Inequality and Political Change

Research Affiliates posted an interesting article today titled, "The Profits Bubble. "

The gist was that outsized profits are controlled (or allowed) by government and when they get too big (there is a trade-off between profits and income), the resulting growing inequality leads to social unrest and political change. The article correctly argues that profits cannot grow at a faster rate than the economy for too long and established that they have been growing at a faster pace than the economy for the last 20-30 years.

I think this idea/notion is correct. The problem is one of timing. It is very hard to know when or what the last straw will be that has been added to the camel's back. Changing societal/cultural norms and rising living standards around the world (rising economic tide in developing world, falling cost of living in developed world) are likely to make this process alot longer than prior history examples (maybe).

Societies are just like markets inasmuch as they are tightly coupled complex systems prone to periodic crisis and unravelings.

Salt, Sugar & Fat = Money, Sex & Violence

The food industry knows what we like to eat and how to get us to eat. Salt, sugar & fat are the holy trinity of food sales.

Similarly our society and culture has its own irresistible fantasy based upon its own holy trinity of insatiable desires - money, sex & violence.

The facilitator is tv, movies, and videogames, and the enabler is the entertainment industry.

A Book I'd Want To Read

I reckon this is a good book idea.

Need to think about this a little.

An account of the origins, the people and the ideas behind our modern mindset and culture, and how those ideas became embedded in our modern belief system.

Example
The idea of social justice.
Modern fatalism and nihilism.
Deterministic materialism.
Humanism.
Secular liberalism.
Existentialism.
Being and becoming.
The social contract.
Identity.
Origins.
Rationalism vs scientism.
Utilitarianism vs evolutionary naturalism.
Pragmatism.
Idealism.
The role of the state.
Collectivism v radical individualism.

Global Socio-Politico Trends

Post the Great Depression the global socio-economic trend among political elites was toward greater government involvement in the economy. That trend finally came to an end, shipwrecked on the rocks of the 70s recession. But by the time it had run its course, it had blended opposing socio-economic ideologies into indistinguishable political forms. Turning, so-called "conservatives," such as Richard Nixon, Edward Heath, Helmut Schmidt, Valery Giscard d'Estaing, Malcolm Fraser, and Robert Muldoon into quintessential socialists. Such is the pressure of a trend and a supportive ideology (Keynesianism).

The natural backlash to the expanding Statism of the 50s, 60s, and 70s, was the countermove toward deregulation and financial liberalization in the 80s and 90s, led by Margaret Thatcher and Ronald Reagan (supported incidentally by ideological liberals Francois Mitterand, Bob Hawke and David Lange in France, Australia, and New Zealand respectively). This trend now appears to have run its own course, shipwrecked on the shoals of the Global Financial Crisis, with Tony Blair and Bill Clinton the best examples of political actors who melded their opposing ideological disposition to the dominant ideology of the time (monetarism). Whether Democrat or Republican, Labour or Liberal, the times and the culture might change, but the dominant political parties seem to move symbiotically together.

Interestingly, the role that President Carter played (serving in the transitional flux between periods) might serve as a template for the role that President Obama is playing, as socio-political forces work out a new direction.

"plus ça change, plus c'est la même chose"

Tiger! Tiger! Tiger!

Quite apart from the media frenzy over the car crash, salacious revelations, and gross invasions of privacy (sadly, a grotesque reflection of our modern culture).

What were you thinking!

Eliot Spitzer (and every other high powered guy messing around with flouzies) comes to mind.

What are these guys thinking? I'm not sure I want to go there.

It isn't the first time, and it sure won't be the last. I don't really think anyone is surprised. Just disappointed. There are plenty of high powered folks who have led lives of honesty, integrity and fidelity. That does not mean they are perfect, only that their weaknesses and indiscretions are "normal."

We're not in Kansas anymore Toto

I've written about this before, but I think it bears repeating.

The market and the environment in which investment decisions are made and investors interact has meaningfully changed over the past fifteen to twenty years or so.

The advent of new players (bank prop desks), new investment vehicles (hedge funds, SWFs, private equity), new investment instruments (ETFs, fixed income related derivatives), new quant strategies (HFT), increasing computing power, access to and the manipulation of voluminous mountains of financial data, and the willingness to use leverage, all combined with evolving academic support for momentum strategies has changed dramatically the nature and complexion of investment markets.

The best way I can think of to describe the market these days is either like a run and gun engagement, or as a game of chicken. Either way, it usually ends badly for someone.

I would also point out that these changes to and in markets, parallel in many ways some of the changes to our society and culture.

Where did we get our stomach for risk

It amazes me the gutsiness of the guys who sit on prop desks, or at hedge funds making market bets with 20x-30x-40x-50x leverage. I don't know how they do it! One wrong move and it all goes poof.

Is it ego? Is it hubris? Is it bravado? Is it incentives? Is it stupidity? Is it madness? Is it skill? Is it luck? Is it greed? Is it insecurity? Is it peer pressure? Is it culture? Is it ambition? Is it hope? Is it faith? Is it the will-to-power? Is it immaturity?

The one thing they invariably have in common is that it is someone else's money.

This penchant for risk among our financial superstars has slowly, but insipidly made its way through the system. To the point where modern Anglo-Saxon economies are a mere shell of their former financial selves.

One way or another change is coming. It may be through enlightened cultural norms (don't count on it), more likely it will be through enlightened self-interest brought on by economic necessity.

The choice is ours (if only there was leadership to help navigate the waters). We can either take our medicine now (manifest in a deep recession) or we will experience something a lot less savory later.