Unexpected and Unsuspecting

The future confronts us with an impenetrable complexity.  And the future is now.  Hidden within this new reality is an unexpected menace that we can only barely imagine.

In the densely interconnected world of digital networks, instant communication, and global markets we find ourselves arriving in what appears to be a seductively attractive frontier, but which in fact masks entirely new dimensions of danger.

It is a new and unpredictable world, and it hides hazards of unimaginable magnitude.

Exponential population growth and digital connectivity, along with warfare, fragile commercial distribution systems, and the global transmission of deadly diseases, are all contributing to rapidly intensifying complexity.

However, it is the immensity and density of digital networks that is most difficult to comprehend.  And it is here where we are learning that complexity itself can behave in very strange and disturbing ways.

Complex systems are capable of spiraling out of control suddenly and inexplicably.

Living as we do in the instability of today’s world, I think it important that we understand this.

In his book, “Ubiquity”, science writer Mark Buchanan writes that a natural structure of instability is in fact woven into the fabric of the world.

He writes that complex structures and processes – in geology, in rush hour traffic, in financial markets, and in the many intricate networks of human society – have a natural tendency to organize themselves into what’s called a “critical state,” in which they are poised on what he describes as the “knife-edge of instability.”

A critical state occurs when a system is poised for sudden change.

Some mathematicians and scientists now believe that a pervasive instability is a fundamental feature in nature – and in the structures of human societies.

Any event, even a small one, can have an effect that seems far out of proportion to its cause. A single grain of sand, for example, will cause a sand pile to avalanche. But it is impossible for us to know which grain of sand, which individual maneuver in heavy traffic, or which specific circumstance in the financial markets will trigger inevitable catastrophe.

What is the difference between something that is complicated and something that is complex?

James Rickards, who I introduced to you in the previous post, answers this question in his book, “The Death of Money: The Coming Collapse of the International Monetary System”.

Rickards explains: “Many analysts use the words ‘complex’ and ‘complicated’ interchangeably, but that is inexact. A complicated mechanism, like the clockworks on St. Mark’s Square in Venice, may have many moving parts, but it can be assembled and disassembled in straightforward ways.

“The parts do not adapt to one another, and the clock cannot suddenly turn into a sparrow and fly away. In contrast, complex systems sometimes do morph and fly away, or slide down mountains, or ruin nations….

“Complex systems include moving parts, called autonomous agents, but they do more than move. The agents are diverse, connected, interactive, and adaptive. Their diversity and connectivity can be modeled to a limited extent, but interaction and adaptation quickly branch into a seeming infinity of outcomes that can be modeled in theory but not in practice.

“To put it another way, one can know that bad things might happen yet never know exactly why.”

James Rickards goes on to expound on the instability of today’s financial markets and global economy.  He writes: “Bankers’ parasitic behavior, the result of a cultural phase transition, is entirely characteristic of a society nearing collapse.

“Wealth is no longer created; it is taken from others. Parasitic behavior is not confined to bankers; it also infects high government officials, corporate executives, and the elite societal stratum.”

Today the financial markets and monetary system are again poised “on the knife’s edge of criticality.”

My message here is the importance of preparing for severe unforeseen shocks.  It is essential that we not panic when confronted with the unexpected.  We must remain steady on our feet when others are ready to stampede.

Only with a commitment to justice – and the self-discipline for ethical behavior and moral responsibility – will we hold our communities together and begin to rebuild.

Yes, the road to freedom requires courage, but getting there depends on responsibility.

Tom

Please look for the next post on or about October 20: Why the Bankers Are Trapped.

New readers can find a project description, a draft introduction to the forthcoming book, and several chapter drafts on this page.

When Money Dies

Americans experienced a major financial crisis in 2007-8.  Some would argue that it began far earlier, and clearly it is ongoing today.  We may be more aware of this crisis than others because it confronts us daily.  In preparing for what is to come, we would do well to listen to those who saw it coming and who continue to warn of its’ inevitable consequences.

Beyond all the foolishness and greed running rampant in the financial world, one great threat hangs over our future more than any other: The greatest expansion of debt the world has ever seen.  This is in large part due to non-stop deficit spending by governments.  Corporate borrowing has recently exploded similarly.

However, we need to understand that this has been made possible by a credit-based monetary system.  Easy access to credit, which is money created out of thin air, has led to the belief that credit is wealth.  This fantasy has infected society from top to bottom.

When a credit-based monetary system functions the way central bankers wish, the money supply should expand only slightly faster than economic growth.  Enough additional money must be created to cover the growing cost of servicing the expanding debt.

But, since 2008 the central bank (which we call the Federal Reserve) has expanded the monetary base almost four-fold while the economy has grown very little.

They call this “money”, but it is mostly debt.

The arrangement is extremely profitable for banks and the wealthy elite.  It allows for all kinds of mischievousness.  And, it depends on inflation, which is a long-term problem for the rest of us.  If it sounds to you like a Ponzi scheme, you are not alone.

In managing the money supply to avoid the growing threat of another banking crisis, the Federal Reserve has facilitated repetitive cycles of booms and busts, each more severe than the last.  This has perpetuated major social and economic distortions and dislocations.  It has stifled any possibility of restoring normalcy to the lives of ordinary Americans.

The economy has not been permitted to return to a normal and balanced condition.  Nothing has been fixed.  Extremely low interest rates have encouraged rapid growth of corporate and government debt, so the situation has been steadily worsening.

At such extreme levels, there are only two paths forward: default or devaluation.

Debt must default and be liquidated before economic productivity can recover.  But, the immediate pain of bankruptcy is too great for the bankers and policy-makers to bear. Consequently, they are struggling to gradually devalue the currency in relation to the cost of goods and services.

The government hopes desperately to meet the nominal cost of Social Security, Medicare, and other long-term budgetary obligations without defaulting.  This means the value of the dollar must fall significantly.

By altering the method of measuring price inflation, rising prices have been masked and social security payments held to a minimum.  Only those who live in the real world know the truth.

The devaluation of currencies is taking place around the world as budget deficits grow. Central banks attempt to minimize the interest costs of huge debt loads, while at the same time trying to avoid the failure of banking institutions that depend on interest rates.

Monetary economist and former banker, James Rickards, has written that “financial crises have supplanted kinetic warfare at the center of complex system dynamics. Financial crises in 1998 and 2008… are warnings – tremors ahead of a misfortune beyond imagining.” (“The Road to Ruin”, 2016, p.204)

The consequences of all this are profound and unpredictable.  We face a deepening crisis that will exaggerate all others, severely limiting the capacity of businesses to grow and create jobs, undermining our standard of living, and making it impossible to address pressing needs without worsening monetary instability.

The dependability of a productive, self-sustaining economy has been sacrificed to the tyranny of selfish interests.

Strangely, however, the wealthy elite have behaved like parasites that destroy their host.  They have wrecked the healthy economy upon which their profits depend.  And they have exposed themselves, as well as the rest of us, to the evaporating value of credit-based money.

Tom

Please look for the next post on or about October 6.  We will take a look at the problem of complexity, and the realities of financial markets and other systems that have vastly exceeded the human capacity to fully understand or control.

In This Time of Danger

I have addressed my concerns to Americans for two primary reasons.  I believe we have entered a period of severe, successive and interacting crises that promises to be deep, grinding, and long-lasting.  And, I am concerned that the bitter divisiveness and disunity current among us will limit our ability to respond effectively to the danger we face.

Many of you know that the present disorder has been gradually escalating for decades. We now find ourselves with a pervasive loss of respect for civility and moral responsibility, (both public and private), a frightening loss of social coherence and stability, and a broad deterioration of economic well-being for ordinary Americans.

We now stand at an extraordinary turning point.  Do we want the United States to be preserved as a constitutional republic?  Are we personally prepared to rise above our differences to make this possible?

There are pragmatic solutions to these questions, but they will be extremely difficult.  I have never said it would be easy.  I have said I do not think we have a choice.

With closed minds and hardened attitudes our circumstances are becoming increasingly extreme.

We face a formidable array of complex crises.  The challenges are diverse, profound, and mutually reinforcing.  Some will impose themselves suddenly, others gradually, but all will ultimately converge as they impact upon our lives.

What is most extraordinary is the number and variety of crises that are emerging into view at the same time: social and economic, moral and material.

An abbreviated review is offered here to demonstrate this diversity.

1) Increasing social instability characterized by a dramatic loss of civility and unrestrained anti-social behaviors that include accelerating incidences of brutality and mass murder.

2) A banking and monetary system that favors the financial elite rather than the American people, and which has become dominated by self-serving individuals who appear incapable of recognizing that their risk-taking behavior threatens the well-being of everyone, including themselves.

3) Massive government, corporate, and private indebtedness, which constricts the economy and threatens to precipitate a significant devaluation of the US dollar.

4) Old and deteriorating infrastructure, which we depend on every day: bridges, municipal water and sewage systems, and the electrical grid.  These cannot be upgraded or replaced by national, state, and municipal governments that are hobbled by indebtedness and shrinking revenues.

5) An exponentially increasing global population.  With this comes rapidly increasing risk of war and global epidemics, as well as food shortages caused by falling water tables and the ongoing loss of arable farmland.

6) The rapid development of advanced technologies without a commensurate advancement of ethical maturity or a commitment to moral responsibility.

7) Degradation of the natural environmental systems that provide us with clean air and water, the consequence of population pressures and the long-term aggregate build-up of toxic substances derived from motor vehicles, household products, and industrial pollution.

8) Last, but not least, the loss of ethical integrity and moral responsibility on a massive societal scale.  This deterioration is overwhelming the values and norms upon which social stability depends.  It is a crisis weakens our ability to respond to all other crises.

During the past 100 years we have seen the emergence of integrated global systems that include transport, communication, and surveillance technologies, and an interactive global monetary system.  No crisis can take place anywhere without disrupting the whole interrelated system.

However dark the immediate future, we will always be presented with opportunities.  The most important opportunity for us lies in a disruption so broad and profound that it alters our perspective and challenges our assumptions.

We will find ourselves thinking differently to survive: How well do we actually know our neighbors? What are our priorities?  How important to our future is the idea and vision of America?

Local problem-solving will once again become paramount.  Safety and food security will depend on a diversity of local knowledge, skills and experience – regardless of our politics or religion or the color of our skin.

Discovering safety and strength in diversity will change us.

If we can build dependable communities we can also begin to talk – to identify shared needs and shared values, and to re-imagine a shared vision of the future that we can respect and believe in.

Tom

Please look for the next post on or about 8 September:  “A Confluence of Crises”

Common sense…

Farm 4-x

“Common sense is genius dressed in its working clothes.”

–Ralph Waldo Emerson

The Deeper Crisis

We live in extraordinary times. Having entered a period of successive and interacting crises, we are challenged to pull together as a people, to clarify our purposes for safeguarding the integrity of our nation as a democratic republic, and to determine effective means for doing so.

I have commented here that we face a range of diverse crises, all emerging into view at virtually the same time. We have reviewed a number of them very briefly on this blog, and several at greater depth.

Some, like the continuing financial crisis, have impending implications. Others, like the unrecognized instability of complexity in today’s digitized world, remain hidden, but may well provide the trigger that sends things into freefall.

(See blog posts: February 6, “Why the Bankers are Trapped”; February 13, “Insolvency and Devaluation”; February 20, “A New Kind of Crisis”; and March 13, “The Hidden Dangers of Complexity.”)

I have placed emphasis on the coming financial storm because it hangs over us now, waiting for a trigger.

The too-big-to-fail banks are now bigger than they were before they helped bring down the economy in 2008. The federal debt has risen by 83% since that time. We see an increase of low-paying service sector jobs while our economy continues to lose higher-paying jobs.

The stock market has shot upward with no foundation in economic reality, and has now reached irrational valuations not seen since just before the 1929 panic and the dotcom crash of 2000.

The Bank for International Settlements (BIS), which is the central banker to the world’s central banks, announced recently that central bankers will be out of options when the next crisis hits.

Essentially confirming my points in the February blog posts referenced above, the BIS suggests that the major central banks have mismanaged the situation to a large extent because they don’t understand it. Previously “unthinkable risks,” they said, are coming to be “perceived as the new normal.”

The International Monetary Fund (IMF) also released a report recently, stating that “key fault lines” are growing across the US financial landscape, and that “new pockets of vulnerabilities have emerged.” The largest and most interconnected banks, the IMF concludes, “dominate the system even more than before.”

As imposing as this unfolding drama appears, in my view there is a more fundamental crisis. And, it is clearly visible behind all the others.

I have written here, (as recently as June 26), of the stunning loss of personal integrity – honesty, trustworthiness, responsibility – we have witnessed in recent years. A profound collapse of moral standards has taken place on a broad, societal scale.

This is the deeper crisis, and it may ultimately be responsible for the general deterioration that is dragging civilization to its knees. I say this because trust and responsibility are the basis for the sound functioning of human affairs, and lack of them has led to crippling disorientation and disorder.

Why has this happened to such a broad extent? Certainly we have lost the ethical and intellectual foundations that have contributed to stability in the past. But, why? We are intelligent people. What happened to good judgment? Where is common sense?

Have we walked away from responsibility believing that honesty and fairness limit our freedom? Has the daily bludgeoning of mass media warped our minds and stunted our capacity to think for ourselves?

Whatever the reasons, we are now reaping the whirlwind. For a world where many young people have grown up with little effective parenting, and many of their elders have lost any meaningful grounding in values or virtues, there will be no guidance available in the chaotic upheavals that lie ahead.

Analyzing and explaining the prospective dangers we face is beyond the scope of this blog and book. Rather, I seek to gather Americans around a constructive response that is rooted in our local communities, irrespective of unpredictable events.

Tests that require us to pull ourselves together and rise to our full potential might actually be the only antidote to the toxic cocktail of partisan negativity that is poisoning the American soul.

Stability requires and integrity demands a rational and compassionate response to the downward spiral of social and economic deterioration.

Tom

Next week: Responsibility, personal and practical

A Future We Can Respect

In preparing ourselves for the future I have proposed two priorities for your consideration. The first, as you know, is to get ourselves onto the same page. This means rising above our differences to identify some degree of shared values and to unite around a common vision.

The second priority, which depends upon the first, will be to think strategically – together as a nation – to envision and build a future we can believe in. This will require that we adjust our thinking both to the broader realities of structural change and to the immediate challenges confronting us locally.

It will also require setting aside partisan politics to get on with practical solutions to local problems. And so it is that reaching general agreement on shared vision and purpose will be necessary if we are to move forward.

I believe we face a long, grinding crisis. If we are to organize our local communities to secure the safety of our families and neighbors, we have no choice but to rise above our differences and to find common ground on which to live and work.

In Part 3 of the book, I will offer practical tools that you may find useful if you choose to undertake this difficult task. We will consider the processes by which we can consult with one another effectively, deal with differences, make decisions, and address local needs.

However, as most of you know, the purpose of this project involves more than a concern with survival. I have asked that we approach the future constructively, building on the foundation of trustworthy relationships, safe communities and well-organized networks of communities.

In the coming weeks I will focus on the second of the priorities mentioned above, the task of envisioning the future and rebuilding the foundations of the American republic.

Planning for the future when we are fighting for survival might not seem realistic. To secure the necessities of life it will be difficult to think about anything other than the immediate needs at hand. But, in truth, surviving with dignity will require that we learn to live with one another. And safety will require that we can depend on one another.

So, let’s be clear: The way we manage relationships and resolve problems will be the first stage in our process of preparing for the future. A right attitude for dealing with an immediate crisis will probably be the right attitude for working with one another in addressing the future.

We would do well to recognize that our first priority will be to manage ourselves.

There are some questions we can only ask of ourselves. How can we act in a way that will lead to the desired results? What approach will best facilitate community-building among diverse and sometimes anxious or frightened neighbors? What personal strengths can we develop in ourselves to inspire trust and a positive response from others?

Beyond the personal challenges of mastering the self, there are a number of concerns for the future that beg attention.

For many the first that leaps to mind is learning to accept fiscal responsibility, to manage money and resources responsibly. This problem has led the way into the current debacle at every level of society.

Another is the problem of “bigness”, and the heavy cost Americans are paying for this. I think many things have grown far too big, from government and banks to big business and big-box stores. As I wrote in response to a reader comment on Facebook last week, the American character needs both government and business to function on a human scale.

Perhaps the most difficult and thorny questions relate to the rapid deterioration of the quality of life for middle class and poorer Americans. If we approve of the policies of Ronald Reagan and Bill Clinton that ended or greatly restricted social programs, as I expect many of you do, then we need to think constructively about the painful consequences that now confront us – and craft solutions that work.

A renewed America will require new and creative ideas. In the coming weeks, we will consider some of the strategic questions we will face in reconstructing the future.

Tom

Next week: A Pattern of Change

Dear readers, your thoughts and feedback will be very helpful; please join the conversation.

On Our Own

Many of us feel ensnared in the midst of social disintegration and a slowly suffocating economy, a predicament threatening to slide toward disorder. A distressing sense of foreboding can sometimes weigh on the soul. These feelings are not unreasonable, but let’s try to take in the whole picture.

I submit that we are actually experiencing the pain of renewal and rebirth brought about by profound change. A dysfunctional past must collapse before a revitalized nation can turn the corner to reach a principled and productive future.

I do not mean to minimize the severity of the present circumstances, which may become more painful than we can even now imagine. The crisis will be long and hard for the very reason that it is enforcing adjustment to monumental structural change.

While our lives may become increasingly uncomfortable for a time, however, it is apparent that we are at a turning point. A window of opportunity is presenting itself that may not come again, when it will be possible to reaffirm the vision and principles that have made this nation a beacon of hope to the world for 200 years.

The America we love can only regain its balance, recover its integrity and make itself whole, if Americans seize the day.

I have shared with you some of the reasons why I believe we are in trouble. And I have stated my conviction that we must look forward to the future beyond the crisis.

Most readers are aware that I have generally avoided addressing partisan issues for a reason. Certainly I have personal views and opinions. My intention, however, is to call Americans to join with one another despite our great differences, to seek a shared vision and effective means in our determination to rebuild the foundations of the republic.  And, I wish to gain a hearing from every American.

Our responsibility is to ensure that we come through this great turning point with meaningful purpose, committed to building the kind of future we wish to live in. Without a determined effort, based to a sufficient a degree on shared values and unified intent, a secure and civilized future will not be possible.

Looking ahead, we cannot know exactly how things will play out. How long will these fragile conditions continue before an unexpected shock knocks down the house of cards?

We cannot know the extent to which we will be forced to struggle with the remnants of the economic past – or the more frightening but freeing potential of a complete economic collapse. We cannot foresee how social deterioration or the degradation of infrastructure and environmental systems will challenge our resourcefulness.

Whatever comes our way, we are on our own. We can no longer have confidence in government to maintain order or meet emergency needs. Only the strength of local community can be depended on.

The foundations of an America we can believe in will not be reconstructed without individual initiative, community consultation, and unified intent. We must organize our local communities and attend to local needs. This is where we have the power and capacity to take matters into our own hands. And we need to get on with it.

Effecting change on a national level will be far more difficult and the means for doing so far more complex and political. The financial elite will remain in control until they lose control. As long as financial collapse is avoided the global economy will remain trapped by financial interests that have attention only for their own short-term gain and are oblivious to the implications of structural change.

However frightening the disruptions of the near future, we would do well to recognize the unique opportunity that can only come when basic human assumptions are shaken. As I have said, the moment to gather people together, to engage in creative thinking and constructive action, to identify shared values and embrace a shared vision – may not come twice.

Building community with our neighbors will provide safety and security for our families, but also a platform for dialog and problem-solving that will carry us forward.

Tom

Next week: Taking Ownership of the Future

Freedom Road: Vision, Principle, Responsibility

As we turn attention to the future beyond the crisis, we find ourselves confronted with difficult choices. One of the most challenging questions involves the meaning and implications of “perfect freedom” as articulated by Patrick Henry, Friedrich Hayek, Milton Friedman, and others.

Americans have held fiercely to the ideal of “perfect freedom” from the beginning. As Patrick Henry famously said, “Perfect freedom is as necessary to the health and vigor of commerce as it is to the health and vigor of citizenship.”

Those following this blog have, I expect, given thought to the limits to freedom we experience in our personal lives. We live in a reality defined by limitation and constraint, and similar complications confront the nation.

If we are committed to ‘perfect freedom’ in principle, how can we fault business leaders for maximizing profits by moving jobs overseas or mechanizing assembly lines or in using any other means absent of fraud?

What else can we expect? And, how can any alternative possibly be legislated with fairness or practical effect?

In his classic 1962 book, “Capitalism and Freedom,” Milton Friedman wrote that “few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is? Can they decide how great a burden they are justified in placing on themselves or their stockholders to serve that social interest?”

The pure simplicity of this principle seems as reasonable today as it did in an earlier era. To require that businesses divide their loyalties would not only constrain the productive economy, but open a plethora of ethical inconsistencies and confusion.

Yet, today we find ourselves facing the overwhelming consequences of structural economic change brought about, in effect, by free enterprise. The jobs we had are gone for good. Incomes have stagnated – at best. The American economy has lost much of its productive capacity. Perhaps most significantly, many of us have lost our means for living with self-respect.

And, as we have seen, the functional integrity of free markets has been abandoned to the self-centered interests of predatory institutions. Money and economic power now flow in the virtual reality of electronic networks, largely independent of the productive economy. The new network economy is global, while jobs and people, community and responsibility, remain locally constrained in the real world.

Let’s be honest with ourselves. A consistent commitment to free enterprise will require that we adjust to a profoundly re-ordered world. We must rethink our economic lives, and our attitudes.

Making an income influences our sense of self-respect and well-being. Unemployment and poverty are not simply insufficiencies of income. They have a debilitating impact on individual freedom, initiative, and capacity.

Poverty is more than a regrettable misfortune. It is a blight on liberty. And, it inflicts a serious drag on the productive economy.

Local communities can choose to overcome this costly barrier. Individuals with practical experience can share knowledge and skills, assisting others to step out of our old lives to learn new skills, both physical and organizational.

Each of us can look around, think creatively, and take initiative. We need to empower one another, cooperate where there are needs to be met, and build local businesses that address local needs. We can network with people in nearby communities to share ideas and resources, to find (or offer) informal training, and to expand our horizons.

Let’s reach out and test our limits. The road to freedom is built with vision, principle, and responsibility.

Locally and regionally-based economies will need to be reconstructed, transcending the chaos around us and surmounting the stumbling blocks thrown up by government and big business.

Americans are smart, industrious, and resourceful. We can rise to the challenge and free one another from the shackles of limited perspective and inadequate skills.

This is a choice that is ours to make.

Tom

Next week: When we are on our own.

Honesty

Coast 2-x

“Honesty is the first chapter in the book of wisdom.”

–Thomas Jefferson

“I am afraid we must make the world honest before we can honestly say to our children that honesty is the best policy.”

–George Bernard Shaw

Escape From Insanity

The word “economy” comes from an ancient Greek word meaning “household management.” So much that is important in our lives, from the means to make a living to civil order and social stability, depends on a well-functioning economy.

American communities need systems and institutions that are geared to serve the best interests of society. While our ‘best interests’ are a matter of debate, we depend on honesty and integrity from those in positions of responsibility.

It comes down to trust. And trust is of limited concern in the digital networks that facilitate the flow of money and power in global finance.

Americans cannot raise families or plan for the future without a consistent and dependable environment, whether physical, social, or economic. We cannot participate fully in civil society without confidence that it is safe to do so. Businesses cannot expand and take on risks without confidence in the consistency of law and policy, as well as the free-flowing accuracy of prices provided by the marketplace.

In short, we need our economy to be managed in the interests of the American people as a whole, rather than for certain elite groups. And, we need to trust the managers.

However, the difficulties we face involve more than a problem of simple personal trust. Leadership must acknowledge the uncomfortable fact that it is not possible to control everything, even with the best of intentions. Indeed, the present perplexity leaves little possibility for constructive change without new thinking.

John Taylor’s five keys to restoring America’s prosperity,” (outlined here in the March 20 blog post, “In Pursuit of Economic Stability”), provide reasoned guidelines for policy-making grounded in “a rules-based approach.” His 2012 book, “First Principles”, argues persuasively that the arbitrary application of discretionary policies has led to inevitable imbalances and distortions that feed upon themselves.

Three years later, however, it is difficult to see how the economy can escape the control of people who cannot admit their errors or bear to face the pain of changing course.

The “five keys” will not extricate us from the present mess as long as we remain trapped in the mentality of the past. They will not protect us from the current anarchy of global finance or the massive distortions that now prevail. Short of another major financial crisis, I do not see this changing.

Central bankers will either abandon the illusion of control and the hubris of the past, or it will be wrenched from their hands by a reality reasserting itself. Leaders of government will either awake to the truth or they will find themselves helpless before a calamity of unprecedented proportions.

We must let go of the economy and set it free. The transition will be painful and frightening, because great destabilized forces must re-balance themselves. The extraordinary excesses of recent decades will be wrung from a shuddering world. An instability reaped by ego, greed, and indebtedness has infected both the mind and spirit of the nation.

What does this mean for ordinary Americans?

We will not be saved by self-styled leaders who think they know it all. We’ve been there and done that. Rather, we must rise above our differences and commit ourselves to one another in our local communities – and to a principled integrity.

And, when the ground moves beneath our feet we must trust in the Constitution of the United States.

Ultimately, it will be our compassion and our principles that guide us home.

The most important principles – those that provide the foundations for the future – will also be those that facilitate local problem-solving. As you well know, these are based on the values of true civilization: honesty, trustworthiness, ethical integrity, and moral responsibility.

Healing will take time. But rest assured: the economy will reboot. When we adhere to principle, the economy will reconfigure itself and our lives will be renewed and strengthened.

Our responsibility is to facilitate reconstruction with determination and grace, accepting our diversity and seeking a shared purpose that will guide us back to safety – and sanity.

Tom

Next week: Freedom, Principle and Context

Note to readers: Your ideas and feedback are helpful to me; please join the conversation.

Common Sense

Leaves 2

“We cannot solve our problems with the same thinking we used when we created them.”
–Albert Einstein

“Democracy is finding proximate solutions to insoluble problems.”
–Reinhold Niebuhr

“Society is always taken by surprise at any new example of common sense.”
–Ralph Waldo Emerson

The Wisdom of Free Markets

In recent years we have witnessed the ultimate consequences of failure to protect the orderly efficiency of free markets. Instead, we have seen the marketplace subverted and overwhelmed by the forces of greed and self-interest.

Regulation of markets is essential, no less than the enforcement of traffic laws on our roads and highways. But, the primary purpose of regulation in a complex economy must be to protect the integrity of free markets from manipulation.

Never has this necessity been more apparent than in the recent damage caused by major financial institutions.

It appears to many of us that the self-serving excesses of powerful financial interests have been aided and abetted by the very agencies and institutions that should be responsible for the integrity of the marketplace.

There are some who suppose that recent economic problems were actually caused by free markets. This could not be further from the truth. Indeed, the destruction of free markets in the United States in recent years has been nearly complete. A crippled national economy is an inevitable consequence of this damage.

Free markets are essential for very practical reasons. While the concept has significant philosophical implications, the economic reality is simple and entirely non-political.

To maintain a productive economy, markets must have the capacity to perform accurate price discovery across an immense complexity of activity. That is, markets must be permitted to respond without interference in determining prices and value based on the dynamic aggregate of economic activity in the real world.

When this function is upset, critical information becomes distorted and economic reality is misrepresented. Further, distortions take on a life of their own, projecting themselves broadly in ways that are insidious and often impossible to recognize.

Under present circumstances it is not possible for firms, especially small and medium-sized enterprises, to assess risk and make expansionary decisions. Confidence has evaporated.

This is significant in part because small and medium-sized enterprises (SMEs) have historically generated virtually all meaningful job growth. Large corporations have, with very few exceptions, been net destroyers of jobs.

There tend to be two primary motives for interfering with free markets. One is the good intentions of those in government and academia who think they know best. The other, which has emerged more recently, is the virtually unlimited cunning and greed of powerful banking and financial interests that now dominate the marketplace with their high-powered computers and manipulative genius.

Whether motivated by good intentions or by greed, the manipulation of markets will inevitably produce imbalances and, ultimately, the massive distortions and dislocations that we are now witnessing.

While it is true that markets can be afflicted by unintentional pathologies, these need to be studied and understood as such by stewards committed to protection rather than control.

Why are well-intentioned planners unable to influence markets effectively? As we discussed last week, the answer lies in the immense complexity of a dynamic economy. It is impossible for the human mind to fully comprehend the vast realm of interactive forces and their aggregate implications. There is simply no way.

The ultimate consequences of market interference can take time to manifest visibly, especially to those who are emotionally invested in doing it. But, as we have seen, the consequences can be quite spectacular.

Those who get hurt the most are those who are most vulnerable rather than those most responsible.

Let’s not to compromise the values of free enterprise in reaction to poor judgment and bad behavior. If we are to rethink our economic future intelligently, we must do so with a rules-based approach founded upon economic principles rather than one motivated by a discretionary human agenda.

And, make no mistake! Neither economic principles nor social stability will prevail without a firm foundation in the honesty, trustworthiness, and personal responsibility of real people. Economic reconstruction will not be possible until integrity is understood and confidence restored.

Those who fail to comprehend this truth need to wake up to the destruction around them – and get real. At this writing many in the financial world remain in denial.

Tom

Next week: Escape From Insanity