"Not Our Fault" - ECB Says "Fake Data" Is To Blame For The Coming "Manias And Panics"

In the days ahead of China"s Communist Party Congress last month, which culminated with the crowning of Xi Jinping as the modern equivalent of a quasi-emperor, China’s securities watchdog made it clear to local companies that bad news would not be tolerated, and "advised" loss-making companies to avoid publishing quarterly results as authorities were desperate to maintain stock-market stability. As a result, as we reported at the time, at least 17 Shenzhen-listed companies announced delays to their earnings reports from Oct. 20 to Oct. 24, up from three during the same period last year.

Moral of the story: if you are about to report bad news, especially news which can destabilize the stock market, it is "prudent" to delay...  or simply not report at all, or alternatively just make it up. And since we are talking about China, whose government has itself admitted it has repeatedly fabricated both trade and GDP data in the past, fabricating data has become a way of life.

There is just one problem: as ECB board member Benoit Coeure explained yesterday, “fake data” is as much of a threat to economic and financial stability as “fake news” is to politics.  Speaking in Paris, the central banker said there "was a growing prevalence of poor quality data which risks fuelling economic manias and panics."

It was unclear if by poor quality, and/or "fake" data, the ECB was merely referencing any data that suggested the "recovery" was off track - in the same way that any news that criticizes the US and global political establishment has become synonymous with "Russian propaganda", and "fake news" - or if the ECB was genuinely worried about fabricated data, of the type that has made a mockery of China"s GDP which has printed between 6.5% and 7.5% for the past 3 years with such determination, the number has become a joke (as Michael Pettis warned last week).

Quoted by Reuters, Coeure said that since skewed public perceptions can even alter the course of monetary policy, the ECB is increasingly relying on large scale analysis of news to gauge whether its message is correctly received.

But that carries what he described as a “monkey in the mirror” risk - a reference to a behavioral experiment in which it is unclear whether an animal recognizes itself in the mirror or thinks it is a different animal.

"Just as there are concerns about ‘fake news’ dominating social media, there is a risk of ‘fake’, or at least poor quality, statistics driving out better quality ones in public discourse,” Coeure said adding ominously that “actions by economic agents could become less anchored to actual activity and more prone to manias and panics, with obvious implications for economic and financial stability.”

Reading between the lines, Coeure is clearly preparing to blame "fake economic data" when the ECB next disappoints markets, and bond yields - propped up by the ECB"s CSPP program - finally crash.

In other words, the next crash will be blamed not on central banks blowing the biggest bubble in history but... drumroll... "fake data"!

Of course, the crash when it comes, will hardly be a surprise: recovering from the biggest recession in decades, the ECB has relied on a plethora of unconventional and still not fully understood tools to kick start growth, boost employment and raise inflation. Much of it has been based on a signalling and propaganda, including the constant refrain that things are getting much better.

Well, if they are so much better, why not stop QE and hike rates?

As Reuters adds, central banks also talk more since they rely on tools poorly understood by the public, so they also increasingly employ sophisticated computer technology to study whether their message reaches the right destination. But such feedback could also be misleading.

But the scariest thing is what he said next:

“We may one day be tempted to draft our monetary policy statements and speeches in the light of how they will be comprehended and interpreted by artificial intelligence algorithms,” Coeure said, adding that the consequences of such a mechanism has yet to be understood.

In other words, with human traders swept away from the market, in the ongoing passive revolution which has increasingly left algos and robots to make most capital allocation decisions. central banks are admitting that soon their statements will be written if not in binary code, then certainly designed to fool as many algos as possible into BTFD, since unfortunately the "keep the markets propped up" mandate has emerged over the past decade as the only one central banks truly care about. In light of this admission, the only "fake news" to be concerned about, is that created by central banks including "there is a global, coordinated recovery." Well, yes, when you inject a record $2+ trillion annualized in liquidity in 2017 and when you monetize a third of global GDP since the Global Financial Crisis, you better have at least a short-term recovery to show for it...

Black Monday 2.0: The Next Machine-Driven Meltdown

Authord by Ben Levisohn via Barrons,

In the rise of computer-driven trading, some hear echoes of the stock market’s 1987 crash. Beware the feedback loop...

Black Monday. Although the event to which those two words refer occurred 30 years ago, they still carry the weight of that day—Oct. 19, 1987—when the Dow Jones Industrial Average shed nearly a quarter of its value in wave after wave of selling.

No one in living memory had seen anything like it, at least not in the U.S., and in the postmortems conducted to understand just how the Dow managed to drop 508 points in one day, experts found a culprit: so-called portfolio insurance, a quantitative tool designed to use futures contracts to protect against market losses. Instead, it created a poisonous feedback loop, as automated selling begat more of the same.

Since that day, markets have rallied and markets have tumbled, and still we marvel at the unintended consequences of what, in hindsight, was an obviously misguided strategy.

Yet in the ensuing years, market participants have come to rely increasingly on computers to run quantitative, rules-based systems known as algorithms to pick stocks, mitigate risk, place trades, bet on volatility, and much more - and they bear a resemblance to those blamed for Black Monday.

The proliferation of computer-driven investing has created an illusion that risk can be measured and managed. But several anomalous episodes in recent years involving sudden, severe, and seemingly inexplicable price swings suggest that the next market selloff could be exacerbated by the fact that machines are at the controls.

“The system is more fragile than people suspect,” says Michael Shaoul, CEO of Marketfield Asset Management.

THE RISE OF COMPUTER-DRIVEN, rules-based trading mirrors what has happened across nearly every facet of society. As computers have grown more powerful, they have been able to do what humans were already doing, only better and faster. That’s why Google has replaced encyclopedias in the search for information, why mobile banking is slowly replacing bank branches, and why—someday—our cars will be able to drive us to work. And it is also why Wall Street has embraced computers to help with everything from structuring portfolios and trading securities to making long-term investment decisions.

In the years since 1987, huge strides have been made in understanding what drives stock performance and how to apply it to portfolio construction. At first, researchers focused on “factors,” such as a stock’s volatility relative to the market—known as beta; whether a stock is large-cap or small—the size factor; and whether it is cheap or expensive—the value factor. More recently, the use of factors has proliferated to include many others, such as quality and momentum. (The latter involves buying the best-performing stocks and shunning the worst performers.)

Quantitative investors understood early on that betting on stocks based on their characteristics - and not the underlying business fundamentals of a particular company - was a good way to outperform the market. So good, in fact, that many fundamental, or “active,” money managers now use quantitative tools to help construct their portfolios and ensure that they don’t place unintended bets. Nomura Instinet quantitative strategist Joseph Mezrich says that 70% of an active manager’s performance can be explained by quantitative factors. “Factors drive a lot of the returns,” Mezrich says. “Over time, this has dawned on people.”

Has it ever. One result has been the rise of indexing and exchange-traded funds. The ability to buy an index fund based on the Standard & Poor’s 500 - effectively a bet that large companies will outperform small ones - made the need for traditional fundamental research and stock-picking unnecessary. Since then, indexes and ETFs have been created to reflect just about any factor imaginable - low volatility and momentum among them. Some funds even combine multiple factors in a quest for better performance.

As a result, an increasing amount of money is being devoted to rules-based investing. Quantitative strategies now account for $933 billion in hedge funds, according to HFR, up from $499 billion in 2007. And there’s some $3 trillion in index ETFs, which are, by definition, rules-based. The upshot: Trillions of dollars are now being invested by computers. “We’ve never seen so many investment decisions driven by quantitative systems,” says Morningstar analyst Tayfun Icten.

That’s quite a change from the 1980s. If you wanted to place a trade 30 years ago, you picked up the phone and called your broker; your broker called the firm’s trader; the trader would ring up a specialist, the person in charge of running trading in a given stock; and the trade would be executed. The process was slow, cumbersome, and inefficient. As computer technology advanced, machines gradually took most of these steps out of the hands of humans. Today, nearly every trade is handled by an algorithm of some sort; it is placed by a computer and executed by computers interacting with one another.

The entity handling trades isn’t the only thing that has changed in the past 30 years. Trading now occurs in penny intervals, not fractions such as eighths and 16ths. While that has made it cheaper for investors to buy and sell a stock, pennies made trading far less lucrative for market makers, who historically profited by playing the “spread” between the highest bid to buy and the lowest offer to sell. Consequently, market makers have been replaced by algorithms programmed to instantaneously recognize changes in liquidity, news flow, and other developments, and respond accordingly. At the same time, the proliferation of exchanges helped to lower trading costs but also created a fragmented market that can make shares hard to find during dislocations.

Most of the time, none of this matters. If you want to buy a stock, you boot up your computer, log in to your brokerage account, and place an order that gets filled almost immediately. The fee you pay is so low that it would have been unimaginable 30 years ago. The system has worked well for individual investors, and will continue to do so—as long as nothing goes wrong.

BUT MISTAKES HAPPEN.

In 1998, the “quants” at Long-Term Capital Management, led by Nobel Prize winners Myron Scholes and Robert Merton, nearly caused a massive market selloff when the hedge fund’s highly leveraged trades, based on quantitative models of expected market behavior, suddenly lost money after Russia unexpectedly defaulted on its debt. The damage was magnified by the borrowing that LTCM had used to supersize its bets. Only a bailout organized by the Federal Reserve prevented the broad market from plummeting.

In August 2007, a selloff occurred in quantitative funds that would become known as the “quant quake.” To this day, no one knows what sparked the selling, but once it began, computer models kicked in, causing further selling. Humans added to the mess as risk managers looking at losses dumped shares. Funds specializing in quantitative investment strategies reportedly suffered massive losses: The Renaissance Institutional Equities fund was thought to have lost nearly 9% early in that month, while Goldman Sachs ’ Global Alpha suffered a double-digit decline.

The impact on the market wasn’t huge - the S&P 500 dropped just 3.3% during the first two weeks of August - but the event demonstrated what happens when a trade sours and too many funds are forced by their models to sell at the same time. It was a wake-up call for quants, who have since created more-sophisticated systems to reduce the kind of crowding that led to the selloff.

More recently, problems have been caused by algorithms that are supposed to provide stock for investors to buy, or buy when investors sell, creating liquidity. On May 6, 2010, the S&P 500 dropped 7% in just 30 minutes, as bids and offers for stocks moved far away from where stocks had been trading, in some cases leaving bids down as low as a penny and offers as high as $100,000.

Again, no one knows what caused the sudden decline. Investors had been on edge because of an unfolding European debt crisis, but that alone seemed unlikely to have triggered the flight of automated market makers. The U.S. Commodity Futures Trading Commission blamed the swoon on fake orders placed by a futures trader, while the Securities and Exchange Commission fingered a massive sell order in the futures market allegedly placed by a mutual fund company seeking to protect itself from a potential downturn. That order, it argued, had been handled by a poorly designed algorithm—yet another reminder that an algorithm is only as good as the inputs used by the people designing it.

While the rout was over quickly, and the S&P 500 finished the session down a more modest 3.2%, the episode raised concerns about the potential for computerized trading to exacerbate selloffs.

REGULATORS AND EXCHANGES have made changes since then, but so-called flash crashes continue to happen, even if they are no longer quite as disruptive as the 1987 selloff. On Aug. 24, 2015, for instance, the Dow dropped almost 1,100 points during the first five minutes of trading. The selloff was spurred by a plunge in China’s stock market, which led to a drop in Europe. All of this happened when U.S. markets were closed, which meant that investors turned to the futures and options markets to place their trades.

Chaos prevailed when the stock market opened: Only about half of the stocks in the S&P 500 had started trading by 9:35 a.m.; a quarter of the Russell 3000 index was down 10% or more intraday, and many large ETFs traded far below the value of their underlying assets. Algorithms, sensing something amiss, simply stepped back from the market. Once again, the S&P 500 recovered much of its sudden loss, but savvy market observers detected eerie echoes of an earlier era. In a much-read note at the time, JPMorgan strategist Marko Kolanovic cited the feedback loop of selling and compared it to the Black Monday selloff of 1987.

Flash crashes have not been limited to stocks - or even crashes. On Oct. 15, 2014, the price of the 10-year Treasury note soared, causing yields to tumble 0.35 of a percentage point in mere minutes before quickly reversing. The SEC blamed the increasing role of automated high-frequency algorithms for the sudden move.

The most recent scare occurred on May 18, when the iShares MSCI Brazil Capped ETF (ticker: EWZ) dropped as much as 19% in a single trading session before closing the day down 16%. To put that move in perspective, the Brazil ETF’s worst single-day decline at the height of the financial crisis in 2008 had been 19%. While there was bad news in May—reports that Brazilian President Michel Temer had been ensnared in a corruption scandal—that seemed insufficient cause for such a precipitous decline.

Shaoul, of Marketfield, attributes the Brazil ETF’s plunge to a combination of factors, including the growth of passive investing, which has made it easy to buy and sell an entire country’s market with the press of a button, combined with computer-driven trading.

“There was no way of knowing what was a human being pressing a button, or a computer pressing a button,” he says. “But it generates the potential for sudden spikes in volatility that come out of nowhere.”

The Brazil ETF recovered its losses fairly quickly. By the end of August, it was trading above its May 17 close.

U.S. markets haven’t suffered declines like that, but have experienced numerous “fragility events”—sudden one-day declines—during the current rally, says Chintan Kotecha, an equity derivatives strategist at Bank of America Merrill Lynch. But because stocks have been in a bull market, there has been little follow-through after the initial selloff. As a result, some quantitative strategies reposition for more volatility, but none arrives. Kotecha attributes the lack of follow-through, in part, to central bankers’ continued bond-buying, which has provided much-needed support for the markets.

Follow-through was all the market had in 1987, as selling automatically triggered more selling. To some observers, the risks of a similar scenario are growing. One particular area of concern: volatility-targeting strategies, which try to hold a portfolio’s volatility constant, and risk-parity strategies, which attempt to equalize the risk in a portfolio among bonds, stocks, and other assets—and sometimes use leverage to do it. When volatility is low, these portfolios can hold more-risky assets than when volatility is high. But as soon as volatility rises—and stays high—these types of funds will need to start selling stocks and other assets to keep the risk of their portfolios at the same level. If they sell enough, volatility could spike higher, leading to even more selling.

“ The PROLIFERATION of COMPUTER-DRIVEN INVESTING has created an illusion that RISK can be measured and managed. But several anomalous episodes in recent years involving sudden, severe, and seemingly INEXPLICABLE PRICE SWINGS suggest the next MARKET SELLOFF could be exacerbated by the fact that the MACHINES are at the controls. ”

In a market selloff, commodity-trading advisors similarly could exit their long positions quickly and look to short stocks, creating further selling pressure as they head for the exits. “Action leads to more action,” says Richard Bookstaber, chief risk officer at the University of California and author of The End of Theory, a book about financial crises caused by positive feedback loops.

PERHAPS THE BIG QUESTION is who might be left to buy. Warren Buffett once quipped that investors should be fearful when others are greedy and greedy when others are fearful, but the current market structure has turned that maxim on its head. Algorithms provide less liquidity in a downturn than a human market maker, who might be thinking about how to profit from a dislocation.

The rise of momentum and passive strategies has caused some $2 trillion to shift away from active money managers, who could be counted on to look for bargains as stocks sold off, says Kolanovic, the JPMorgan strategist.

“We think the main attribute of the next crisis will be severe liquidity disruptions resulting from market developments since the last crisis,” he says.

But most strategists acknowledge that such an occurrence isn’t a high-probability event. Much will depend on the cause of any disruption, as well as seasonal factors—stocks are more thinly traded in summer, for example. Also, computers aren’t the only cause of selling cycles; bear markets, after all, long predate machine-driven trading.

Quantitative investors argue that they have learned from past mistakes and are less likely to be leveraged or crowded into the same trades.

Moreover, regulators and exchanges have instituted rules that could help arrest a bout of unchecked selling, with trading halts imposed when the S&P 500 falls 7%, 13%, and 20%.

Maybe these precautions will work to stem a tidal wave of selling. One of these days—possibly soon, given stocks’ lofty valuation and the Fed’s plan to shrink its balance sheet—we’ll find out.

Feudalism And The "Algorithmic Economy"

Authored by Thaddeus Howze via Medium.com,

For the sake of this essay, feudal economic models imply the idea that a very tiny segment of the society is fantastically rich while the bulk of society works hard, has few choices about the work they do, and tend to be poorly compensated for their efforts.

feu·dal·ism: noun, historical

the dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants (villeins or serfs) were obliged to live on their lord’s land and give him homage, labor, and a share of the produce, notionally in exchange for military protection.

Welcome to the Algorithmic Economy, a future which uses machines to determine how effective you can be and how little they can pay you in the process.

There are no unions in this economy. There are no bosses to complain to. There are no people you can ask for redress. Because in this economy, the people doing the labor are considered the least important part of the machine and it’s best if they never communicate with someone living if it can be helped.

This is just like something out of a dark and dystopian science fiction novel, except its likely happening to you, right now. If it isn’t, unless you are very fortunate, it will be, soon. I write about the near-future in my speculative fiction. Often these are my most unpopular stories because they paint technology in a less-than-ideal light.

In a world in desperate need of positive imagery, a number of famed science fiction writers such as David Brin are recommending writers look at creating more beneficial, beneficent and Utopia-oriented stories, where people see the future as something to look forward to rather than promoting the more popular (and definitely easier to write) dystopias.

I have heard David Brin and know this work does need to be done, but having the extensive background in computer technology that I do, I still feel compelled to point out just how powerful and how much effect technology can have on our society now and in the near-future.

In “Dark Harvest” I point out the future of human trafficking improving its capacity to provide “slaves to order” using social media habits to gather intelligence on users making it possible to predict their behaviors and habits. Such technologies which I see being furthered by companies like Facebook, Instagram, and now Match.com are making it even easier to find, isolate and extract people from their lives without warning and without recourse.

In “We Now Return You to Our Scheduled Advertising” I posit a world overrun by “push” information technology being used to ensure advertising cannot be stopped from being heard by potential customers.

In our current world, television advertising is diminishing due to the power of DVR technology. As a result, smartphones (because they are harder to secure) are becoming a means of forcing users to endure advertising they don’t want in order to get content.

Companies are also learning how to hack your smartphone to send you content you did not ask for, by forcing your browsers to accept cookies, they can target you with specific advertising based on your search requests. Stores can, with the right software installed, direct information to your phone in order to influence your shopping decisions.

How long before such technology becomes part of the shopping experience you cannot opt out of? Recently it became possible to push an ad to speakers at remote locations using software technology. While it was immediately repudiated, it did not stop someone from discovering it could be done.

With recent laws being created, it will be possible to extract your data from an ISP and create profiles allowing advertisers to send information directly to you, no matter where you are.

THIS WEEK, THE House of Representatives followed the Senate in voting for a resolution that throws out Obama-era regulations that would have banned your internet service provider from selling your web browsing history to advertisers. What possible reason could Congress have for repealing such a consumer-friendly policy? The refrain on the House floor yesterday was “consistency.”

“What America needs is one standard across the internet ecosystem,” said representative Greg Walden (R-OR). If services like Google and Facebook can turn data into profit, the logic goes why can’t the cable companies?

But the House’s resolution doesn’t actually apply a single, consistent standard to the internet. It maintains the broken status quo, one in which internet service providers aren’t actually at a disadvantage to websites and apps. If anything, they’re held to a lower standard. (Wired.com)

I have also written about the nature of technology in a non-fiction format discussing the future of employment, opportunities for work and the eventual need for some kind of subsidy to offset the lack of employment opportunities in the future in an essay called: “Humans Need Not Apply.”

*  *  *

In this essay, I posit something I call the “Algorithmic Economy” though it is often called the “Sharing Economy” or the “On-Demand Economy” by economists and other writers on this subject.

I prefer the “Algorithmic Economy” because it speaks to the creeping effects on decisions being made by companies and organizations, which not only include automation used in factories, but the development of apps and programs which use algorithms to direct, control and manage Human behavior.

As programmers using design-thinking engage computers to map, monitor and control Human endeavors, it is becoming more prevalent that computers are effectively in charge of Human behaviors utilizing a number of algorithms (programmed behaviors and decisions made by programmers to elicit a desired response from Humans or there programs) to enrich corporations using such technology such as Lyft, Uber, TaskRabbit and many other such “on-demand” driven businesses.

The continued existence and economic support of such companies has created companies whose values seem far greater than the benefits such corporations provide to their workers. The company is perceived to have a fantastic value which benefits investors, disrupts previous businesses or services, often unfavorably, and enriches only those at the very top of the workforce in those companies, usually executives and senior developers.

At Uber, for example, depending on the city, drivers who are, in essence the bulk of the workforce for the company can make as little as $9-$11 an hour as their only compensation for working with the company. While they are promised upwards of $30 per hour in advertising, such rates vary widely depending on the number of drivers, the time of day, the density of calls and the optimization of algorithms designed to reduce wait time for customers and to provide customers with reductions in costs per mile.

None of these reductions, however improve the amount of money made by drivers and passengers weren’t until recently even able to use the Uber app to leave tips for employees through the service because Uber decided they paid well enough that tipping wasn’t a requirement.

In fact, one of Uber’s more successful passenger programs, Uber-Pool, reduces the earning capacity of drivers by at least one third since, it cuts the cost of long trips to a third of their value under the expectation the driver will be able to make up those costs by moving multiple passengers, simultaneously.

A driver is expected to upon receipt of an Uber-Pool passenger expect at any time, their trip may be interrupted by a call to another passenger. They are expected to navigate to this new location, find the next passenger, assure the current passenger of no serious delay and get back on the road depositing the two (or three) of them in order to nearby destinations.

Unfortunately, this multi-passenger event rarely happens, in essence, reducing the cost of long trips to one third of their value since pooling occurs far less often than Uber is willing to admit. A $20 trip becomes a $7 trip of which become $5.25 after Uber gets its cut.

Adding insult to injury, Uber does not treat its drivers as employees, thus they are not compensated for the use of their vehicles, their repairs, wear and tear, their gasoline, their healthcare, or any other such requirements of normal companies for their employees.

Instead, the drivers must bear the entirety of the expense of their “economic opportunity” while turning over one-quarter of what they earn in every transaction.

If Uber were honest, they would reveal to most drivers, that under the majority of circumstances, drivers lose more money than they earn (due to the costs of incurred during their driving and vehicle operation), depending on how the algorithms are structured where someone is working. I suspect more than Uber is at fault here. I would suspect the entire workforce development of the future is heading toward this path.

More workers are doing part-time work, on-call work, unscheduled work, without significant healthcare, sick leave, or vacation pay than ever before. Corporations have grown to the point they are unable to cut any more costs during their operations and continue to pay out to investors and executives their incredible levels of profitability without cutting corners on the only remaining element of running a business: their workforce.

Rather than restructuring pay or expectations for investors, these business engines will continue to impoverish their workers, using gamification to extend their hours, while reducing their pay and opportunities for healthy lifestyles.

The New York Times reports:

The secretive ride-hailing giant Uber rarely discusses internal matters in public. But in March, facing crises on multiple fronts, top officials convened a call for reporters to insist that Uber was changing its culture and would no longer tolerate “brilliant jerks.”

Notably, the company also announced that it would fix its troubled relationship with drivers, who have complained for years about falling pay and arbitrary treatment.

“We’ve underinvested in the driver experience,” a senior official said. “We are now re-examining everything we do in order to rebuild that love.”

And yet even as Uber talks up its determination to treat drivers more humanely, it is engaged in an extraordinary behind-the-scenes experiment in behavioral science to manipulate them in the service of its corporate growth?—?an effort whose dimensions became evident in interviews with several dozen current and former Uber officials, drivers and social scientists, as well as a review of behavioral research.

Uber’s innovations reflect the changing ways companies are managing workers amid the rise of the freelance-based “gig economy.” Its drivers are officially independent business owners rather than traditional employees with set schedules. This allows Uber to minimize labor costs, but means it cannot compel drivers to show up at a specific place and time. And this lack of control can wreak havoc on a service whose goal is to seamlessly transport passengers whenever and wherever they want.

The Algorithmic Economy isn’t only going to stay in disruptive companies like the On-Demand workforce, it will make its way into other workforces, slowly, insidiously removing time, opportunities for growth, limiting costs by reducing perks except for the elite, in order to create the second age of feudal endeavor.

Their goal is to create a workforce bound by their economic debt to the system, forced to take whatever work they can find, while being paid as little for that work as possible, understanding ultimately, the creation of an indentured workforce is not only the result but an expected one, keeping society enfeebled and unable to create opportunities for further development.

Since all new creativity is held hostage in the hands of insensitive investors who promote the development of White business leaders to the exclusion of any other forms of creativity. Seventy five percent of all investment dollars are placed into the hands of White men. In the tech industry, most companies are run by, lead by, and pay the bulk of their company’s value to White men, the primary beneficiaries of such investment effort.

The Algorithmic Economy resembles feudalism complete with peasants who lack choices, and lords who decide who can become a lord, who remains a peasant, and defining the value of a peasant’s worth based on what the lord is willing to pay the peasant.

Like the feudal lords of old, neo-feudalism says they are willing to pay indebted students, just enough to not have any opportunity next year, either.

The older workers who might have known their worth will have to find a way to live off the land, creating their own slower growing opportunities because no one is funding anything which offers an opportunity for people to experience economic parity or the ability to own an operation which treats them humanely, pays them fairly, and doesn’t believe exploitation is an effective work and pay structure.

For most older workers, their opportunities lie with older exploitive corporations such as Walmart, known for its low pay and older workforce, or at the hands of the aforementioned Uber, who has, at least in the Bay Area, has a much older, and more minority workforce.

The driver diversity makeup is distinct from the much Whiter corporate office workers who draw the lion’s share of the money from the Algorithmic Economy they have helped to create and surely recognize how their algorithm exploits their workers.

If Uber’s programmers are smart enough to recognize how those numbers and gamification ensure their own prosperity, they are also aware that drivers earn less, stay with the company for less time and will eventually leave the company once they understand how they are being exploited.

Can such companies change their behaviors? It is unlikely given the expectations of double digit growth by investors and the stock market. Thus we can assume, such companies will continue to make money for the elite members of society while being a drain on every other aspect of our social fabric undermining individual wealth and earnings, employment opportunities, home ownership, and community development.

People without money can’t improve themselves or their communities. People who exploit those people don’t help with those communities either, creating a vacuum effect, taking money from communities without ever returning an equal or greater amount of money to those areas, ensuring the slow and inexorable decline of society over time.

Do a bit of research on the subject of the On-Demand economy. While prognostications promote the idea it is good for investors, almost no mention of the people doing the work and their eventual fates are ever mentioned. There is an amazing collection of essays on the On-Demand economy which point out the future of this industry and what it means to the modern workforce.

There will be arguments on both sides of the fence, pro and con, but my entreaty to you is simple: Read about it. Learn about it. Pay attention to the disruptive force it is having on your society because while you may believe it doesn’t affect you, you’re wrong.

Don’t take my word for it. Watch it and see for yourself. It is happening before you eyes. Don’t blink.

The workforce of the future will be smaller than you think.

Do The Roots Of Rising Inequality Go All The Way Back To The 1980s?

Authored by Charles Hugh-Smith via OfTwoMinds blog,

Unless we change the fundamental structure of the economy so that actually producing goods and services and hiring people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

I presented this chart of rising wealth inequality a number of times over the past year. Do you notice something peculiar about the inflection points in the 1980s?

Correspondent W.S. noted that the inflection point for the top .1% (late 1970s) preceded the inflection point of the bottom 90% (around 1986): both increased their share of household wealth from 1978 to 1986, and then the share of the top .1% took off, essentially tripling from 8% to over 22%, while the share of the bottom fell precipitously from 36% to 23%.

(Note that the data stops at 2012; if we extend the trends to the present, the lines have certainly crossed and the share of the .1% now exceeds that of the bottom 90%.)

So what happened between 1978 and 1986? The first phase of the financialization of the U.S. economy. What is financialization? In a financialized economy, speculating with highly leveraged debt and exotic financial instruments is far more profitable than producing goods and services.

Financialization hollows out the productive assets of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites" ownership of the government"s regulatory and legislative bodies.

Here is another less pungent description via Wikipedia: "Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics."

Here is my more formal definition:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

I describe the dynamics in What"s the Primary Cause of Wealth Inequality? Financialization (March 24, 2014)

Correspondent W.S. submitted commentary and references this 2005 book Financialization and the World Economy:

In the US "total credit market debt divided by GDP was about 1.5 from 1961 to 1981. It accelerated rapidly in the decade of the 1980s - from 1.6 in 1981 to 2.3 in 1989 - as the federal budget deficit soared, hostile takeovers and leveraged buyouts loaded corporations with debt, and household borrowing increased. Corporate and household borrowing raised indebtedness further in the 1990s; by 2001 the debt to GDP ratio was 2.8, almost double the ratio in the Golden Age. Moreover, average real interest rates have been much higher in the neoliberal era than they were in the three decades that preceeded it.

W.S. Also referenced FINANCIALIZATION OF THE ECONOMY and added this commentary:

While “bloated” conglomerates were linked by some to the sluggish performance of the American economy in the 1970s, for corporate raiders they presented a get rich quick opportunity via the “market for corporate control” (Manne 1965). Outsiders could buy the firm from its existing shareholders, fire its managers, and sell off the parts for a quick profit.

After the election of Ronald Reagan in 1980, this became possible on a grand scale due to relaxed antitrust guidelines, changes in state antitakeover laws, and financial innovations that enabled raiders to get relatively short-term financing on a large scale (Davis & Stout 1992). Within a decade, nearly one-third of the Fortune 500 largest industrial firms had been acquired or merged, often resulting in spinoffs of unrelated parts, and by 1990 American corporations were far less diversified than they had been a decade before (Davis et al 1994).

The other thing that happened in the mid-1980s was computer technology became cheap enough and powerful enough to start replacing human labor on a wider scale. Spreadsheets such as Excel became accessible to small business, and the desktop publishing combo of the Apple Macintosh and laserprinters revolutionized the cost structure of marketing.

The rise of the Internet (coupled with cheap memory and processing power) further fueled the productive expansion of digital technologies. As I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy, these tools-- which are now ubiquitous and inexpensive--enable one person today to equal the output of what once took four people to produce in the late 1980s.

In effect, labor entered an era of dynamic over-supply just as healthcare costs began to rise, making it more costly to hire workers. Some skills and trades remain scarce and thus well-paid, but as a generalization it became cheaper and more efficient to replace increasingly expensive human labor with increasingly inexpensive and powerful software and digital tools.

Unless we change the fundamental structure of the economy so that actually producing goods and services and maximizing opportunities for people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

Recent podcasts/video programs:

Deep State Fractures Under Populist Revolution (TruNews, 37:27)

A CIA Cyber False Flag

Authored by Federico Pieraccini via The Strategic Culture Foundation,

New revelations from Wikileaks’ "Vault 7" leak shed a disturbing light on the safeguarding of privacy. Something already known and largely suspected has now become documented by Wikileaks. It seems evident that the CIA is now a state within a state, an entity out of control that has even arrived at the point of creating its own hacking network in order to avoid the scrutiny of the NSA and other agencies.

Reading the revelations contained in the documents released by WikiLeaks and adding them to those already presented in recent years by Snowden, it now seems evident that the technological aspect regarding espionage is a specialty in which the CIA, as far as we know, excels. Hardware and software vendors that are complicit -- most of which are American, British or Israeli -- give the CIA the opportunity to achieve informational full-spectrum dominance, relegating privacy to extinction. Such a convergence of power, money and technology entails major conflicts of interest, as can be seen in the case of Amazon AWS (Amazon"s Cloud Service), cloud provider for the CIA, whose owner, Jeff Bezos, is also the owner of The Washington Post. It is a clear overlap of private interests that conflicts with the theoretical need to declare uncomfortable truths without the need to consider orders numbering in the millions of dollars from clients like the CIA.

While it is just one example, there are thousands more out there. The perverse interplay between media, spy agencies and politicians has compromised the very meaning of the much vaunted democracy of the land of the Stars and Stripes. The constant scandals that are beamed onto our screens now serve the sole purpose of advancing the deep interest of the Washington establishment. In geopolitical terms, it is now more than obvious that the deep state has committed all available means toward sabotaging any dialogue and détente between the United States and Russia. In terms of news, the Wikileaks revelations shed light on the methods used by US intelligence agencies like the CIA to place blame on the Kremlin, or networks associated with it, for the hacking that occurred during the American elections.

Perhaps this is too generous a depiction of matters, given that the general public has yet to see any evidence of the hacking of the DNC servers. In addition to this, we know that the origin of Podesta’s email revelations stem from the loss of a smartphone and the low data-security measures employed by the chairman of Hillary Clinton’s presidential campaign. In general, when the 16 US spy agencies blamed Russia for the hacking of the elections, they were never specific in terms of forensic evidence. Simply put, the media, spies and politicians created false accusations based on the fact that Moscow, together with RT and other media (not directly linked to the Kremlin), finally enjoy a major presence in the mainstream media. The biggest problem for the Washington establishment lies in the revelation of news that is counterproductive to the interests of the deep state. RT, Sputnik, this site and many others have diligently covered and reported to the general public every development concerning the Podesta revelations or the hacking of the DNC.

Now what is revealed through Wikileaks’ publications in Vault 7 is the ability of a subsection of the CIA, known as Umbrage, to use malware, viruses, trojans and other cyber tools for their own geopolitical purposes. The CIA’s Umbrage collects, analyzes and then employs software created variously from foreign security agencies, cyber mafia, private companies, and hackers in general. These revelations become particularly relevant when we consider the consequences of these actions. The main example can be seen in the hacking of the DNC. For now, what we know is that the hacking - if it ever occurred - is of Russian origin. This does not mean at all that the Kremlin directed it. It could actually be very much the opposite, its responsibility falling into the category of a cyber false-flag. One thing is for sure: all 16 US intelligence agencies are of the view that “the Russians did it”. That said, the methods used to hack vulnerabilities cannot be revealed, so as to limit the spread of easily reusable exploits on systems, such as the one that hosted the DNC server. It is a great excuse for avoiding the revelation of any evidence at all.

So, with little information available, independent citizens are left with very little information on which to reliably form an opinion on what happened. There is no evidence, and no evidence will be provided to the media. For politicians and so-called mainstream journalists, this is an acceptable state of affairs. What we are left with instead is blind faith in the 16 spy agencies. The problem for them is that what WikiLeaks revealed with Vault 7 exposes a scenario that looks more likely than not: a cyber false-flag carried out by the Central Intelligence Agency using engineered malware and viruses made in Russia and hypothetically linking them back to hacking networks in Russia. In all likelihood, it looks like the Democrats’ server was hacked by the CIA with the clear objective of leaving Russian fingerprints and obvious traces to be picked up by other US agencies.

In this way, it becomes easier to explain the unique views of all 16 spy agencies. Thus, it is far more likely that the CIA intentionally left fake Russian fingerprints all over the DNC server, thereby misleading other intelligence agencies in promoting the narrative that Russia hacked the DNC server. Of course the objective was to create a false narrative that could immediately be picked up by the media, creating even more hysteria surrounding any rapprochement with Russia.

Diversification of computer systems.

The revelations contained in the Wikileaks vault 7 (less than 1 % of the total data in Wikileaks’ possession has been released to date) have caused a stir, especially by exposing the astonishing complicity between hardware and software manufacturers, often intentionally creating backdoors in their products to allow access by the CIA and NSA. In today’s digital environment, all essential services rely on computer technology and connectivity. These revelations are yet more reason why countries targeted by Washington, like China, Russia, Iran and North Korea, should get rid of European and American products and invest in reducing technological dependence on American products in particular.

The People"s Republic has already started down this track, with the replacement of many network devices with local vendors like Huawei in order to avoid the type of interference revealed by Snowden. Russia has been doing the same in terms of software, even laying the groundwork to launch of its own operating system, abandoning American and European systems. In North Korea, this idea was already put into practice years ago and is an excellent tool for deterrence for external interference. In more than one computer security conference, US experts have praised the capabilities of the DPRK to isolate its Internet network from the rest of the world, allowing them to have strong safety mechanisms. Often, the only access route to the DPRK systems are through the People"s Republic of China, not the easiest way for the CIA or NSA to infiltrate a protected computer network.

An important aspect of the world in which we live today involves information security, something all nations have to deal with. At the moment, we still live in a world in which the realization of the danger and effect of hacking attacks are not apparent to many. On the other hand, militarily speaking, the diversification and rationalization of critical equipment in terms of networks and operability (smartphones, laptops, etc) has already produced strong growth in non-American and European manufacturers, with the aim of making their systems more secure.

This strengthening of technology also produces deleterious consequences, such as the need for intelligence agencies to be able to prevent the spread of data encryption so as to always enjoy access to any desired information. The birth of the Tor protocol, the deployment of Bitcoin, and apps that are more and more encrypted (although the WikiLeaks documents have shown that the collection of information takes place on the device before the information is encrypted) are all responses to an exponential increase in the invasion of privacy by federal or American government entities.

We live in a world that has an enormous dependence on the Internet and computer technology. The CIA over the years has focused on the ability to make sure vulnerable systems are exploited as well as seeking out major security flaws in consumer products without disclosing this to vendors, thereby taking advantage of these security gaps and leaving all consumers with a potential lack of security. Slowly, thanks to the work and courage of people like Snowden and Assange, the world is beginning to understand how important it is to keep personal data under control and prevent access to it by third parties, especially if they are state actors. In the case of national security, the issue is expanded exponentially by the need to protect key and vital infrastructure, considering how many critical services operate via the Internet and rely on computing devices.

The wars of the future will have a strong technological basis, and it is no coincidence that many armed forces, primarily the Russian and Chinese, have opted in recent years to training troops, and conducting operations, not completely relying on connectivity. No one can deny that in the event of a large-scale conflict, connectivity is far from guaranteed. One of the major goals of competing nations is to penetrate the military security systems of rival nations and be able to disarm the internal networks that operates major systems of defense and attack.

The Wikileaks revelations are yet another confirmation of how important it is to break the technological unipolar moment, if it may be dubbed this way, especially for nations targeted by the United States. Currently Washington dictates the technological capacities of the private and government sectors of Europe and America, steering their development, timing and methods to suit its own interests. It represents a clear disadvantage that the PRC and its allies will inevitably have to redress in the near future in order to achieve full security for its vital infrastructure.

War Gaming - Part 2: Cyberwarfare & Disinformation

Submitted by Bill O"Grady via Confluence Investment Management,

Yesterday, we began this two-part report by examining America’s geographic situation and how it is conducive to superpower status. This condition is problematic for foreign powers because it can be almost impossible to significantly damage America’s industrial base in a conventional war with the U.S. In addition, it would be very difficult to launch a conventional attack against the U.S. (a) with any element of surprise, and (b) without significant logistical challenges. The premise of this report is a “thought experiment” of sorts that examines the unconventional options foreign nations have to attack the U.S. Although these may not lead to regime change in America, such attacks may distract U.S. policymakers enough that foreign powers could engage in regional hegemonic actions that would otherwise be opposed by the U.S.

In Part I of this report, we discussed two potential tactics to attack the U.S., a nuclear strike and a terrorist attack. Today, we will examine cyberwarfare and disinformation. We will conclude with market effects.

#3: Cyberwarfare

Cyberwarfare is a broad tactical category, ranging from the use of computer technology in conventional warfare to hacking enemies’ industrial, financial, media, utility and social networks to gain information, monitor behavior, spread disinformation and disrupt operations of these networks. Both state and non-state actors are active in cyber activities. There is a significant criminal element as well.

The best known cyberattack was allegedly jointly created by Israel and the U.S. Dubbed “Stuxnet,” it was a computer virus which took control of systems that monitored Iran’s nuclear centrifuges. The virus returned information to its handlers and eventually was able to adversely affect the operation of the machinery itself, causing some of the centrifuges to spin out of control. Although Iran’s nuclear facilities were not directly connected to the internet, the bug was apparently introduced through a flash drive. This means that either a spy plugged a drive into Iran’s system or an innocent Iranian did it by mistake.

Initially, as reports from Iran began emerging about problems in its nuclear facilities, it was generally assumed that the Persians simply didn’t know what they were doing or had purchased faulty equipment. Eventually, Stuxnet ruined about 20% of Iran’s nuclear centrifuges. The virus turned out to be rather pervasive, spreading to Indonesia, India, Azerbaijan and Pakistan, and, interestingly enough, also infecting about 1.6% of American computers.

There are numerous other examples of cyberwarfare. The U.S. hacked insurgents’ cell phones in Iraq, allowing the American military to track their movements and even send them texts with false orders that may have led to their capture or demise. China has become notorious in its hacking of U.S. government and defense sites. Criminals routinely use “phishing” emails to gain control of individual and business computers, sometimes to “kidnap” their data (ransomware) or to simply gain their information.

Cyberwarfare carries numerous risks. As seen with Stuxnet, once released, a virus can become uncontrollable, harming friends and foes alike. It is relatively easy to conceal as it can be difficult to determine where an attack originated. In other words, a state actor could make it appear that a criminal group was responsible for the hack. Or, the criminal group could act as a mercenary for a state, giving the government plausible deniability. Governments have an incentive to co-opt and coerce technology firms to build in “back doors” that allow them to monitor information from citizens. This deliberate defect makes the product less attractive to consumers. On the other hand, an impregnable information system would be a very attractive tool for terrorists and criminals. Essentially, personal privacy is always at risk in a world where cyberattacks are possible.

Technology, for the most part, improves efficiency. Recently, my family traveled to the Caribbean which required a tour through U.S. Customs upon our return. We were checked into the country using an automated kiosk that scanned our passports, took a picture and sent us to a border agent. The following day the system crashed and what took us about 45 minutes to navigate took others up to six hours to clear. Payment systems have become increasingly electronic. This allows households to carry less cash and lets banks and other financial institutions move funds more easily through the economy. However, it also makes the system vulnerable to hackers. Banks are constantly facing threats from criminals trying to gain access to accounts.

Fraudulent purchases on credit cards are common. These acts are more easily facilitated due to technology.

In financial services, technology has changed how orders are handled. Trade execution is nearly instantaneous. The futures pits used to be populated with wildly waving traders in colorful jackets; now, these trades are executed via terminals and, in many cases, ordered by algorithm. Although this has lowered execution costs, it also makes financial markets susceptible to “flash crashes” that occasionally roil the markets.

Essentially, technology has been eliminating the number of people directly involved in processing transactions, everything from financial markets to retailing and government services. Although this makes the economy more efficient, it also makes it more fragile. If a system crashes, it can cause widespread disruptions and close firms, government agencies and markets. The U.S. economy, due to its technological advances, may be more vulnerable to cyberattacks than other nations.

Although cyberattacks won’t likely cause regime change in the U.S., it could seriously disrupt the American economy, giving a foreign power time to use conventional military means to establish regional hegemony. Thus, if China wanted to capture Taiwan or if Russia wanted to invade the Baltics, a major cyberattack, such as bringing down the electrical grid, causing dams to malfunction or disrupting air traffic control, may be enough to shift security and other officials’ attention in order to improve the odds of a successful attack.

Cyberwarfare is a significant threat to U.S. security and has very attractive characteristics. It is stealthy; the origin of the attack can be disguised and it can cause significant damage to an economy. Although the U.S. may be vulnerable to such an attack, it should be noted that American intelligence agencies and the military have significant firepower in this area as well. The difference is that disrupting the Russian economy might not matter all that much because it’s already in poor shape. But, in the U.S., shutting down the electrical grid for several days would be considered catastrophic; in fact, simply bringing down the internet might be just as bad. The U.S. faces a constant threat from cyberattacks. The key concern is what a foreign power would do with a disruption. China has already captured defense plans and personal information. So far, it has used this information to improve its own defense materials and to create countermeasures to U.S. defense goods. But the threat of a cyberattack as cover for a regional military operation is perhaps the greatest threat the U.S. currently faces.

#4: Disinformation

Disinformation is nothing new. From time immemorial, governments have tried to fool their adversaries. From America’s perspective, Radio Free Europe was broadcasting the truth to those behind the Iron Curtain. To the communists, it was pure propaganda.

There are two changes that make disinformation more dangerous. First, the technology behind news flow has changed dramatically. During the era of print media, disseminating news was rather expensive. Printing needed to occur. Journalists needed to be hired. The journalists were usually trained and there were standards of conduct that acted as a screen for reports. Although there was a “yellow press” in American history, the Cold War period was probably the golden age of journalism.

By the 1980s, cable news became an alternative to the major networks. The cable news companies discovered that they were able to capture a more reliable viewership by taking a definite slant toward the news. AM radio, as an older technology and because of its low cost, became an avenue of more extreme views. But the real change agent was the internet and social media. The internet allowed for news to be disseminated almost instantly. Social media allows common citizens to post items and videos for all to see. Regular media companies suddenly found themselves competing with citizens and their cell phones. From 1981 to 2014, the number of daily newspapers declined by 25.3%. Social media and news aggregators have the ability to screen news flow based on the viewing habits of the reader. Essentially, if one reads off the internet uncritically, they can live in a virtual news echo chamber. Thus, news, “facts” and viewpoints become hardened.

The changes in news dissemination dovetailed with changes in political polarization.

This chart is a measure of party polarization; essentially, it measures partisanship. The higher the reading on the chart, the more the political structure is partisan and polarized. Before the U.S. emerged on the world stage, there were strong disagreements on policy. There was less polarization by WWI, and during the Cold War the degree of polarization reached historical lows. In other words, regardless of political party, there was a high degree of bipartisanship.

When the Cold War ended, bipartisanship also deteriorated. Currently, the country is probably the most polarized it has been since the Civil War. Unfortunately, this degree of disunity is dangerous for a superpower because it creates conditions that can distract policymakers from global concerns.

Perhaps the greatest risk to the evolution of American hegemony was the Civil War. Although the British were the undisputed global superpower at the time, the leadership of that nation was watching the explosive economic growth in the U.S. warily. The British probably made a strategic mistake in not supporting the Confederacy because if it had survived the U.S. would have been divided and would never have achieved the same degree of power. According to historians, the political elites favored supporting the South but the public opposed it because of slavery. In addition, Queen Victoria also supported abolition and opposed the Confederacy. The British did offer some support but never enough to turn the tide.

An America divided is susceptible to disinformation. We are living in an era where “false news” is routinely disseminated. In addition, facts have become increasingly tied to social and political positions; in other words, no fact seems to exist outside a social and political context. During the Cold War, the losing political party in an election was in opposition but did work with the winner; in the current environment, the losing party believes catastrophic events are likely and the only way to ensure a better future is to resist the policy goals of the other party.

This environment allows foreign powers to influence social and political beliefs. It is clear the Russians tried to influence the U.S. presidential election. This should not come as a shock to anyone. The U.S. has done this for years; what Americans see as supporting democracy-loving activists in foreign nations looks much like meddling to foreign governments. In addition, it is routine for other nations to have lobbying efforts in the U.S., ostensibly to affect American policy.

What is surprising is that the Russians seem to have had some success, although we would argue that it probably wasn’t as significant as the media is suggesting. We believe the reason the Russians were able to find some traction with the leaks and its behavior is that the political environment allowed it to occur. A political environment in which the other party isn’t seen as merely an American with a different political position but one that is perhaps evil allows leaks and disinformation to have power.

Essentially, it appears that our current highly partisan climate has created an environment where disinformation is more likely to be accepted. If this process makes America more divided, it will reduce our ability to project power and exercise hegemony. Although disinformation probably won’t bring regime change, it can create conditions under which an aspiring regional hegemon can try to influence American public opinion in a fashion that will reduce the likelihood that the U.S. responds negatively to the aspiring regional hegemon’s encroachment. In other words, if Russia wanted to take the Baltics, it may try to use false news and internet dissemination to sway Americans to oppose U.S. and NATO intervention.

Ramifications

This report is something of a thought experiment about how foreign nations can attack a hegemon with extraordinarily favorable geographic conditions. We identified four primary methods—a nuclear strike, terrorism, cyberattack and disinformation. These are not the only methods, but we suspect these are the most likely. Two others that deserve mention are biological/chemical warfare and space. The reason we didn’t explore the former is that it is probably similar to a nuclear attack if done in scale; we would know who did it and we would not be surprised to see a state-sponsored biological attack met with a nuclear strike or a massive conventional attack. Of course, a terrorist attack using these methods could be effective but these weapons are notoriously difficult to deploy effectively. And, the U.S. has an advanced medical sector that would probably be able to cope with a small biological attack. A space attack, which could range from attacking satellites to launching weapons, is possible. However, the U.S. is probably as well prepared as any nation for such conflicts and so a pre-emptive strike would probably be met in kind. Thus, for considerations of length, we didn’t explore either of these methods in detail.

We are not likely to face a nuclear attack but the other three are quite likely and, in fact, have occurred and will likely continue to occur. Of the remaining three, we are most worried about the two discussed this week. Computer hacking by China and Russia is common; although it hasn’t led to anything that threatens civil order, the potential does exist that it could at some point.

Disinformation is another rising concern. Although this method has existed for centuries, the internet allows dissemination without filters. Thus, the ability to affect the unity of the nation and America’s capacity to mobilize against enemies to support allies could be compromised.

As noted, we believe a conventional military attack on the continental U.S. is highly unlikely. However, that doesn’t mean that aspiring regional hegemons won’t use the last three methods to improve their odds of success in local actions. The Russian concept of “hybrid war” uses the last three in combination to undermine nations in its near abroad and weaken any opposition to Russian goals of regional domination. The U.S. may become a more likely target of similar actions in order to distract America from opposing the aims of aspiring regional hegemons to expand their areas of control.

The market ramifications are complicated. Technology security firms should find steady business from the private and public sector. Media companies may face additional burdens of screening news for potential “false news” stories. Overall, though, the biggest impact may be that these factors are part of a trend where the U.S. continues to move away from the superpower role it has played since the end of WWII. We have documented and discussed these issues at length. The bottom line is that a G-0 world is one that is negative for foreign investment but probably bullish for commodities. The dollar and U.S. financial assets will likely benefit relative to foreign assets.
 

Guest Post - Americans Play Their Trump Card (And Why the System Always Deals Us a Bad Hand)

Guest Post - Americans Play Their Trump Card

(And Why the System Always Deals Us a Bad Hand)

By

Joe Withrow

(We are so inured to the present day socioeconomic system of exploitation and control that it has become seamless and mostly invisible to "We the Walking Wounded". Passed off as just the way things work, nothing to see here so move on, we sooth our crushed soul with the ego saving lament you just can"t fight city hall.

It rarely occurs to us there is no need to actually fight at all, that what we dimly perceive as the enemy, the thorn in our paw, is doomed by its own dominance of an industrial age soon to be left behind.

Please welcome back Joe Withrow (aka joegalt here on ZH) a long time Two Ice Floes guest author, with another insightful and timely article outlining what is happening and how to navigate the fall of the industrial age and the Rise of the Individual.) 

Cognitive Dissonance

www.TwoIceFloes.com

We wait anxiously in our seats as the orchestra finishes tuning, the lights dim and the curtain draws signaling the commencement of Act Two - The Trump Triumphant.

Act One - The Campaign offered an amazing display of political strategy and showmanship! The tried and true hero vs. villain narrative was perfectly established and relentlessly repeated, drawing all of us in. Evidence of Hillary"s dirty dealings were constantly paraded for all to see - the Podesta emails, the Clinton Foundation, Benghazi, the paid speeches to Goldman Sachs – much of it delivered directly to the people via Twitter leaving us all to wonder: will a Hillary indictment come? 

Our hero stood tall and fearless on television, staring corruption directly in the face. "Remember, the election is rigged...” he warned us, implying the villain would do anything, including cheating, to win.

America was listening.

Middle class citizens all over the country had their pitch forks and torches arrayed and at the ready; enough was enough! Even a portion of working class people on the "left", most of whom enthusiastically supported Obama in the previous two elections, threw their support over to the Trump camp.

The mainstream media made it clear a Trump victory was nigh impossible. But that only succeeded in invigorating supporters and enlisting new recruits. After all, the narrative of America is the ultimate underdog story. If George Washington and the colonists could do it, so can Team Trump!

Yet poll after poll came back with the villain comfortably in the lead. Enthusiasm remained, but hope began to ebb and teeter...then BOOM!

The crescendo was queued and Trump stood victorious against all apparent odds on election night.

Initially stocks sold off and gold skyrocketed on uncertainty as the vote tally came in, but then something very curious happened. As if a testament to the sheer power of our hero"s will, the markets completely reversed course in after-hours trading. By the time the financial markets geared up in the U.S. the next day, stocks were in the green and gold was in the red.

It was morning in America.

The opposition paid rabble-rousers to foment unrest in a handful of cities on the coasts, as well as on many college campuses. But by and large Middle America rejoiced. Away went the pitchforks. Away went the torches. Out came the baseball caps - a true symbol of American greatness. Their hero would be the next president of the United States; they had won and all was right in the world! The swamp would be drained, jobs would be returned, and prosperity would be restored. America would be great once again!

Just a masterful display!

We watch enthusiastically as the curtain draws to reveal our hero as he addresses supporters and the nation. First he speaks of the villain: "We owe her a major debt of gratitude for her service to our country.” he informs us. A few timid voices can be heard from the back of the auditorium: Wait a minute... didn"t you just say she should be in jail?

Those voices are immediately hushed. Quiet down! It"s just political talk, don"t you know anything?

Next our hero expresses his gratitude to a number of his high profile advisors: Rudy Giuliani, Chris Christie, Jeff Sessions, Mike Huckabee, Gen. Mike Flynn, Gen. Kellogg, Reince Priebus, the RNC...

To the ire of many, several apprehensive voices can be heard from the back of the room once again. Hold on now. Those are the same old political hacks who have been living high on the hog from the status-quo for decades! I thought you were supposed to drain the swamp... not embrace it!

Once again their voices are immediately hushed. Can it! It"s just political maneuvering. He has to play nice to get anything done.

Next our hero proclaims his vision: "We will embark upon a project of national growth and renewal..." This project, we learn, is to be a $1 trillion spending plan for infrastructure. The crowd cheers:  It"s about time we take care of our country! And think of the jobs!

Those tentative voices just can"t help themselves: Wait a minute... that sounds an awful lot like FDR"s New Deal. I thought we opposed the New Deal. Not to mention, that"s a lot of government spending...which is how the swamp got to be so darn big in the first place. I thought we opposed government spending? I thought we opposed deficits and public debt?

The crowd is getting pretty fed up at this point. Stop being a sissy... just wait until you see how he is going to pay for it! You don"t know anything about economics or geo-politics!

As Act Two plays out, our hero continues to announce the people who will serve on his cabinet and staff... more Beltway insiders... more Wall Street insiders... more swamp creatures.

The crowd doesn"t care very much... the only thing that really matters is they got "their guy" elected.  They can finally "get their licks in" at the annual Christmas party for the first time in eight years. The crowd claims to want the swamp drained, but observation suggests they simply want to be part of the winning team.

Such is the nature of politics; it is a zero-sum game. The crowd understands this perfectly well, but they think the game is "our side" vs. "their side". Left vs. Right... Liberal vs. Conservative... Working Class vs. the Rich... Main Street vs. Wall Street... Our Nation vs. Their Nation.

Those are all false paradigms. The zero-sum game is always Politics vs. Humanity.

It"s always Politics vs. Humanity. 

Always!

Politics proclaims hope and change, yet foments anger and hatred. Politics poisons the mind and pits otherwise good people against one another. Politics is the venom that encourages neighbors to actively hate one another, despite the fact they mostly share the same values, culture, and interests. Politics is the greatest engine of theft, coercion, violence, misinformation, lies, death, and destruction the world has ever seen.

Yet the crowd remains glued to political news programming and faithfully shows up at the ballot box every four years ready to enact political change. They are always trying to get the "right" people into office. They never seem to understand the things they wish to change have very little to do with the people in office, and everything to do with the structure of coercive government. Without the structure of institutionalized force, coercion, theft, and violence, it would not matter much who claimed to be the ruler.

This has been going on for hundreds of years now, ever since "representative democracy" convinced people they themselves own their government and that politics is all about civil service. Prior to this, people understood that they were "subjects" to their government, not "citizens", and they did their very best to avoid it whenever possible. That"s why the tax collector was once the most reviled of professions.

Here"s the thing: even if the crowd understood they were "subjects" to the structure claiming dominion over them, there is very little they could do to change it. You don"t get to vote for the structure or even for the fundamental components comprising the structure; you only get to vote for a public overseer. That is the great democratic deceit - the illusion of governmental ownership and control by “We the People”.

The crowd will continue to be preyed upon for as long as they fail to recognize this. But that doesn"t mean you have to be a victim.

The world has undergone a massive change over the past several decades – the type of change from which there is no return. This change has been the transition from the Industrial Age to the Information Age; a transition still in its infancy.

The Industrial Revolution, which began in the mid-to-late 18th century, has lifted more than a billion people from the shackles of poverty, raised standards of living exponentially and created the world in which we live today. In the developed world, even people of the most modest means enjoy far more comforts and luxuries than the wealthiest kings and nobles of the pre-industrial era.

Commerce was the driving force behind industrialism and the market system was spawned from enterprise and trade. But for all of its revolutionary and wealth-creating qualities, the Industrial Age carried one major limitation; it required highly rigid centralization.

Centralized institutions require a certain degree of administrative bureaucracy in order to function. This applies to corporations just as it applies to governments, and it is why corporate organizational structures fundamentally resemble government hierarchies.

All of these institutions employ pyramidal hierarchical structures: there are a few people at the top who send orders down to the people comprising the chain below them who pass those orders on down the hierarchy. Each successive chain is progressively larger as you work your way down the organizational chart.

Old or new, all legacy institutions employ failing pyramidal hierarchical structures.

The problem with bureaucracies is that they are slow, inefficient, and carry conflicting incentives and disincentives across the various chains of authority. These problems become magnified as the bureaucracy grows, and the one consistent incentive present in all bureaucracies is the desire to expand. As an institution grows, its focus becomes less on innovation or wealth-creation, and more on suppressing competition.

This is why the very institutions responsible for empowering individuals and enriching civilization on a mass scale always seem to stagnate and become parasitic over time.

So many institutional systems of the Industrial Age began (and I paint with a broad brush here) as liberators and innovators. These systems grew to encompass most of the globe, and they came to be thought of as permanent. For many, perhaps they still are.

Francis Fukuyama penned an essay back in 1989 titled The End of History? which suggested that humanity may have reached the end of its socio-cultural evolution with the collapse of the Soviet Union. Francis made a number of good points in his essay, and overall it made perfect sense at the height of the Industrial Age.

But God has a sense of humor and the Universe is unequivocally characterized by change and paradox. The Information Age was beginning its ascent precisely as Mr. Fukuyama was proclaiming the supreme permanency of western regulatory democracy and its established institutional systems. Little did the Establishment know that a new disrupting force was rising from the ether.

In fact, Timothy C. May had already penned and presented his powerful manifesto a year earlier at the Crypto 88 conference. History may very well point to Mr. May’s manifesto as the definitive beginning to the Information Age. Here’s May:

A specter is haunting the modern world… Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other…

Reputations will be of central importance, far more important in dealings than even the credit ratings of today. These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation…

Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions…

That day has arrived; we are living in the early stages of the Information Age. Most people may not know this yet, but they can feel it.

The institutional foundation of the industrial world is crumbling around us. Governments are bankrupt. Social welfare program costs are growing exponentially. Unions are broke. Pension plans are severely underfunded. National currencies have been trashed. Blue-collar jobs in the developed world have been lost to low-wage countries. Low-wage jobs have been lost to robotics and automation. Many of the jobs just disappeared entirely. Everyone"s retirement account is propped up by the constant creation of money out of thin air required to keep the financial markets afloat.

Welcome to the Information Age!

The Information Age is still in its infancy.

In truth, these are all great things. The seeds of a second Renaissance for human civilization have already been sown. These seeds will blossom as civilization continues to move away from the Industrial Age model and its centralized dominant/submissive paradigm.

Think about it this way: technology is conquering scarcity and reducing the need for centralization.

It required 40% of the U.S. population to work in agriculture in order to produce enough food to meet demand in the year 1900. Today that number is around 2%, and food is more available than ever before. You can find milk, eggs, meat, fresh fruits, vegetables, and all kinds of other items at your local grocery store year-round. This has enabled people to focus their time, energy, and labor on more advanced endeavors which in turn has led to an explosion of technological innovation.

As a result of this drastic reduction in scarcity, the average person today is far wealthier in standard of living terms than the wealthiest people alive one hundred years ago. Take a few minutes to walk around your house and catalogue your furniture, appliances, electronics, gadgets, widgets, and stuff. Most of what you take for granted every single day was not available to your forefathers a mere one hundred years ago.

Here"s the point: the world is not going to hell in a hand basket; the institutionalized industrial model is.

I don"t know whether or not the centralized structure of coercive government was a necessary evil on the way to building an advanced civilization, but I do know this: politics is 100% obsolete in this digital age we now find ourselves in. We are living with space-age technology, yet we still employ the structure of bronze-age rulership by means of force, coercion, theft, misinformation, and violence on a mass scale.

We have been conditioned by this model to view ourselves as a victim always in need of a savior. Yet we humans are engines of creation. We can imagine and envision, then turn our imaginations and visions into reality. I mean that quite literally. It is just a choice. We are astonishingly capable beings, but we have been conditioned to focus on manifesting conflict and negativity.

This is why I am so saddened when I see politics, and the dark forces behind it, trick wonderful people into spending all of their time, energy, and thoughts on political abstractions. I see this every day in my own life. I see people whom I love and respect get sucked into the political game; I see them elevate politics to religious levels and willfully ignore those things that are most important in their own life. I watch as the twinkle vanishes from their eye, the pep disappears from their step, and the anger slowly poisons their psyche.

And I understand. I was there myself not too long ago.

As best I can tell, western civilization is a tale of two cities at the current point in time.

The people in one city are confused and angry because they do not understand why their industrial institutions are failing them. The 2016 U.S. election cycle made it obvious the people living in this city reside on both the "left" and the "right" side of the modern political spectrum. They know it’s broke and they want it fixed no matter what it takes, and no matter whose rights are trampled to do so. They are looking for a hero, and they see politics as the solution.

The people in the other city are much less concerned about the devolving industrial model because they are leveraging the budding trends of the Information Age in their favor. These are the people learning how to operate in the digital economy that bypasses industrial borders. They are learning there"s a whole lot more to the money story than what they were led to believe.

They are learning how to build collaborative networks utilizing digital technology and secure communications. They are actively creating superior alternatives to literally every civil service function currently provided by industrial institutions. They see politics as the problem, and they see decentralized networks as the solution.

I lived in that first city several years ago. I was angry and depressed all the time. I thought the answer was to fight the trends; fight the world. I was stressed to the max, and terribly unpleasant to be around...just ask my wife.

When I eventually got tired of being angry and depressed my mind switched gears, and I moved to the second city. It"s much more pleasant here, and the people are friendlier. The people in this city aren"t trying to change the world - that"s a win-lose proposition. Instead, they are building an alternative world based upon participatory networks and voluntary association utilizing modern technology.

Never before has this been possible in recorded human history.

While the crowd is focused on fighting the existing status-quo on the macro scale, a growing number of individuals are focused on building a better model on the micro scale. The new model is not fixated upon enacting "social change", it is geared towards empowering individuals. In fact, it"s not much of a model at all in the traditional sense. It is not about replacing the old structure with a new one. Instead, the new model is a perspective paired with an understanding of the economic trends, digital technologies, and financial tools necessary to build a life of freedom, wealth, and fulfillment to the fullest extent possible.

This is the theme of the third edition of my book titled The Individual is Rising: Transcending the Industrial Order and Prospering in the Digital Age.

Pick up a digital copy absolutely free at http://theindividualisrising.com/.

The book is available in both paperback and Kindle format on Amazon. But at the moment I’m not terribly interested in selling copies as much as I am in distributing copies. Anyone interested can pick up a digital copy absolutely free at http://theindividualisrising.com/.

If you are tired of politics and its associated corruption, this book is for you. You see, in every developed industrial country there is a glass ceiling of-sorts over the middle class. When you add up all of the taxes across all levels of government, the middle class pays at least half of their income to their governments each year.

In addition to taxes, the middle class is also subjected to the whims of their rulers almost entirely. They just don"t have any other options - they are stuck. And truthfully very few in the middle class even think about it. After all, the rat-race consumes the bulk of their time and energy.

But what if you don"t want to participate in any of their political programs? What do you do when you just want to be left alone to experience this life in a meaningful way, but politics and its supporters are hell-bent on forcing you to play their games and participate in their schemes? What do you do when the moral busybodies are determined to keep you corralled within their systems of taxation and surveillance? What do you do when your logic is met with anger and condemnation?

Historically, the answer has been to fight; to use force - politically or even physically - as a means of instituting change. This is a losing proposition, and it is completely unnecessary in the digital age.

In the old days, the dreamers, visionaries, philosophers, and wayfaring souls were forced to meet secretly in the back rooms of taverns, inns, and speak-easies to discuss their radical ideas. Today, they can all connect with one another to share information and ideas instantaneously on the Internet, in total privacy thanks to encryption technology, from the comforts of their own home.

What this means is individuals can create their own future independently; they no longer need to fight to reform society in accordance with their own ideals and preferences. As systems theorist Buckminster Fuller pointed out, fighting the System only strengthens it. Here"s Bucky:

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

For perhaps the first time in history, the Information Age and its digital economy are enabling individuals to build and experiment with new models on a global scale in relative peace and freedom. I don"t think the significance of this is well-understood or appreciated as of yet.

This dynamic is unprecedented and absolutely revolutionary. And it is irreversible. The rulers can certainly build censorship and misinformation into popular social media sites, search engines, and top-level domains, and I suspect they will. But they cannot censor or shut down distributed networks designed to decentralize the Internet and all of its applications by bypassing third parties entirely.

The rabbit is out of the hat, and it won"t be going back in. It is the Gutenberg Press all over again, except on a much greater scale. Fundamentally, the encryption technology driving decentralization is just a branch of mathematics. No matter how much legislation is passed, and no matter how many guns are drawn, the rulers cannot alter mathematics. 2 + 2 will always equal 4.

This presents the disenfranchised individual with a unique opportunity.

Most aspects of our society are digital today. Information is digital. Communication is digital. Vital records are digital. Money is digital. Wealth is digital. Transactions are digital.

I don"t think this dynamic is well understood, nor do I think it is particularly welcomed by those of us who came up according to the rules of the Industrial Age. But those who understand the trends and the available technology can organize their affairs to bypass the abusive structure to the fullest extent possible to enhance their quality of life. Further, they can build alternative networks geared towards any desired purpose; they can construct better alternatives to the existing model which is based on centralization, hierarchy, monopoly, coercion, and political power.

Now this doesn"t reduce the need for basic resiliency - food, water, shelter, and gold... but those are chaos hedges. My experience is that a fixation upon chaos hedges tends to foster an unpleasant and rather defeatist perspective. I am not sure that fulfillment can ever come to those with a defeatist mindset. Simply, a focus on negativity necessarily crowds out the inner genius capable of building a custom-tailored life.

Einstein once mused: "I think the most important question facing humanity is, "Is the universe a friendly place?"."

If we come to the conclusion that the answer to Einstein"s question is no, then we are doomed to a Hobbesian life of scarcity, struggle, and subservience. But if we decide the answer is yes, then a whole new world of opportunity opens up to us. As to what, specifically, that opportunity is - that is up to you.

It"s all just a choice...

Joe Withrow

aka joegalt here on ZH

There are always Jokers in their deck. The only way to win is not to play their game.