Posts tagged with ‘postnormal’
The Economist reviews Martin Wolf’s The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis, and shows a centrist going rogue. The world economy has not healed itself following the last bust in 2008 because the systemic issues have not been addressed: there is too much of a reliance on banks and too little effort into making our financial systems resilient. Wolf seems to have seen through the fog of confusion arising from the crash of the economy, and he sees we are in the postnormal, where everything has changed.
The Economist, The world economy: How to fix a broken system
Mr Wolf’s proposals stem from an exhaustive assessment of the origins and contours of the crisis, which make up the bulk of the book. Plenty has already been written on this; “The Shifts and the Shocks” contains little that has not been said elsewhere. Mr Wolf’s contribution is comprehensiveness and a piercing logic in piecing the disparate elements together. He weaves the macroeconomic and financial elements of the crisis, its origins and aftermath, into an all-encompassing analysis. Along the way he demolishes many of the popular explanations—such as that the mess was due to greedy bankers or to loose monetary policy—as too simplistic.
The result is convincing and depressing; there are no quick fixes. The origins of the crisis lie in the revolutionary changes in the structure of the global economy and finance in the 1990s and early 2000s (these are the “shifts” of the book’s title). The macroeconomic shift was the emergence of a “savings glut” as countries from China to Germany saved more than they invested, pushing down real interest rates. Both at a global level and within the euro area financial innovation and freer capital mobility transformed these excess savings into huge cross-border capital flows, sending asset prices and credit soaring and, in the process, creating an inherently fragile financial system. Unfettered finance transformed the savings glut into a credit bubble. And in both cases the bursting of that bubble worsened the savings glut, as households, companies and governments in Europe slashed their spending.
Mr Wolf argues that the post-crisis recovery has been feeble because too many policymakers failed to understand this dynamic. Rather than accepting that bigger fiscal deficits would be the natural counterweight to private thrift, politicians pushed for austerity. Far too little emphasis was put on restructuring unpayable debts. At the same time, the underlying causes of the savings glut have, if anything, become stronger as deeper factors such as rising inequality have kept overall spending weak. Larry Summers, a Harvard economist, has argued that the rich world faces “secular stagnation”. Mr Wolf also believes that weak demand is here to stay. So, too, is the fragility of finance. Despite “manic rule making” he argues that banks are still a powder keg, with insufficient capital, and are liable to wreak havoc when they blow up.
This grim assessment leads Mr Wolf towards radicalism, both in macroeconomic and financial reforms. His more moderate suggestions include requiring banks to hold vastly more capital and the creation of insurance schemes that allow emerging economies, the most plausible engines of demand, to import capital safely and sustainably. But moderate change may not be enough. Pushing his analysis to its logical conclusion, he argues that the only way to deal with today’s underlying problems—a fragile financial system and a secular weakness in demand—may be to move away from bank-based credit altogether and rely on permanent budget deficits financed by central banks. Forcing banks to match their deposits with safe government bonds would reduce the risks of bank crashes and encourage a healthier reliance on equity finance. Permanent money-financed deficits would, in turn, provide a safer way to sustain spending than private-asset booms and busts. If done responsibly, they need not cause inflation.
Radical to admit that the financial markets are not self-regulating. The next step is to move control of the financial system out of the hands of those who make money by manipulating financial markets.
There are some things too important to run by wagering.
The oversimplification of human risk appetite is yet another example of science being excluded from the discourse about economics, policy, and business. John Coates has show that different levels of hormones — cortisol, dopamine, and testosterone — can wildly alter people’s risk taking or risk aversion.
John Coates, The Biology of Risk
In one of my studies, conducted with 17 traders on a trading floor in London, we found that their cortisol levels rose 68 percent over an eight-day period as volatility increased. Subsequent, as yet unpublished, studies suggest to us that this cortisol response to volatility is common in the financial community. A question then arose: Does this cortisol response affect a person’s risk taking? In a follow-up study, my colleagues from the department of medicine pharmacologically raised the cortisol levels of a group of 36 volunteers by a similar 69 percent over eight days. We gauged their risk appetite by means of a computerized gambling task. The results, published recently in the Proceedings of the National Academy of Sciences, showed that the volunteers’ appetite for risk fell 44 percent.
Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge.
When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as “the hour between dog and wolf.” One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment.
Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite.
I consult regularly with risk managers who must grapple with unstable risk taking throughout their organizations. Most of them are not aware that the source of the problem lurks deep in our bodies. Their attempts to manage risk are therefore comparable to firefighters’ spraying water at the tips of flames.
The thesis of Coates’ article is that the Federal Reserve has two tools to influence the behavior of markets: the level of rates and the uncertainty of rates. By adopting a policy of very gradual changes in rates — rate stability — the Fed is decreasing the cortisol in traders’ bodies, and so we have moved into a prolonged period of boom-and-bust. As he suggests,
Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community. People running factories or coffee shops or drilling wells might not even notice. And that means the Fed could keep the level of rates lower than otherwise to stimulate the economy.
IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.
And that possibility opens up exciting vistas of human performance.
I wonder about that last statement, but we are well-served to keep his basic findings in mind: people’s risk profile is not a stable attribute, and as a result our risk-seeking or -aversion changes based on our perception of uncertainty.
We’ve moved into an era of increased uncertainty, but our bodies haven’t adapted to it. As a result, the amplitude — the beta — of boom-and-bust market cycles is increasing, and nothing short of controlling the blood chemistry of traders, CEO, and policy makers will slow it.
Welcome to the postnormal.
The way the world’s financial markets ‘work’ has ceased to follow classical models, and now the experts cannot track risk. Welcome to the postnormal.
Susanne Walker and Liz Capo McCormick, Unstoppable $100 Trillion Bond Market Renders Models Useless - Bloomberg
If the insatiable demand for bonds has upended the models you use to value them, you’re not alone.
Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters. Priya Misra, the head of U.S. rates strategy at Bank of America Corp., says a risk metric she’s relied on hasn’t worked since March.
After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion. With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade.
“The world’s gotten more complicated and it’s a little different,” James Evans, a New York-based money manager at Brown Brothers Harriman & Co., which oversees $30 billion, said in a telephone interview on May 30. “As far as predicting direction up and down, I don’t think they have much value,” referring to bond-market models used by forecasters.
In an economy where secular stagnation has taken hold, and the world’s currencies are spiraling in a liquidity trap, it appears we are still in a crisis; but people are spending a great deal of time talking about heading off the next one.
A hundred trillion being invested in bonds because investors can’t accurately gauge risk, and the degree of complexity and uncertainty continue to rise, and — despite the hype about big data — no one seems to know where things are headed.
Recent experience suggests that the productivity of farmland won’t decline gradually as the world grows warmer. World food prices stopped their long secular decline around 2007 and have been on a roller-coaster ride since. More volatile weather patterns promise to bring sharp disruptions to agricultural production that can cause spikes in food prices.
“There is a rigorous correlation between food price spikes and urban unrest,” said Andrew Holland, who studies climate change at the American Security Project, a research group in Washington. “There was a food price spike in 2008, and you can see unrest spread throughout Africa. And there’s a relatively clear line that leads from the food price spike in 2010 tounrest in the Middle East and the Arab Spring.”
Instability spreads easily. When rice prices jumped in 2007, big producers like India and Vietnam banned exports to protect their domestic markets, while importers like Bangladesh, Nigeria and Iran went out on the market to hoard as much grain as they could. The combination wreaked havoc in commodity markets.
Since then big food importers, like China, Saudi Arabia and South Korea, have tried to insulate themselves from future food shortages by buying or leasing agricultural land in places like Sudan, Madagascar and Uzbekistan. The strategy is still to be tested in a situation in which Africa or Central Asia were to suffer itself shortages of grain.
“I have run some war game scenarios,” Mr. Holland said. “The tendency becomes very quickly for a country to look after its own interests.”
David Brooks is a strange combination of insight and ideology. He is a conservative at the core, and as a result his occasional epiphanies regarding the social nature of human life, society, and culture wind up in strange territory, like a fox with its head caught in a cookie jar.
This newest episode has Brooks summarizing a recent Pew Research Center survey (which he didn’t link to), which shows that Americans believe — for the first time ever — that the US is having a declining influence on what’s going on worldwide, although they are not advocating isolationism, but instead a deeper integration in the world.
This contemporary, postnormal worldview seems like a dilemma requiring resolution to him. He contrasts it with the false certainties of the postmodern — where his feet are still firmly planted — and then scratches his head in wonder:
David Brooks, The Leaderless Doctrine
These shifts are not just a result of post-Iraq disillusionment, or anything the Obama administration has done. The shift in foreign policy values is a byproduct of a deeper and broader cultural shift.
The veterans of World War II returned to civilian life with a basic faith in big units — big armies, corporations and unions. They tended to embrace a hierarchical leadership style.
The Cold War was a competition between clearly defined nation-states.
Commanding American leaders created a liberal international order. They preserved that order with fleets that roamed the seas, armies stationed around the world and diplomatic skill.
Over the ensuing decades, that faith in big units has eroded — in all spheres of life. Management hierarchies have been flattened. Today people are more likely to believe that history is driven by people gathering in the squares and not from the top down. The liberal order is not a single system organized and defended by American military strength; it’s a spontaneous network of direct people-to-people contacts, flowing along the arteries of the Internet.
The real power in the world is not military or political. It is the power of individuals to withdraw their consent. In an age of global markets and global media, the power of the state and the tank, it is thought, can pale before the power of the swarms of individuals.This is global affairs with the head chopped off. Political leaders are not at the forefront of history; real power is in the swarm. The ensuing doctrine is certainly not Reaganism — the belief that America should use its power to defeat tyranny and promote democracy. It’s not Kantian, or a belief that the world should be governed by international law. It’s not even realism — the belief that diplomats should play elaborate chess games to balance power and advance national interest. It’s a radical belief that the nature of power — where it comes from and how it can be used — has fundamentally shifted, and the people in the big offices just don’t get it.
That’s the Brooks insight. Yes, we believe that the people in the big offices don’t get it. We are past Reaganism, and Realpolitik: we don’t trust the players that want to play those games. The ideal of a unified International community ruled by law — a la United Nations, or, in the small, in a united Europe — has fallen short, and those organizations are themselves the dreams of the last half of the 20th Century. We look at today’s world order — architected by those ideals — with a resigned sense of profound worldweariness. The defining emotion of our time is weltschmerz, not the nostalgia of the postmodern.
We aren’t waiting for a Jack Kennedy or an Eisenhower to stare down Putin. We know they are all involved in a game of thrones, and we are just pawns, and the world is the spoils.
Brooks, the fox, then gets trapped in the past, and seeks to delegitimize a postnormal rejection of statism and neoliberal globalism:
It’s frankly naïve to believe that the world’s problems can be conquered through conflict-free cooperation and that the menaces to civilization, whether in the form of Putin or Iran, can be simply not faced. It’s the utopian belief that politics and conflict are optional.
Again, postmodern values always lead to postmodern conclusions. Here Brooks calls those that reject the present day system ‘naïve’ and ‘utopian’. Personally, I consider the postnormal worldview to be protopian: I hope to be able to make the world slightly better. And the primary path of that is dismantling the worst aspects of the postmodern, which has been thrown into our hands like a ticking bomb.
Globalist political conflict and neoliberal financial markets have been brandished as the primary means of ensuring a world order for the past century and more, with decidedly mixed outcomes. Just look at the state of the world today: global warming, conflict and revolution everywhere, sectarian terrorism, genocidal policies, end-of-days religious bigotry, worldwide ineqaulity, and with power concentrated in the hands of the few to the detriment of the many. Is it any surprise that, at long last, we have come to a new appreciation of all systems where we, the people, are led by a powerful elite?
We live in a country in which many people act as if history is leaderless. Events emerge spontaneously from the ground up. Such a society is very hard to lead and summon. It can be governed only by someone who arouses intense moral loyalty, and even that may be fleeting.
On the contrary, history is the tale told by the victorious leaders of past conflicts. It is the future that we hope will be leaderless, where we can harness the technologies of the postnormal to bypass leaders and enact direct democracy based on truly human, local, and global principles of equality.
Brooks, of course, sees only a void at the heart of the swarm, and the destruction of the institutions he believes are needed; where I see a multitude connecting to make a new world order, one that does without leaders trying to get us to march off to war or over a cliff, but instead displaces top-down organization with bottom-up association.
Brooks ends almost spuming in despair, while I find in this growing American rejection of the principles of the postmodern a reason for hope, a new pole star to steer by.
This is one reason that I am promoting leanership as the alternative to leader-focused organizations. The book I am writing — Leanership: A New Way of Work — explores these principles within the business context, but the logical outgrowth is the reworking of our institutions — including governments — to adopt the premises of postnormal economy and culture.
"We—the dronesexual, the recently defined, though we only call ourselves this name to ourselves and only ever with the deepest irony—we’re never sure whether the humming is pleasure or whether it’s a form of transmission, but we also don’t really care…There are no dronesexual support groups. We don’t have conferences. There is no established discourse around who we are and what we do. No one writes about us but us, not yet."
Dronesexual — that’s a new usage.
Drones are the defining dark appliances of the postnormal. Not the tablets we hardly think about as we type, or the smart barnacles sticking to us and the walls of our homes. It’s the glitched video streams and the over-saturating images of rockets slamming into mud-sided buildings in the over-green darkness in the screens, the near-silent, near-insect whine of their roaming search. Will they find us? We know they can see us. We know we are known.
It’s not a sexual attraction for me, but I don’t kink for bondage, but I see how it could be a reaction to surveillance, some frisson of pleasure from being aggressively watched.
She goes on:
One of the things that we often see in dystopian fiction – at least, in dystopian fiction that deals with a god-like, usually fascist state – is the idea of sex-as-resistence. Sex is presented as something unregulated and unregulateable, at least when sex is the result of the personal desires of the protagonists. It’s not uncommon in older dystopian fiction to see sex made into a kind of state-mandated “mating” solely for the purpose of social control and reproduction, but that almost always exists to contrast with the kind of revolutionary sex engaged in by the heroes (or rather, the hero and the woman who just can’t keep her hands off him, because of course it’s always a man wearing the hero-pants).
But something you see less often is a story that deals directly with power – at least state power – and the eroticism of being known.
I’ve written about this before, the erotic aspects of the Gaze, the ways in which the predatory nature of being seen drifts into the territory of possessive sexuality. There’s an intimacy in being known, and – again, to reference Foucault on a basic level – we often assume that anyone who fucks us gets to know something about us, at least when the fucking is coupled with emotional intimacy and connection. Someone really knowing us is sort of supposed to make us want to have sex with them. When someone has sex with us, they know us. This is naturally a massive oversimplification, but these are powerful ideas that underpin not only how we tend to conceive of sexuality but what kinds of sexuality we tend to identify as desirable and appropriate.
Drones have become a symbol of contemporary surveillance, a thing that’s always there and always watching and always potentially capable of doing harm. Sometimes this harm is through direct violence, and sometimes it’s merely the delivery of data to people who can use it against you. But either way, there are two aspects to the erotic power of drones, and they’re interrelated: Being known, and being controlled.
Robin James wrote a fantastic response to my post linked above, wherein she discusses the idea of droning as a process of the regulation and control of people (emphasis hers):
So, where the gaze regulates people by fixing them as objects (as, for example, Frantz Fanon argues the exclamation “Look, a Negro!” does), droning regulates people by creating the conditions that lead them to exhibit the wrong (or right) sort of profile, the sort of profile that puts you on watch lists, that disqualifies you for “discounted” credit, health insurance plans, etc…The gaze and the drone are absolutely not opposed or mutually exclusive; more often than not, they’re deeply and complexly implicated in one another. That’s why super-panoptic surveillance is above or on top of regular old visual panopticism; it’s an additional layer, not a replacement.
What I think that characterization requires me to talk about here is the kind of power exchange that we find in BDSM and other forms of kink, which get their sexual power from the eroticism of surrender and dominance, laying yourself bare to someone else and putting your body under their control, for them to give pain or pleasure or merely orders that have to be obeyed. There are many, many kinds of kink, of course, and this is another oversimplification, but I think for a lot of people, this serves as much of the underpinning. Surrendering to someone else sexually is itself incredibly erotic, and even if one isn’t truly known or truly controlled, the pretense of it is powerful.
The act of surrendering to the drone might be an aphrodisiac, because we know they know us, and because to be known, deeply, is foreplay.
In a world of real and imagined pressures to move fast, architects are rendering people as ballistic objects, hurling through designed spaces:
Sue Shellenbarger, How Busy Colleagues Spread Secondhand Stress - WSJ.com
Architects have begun blurring human figures in drawings of new-office projects, to appeal to clients who aspire to active, high-energy workplaces, says Jorge Barrero, a technical designer in Chicago for Gensler, an architecture, planning and design firm. The image is one clients “can connect with on an emotional level,” Mr. Barrero says.
Tom Krizmanic, a principal with Studios Architecture in New York, says about a quarter of the 218 designs he helped judge in a recent office-design competition, co-sponsored by Business Interiors by Staples, showed humans as blurred figures in motion. The trend began about three years ago, he says.
This may be the enterprise elite’s equivalent of the new aesthetics. Instead of glitch art and drones, though, it’s executives sprinting through foyers or hallways, striding purposefully across streets, just on the verge of reaching escape velocity.
Krugman parses Larry Summers recent IMF talk, and finds at the core the hard paradoxes of the postnormal: Secular Stagnation, where the liquidity trap inverts the order of the economic universe.
If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.
Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”
He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.
Amazing stuff – and if we really are looking at secular stagnation, he’s right.
Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.
One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go theKrugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.
Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!
But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.
Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.
I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.
A comment I made that actually got applause during an open and free-wheeling session at IBM’s Cloud Forum, today.
Because of the increasing pace of business today, the only sensible strategy is to become more risk tolerant, but companies are not in general adopting that mindset. Things are moving faster but business leaders are not moving to reduce the friction in their business to keep pace.
The average company lifetime was 75 years 50 years ago, and today it is fifteen. I bet that in five it will be down to ten, and that’s because management still thinks it’s smarter to operate with a foot on the brake instead of on the accelerator. It seems that should be true, it’s intuitive, but it isn’t anymore.
We’ve moved into a new economy where the fundamental rules have changed, and the operating premises the past are not only broken, but dangerous.