeing a lot more megaprojects entering the pipeline in time to make much of a difference in this. SO, by around 2012, there should be a pretty substantial supply shortage, even if demand continues to be constrained.
2. Based on some of the Export Land Model (ELM) analyses it looks to me that 20 years out (2029) for zero US imports is  probably about the best case  (although the US might still be getting a trickle from Canada then). I’m more inclined to think that China and Japan will use their massive accumulation of US $ and treasuries to lock in long-term supply contracts, thus shutting the US out earlier rather than later.  As for the US using its military to acquire by force what it cannot acquire through legitimate commerce, that is likely to destroy as much or more supply than it will secure.

or

Having to make huge cuts or even eliminating altogether Social Security and Medicare obligations?

or

Having to eliminate almost all other federal government programs?

or

Having to raise federal income taxes or implement at VAT, raising the AVERAGE tax burden to 50% or more?

We are probably less than 4-8 years away – and maybe sooner – from having no choice but to face up to one of these fundamental, painful tradeoff decisions. Maybe we’ll have to accept all of the above in order to keep making payments on our national debt. Are we willing to do that? At what point does sovereign default start to look not quite so painful or unthinkable after all?

Of course, once The Powers That Be finally realize that we’ve only got a few more years of imports coming in any case, and once they’ve finally come clean with the general public about this, then a lot of the downsides of sovereign default start looking a lot less painful.

What you can do to protect yourself

There’s a lot on the web written about this — how to get foreign bank accounts, stash 1/10th gold coins here and abroad, Swiss annuities, foreign real estate, a foreign LLC for investments and/or business, establish your own international trust, or be the beneficiary of an international trust someone else established, and so on.

But this is the biggest crash in the history of mankind.  It’s silly to think you can use business-as-usual financial trickery.  How are you going to get to that foreign home once oil shortages strike and its rationed to agriculture and the military? It may appear to be a financial crash, but it’s actually a Malthusian die-off of 5 to 6.5 billion people, the worst calamity that has ever happened to homo sapiens.  The only way to survive an ecological crash is to have the necessary skills, friends, community, and above all, to live in the best areas of the country, and hope that climate change doesn’t drive us extinct.

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