Letter to RL

2

August 2016
Ivan Obolensky

Note from Mary Jo: This month’s article is unusual, as it is a response to one of our readers, who wrote Ivan with questions and a request after last month’s article. The comprehensive response also addresses current events in the framework of history. We thought other readers might enjoy it.

Letter from RL:

Ivan… Your article was thought-provoking as usual, and it prompted a couple of questions. I accept the equation, that is, intake minus output equals surplus or profit, but it raises the question of actual balance in the universe. It seems, with humans, the actual goal is balance. If intake wins, doesn’t obesity result? If output wins, don’t we wither and die? In a slightly different vein, when a corporation generates profits, aren’t those counterbalanced by losses somewhere else? I’m fuzzy on this next point, but isn’t energy a zero sum game*? It gets used, but doesn’t it simply change forms and get reused? But here’s my main thought, actually a request. The talking heads have given us plenty of examples of Donald Trumps through the ages, and in most cases, they can tell us what happens next. For example, McGovern was completely out of step with his Democratic party in 1972, but 25 years later, his views were the Democratic mainstream. Same with Goldwater. More negatively, Joe McCarthy finally was recognized as a nut and his brand of witch-hunting died. Here’s my request. Does the current world situation… Islamic Fundamentalism, worldwide terrorism, governmental chaos throughout the countries of the world, the rise of nationalism throughout the world, etc… have any parallel periods in history? And if it does, what happens next? Since you’re the only pure researcher I know, I decided to “Ask Ivan!” RL

*A zero sum game is where someone can win only if somebody else loses.1

Answer:

Hi Ron,

You raised many interesting points, and I will attempt to answer them with this somewhat lengthy reply.

Balance:

Balance would seem to be the goal; however, the universe as a whole may not be in balance. It is likely inflationary, at least from our current understanding.

Over the last century, cosmological ideas about the universe have evolved from that of a universe in equilibrium to an expanding one. Einstein believed in a non-expanding universe and even added a constant to his famous field equations to allow for this. (His original work had not included it.)

Observational data counteracts the static view he advocated.

Intergalactic distances are increasing, and the farthest galaxies are moving away faster than the closer ones.

We know this because light from the spectrums of stars in observed galaxies are red-shifted, showing they are moving away. Blue-shifted stellar spectrums show objects are approaching. Non-shifted spectrums show that the distance between galaxies is constant. The red-shifting of galactic light means that on a large scale, the universe is not in balance. It is inflating. It may be oscillating (expanding and contracting over very large cycles of time) but we are only able to observe the remnants of the last Big Bang.2

Balance is also another way to say that a system is in equilibrium. Equilibriums take many forms and are not always motionless. Many comets have stable orbits that are cyclic but extend well beyond the solar system. Equilibriums can also have different regimes. Spin characteristics of certain aircraft can have more than one mode, some much more rapid than others.

The reason there are equilibriums, at least from my point of view, has to do with the conservation of energy and other conservation laws (charge, angular momentum, etc.), which leads to symmetries of all kinds. One could think of symmetries as things being in balance.

Equilibriums form a large part of economics. Money is not a real form of energy, but there is a loose connection because, ultimately, it is tied to the real world, and in that environment, conservation laws apply. If we look at economic expansion through the use of leverage (loans), capital (energy) is created out of thin air, used to build plants, etc. that create real-world goods. The creation of money is where the energy and money parallel breaks down.

Profits are never guaranteed. Profits occur when there are pricing and demand asymmetries such as the prices of fruits in the Northern Hemisphere during winter as opposed to summer when fruits are plentiful. Shipping from South America becomes profitable because of seasonal differences. If you own a company that makes iPhones and people want them, you can charge accordingly, or as much as the market will bear if you are the only supplier. Because the margins are so high, competitors, seeing the profit potential, will invest to capture them and, thus, take them away. This leads to competition and margin squeeze. (Apple has a 39% profit margin, which is huge).3 Profits in the monetary sense are not a zero sum game. Profits occur because of the asymmetric distribution of goods and demands for them. The operations of economic entities for the purpose of creating profits promotes the formation of equilibriums and the restoration of balance over time. If there are no imbalances, there are no profits and pay for work becomes problematic. One can create equality of opportunity, but economic equality for all is doubtful.

The relationship between money and the physical things money buys is also asymmetric. From the money side of the relationship, money is not a zero sum game. When viewed from the physical part of the relationship between money and things, it is at least close to a zero sum game.

Take a house in the 1920s. It was yours for 10K. Say you sold it for 150K years later (or now for 1.5 million). If you wanted to buy another comparable house, how much did it cost at the time? 150K, the same as the one you sold. Suppose you decided to rent instead as you waited for housing prices to decline? Let’s say they did and you buy the same house for 100K (50k less), you would profit by that amount, but in terms of the number of goods (houses in this case), there was no change, only the price was different. You took advantage of a temporal asymmetry in pricing.

This concept becomes important in the current economy.

In the past, long-term profitable enterprises came about from the creation of goods that were in demand, where profits could be made by charging high margins kept in place by improving production costs. These enterprises required capital expenditures: investments in plants, ideas, etc.

Currently, low interest rates are leading to over-investments in production.

Chinese steel is a good example. There is so much of it, the steel is either dumped on the market, driving the steel producers in other countries out of business, stockpiled, or the plant is closed. There is waste because the excess steel will eventually disintegrate. At the very least, it is throwing away resources that may have been better utilized rather than taking up space as a giant pile of metal.4

Companies should be investing in things that are profitable for them in the future. Where to allocate and invest capital is one of the most important management decisions, according to Warren Buffett. The many different markets of the world used to tell participants where to invest resources and where asymmetries existed. The price of each trade would tell you this information. If oil was high, a new oil facility becomes a good idea if it pays to get the oil out of the ground. If the profit margins are there, the plant is built. With more production, oil prices fall. Those now looking to invest in oil production will put off their investments in new plants because it makes little economic sense. The profit is insufficient. This points out one of the most important aspects of free markets: price discovery. Markets exist not just to buy and sell things. They allow participants to discover the real costs of goods and based on this information, make informed, intelligent allocations of resources.

Nature does the same, but it will invest in procreation rather than in creating new species when all else fails. Nature will overdo it just like our economies, but the diversity is such that the excess production in the form of large numbers will be consumed by other species (predator-prey relationships, parasites, etc.) so waste is minimized. This is one of the reasons biodiversity is so important. Resources are never wasted, which is why we say Nature is in balance when it is not, at least not all the time. Because no single species can totally collapse the overall equilibrium, the human species excluded, life goes on. Underneath the surface, however, there are large swings in terms of population sizes, but because of the diversity, it all works. Environmentalist arguments about species preservation have a point for this reason. Diversity is precious because it minimizes nonutility and waste.

In the economic world, there is not as much diversity as in nature. Wasting resources becomes an issue when resources are unable to be used. The ghost cities of China are an example. Due to limited avenues of investment and lots of available money, whole cities were built but never occupied. The waste in terms of resources, time, and capital is staggering.5

Asset bubbles skew the prices of goods and can make proper capital investing difficult and even irrational. For example, many listed corporations take out close to zero interest loans. They buy back their stock in the open market with the proceeds to reduce the number of shares and raise the company’s Earning Per Share (EPS). This makes them look better than they are. In addition, paying out dividends, rather than reinvesting in new means of production, makes their shares enticing to yield-starved investors. This may make sense over the short term but not over the long term.

Behind much of this behavior are central bank easy-money policies. In addition, several large central banks have implemented asset purchase programs. The central banks of Japan and Switzerland have some of the largest stock portfolios in the world.6

How will this end?

Once a system is in equilibrium, it can remain in that state for some time. Energy thresholds hold a system in place because it requires energy, often large amounts, to destabilize it sufficiently before a new and often more disorderly equilibrium forms.

In chemistry one sees this with the heat of fusion and the heat of vaporization. These are defined as the amount of excess energy needed to change a solid to a liquid or a liquid to a gas without changing its temperature. Vapor has more inherent energy than liquids.7 Steam burns are much more serious than those from boiling water because of the excess energy steam contains relative to liquid water.

Historically, political and economic equilibrium changes require large shocks usually brought about by several simultaneous events.

With the above in mind, I will answer your main question.

Are there parallels in history?

Today we look at the past to predict the future.

Humans love predictability, but what makes things predictable?

Many believe life is not predictable, but if it weren’t predictable to some degree, physical laws could not exist. On a fundamental basis, information can be compressed. Compression works because it has structure that is repetitive. Take all the repetitions away and the volume of data is reduced. Physical laws take physical information and reduce it. By knowing the laws, we don’t need the specifics because we can deduce what they must be from the laws. It is likely that all physical laws ultimately derive from conservation laws.

Conservation laws lead to symmetries, and symmetries allow one to predict. Whether symmetries are the result or the ultimate reason for physical laws is not exactly clear.

Symmetries occur in several laws of nature, many of which are linear. Newton’s laws are linear. Shoot a cannon, and the ball goes up and down. It starts. It travels. It stops. One can predict the ball’s behavior knowing the laws both backward and forward in time. It’s deterministic. Knowing the initial conditions, the end is known.

The other way to predict is using cycles. All things oscillate, including matter. Why they do this may have to do with conservation laws again. Tides, orbits, sun spots are examples. They are all cyclical in that the same or similar cycle repeats over and over.

There are also things that are not cyclical, not linear and also unpredictable except when viewed in aggregate. The discovery of radioactivity threw the science world on its head, not just because of its mystery, but because it required a probability function to describe its behavior. Randomness actually existed and causality’s place in the universe needed serious reappraisal. If you wanted to know everything about the world with certainty, and scientists did, it was a hard pill to swallow. In a short space of time, certainty, determinism, and complete knowledge of the universe became an impossibility.

In the late 20th century, chaos theory further chipped away at predictability. Determining the future using linear laws depended on knowing the initial conditions and these were impossible to know with the accuracy necessary for long-term forecasts of behavior. Predictions had limits. Weather forecasts, for example, extend only to days, not months, and certainly not years, because small changes in the initial conditions of the processes involved lead to large changes in outcomes over time (climate change).

One of the more popular prediction tools is statistics. Computerization and statistics are very compatible. Big Data and the mining of trends and tendencies of a population take the randomness associated with individual action and observe the behavior of the whole, from which conclusions can be drawn. Classifying data and determining the profiles of classes of individuals, given certain prerequisites and constraints, allow the statistical operator to determine the probability of an individual being part of a specific group, with all the Big Brother implications that implies. What is often overlooked is that any such conclusion or determination using these methods is a probabilistic one. Even DNA testing is a probabilistic event, not a causal one. There is always a measure of uncertainty even if the accuracy is to 99.9999%. Given a population of one billion, .0001% of the population is one thousand individuals. What if you are one of the thousand?

Given the above, the most useful prediction tool is cycles. Cycles are repetitions that happen regularly. Because of their regularity and symmetry, they work backward and forward in time. Tide tables can be calculated years in advance and years into the past. We know when Caesar was in Gaul because he reported he lost a bunch of men due to a specific tidal pattern. Since we know the cycle of this pattern, we can look back and precisely determine when this occurred.8

Kondratieff and others, such as Martin Armstrong, for one, perceived that history had 70-90 year cycles and have used these as predictive tools.

See “Is it Possible to Predict the Future?”

William Strauss and Neil Howe, authors of The Fourth Turning, had a generational approach.

The subject of using previously observed historical cycles to determine the future is controversial and given the information outlined above, one can understand why. One can know that an event will happen with certainty (each of us will die) but not the when. Nonetheless one can still get some useful information knowing that in aggregate whole generations flood schools, enter the workplace, retire and then live it up, or work some more. These tendencies and trends move as large demographic waves over time and have a predictable average life cycle.

Given the above, let’s do some predicting.

According to Strauss and Howe, each generation lasts 20 years with a full cycle taking 80 years, a human lifetime, to complete. The US started in 1776 and if we add 80 years, we get 1856 which is about the time of the Civil War. Add 80 years again, and we are close to WW2. Add another 80 and here we are now. Again there is some give and take. So the three periods which are similar to today are the ones just before 1776, the Civil War and WW2.

We will look at those periods, but first let me say this: the present compared to the past is still pretty tame. Current instant newsfeeds allow more distribution of bad events giving us more inputs when that was not the case in the past. If one thinks terrorism is bad today, one need only study the history of sieges during the Crusades to get a very different perspective.

Concord and the Boston Tea Party were armed rebellions and happened just before 1776. The environment was politically boisterous and dangerous although the grittier aspects have been romanticized away.

The US Pre-Civil War environment was also politically contentious. Whigs and Democrats (Urban industrialism and strong federal government supporters vs. agriculture and individual rights advocates) were the two parties of the day, similar to Republicans and Democrats of the current era. Just before the Civil War the two parties splintered across North-South lines and out of this fracture came the Republican party; Lincoln was their first elected presidential candidate. The rise of the third party at the time was a theme for two of the elections before the Civil War. The economic disparity between the agrarian South and Industrial North was another. Politics went crazy. There were fistfights in the Senate and guns were drawn (they had to have a Master-at-Arms to control the blowups.) One Senator, Charles Sumner, almost died having been beaten for a full minute with a metal-tipped cane by fellow Senator, Preston Brooks. Outrage, threats, and blows became the new political normal. The country exploded. There was armed rebellion (John Brown and Harpers Ferry for one).9

The entire understanding of the nation had to change due to the polarizations that occurred before each of these time periods. The Civil War period was particularly violent. See “Democracy and the Founding Fathers”.

One of the causes for the Civil War was the Constitution itself. Its ratification as shown in the Federalist Papers around 1779 and the demand for a Bill of Rights (there was none with the original document) can give one a sense of how contentious a document it was. Again, this was some 80 years before the Civil War.

The 1930s, 80 years in the future from the Civil War, was the Depression Era. It was marked by a large expansion of federal government authority and a divide between the haves and have-nots. The US was mostly agrarian (70%), not urban, and the deflation in commodity prices (farm goods) affected them markedly. The rise of technology (the combine and the tractor) made food cheap and many suffered. The past, in the form of the Versailles Treaty of WWI and its reparations, blew up the economies of Europe. The resulting capital flows and tariff wars during the period cratered the US economy. Communism was the terrorism of the day. Many were alarmed and the threat to law and order resulted in the rise of dictatorships in Spain, Japan, Italy, Ethiopia, Russia, and Germany.10

Based on the past we see these same themes playing out today. Historical cycles are not precise but one can perceive rhythms nonetheless. So here are some possible outcomes:

Economic turmoil and financial meltdowns

Armed rebellion

A new technology

A new economic system

A swing toward dictatorship

Rearmament and isolationism

Fiscal reform

A rethinking of what government is and should be by the people

Social upheavals and migrations

A new idea of work (in the ’30s, WW2 re-educated the population via the Armed Forces, and those returning went into manufacturing.)

War

Third-party candidates and the rise of a candidate from nowhere.

A reassessment of what it means to be a citizen, and a human being.

These are general outcomes, but would be consistent with previous cycles and quite likely to repeat. Of course, similar events occurred at other times, but the confluence of these events happening at the same time with their cumulative shocks seem to follow the 80-year pattern.

In spite of all the things listed above, it is worth reading Raymond Chandler’s novels to get a sense that life in the US during the Depression was not all bad. Second, many of the big corporations we know now were founded during this time. The world settled down after WW2 and the electronic age started in earnest. We had what the future will call, in my opinion, a semi-golden age of work, industry, and purpose during the ’50s and ’60s. The Civil War gave the nation new life (government for the people by the people), as did the idea of a social net in the ’30s (Social Security, Unemployment Insurance, deposit insurance).

Going back to the beginning in 1776, a new nation started and it changed everything for the better. Freedom became possible, and that was a gift. Eighty years later, the Civil War gave us a chance to start over and redefined who was a citizen. Another 80 years and WW2 paved the way for what will likely be seen as the high point of US prosperity and influence. Today we face large fractures and divides of ideology. Will we pull through again? I think we will, as we redefine and reinvent the concept of ourselves operating in an Internet world, where nothing is hidden, or we reject it altogether.

Golden Ages happen but usually after dark uncertain periods.


1. Harris, L. (2003). Trading and Exchanges, Market Microstructure for Participants. New York, NY: Oxford University Press
2. Collier, P. (2014). A Most Incomprehensible Thing, Notes Towards a Very Gentle Introduction to the Mathematics of Relativity. UK: Incomprehensible Books.
3. Seitz, P. (2015). 5 key takeaways from Apple’s blowout Q2 report, Investor’s Business Daily. Retrieved August 6, 2016 from http://www.investors.com/news/technology/click/aapl-stock-hits-record-high-on-q2-earnings/.
4. Kollewee, J. (2016). UK and EU urged to act on Chinese steel dumping after US raises duty on imports, The Guardian. Retrieved August 6, 2016 from https://www.theguardian.com/business/2016/may/18/uk-and-eu-urged-to-act-on-chinese-steel-dumping-after-us-hikes-duty-on-imports.
5. Mallonee. L. (2016). The Unreal, Eerie Emptiness of China’s ‘Ghost Cities’, Wired. Retrieved August 6, 2016 from http://www.wired.com/2016/02/kai-caemmerer-unborn-cities/.
6. Parker, B. (2010). The Power of the Sea. New York, NY: Palgrave Macmillan
7. Young, H. D., Freedman, R. A. (1996) University Physics, Ninth Edition. Reading, MA: Addison Wesley Publishing Co.
8. Durden, T. (2016). “Mystery” Buyer revealed: Swiss National Bank’s US Stock Holdings Rose 50% in First Half, to Record 62BN, Zero Hedge. Retrieved August 6, 2016 from http://www.zerohedge.com/news/2016-08-04/mystery-buyer-revealed-swiss-national-banks-us-stock-holdings-rose-50-first-half-rec
9. McPherson, J. (2003) Battle Cry of Freedom. New York, NY: Oxford University Press
10. Kennedy, D. (1999) Freedom from Fear, The American People in Depression and War, 1929-1945. New York, NY: Oxford University Press.


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  1. Ron
    Ron08-16-2016

    Ivan… Your article was brilliant. I’ve read it twice so far, and I imagine I could read it many more times. Here’s a thought. At the end where you draw conclusions about what events and movements could happen, why not give it a shot and predict specifics? For example, Trump gets defeated but he gives rise to a populist, nativist movement that finds support throughout the developed world. Borders close. Civil wars become the norm. Terrorist organizations like ISIS become irrelevant as “welcome” parties physically battle “get out and stay out” parties. Each practices its own form of “might makes right” politics. The “new politician” will be very Trump-like, a media savvy, televangelist stirring hate and aggression among his/her followers, etc. Economies will collapse under populist demands for a fairer distribution of wealth, but rich and powerful players will be the puppet masters accumulating ever more wealth as the poor kill each other while the middle class, believing someone will ultimately give them a piece of the pie, will continue to buy into the demagoguery of the corporate ruling class.

    • Ivan
      Ivan08-16-2016

      Hi Ron,

      Glad you liked it.

      I could, but I doubt the predictions would be accurate simply because of the ‘looseness’ that these trends have. Getting specifics right when starting with generalities usually is a form of guessing. I like to guess, but the data does not support that.

      There are many variations on any given theme. Dictatorships could be in the form of severe regulations like a digital currency where participants have to be part of the system so there is no way to avoid it. In the 1930s it was the confiscation of gold, today it might be currency. We just don’t know. There were also exogenous events that came out of left field during the 1930s like the dust bowl from all the “automated” non-conservationist farming that was done as well as a drought cycle whose severity was coincident. I did not go into that. The best takeaway I think is the idea that for new equilibriums to form, there must be sufficient energy to overcome the energy threshold necessary to destabilize a system already in an equilibrium.

      With so much short-coupling and connectivity in today’s world, deducing what exactly will be the proximate cause is uncertain. What is known is that it will take a confluence of events not a single one to disrupt a system as complex and interdependent as today’s. Currently there are many themes of sufficient energy moving in converging directions which I think heighten the possibility of my conclusions being correct. Alone any one would be simply a situation. When they are piled on, all it takes is a single blade of grass to have the structure destabilize in a big way. The timing is critical and that leads me to the historical uncertainty principle (I don’t know who thought it up but it is a play on Heisenberg.) You may know the substance but not the timing and if you know the timing, not the substance. (Brexit is an example.)

      One exogenous possibility is a large solar flare. We have been lucky so far in this regard. Again, I reiterate what I mentioned before: from generalities one can make comparable generalities, not specifics.

      I guess I’m not a fortune teller, just an observer of trends.

      Cheers to you,

      Ivan

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