Making News

"A free press, like a free life, sir, is always in danger."
--Ed Hutcheson (Deadline U.S.A.)

When my dad wrote for the Cincinnati Enquirer, the paper would host annual employee family days. As I recall, they took place about this time of year. Families could tour the Enquirer Building and learn how newspapers were made.

My greatest recollection is the basement--where the printing presses ran. Press operators folded hats out of newpaper pages and gave them to the kids. I also recall those linotype machines used for arranging letters on letterpress printing plates. An entirely new set of  metal plates in high relief type had to be made daily to fit the content. I remember thinking how much work went into producing newspapers each day.

The above figure sketches production flow for the Washington Evening Star (1852-1981). Not terribly different than the Enquirer layout. Even the sports department's position, which as I recall from visiting my dad now and then on the sixth or seventh floor, was in about the same place.

The integrated approach to news and newspaper production has generally given way to a virtual model. Formerly in-house steps in the process--ad sales, reporting, printing, etc--are often outsourced. And, of course, newsprint has yielded to digital media.

A primary risk of outsourcing is loss of control. Loss of control--in cost, quality, key resource access, etc--can be the kiss of death strategically as commitments that define competitive position are relieved.

It seems of little surprise, therefore, that as the self-contained production process of newpapers has dwindled, so has the independent, objective nature of the product.

And with it, the relevance of the institution.

Environmental Coupling

I wanna know what you're thinking
There are some things you can't hide
I wanna know what you're feeling
Tell me what's on your mind
--Information Society

Environmental coupling reflects the extent which a living entity is linked and responds to stimuli in its external environment. Tight coupling reflects high degrees of linkage and response. Loose coupling reflects low degrees of linkage and response.

It has been posited that tight coupling is maladaptive (e.g., Glassman 1973, Weick 1979). Tight coupling creates instability. An entity that is tightly coupled to its environment responds to every little stimuli--even those that do not demand response. Stated differently, tightly coupled entities are prone to overreact to their environments, which weakens their position to thrive and prosper. In the language of Orton & Weick (1990), tightly coupled systems are responsive but not distinctive.

Loose coupling is thought to be a more stable configuration because fewer connections makes living entities more productive. Although they might miss signals occasionally, loosely coupled entities are less susceptible to environmental noise that does not demand response. From an information processing theory perspective, loosely coupled entities tend to process information with a higher signal-to-noise ratio, thereby allowing them to more effectively cope with uncertainties in their environments.

Loosely coupled systems are both responsive and distinctive (Orton & Weick 1990).

References

Glassman, R.B. 1973. Persistence and loose coupling in living systems. Behavioral Science, 18: 83-98.

Orton, J.D. & Weick, K. 1990. Loosely coupled systems: A reconceptualization. Academy of Management Review, 15: 203-223.

Weick, K.E. 1979. The social psychology of organizing (2nd ed). Reading, MA: Addison-Wesley.

Disparity of Force

"Cameron Poe, you have pleaded guilty to manslaughter in the first degree. With your military skills, you are a deadly weapon, and are not subject to the same laws as other people that are provoked--because you can respond with deadly force. It is the order of this court that you be remanded to a federal penetentiary, where you will remain incarcerated for a term not less than seven to ten years."
--Sentencing Judge (Con Air)

Some people seem to believe that there is no justification for an individual to shoot someone who is 'unarmed.' These people ignore the legal principle of disparity of force.

In the eyes of the law, a gun is not a magical source of power. It is one of myriad ways of exerting deadly force. Disparity of force recognizes that even without a gun, knife, or other ostensible weapon, a violent attacker may possess a physical advantage over the intended victim that, if the assault is permitted to continue, the totality of circumstances suggest that the victim is likely to badly hurt or killed. This situation authorizes the victim to use lethal force (a.k.a. proportionality of force), including use of a gun, against the attacker.

Factors that establish disparity of force conditions include:

Age. Young attacking old (man in 20s attacking man in 70s), or old attacking young (man in 20s attacking young teen).

Size. Big attacking small.

Fitness. Highly fit attacking weak or unfit.

Numbers. Many attacking few.

Fighting skill. Highly skilled hand-to-hand fighter attacking someone with low unarmed fighting skill.

Position of advantage. Attacker has freedom of movement and leverage while the victim does not.

Furtive movement. As part of attack or credible threat of attack, attacker reaches into concealed area for what appears to be a gun or other lethal weapon.

Attempt to gain control of victim's weapon. Attacker seeks to gain control of victim's gun or other lethal weapon.

Impaired victim. Attacker assaults previously injured or handicapped victim, or during the fight an attacker impairs victim's ability to fight back, escape, or evade continuing blows.

Being armed does not require a weapon. Being without a weapon does not make one unarmed.

Principled self-defense requires thorough understandinging of disparity of force.

Thanksgiving Lessons

Neal Page: He says we're going the wrong way.
Del Griffith: Oh, he's drunk. How would he know where we're going?
--Planes, Trains & Automobiles

Once again on this day, remembering that early American settlements were failed experiments in socialism. The first Thanksgiving meals celebrated newfound abundance and the throwing off of policies that created squalor.

 

Our early ancestors learned it the hard way. Praying this Thanksgiving that we're not destined to endure a similar process before we figure it out.

Looter's Message

John McClane (after he grabs kid stealing candy bars): Hey, hey! Where are you going? Come here. What are you doing?
Kid: Let me go, dickhead.
John McClane: Watch your mouth. You want to go to juvenile hall for a Butterfinger? Is that it?
Kid: Look around. All the cops are at something. It's Christmas. You could steal city hall.
--Die Hard With A Vengeance

Salient point made by Gary North. Looters and rioters send a message: the state is largely impotent when it comes to protecting life and property.

Government is legitimized force. Proper use of that force is for defensive purposes--for helping people defend their person and property from offensive intrusion by others.

Looters and rioters demonstrate that, when push literally comes to shove, government force is often ineffective in defensive situations.

North also observes that in the Watts riots of 1992, Korean store owners stood their ground, fully armed in defense of their property. They understood that government was unable to provide the necessary defense to turn back looters. Instead, the store owners collaborated in self-defense.

Greater Cincy Map, 1907

Left a good job in the city
Workin' for the man every night and day
And I never lost one minute of sleepin'
Worryin' 'bout the way things might have been
--Creedence Clearwater Revival

Interesting 'Map Showing Cincinnati's Principal Industries and Suburbs' circa 1907.

As of yet, no significant urban sprawl. Communities like Hyde Park and Spring Grove marked outer suburbs--peaceful getaways from city bustle.


Also enjoyed tracing road names and paths, particularly away from town.

In addition to the downtown area, industries clustered along the Mill Creek and in Norwood. Not so much today.

CBs Buyin' 'Em

It's time we stop
Hey, what's that sound
Everybody look what's going down
--Buffalo Springfield

A veteran trader thinks the Fed and other central banks are buying stocks. These pages have been considering this possibility via discussion of non-economic buyers and stock pools.

Of course, in some countries, stock buying by CBs is legal. Bank of Japan, for example, recently announced that it would be increasing its position in equities.

In the US, however, it is against the law for the Federal Reserve to buy stocks.

What I wonder is, if it was revealed that the Fed was indeed buyin' 'em, would there be public outcry?

Or might there instead be public support for Fed activities designed to goose stocks higher?

position in SPX

Central Banks and Social Instability

There's a room where the light won't find you
Holding hands while the walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Minsky-esque hypothesis that efforts by central banks to stabilize economies and financial markets will create social instability as the wealth chasm grows between people at the top and bottom of the social pyramids. That social instability, in turn, could exert significant political pressure on the system to remove interventionary monetary policy.

Of course, such social instability could also spawn riots in the streets.

Uncertainty Avoidance

I can see clearly now the rain is gone
I can see all obstacles in my way
--Jimmy Cliff

Uncertainty avoidance is the degree to which a culture prefers structured over unstructured situations. In high uncertainty avoidance cultures, people have high anxiety about uncertainty and ambiguity. Laws, rules, regulations, and controls are designed to reduce uncertainty. Things that are new and different are considered dangerous and risky.

Low uncertainty avoidance cultures are less dismayed by ambiguity and have greater tolerance for various options. There are less rules and more risk taking. Change is more readily accepted.

Hofstede (1978, 1980, 1997) developed the uncertainty avoidance construct in the context of country cultures, although it obviously applies elsewhere.

References

Hofstede, G. 1978. The poverty of management control philosophy. Academy of Management Review, 3: 450-461.

Hofstede, G. 1980. Culture's consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications.

Hofstede, G. 1997. Cultures and organizations: Software of the mind. New York: McGraw-Hill.

Hungry Alligator

Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity
--Kenny Loggins

Plot 20+ years of the SPX and the VIX and what do you get? The 'hungry alligator' pattern. Currently the gator's jaws are opened to record wides.

Poised to snap shut, perhaps, on nearby risk.

position in SPX

Senior Savings Famine

Sun streaking cold
An old man wandering lonely
Taking time
The only way he knows
--Jethro Tull

Charles Schwab estimates that people aged 65+ lost more than $2000/yr on average due to the Fed's financial repression programs. Because seniors tend to spend about $2 for every $1 of interest income, Schwab estimates that financial repression has cost the economy upwards of three quarters of a trillion dollars in lost spending by seniors over the past six years.

Moreover, many seniors have also taken on more risk in search of yield bearing instruments. Instead of CDs with puny yields, for example, many seniors have substituted dividend-paying stocks and high yield (read: junk) bond funds.

Seniors and other savers have been experiencing a famine that Charles Schwab suggests is coming to an end with the recent closing of the Fed's QE3 project. Not so fast, Chuck. Central banks around the world, recently those of Japan and China, appear to revving up their interest rate suppression machines.

And just because the Fed is no longer buying bonds in large size does not mean that it intends to raise short rates (which have large influence on yields linked to savings vehicles) any time soon. Or that the Fed wouldn't re-engage their QE habit at the drop of a stock price, er, hat.

Seniors and others hungry for yield are likely to continue down the path toward starvation.

Presidential Nullification

And the men who spurred us on
Sit in judgment of all wrong
They decide and the shotgun sings the song
--The Who

Nullification is usually defined in the context of states refusing to enforce what are perceived to be bad laws passed by the federal government. In this context, nullification can be seen as an expression of distrust in government and as a mechanism for coping with oppressive rule. 

More broadly, nullifaction can be seen as overt refusal to enforce law by an institutional entity. States can refuse to enforce a law. So could branches of the federal government.

Currenly, President Obama is preparing an executive order that would effectively nullify federal immigation law. Similar to Judge Nap, I can sympathize with this action to some degree. Under natural law, people should be free to travel where they wish--provided that they do not infringe on someone else's property rights.

However, under current our current system, open immigration policy in the US would infringe on the property rights of others. This is because immigrants could tap various social welfare programs funded by property taken from some people by force. Immigrants who partake in those services are party to robbery.

A president who selectively enforces federal law also portrays himself as a discretionary ruler who dictates legality by fiat--someone who believes in the rule by authority instead of rule of law and who thinks that he is above the law.

Finally, a president who nullifies federal law violates his oath of office. He essentially condones lawlessness. When someone else, be it another government official or Everyday Citizen, breaks a law, the president cannot complain or seek to prosecute.

Because he has done the same thing himself.

Information Processing Theory

I want to know
What you're thinking
There are some things you can't hide
--Information Society

Information processing theory (Galbraith 1973; Tushman & Nadler 1978) views effective production as the organization's central objective. In order to effectively produce, the organzation must obtain and process information relevant to its 'task environment' (market demand, customer requirements, new technologies, regulations, etc).

The difference between information required to perform a task and the information already processed is known as 'task uncertainty' (Galbraith 1973: 5). Uncertainty creates lack of clarity about what must be accomplished to satisfy market needs, and generates exceptions to the status quo (Ford et al. 2014). At low levels of uncertainty, exceptions to what is already known are passed up the decision-making hierarchy for resolution.

However, as uncertainty increases, exceptions mount, and the hierarchy must process ever greater quantities of information in order to achieve acceptable performance (March & Simon 1958). At some point, information processing capacity of the hierarchy is exceeded, and exceptions can no longer be handled in conventional channels without lowering performance.

To take pressure off the hierarchy and improve performance, organizations must develop information processing mechanisms that enable effective task execution. As uncertainty increases, performance should benefit from coordination and control mechanisms that reduce information processing requirements. Joint planning, establishing standard operating procedures, and creating self-contained work groups decrease the need for frequent interaction and take pressure off the hierarchy as long as task performance remains within specificiation.

If uncertainty continues to increase, then benefits gained from mechanisms that reduce information processing requirements no longer compensate for the large number of exceptions that must be addressed. To cope with this situation, the organization must install mechanisms that increase information processing capacity.

Mechanisms for increasing information processing capacity are of two general types depending on the formality of the information. When the information to be processed is formal, then management information systems that span work unit boundaries create common languages and higher levels of information processing. For processing informal information, lateral relationships that cut across lines of authority create joint decision processes that effectively handle more data. Cross functional teams, task forces, and integrating roles such as project or program managers exemplify lateral mechanisms that add information processing capacity.

References

Ford, M.W., Evans, J.R. & Masterson, S.S. 2014. An information processing perspective of process management: Evidence from Baldrige Award recipients. Quality Management Journal, 21(1): 25-41.

Galbraith, J. 1973. Designing complex organizations. Reading, MA: Addison-Wesley.

March, J. & Simon, H. 1958. Organizations. New York: John Wiley & Sons.

Tushman, M.L. & Nadler, D.A. 1978. Information processing as an integrating concept in organizational design. Academy of Management Review: 3: 613-624.

Fed Fog Index

This one, he got some princely racket
That's what I said now
Got some big seal upon his jacket
--Spin Doctors

Interesting analysis by The Economist on the increasingly opaque wording of FOMC statements. The fog index began increasing around the year 2000 under Greenspan's tenure. It then jumped higher with the commencement of Quantitative Easing under Bernanke.

It's been ratcheting higher since.

The Fed's communication strategy: Make it sound complicated, and perhaps the people will let us get away with murder. Murder of the dollar, that is.

Stability and Adaptation

"I belong to the warrior in whom the old ways have joined the new."
--Katsumoto (The Last Samurai)

Stability is often defined in terms of resistance to change or ability to withstand force without distortion. When viewed in this manner, stability relates to maintaining the status quo.

In turbulent environments that demand change, however, clinging to the status quo is maladaptive. Resistance to change brings instability (Farjoun, 2010).

Dynamically, stable systems are those capable of responding to change when necessary.

Reference

Farjoun, M. 2010. Beyond dualism: Stability and change as a duality. Academy of Management Review, 35: 202-235.

Endurance

Can we last forever
Will we fall apart
At times it's so confusing
Questions of the heart
--Survivor

A month back we gazed at Fountain Square circa 1962. The below pic shows Fountain Square in 1875. The view is looking east on Fifth Street.

When I view old pics like this, I often wonder what in the picture might still be around today. None of the people, of course. Very little of the infrastructure either.

Maybe some of the items in people's pockets?

1875-CC $20 Liberty PCGS XF45 CAC

Here's a twenty dollar gold piece struck in 1875 at the Carson City Mint. The CC Mint itself was shut down in 1893 although the building still stands as the Nevada State Museum.

How many hands have touched this coin over its nearly 140 yrs of existence? Perhaps it could have been found, shiny and new, in someone's pocket that day on Fountain Square.

Mutual Fund Epicenter

This wouldn't be the first time
That things have gone astray
Now you've thrown it all away
--Bryan Adams

Interesting theory floated on Ask Fleck yesterday that the Next Time Down will be triggered by redemptions in fixed income mutual funds. Leveraged loans and junk bonds are beginning to show impairment.

If income sensitive investors begin liquidating fixed income mutual fund positions out of necessary (because they have reached for yield in overly risky bond funds), then the redemption ripple will work from periphery to core--taking out stocks as well as bonds.

position in SPX

Socialism and Black Markets

Andy Dufresne: I understand you're a man who knows how to get things.
Ellis Boyd 'Red' Redding: I'm known to locate certain things from time to time.
--The Shawshank Redemption

Like all brands of socialism, Venezuelan-style socialism does little to alleviate scarcity. Instead, it fosters squalor.

Predictably, Venezuelans have taken to producing and trading on their own. These black markets operate outside of laws designed to keep the socialistic system intact.

Now the Venezuelan government is seeking to shut down the black markets.

The people must choose: keep living a life of forced restraint and squalor. Or continue to find ways to voluntarily trade with each other to improve their condition.

Which choice is more likely?

Black markets are institutions of socialism.

Battery Acid

"You're walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place."
--Gordon Gekko (Wall Street)

This morning it was announced that Procter & Gamble will sell its Duracell subsidiary to Warren Buffett's Berkshire Hathaway. The terms of the deal have PG injecting $1.8 billion in cash into Duracell, and then BRK trading its PG stock position currently valued at $4.7 billion for Duracell.

Suppose that PG shares are overvalued and that their intrinsic value is half the current price. If true, then Buffet is paying with currency that is actually worth $2.35 billion. Moreover, PG kicks in $1.8 billion in cash--cash that is on margin via corporate borrowing.

As such, Buffet surrenders about $500 million ($4.7 - 2.35 - 1.8 billion) in real value for Duracell. PG shareholders get a pile of overvalued shares, and they have fewer productive assets with which to create future value (part of which would go to servicing the debt used to fund the cash surrendered in the Duracell transaction).

The better deal appears to belong to which side?

no positions

Stability Motive

Who knows how long this will last
Now we've come so far, so fast
But somewhere back there in the dust
That same small town in each of us
--Don Henley

Environmental uncertainty can be defined as the degree to which future states of the world cannot be anticipated or accurately predicted (Pfeffer & Salancik, 1978: 67). Decision-makers generally do not like high levels of uncertainty because it upsets their strong preference for certainty, stability, and predictability.

As such, when environments are perceived as uncertain and unpredictable, decision-makers will exert greater effort to re-establish the illusion or reality of control and stability over future outcomes (Oliver, 1991).

Actions taken to reduce uncertainty and gain predictability can be seen as driven by the 'stability motive.'

References

Oliver, C. 1991. Strategic responses to institutional processes. Academy of Management Review, 16: 145-179.

Pfeffer, J. & Salancik, G.R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Aggression and Political Ideologies

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

The below graphic does a good job of distinguishing ideologies that mark the political landscape. The traditional left-right spectrum is defined by the use of government aggression--albiet for different purposes.

Libertarian ideology, on the other hand, is grounded in the non-aggression principle. The only valid use of government force is for defensive purposes--i.e., to help individuals defend person and property from invasion by others.

Want to get to the heart of any political philosophy? First and foremost, endeavor to understand the extent to which that ideology condones government aggression.

More of the Same

Meet the new boss
Same as the old boss
--The Who

Jacob Hornberger discusses the biggest failures of Barack Obama's presidency. Few liberty-minded people expected Obama to steer policy toward more economic freedom. In fact, it was easy to fear the worst--more intervention in economic affairs. And that has occured.

But Obama could have worked within his ideological constraints to alter the country's course on civil liberties and foreign affairs. He could have used his office to move America away from policies of militarism, surveillance, and foreign interventionism and back toward original principles of peace, security against warrantless search and seizure, and no foreign entanglements.

Instead, Obama allowed himself to be just another president. JH proposes that "Obama's two terms in office are nothing more than Bush's third and fourth terms in office."

How could it have been different? Obama could have worked toward several ends that would have made big progress on the civil liberties and foreign affairs fronts, including:

Repealing the Patriot Act.

Ending all US invasions, occupations, and coups of foreign soil.

Bringing home and discharing all US troops.

Closing all US military bases on foreign soil.

Ending all sanctions and embargoes. Cuba's embargoes could have been first.

Shutting all Cold War era military and intelligence departments agencies, including CIA and NSA.

Welcoming dissent about infringements on civil liberty and foreign policy, rather than seeking to prosecute it.

Ending all foreign aid.

Ending all surveillance--both foreign and domestic.

Ending the war on drugs.

About halfway through Bush's second term, I hoped that W would break away from his general party's direction and champion radical efforts toward removing force from the system. "Because Bush was a lame duck, what did he have to lose?" I reasoned (probably naively). It didn't happen, of course.

Of course, the book is not yet closed on Obama. Perhaps he will step out of the mainstream and champion liberty rather than force.

I pray that he does.

Bob Gibson

Shoeless Joe Jackson: The first two were high and tight, so where do you think the next one's gonna be?
Archie Graham: Well, either low and away...or in my ear.
Shoeless Joe Jackson: He's not gonna want to load the bases, so look low and away.
Archie Graham: Right.
Shoeless Joe Jackson: But watch out for in your ear.
--Field of Dreams

As a young student of the game, I read, watched, slept, observed, copied, admired hitters. Probably to my detriment, I gave pitchers little thought. One pitcher, however, earned early mindshare.

Some of my earliest baseball memories involve Cardinals pitching great Bob Gibson. The first World Series that I remember was the 1967 Red Sox/Cards contest. Gibson pitched three games of the seven game affair. He completed and won them all. In 1968 the Cardinals returned to face the Tigers. Once again, Gibson pitched three of seven games. Once again, he completed them all, but finished 2-1 when the seventh game went the Tigers' way on a misplayed ball by Cards centerfielder Curt Flood.

Bob Gibson's lifetime World Series stats: 3 World Series, 9 games started, 8 complete games, 7-2 record, 1.89 ERA, 92 strikeouts. As good as the Giants Madison Bumgarner threw this past October, his World Series record has a way to go to match Gibby's.

Gibson also pitched one of the early games I saw at Crosley Field. Sitting behind homeplate and gazing thru Crosley's bulletproof glass backstop, I marveled as Gibson spun like a top toward the first base side of the mound after delivering his pitches.

A fierce competitor who had no problem throwing high and tight to maintain dominance. Happy birthday to Hall of Famer Bob Gibson, my favorite pitcher, who turns 79 today.

Preferential Inflation

So I went to the bank to see what they could do
They said, sir, looks like bad luck got a hold on you
--Simply Red

Many people seem to believe in the value of inflation (creating new money out of thin air) to bolster economic activity. Inflation is ostensibly referred to as 'money printing.' But in modern monetary systems, most money is created electronically rather than in printed paper form.

Primarily, inflationary cash is disseminated using one of two approaches. One approach is via the 'credit money' channel. The Fed begins the process by suppressing interest rates, and then lending digital money (created out of thin air) to large finanical institutions. These institutions either expand their own leveraged loan book using the credit money borrowed from the Fed as collateral, or they trade the credit money for their own account (again, often using leverage).

An important thing to remember about credit money is that it is a liability. Money created in this fashion puts someone in debt to someone else. Credit money disappears when loans go bad or are paid back.

Via the various 'quantitative easing' (QE) programs, the Fed can also give liability-free money to financial institutions. After the institutions purchase Treasuries and other securities on the market, the Fed buys those securities from the banks. The securities go on the Fed's balance sheet; the banks get the newly-minted-out-of-thin-air cash.

My question to those who see inflation as an economic development tool is this: Why do you endorse inflation being done in this manner? Why is it acceptable that printed money goes to financial institutions first? It is well known that early users of newly printed cash benefit the most. Why is it ok that financial institutions get preferential treatment?

Why isn't it more equitable to simply print the cash (rather on paper or electronically) and then distribute it directly to the citizenry?

Speak the Truth

"Speak the truth always, even if it leads to your death."
--Godfrey of Ibelin (Kingdom of Heaven)

Jacob Hornberger picks up where we left off the other day. The game of musical chairs between Republicans and Democrats will continue until the American people change the way they think about government. Much about how Americans think about government has been inculcated into them through years of indoctrination via education and media sources.

One problems is that many Americans believe that we have always had our present form of government. They do not realize that what we have today results from a steady drift away from the limited government principles of our founding ancestors.

The bigger problem, according to JH, is that most Americans actually believe that they are free--and that this freedom is due to our present form of government.

This is what Hornberger believed for many years. Through young adulthood, he firmly believed that he was free, and that government was responsible for granting people freedom. It was not until he seriously reflected on claims that Americans were actually surrendering their liberty that he realized his error.

How to facilitate a public change of mind? Speak the truth about freedom and about what the welfare/warfare state has done to compromise it.

Massive Speculative Carry Trade

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

John Hussman describes the current financial system condition very well: "At present, the entire global financial system has been turned into a massive speculative carry trade."

Carry trades involve borrowing funds at low cost and investing them in projects deemed to return higher than the 'cost of carry.' Carry trades involve leveraged debt used for speculative purposes.

Zero interest rate policies (ZIRP) and quantitative easing (QE) attract carry traders with their low cost funds and asset buying promises. Layer on top of that propensity for central banks to bail out risk gone awry and you have the perfect environment for huge, risk-laden carry trades.

Carry trades persist until either a) cost of carry goes up, or b) return on assets bought on margin with those borrowed funds forecast to decline. If either occurs then carry traders rush to close out their projects before margin calls begin.

With carry trades currently put on in such size, it is only a matter of time before the process reverses.

Voting the Rascals Out

Phil Connors: Do you ever have deja vu?
Rita Hanson: Didn't you just ask me that?
--Groundhog Day

In the 2008 elections, Dems trounced Reps. Tables turned in 2010, with midterms resulting in a GOP route. In 2012, Democrats dominated once again. And in yesterday's midterms, Republicans nearly ran the table.

Each time, the winning party claims a new era. And it is posited that the losing party is on the deathbed of irrelevance.

In reality, both parties are more alike than different. Statist mentality rules both parties. Policies that flow from this mindset are destined for failure.

It should not be surprising, therefore, that we experience this whipsaw action every two years. Because the electorate associates failed policies with the dominant party, the electorate votes those rascals out.

Unfortunately, the electorate generally votes in a new band of rascals.

The folly proceeds in Groundhog Day fashion...until non-statist ideas finally prevail.

Quarantine Power

Dave: My wife makes me take off my clothes in the garage. Then she leaves out a bucket of warm water and some soap. And then she douses everything in hand sanitizer after I leave. She's overreacting, right?
Dr Erin Mears: Not really. And stop touching your face, Dave.
--Contagion

Judge Nap suggests that federal government quarantines on people returning from Ebola relief efforts in Africa are wrong. I understand his point. Presumption of liberty, a tenet of natural law, precludes government from detaining people without due cause in the name of public safety.

I also understand the very real potential for government to abuse quarantine power.

But is there not a argument that due cause does exist here? Ebola transmission mechanisms are not well understood. There is a chance that relief workers can be carrying the virus in hard-to-detect manners. As such, the fact that these people were exposed to conditions that could have infected them and made them carriers could be seen as constituting due cause.

There is also an argument to be made that people who immerse themselves in contagious environments voluntarily surrender their liberty. Upon their return, there is some probability that they could contaminate others with a deadly virus. Thus, prior to reentering their home society, their freedom must be restricted until it is determined that they do not threaten the freedom of others.

Refusing or avoiding quarantine in such a situation could be seen as aggressing on others. Even if the aggressor does not intend serious even lethal harm, it could happen nonetheless (similar to 'involuntary manslaughter').

One remedy is to make people who do in fact infect others liable for harm that they consequently bring to others. However, establishing clear causal links in such circumstances would likely be difficult.

Quarantine, then, seems a plausible alternative. It can be seen as consistent with the proper scope of government--that being to help people protect their person and property against infringement by others. The returning relief worker who avoids quarantine in situations where knowledge about a lethal virus is lacking can be seen as committing an act of aggression on others. Government-facilitated quarantines help individuals defend themselves against this aggression.

Viewed in this light, presumption of liberty rests with the people who might get infected rather than with the relief worker.

Perhaps this is a case where the Welfare Clause rightly applies...

Terminal Tax

Do it nice and easy now
Don't lose control
A little bit of rhythm
And a lot of soul
--Grand Funk Railroad

I love Union Terminal. It may be the best of all Cincinnati landmarks. Its art deco structure, the murals, its position in American history indeed make it a true treasure.

However, my love for Union Terminal gives me no right to force others to surrender resources to preserve it. I am aggressing on them if I do.

This is why there is no such thing as a 'good' tax levy. Unless all are for it, in which case government enforcement is not necessary because voluntary cooperation rules the day, tax levies are instruments of force--the majority furthering their interests by robbing the minority.

Guildthink

Dean Yeager: Dr...Venkman. The purpose of science is to serve mankind. You seem to regard science as some kind of dodge, or hustle. Your theories of the worst kind of popular tripe, your methods are sloppy, and your conclusions are highly questionable. You are a poor scientist, Dr Venkman.
Dr Peter Venkman: I see.
Dean Yeager. And you have no place in this department, or this university.
--Ghostbusters

In a WSJ article, Amity Shlaes suggests that the economics profession is guilty of 'guildthink.' Economists shut out innovative ideas in favor of status quo concepts. Such a notion, of course, is not new. Narrow, status quo thinking has influenced scientific progress for centuries.

Indeed, when viewed through the lens of institution theory, guildthink is a predictable phenomenon. Social pressure builds inside the economics field to promote such normative isomorphism.

Over time, growing uniformity of isomorphic behavior reduces the variation necessary for successful adaptation. Pressure to adapt overcomes pressure to conform, which topples guildthink status quo in favor of ideas with more validity.

Agency Theory

What does it matter to ya
When you gotta job to do
You gotta do it well
You gotta give the other fella hell
--Paul McCartney

Agency theory (Alchian & Demsetz, 1972; Fama, 1980; Jensen & Meckling, 1976) posits that goal incongruence causes problems among cooperating parties. These cooperating parties could be customer and supplier, owner and manager, investor and financial advisor, voter and politician or any relationship where one entity delegates work to another. The delegator is the known as the principal and the delegatee is known as the agent.

The relationship between principal and agent is a contractual one. The principal 'contracts out' to the agent.

Goal incongruence is assumed to stem from axiomatic varied self-interests among individuals, which make it difficult for principals to insure that agents will perform per principal wishes. It is also assumed that information about goodness of agent work and outcomes is a commodity that can be purchased (Eisenhardt, 1989).

Principals therefore contract with agents using two primary approaches. Behavior-oriented contracts (monitoring) employ salaries and hierarchical governance to specify appropriate agent activities and to observe activity execution. Outcome-oriented contracts (incentives) employ commissions, options, and market governance to specify appropriate outcomes and to provide 'carrots' for agents to achieve those outcomes.

Various problems can reduce the effectiveness of these contracts. Regularly monitoring agent behavior may be difficult in many circumstances, thereby making the cost of acquiring information about agent activities prohibitively expenseive. Causal ambiguity about the relationship between agent behavior and outcomes, and poor agreement about goals and means to achieve them can impair the effectiveness of both monitoring and incentive arrangements.

As uncertainty increases, effectiveness of contract is reduced. Agents are more likely to shirk--i.e., fail to fully deliver on their their contractual responsibilites. Principals might also exploit uncertainties to procure better terms from uninformed agents.

High levels of uncertainty suggest alternative mechanisms of integration and coordination (e.g., joint ventures, mergers) in order to manage the relationship (Nilikant & Rao, 1994).

References

Alchian, A.A. & Demsetz, H. 1972. Production, information costs, and economic organization. American Economic Review, 62: 777-795.

Eisenhardt, K.M. 1989. Agency theory: An assessment and review. Academy of Management Journal, 14: 57-74.

Fama, E.F. 1980. Agency problems and the theory of the firm. Journal of Political Economy, 88: 288-307.

Jensen, M.C. & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3: 304-360.

Nilikant, V. & Rao, H. 1994. Agency theory and uncertainty in organization: An evaluation. Organization Studies, 15: 649-672.

General Welfare

We don't move in any 'ticular direction
And we don't make no collections
--The Who

The 'Welfare Clause' is often cited as justification for myriad federal government programs including socialized medicine and social security. However, couched in the notion that all individuals are equally endowed with certain inalienable rights, and that all people should therefore be treated equally under the law, only those federal programs that can be construed ex ante to result in equal benefits for all are valid.

Of course, this perspective would drastically reduce legitimate federal programs as few would pass the true general welfare test.

This was the scope of the Welfare Clause that Jefferson, Madison, and others had in mind.