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Archive for November, 2013

A Thanksgiving Thought: How Lucky We Are!

Tuesday, November 26th, 2013

To all of you and yours, the best of the Thanksgiving holiday. Travel safely, and savor the time to be with family and friends, and to do a good deed or two.

It’s also a good time for each of us to take a moment, reflect on how much is good about each of our lives. As I write these notes each week, I often think about how much we have to be grateful for, and how little worry or fear or going-without there is for us relative to so many others around the globe.

Thanks to all of you who make this Thanksgiving possible.

John

Hopelessness, Fairness and Economic Polarization: Their Role in Threat Generation

Thursday, November 21st, 2013

Directly following the last two notes about the role of hopelessness relative to threats, I just finished The Price of Inequality, by Joseph Stiglitz, a Nobel Prize winner for his work in economics. Possibly like some of you, I have always perceived economic disparity….the gap between the haves and the have-nots…..as an “over there in those countries problem.” Increasingly, we are realizing it’s also a “right here” problem that may be a component of the generation of US citizen threats, lone wolves and otherwise.

So, first some excerpts from Stiglitz’ book:

“while specific grievances varied from country to country and, in particular, that the political grievances in the Middle East were very different from those in the West, there were some shared themes. There was a common understanding that in many ways the economic and political system had failed and that both were fundamentally unfair.”

“Unfair” is an interesting choice of words, isn’t it.

“Three themes resonated around the world: that markets weren’t working the way they were supposed to, for they were obviously neither efficient nor stable; that the political system hadn’t corrected the market failures; and that the economic and political systems are fundamentally unfair.”

There’s that word again….unfair.

“The underlying thesis is that we are paying a high price for our inequality – an economic system that is less stable and less efficient, with less growth, and a democracy that has been put into peril. But even more is at stake: as our economic system is seen to fail for most citizens, and as our political system seems to be captured by moneyed interests, confidence in our democracy and in our market economy will erode along with our global influence. As the reality sinks in that we are no longer a country of opportunity and that even our long-vaunted rule of law and system of justice has been compromised, even our sense of national identity may be put into jeopardy.”

“There are two visions for America a half century from now. One is a society more divided between the haves and have-nots…..at the bottom are millions of young people alienated and without hope……The other is a society where the gap between the haves and have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness…….I believe that thisz second vision is the only one that is consistent with our heritage and our values. In it the well-being of our citizens – and even our economic growth…….will be much greater thaqn what we can achieve if our society remains deeply divided. I believe it is still not too late for this country to change course, and to recover the fundamental principles of fairness and opportunity on which it was founded.”

There are some associated interesting points a recent Wall Street Journal article that echo key points in Stiglitz’ book:

Worry Over Inequality Occupies Wall Street

By Justin Lahart

Nov. 10, 2013

“Even if they have found the widening gulf between America’s haves and have-nots troubling, inequality isn’t something fund managers have worried about professionally. That may be changing.

Over the years, the only way inequality has really mattered to investors has been as a factor when considering stocks. If the rich are getting richer, companies that cater to them have
better prospects. Goldman Sachs Group, for example, recently conducted a survey that showed optimism among high-income consumers relative to low-income ones at a high and pointed investors toward companies like department-store operator Nordstrom.

Lately, though, some big investors have worried increasing income and wealth gaps threaten the economy’s ability to expand.

Bill Gross, manager of the world’s largest bond fund by assets at Pimco, in a recent note said he believed increases in inequality had made the U.S. less productive. “Developed economies work best when inequality of incomes are at a minimum,” he wrote. Several fund managers at a Heard on the Street conference last month also voiced concerns, among them Kynikos Associates founder James Chanos, who worried people have less incentive to participate in the economy if they have concluded “the game isn’t fair.”

When inequality increases as a result of, say, corruption, it clearly causes economic harm. But for the U.S., where much of the increase in inequality results from market mechanisms like changing pay patterns for skilled workers and rising global competition for lower-skilled jobs, its effects are more ambiguous.

Recent work by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva comparing the performance of advanced economies since the 1960s suggests increases in the share of income the top 1% of the population receives relative to the bottom 99% are at most only slightly negative for growth. What that analysis can’t tell is what high levels of inequality like today’s might mean. Tax-receipt data collected by Messrs. Piketty and Saez show the top 1% captured 19.3% of U.S. income in 2012. The only year in the past century when their share was bigger was 1928, at 19.6%.

Worse, this is occurring as average incomes have stagnated. Inflation-adjusted, median U.S. family income fell 6% in 2012 from 2002, according to the Commerce Department. Meanwhile, net worth for the median family in the top 10% by wealth was a record 24 times more in 2010 than for the median family overall, according to the Federal Reserve.

Former Morgan Stanley equity strategist Gerard Minack notes the U.S. Gini index, a gauge of income disparities that is also at a record, tracks with measures of political polarization. So he worries inequality could give rise to more political dysfunction that risks damaging the economy.
Another concern is that rising inequality creates financial instability. Raghuram Rajan, the economist now heading India’s central bank, has posited that the credit bubble in the early part of the last decade was a consequence of inequality. In his telling, stagnating incomes led middle- and lower-income families to borrow excessively to raise standards of living.

But if inequality has risen to a point in which investors need to be worried, any reversal might also hurt.

One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. Another is companies are paying a smaller share of profits on taxes. An economy where income and wealth disparities are smaller might be healthier. It would also leave less money flowing to the bottom line, something that will grab fund managers’ attention.”

Let me know your views, will you, and we’ll share them with our readers. Send me a note at john@lsi-llc.com.

Thanks,
John

Maxie McFarland’s Passing, And Thoughts on Hopelessness

Tuesday, November 12th, 2013

Maxie was a true pioneer and innovator. His Human Terrain Systems was an early effort at adding collection and integration of a range of socio-cultural phenomenon to the knowledge commanders could include in their situational understanding and planning.

On this topic of socio-cultural phenomenon and considerations, let’s take a minute to talk about one of the most hard-to-understand aspects of threats, the suicide bomber or the suicide shooter.

I am the least smart person on this topic, but there seem to be some very basic reasons why people volunteer to sacrifice their lives in this way. Not a popular reason to mention is their poverty and lack of education in combination with religious fervor, common in third world countries, which makes them vulnerable to others with convincing arguments.

There is also Maslow’s Hierarchy of Needs to consider, starting with the need for food, water, shelter and warmth at the bottom of the pyramid. I think there may be an even more basic need that goes a ways toward explaining why people become suiciders. That is the basic human need for hope…..hope for food, water, shelter and warmth. If I wake up in the morning with the hope and belief that I can obtain these basic requirements for life, I have some optimism and some options for my life. If I wake up hopeless, the offer of care and basics for my family and the opportunity to be a hero in death can be much more enticing.

Even if I do not become a suicide bomber or shooter, I may very well agree to fight on the side of terrorists who offer money, safety and the basics for me and my family. Even if I do not fully believe in the cause, I know the necessity of providing for myself and my family….not to mention the threats against me if I do not agree to join the terrorists.

Hopelessness causes people to do things the rest of us cannot understand.

This hopelessness is one of the reasons I expect the turmoil in Syria to get worse before it gets better. I read that the Assad regime is now starving some cities and neighborhoods via blockades. This may have the opposite of the intended outcome, only causing the population to take more extreme actions, and to join the terrorists who offer them their only hope and basics.

Let us all know what you think. Send me a note at john@lsi-llc.com, and I’ll share your thoughts with our readers.

Thanks,
John