Dead Cat

The box is open and the cat is dead. The mathematical theoretical physics behind the "no risk" financial market experiment has ended up killing it. Theoretically the possibility of a loss was insured out of existence.

For example;

• Bank A issued a financial instrument and took out a CDS with Bank B against a possible default or loss.
• Bank B took out another CDS with Bank C to cover the possibility of Bank A's financial instrument going bad.
• Bank A took out another CDS against Bank C if it had to pay Bank B if Bank B payed Bank A 
• Bank A gets both the original loss back from Bank B but also the same again from Bank C.
• Bank C took out yet another CDS with Bank D to remove the risk of having to pay Bank A
• Bank D took out a CDS against Bank A's original financial instrument with Bank A.
• Bank A then used the payment from Bank C to pay Bank D.
• Ad infinitum 

So which Bank loses money? Nobody knows, not even them - but somebody eats the loss. Seems the citizens of any country with a Bank eat it.

The problem we have here is that the same folk that created the problem are trying to solve it. No fresh thinking, no real change in policies - accompanied by the dictum not to let a good crisis go to waste. Using this, or any, crisis to inject more of the same that caused it doesn't, unsurprisingly, appear to work. Never mind, we'll keep going until the life is choked out of it.

Not unexpectedly Obama and Cameron have popped-up demanding a quick fix. Primarily because when, not if, it all goes to rat-shit their banks will topple along with the rest. London and New York are the places that most carcinogenic financial instruments call home.

Let's not forget that, back when all this started in 2007, the estimated value of financial instruments lurking about the world was somewhere between 100 and 300 trillion dollars. Even if only 10% of them go bad - a joke - more like 40% on present estimates - then somebody has to print between 10 and 120 trillion dollars worth of money and give it to the banks.  And these estimates are on the conservative side. As all these instruments are in US dollars that would be bad, bad, bad for them - hence Obama's deep interest in having Europe not fuck the US economy.

Inflation won't solve it. Given the present state of the world's economy the result of a sufficient increase in money supply will be Stagflation - which we are already seeing signs of. Eviscerating trust in money and the printing of 100,000 Dollar, Pound, Euro notes to buy a cup of coffee doesn't sound like one of the better solutions.

So a very, very big turd is about to drop into the fan. This has been constipating since International Accounting Standards, introduced in 2005, prevented companies from provisioning against potential losses before they actually incurred them. Which is, of course, why banks are only now announcing hundreds of billions of losses and looking for some more free cash. Those now looking for the money are the same folk that lobbied for the change to accounting standards in the first place - so they could artificially keep their profits up - even if they knew that a debt was going bad. Better for the share price and the bonuses.

Anyway, I get back to my contention that Globalisation contains the seeds of it's own demise. When there is too little or no domestic industry, manufacturing or production and the banks are making unprecedented piles of money that money has to go somewhere and it, by default, goes into real property as that is the only place left for it to go

Around the turn of the millenium the same lack of alternatives created the "Tech" bubble.

To absorb the fists-full of money spewing out of the banks house prices exploded, builders went on the rampage. When regulations wouldn't permit this path they were changed or new markets created outside regulatory oversight. Not only did the finance industry believe they had found an infallible way to remove risk but they also didn't have to admit that they had lost the money until the instrument was undeniably dead and the loss was taken onto the books. So they had a few years to record record profits and bonuses before they became too big to fail.

The original bail-out money they were given was used to maintain this fiction - now that it has all been spent either they get another round of bail-out or they go down. Any money going to Spain to prop-up it's banks will be used to extend and pretend. When the next 100 billion of property market bad debt pops up, or RBS needs another 40 billion to survive, it'll be another matter entirely.

Ecologists are to blame

So who is really to blame? Theophrastus is who. It is the Ecologists who asserted that all human existence and behaviour can be reduced to a formula and number that begat the rot. We're all digits in the computer of life. Hence the belief that all outcomes can be predicted by formulae - the best of which get a Nobel Prize - hence Game Theory et al. Thus, according to this poppycock, the chances of your best mate fucking your wife are the same as those for a, soon to be cuckolded, Rwandan Gorilla. And there is an elegant formula to prove it.

Never mind that these theories are disproved by reality - the relationship between wolf and bison populations isn't linear any more than a Credit Default Swap takes all the risk out of a Collateralized Debt Obligation. Given the Self excluding nature of these theories, "this is a load of bollocks" is an unapproved response as you can't be outside a universal, mathematically elegant, truth.

This brings us to the truly head banging realisation that the same theory is used to prove opposite ends of the same argument. Those arguing for expansion of the planet's economy are using the same mathematical models as those bitterly opposed to it. Your Goldman Sach's Quant is more like a Greenpeace Eco-warrior than either of them care to admit - even if they realised it. Neither of them take individual behaviour into account as it isn't permitted by the model. Unpredictable individual behaviour is so anathema to an elegant mathematical solution that they invented a means to do away with it - Chaos Theory. When this was challenged by some bright spark that wondered how this could apply universally they invented Fractals. We're all predictably the same - have to be - or the models don't work. Then one day, somehow, somebody let the smoke out of the computer.

Now you'd wonder why any cognitive being would subscribe to an outcome where they're regarded as mathematical rather than biological. But it seems that rather than accept that not everything can be predicted by digits they concluded that there must be a "Theory of Everything". Which brings us, alas, to the purveyors of String Theory. Faced with the reality that most of the mathturbation that got them to this point is based upon giant assumptions that ignore the tricky bit between Particles and Relativity they spent decades introducing invisible dimensions and multiple universes but still couldn't get the numbers to work. The results have all been Infinity. Fear not say these intrepid number doodlers we'll insist that we're on the right track and give our grant money a new name "M Theory". Unfortunately this didn't stop the grants from shrinking so a lot of mathematical physicists were looking for a job just at the time that unregulated financial markets boomed. "I know a theory that takes all the risk out of stupidity" they said, "because we can predict the future - it's just like wolves and bison. Even if it isn't, we have another model that proves you can't lose." What they overlooked to mention is that they couldn't find Gravity and three quarters of Matter and Energy.

In a world where everything can be predicted in numbers and theories nothing else matters - yea, right! Unfortunately, economists didn't seem to realise that any theory that always ends up at Infinity wouldn't, in fact, work. Especially as the same theory could be used to arrive at both plus-infinity and minus-infinity simultaneously. Surely this would raise a few heads, you'd think - not if we're making so much money that it has to be right - QED. Wrong - somebody forgot that the rich like to, whenever and wherever possible, fuck the poor. The theory choked financial system, politically manipulated, permitted the rich to get richer and the poor to get poorer. The theory was that by exporting our poverty we'd all be better off and spend our time having our hair done or buying a flat screen TV. While the people that got our poverty would be delighted to have it as they live on less than $2 a day. Corporations loved it. The rich loved it. The poor, and increasingly the middle-class, got fucked.

Now what would have happened if chemists rather than physicists had come up with economic and financial theories. Well, chemists don't have any vague theories, they do have Principles. Principles, many and varied, are the key missing ingredients in mathematical financial theories - none of which have empirical proof outside of mathematics. So chemists would probably have done a better job. They don't join molecules together in an invisible dimension or another universe. Nor can they fill a test tube with ingredients that only exist in theory - they might try something that does exist. Not so Physicists - they just keep flogging this dead horse in the hope that it will, theoretically, come back to life - somewhere in the 15th dimension or in the billionth universe. If you believe String (M) Theory it is happening in a Universe near you right .... now.

My suggestion is that chemists round up all physicists and lock them up in a Silo. Where they can plan a theoretical escape.

Theory

There is, of course, one very good reason that no matter who is elected they instantly renege on policy promises and revert to getting as much as they can for themselves and their mates before losing the next election -  Theory.  Any word in the dictionary can be placed in front of "Theory" and claimed as a best-practice canon of effective thinking on everything, anything and nothing simultaneously. The best thing about a Theory is that you can have one about things that don't exist, don't work and can't happen and win a Nobel prize for it. This is of little benefit to those supposedly living under it's influence. But given that a real insight is lacking it's better to have a Theory than admitting that you don't have the first clue. Theory is an excuse to stop scratching your head - and justify inflicting your opinion on as many people as possible.

There is little or no point in trying to explain a Theory to the vast bulk of the proletariat and even less in trying to explain one to Politicians - to whom complexity and getting elected are incompatible. This results in Cherry-picking simplistic elements of a Theory for public consumption while leaving the bulk of it's content and ramifications hidden from view to all - including themselves. The need for an aristocracy of thinkers is thus required to develop and prosthelytize Theory. Given that you can have a Theory about everything, anything and nothing then if you don't like one you can find thinkers that come up with another one that you do. This eventuates in conflicting Theories all regarded by their creators and supplicants as indisputable. Upon such things are Policy promises based. Sadly upon such things are nations and societies based.

Which brings me to the Theory of using a cow as a cigarette lighter. This would require positioning cows at all those smoking compounds outside bars, restaurants and office buildings - although for reasons of cows' sensitivities, restaurant locations, other than vegetarian ones, might be a little heartless - unless you blindfold them, but this would cause an additional fire hazard. A Piezo Crystal thingy in the nose or up it's ass would provide ignition. I call this "The Big BIC Theory". This Theory would work a treat in India. It would also provide a purpose for cows past their best milk producing years and make "I'm just popping over to the Abattoir for a quick smoke" common parlance. Even if smokers weren't around, to utilise this flame-off, a burning taper sticking out of all cows bums and noses would have a dramatic effect both on the release of methane into the atmosphere and upon the cost of street lighting. Why no political party in New Zealand has adopted this as a policy promise bemuses me.

Back to the subject of time travel - to a time when cows were pre-industrialised. Why bother? What's the point of arriving in the past and immediately catching Cholera, TB or the Plague and being referred to as "yee" - even if you can't expire. Do you have to take your own toilet paper with you? Anyway time as a continuum is only .... you've got it - a Theory. If it were available time travel would put an end to the retirement age dilemma and reduce health-care costs immeasurably as you'd be constantly sent back to a time when you were healthy and could work for a lower wage - or alternatively sent into the future and be dead. The Time Machine would be called the "See Ya" and located in every hospital, unemployment office, airport, police station and bank thus dealing with any and all social inconveniences at the push of a button.

If everybody had a time-machine would there be anybody left?

Now the Euro. How much would it cost to build a time machine - a few hundred billion, a trillion, ten trillion - certainly a lot less than saving the present financial system. Then we could all keep going back to 2006 and avoid the Global Financial Crisis. Despite the absence of time travel our politicians are attempting to do it by pretending it still is 2006 and using your money to wipe out the intervening years. So here you have two Theories, both of which claim that you can travel back in time, neither of which exist, work or can happen.