Monday, December 20, 2010

A Weird Cosmology - Part 1.1 - TIME

I intend to start wandering into a weird area called “what I think”. In so doing I hope to lay out perhaps a different way to see reality. I would expect that some people might find my thoughts: stupid, intellectual puffery, irrelevant, emotional, immoral, naive.... I have no idea. I don’t pretend that this represents a cohesive system of thought or that this represents latest scientific thinking. It doesn’t.  I believe that rationality as we define it in western culture is way overblown in importance - so if I am accused of being irrational - so be it.

What I am going to say is nonetheless an honest attempt to put down what I think. It is simply a theory of the nature of reality - and I am cool with that. All good theories are meant to be disproven anyway. But for now, its my working theory.

The first and perhaps gateway concept is: time isn’t what we think. We think of time flowing from the past to the future, and that we currently exist “now”. This is the “arrow of time” - it goes ever forward and never backwards.

Except that it doesn’t. Time isn’t an arrow - its closer to a string, or path. It exists always at once and what we think we experience is simply a point on that string. That point on the string, which we consider to be “now”, will exist forever, just as will all the other points on the string. Even though I say “forever”, in this view of time, the idea of forever does not exist. All time exists concurrently such that the only time is forever now. But again, there is no concept of forever.

One way to think of this is that time is simply another dimension, but one in which we as humans can only see at one point.  But otherwise its just another dimension. And does it just extend in one direction - like a string or line, or does it extend in all directions.? I think: all directions.

Strangely enough, my view of time is at least partly supported by the seeming opposite camps of science and religion. From the scientific side, the standard concept of time has been under attack for decades. To see a sample, look at the Wikipedia link to Eternalism  or this excellent site on the Arrow of Time or this link to a Scientific American article That Mysterious Flow by Paul Davis. I don’t want to go into all this scientific theory because there is a massive amount written on this out there and I understand very little of it. But if you want to explore the scientific side of the issue there is plenty to find.

From a religious standpoint, the idea of an omniscient god (God?) has always incorporated a similar view of time. If an omniscient god knows all points of the past, present and future in infinite detail, then they all exist concurrently. Our existence represents a time line and all points are equal.

If time is as I suppose, then why do we experience it like an arrow? Well I ask: If you experienced it any other way, would you be able to function in what we think of as reality? Would you be declared insane?  - no let me change that:  you would be insane! Or alternately you might not be considered conscious.

And there it is:  consciousness as we define consciousness depends on a particular perception of time. In fact, I would argue that consciousness could be defined as the subjective awareness of the passage of time. We see time as an arrow because that is a prerequisite for human consciousness. If we saw it in any other way, we would not be humans.  As a expansion to this thought, if something were to experience time in a different way, we would probably not recognize it as conscious.

Well that is a taste of my weird cosmology. I hope to continue it at a later time.

Thursday, December 16, 2010

Intellectual Disclaimer

Many of the ideas I express in this blog are strictly my own, but when it comes to networks and power laws, many of the ideas come from others. As an introduction to some of these thoughts I recommend the following books:

Ubiquity by Buchanan  - this is the best introduction to the universality of networks and power law concepts
Linked by Barabasi - this is a good discussion of network growth and structure
Why Stock Markets Crash by Sornette - this is a quantitative discussion on network simulation of markets
Fooled by Randomness and The Black Swan by Taleb  - Not for the timid but I recommend anything by Taleb - more than anything, these are works of philosophy and epistemology
The Misbehavior of Markets by Mandelbrot - an attack on traditional market analysis by one of the greats of chaos theory
The Tipping Point by Gladwell  - This was done before much of the current theory was thought about - but it explores the same phenomenon as Linked

Anger Management

In response to David's excellent comment on Capitalism at the Brink, regarding the justifiable anger people have about the financial crisis:  I agree with almost everything you said.


Anger is a natural reaction. Heck - I'm angry about it. I have particular people in mind when I think of attitudes that "led" to this - and when I think of them, I get angry.  Unfortunately, I think my own anger gets mixed into my blog post - but in a weird way - I'm angry at my own anger.

Intellectually, I think the search for causes and villains is in at least some sense unfounded. What happened in the markets is like an earthquake, or avalanche, or like a panic in a crowded room. It is a natural byproduct of the physical and social structure which developed so successfully over the last 40 years. As we drove our economy to more efficiency, less redundancy, and fired anyone who didn't produce immediate results, we created a very successful economy, but also one that was reaching criticality. Was it inevitable that it would happen when it did and in that particular way - no. But it was inevitable it would happen sometime and in some way and when it did - it was inevitable that we would all be angry.

There was a  massive inflow of liquidity/financing made available over the last 30 years and it was this liquidity flow which ultimately stopped. But it was also this massive liquidity flow which led to the stock market and real estate rally over the same time. [And at least in part, these financial innovations were a response to the establishment of ERISA and pension plans in the 80's. Pension plans needed something new to invest in, and our capitalist system created it.] The same phenomenon that led to the economic success of which we are so proud as a nation was both the cause of and result of the processes and practices that blew up.

I am proposing that this crash - and all such crashes - are natural and inevitable byproducts of dynamic "living" systems. If you look hard enough, you may be able to find a triggering event of such a crash, but most likely, every major event was itself caused by a series of smaller and smaller inconspicuous triggering events. Pareto theorized that diverse systems of society and economies can result in a particular and relatively stable pattern of wealth distributions. I'm saying the same thing about how such systems behave over time.

I also believe that a good paradigm for thinking of such a living system is that of a dynamic network.

We see networks everywhere - in a wide range of natural and man made phenomenon. Networks occur naturally - simply as a response to things interacting with with their environment. We see these networks when look out the window at our ecosystem, when we have peaceful relationships with our neighbors, when we see our stocks rally and fall, when we turn on the power to our home. They can lead to amazingly successful growth (Google for example) and equally devastating failures. When things go our way - we think of them as natural and normal. When capitalism "worked" it was because of its inherent superiority and the work ethic of the American people. When it fails - lets find the culprit and string him up.

I also believe that networks display a signature - or fingerprint in their behavior. This signature is the power law distribution, such as the Pareto distribution.

So it is in this context I find the crisis so absolutely fascinating - so cool!  But at the same time -  Yes - those b____s on Wall Street are getting huge bonuses because We bailed them out. I just wish I weren't so angry about it.

[Note that the 80/20 rule is an example of a Pareto distribution - there can be any number of actual parameters - and the Pareto Distribution is just an example of a power law distribution - so when I say networks exhibit power law distributions - I don't mean they all have 80/20 Pareto distributions. Its just that the 80/20 rule is known and hopefully illustrates the point]

Friday, December 10, 2010

Capitalism at the Brink

Recent data released by the Federal Reserve sheds more light as to just how bad things really were in late 2008 - and arguably even today. This Washington Post article summarizes some of it: http://www.washingtonpost.com/wp-dyn/content/article/2010/12/01/AR2010120104658.html?sid=ST2010120106876.  As we all should know at this point,  the Fed was helping a lot more than was admitted to. I looked at what I think was the raw data behind this article (http://www.federalreserve.gov/newsevents/reform_cpff.htm )  and I looked at just the first 3 months of the data. Between the end of October 2008 and January 2009, the Federal Reserve purchased from securities dealers, banks and finance companies over $380 billion worth of commercial paper. Commercial paper is (was) typically considered to be the highest quality, most liquid type of capital market security. The fact that the Fed had to buy this paper means 2 things: 1) the banks, dealers and finance companies would probably not have been able to raise money (by selling these short-term investments they owned) without the Fed help (and therefore may have defaulted themselves). 2) The issuers of this commercial paper were most likely unable to borrow though the capital markets themselves, and thus may have also defaulted. The issuers (ultimate borrowers) of the paper included "good" companies like GE, Caterpiller, Toyota and Harley Davidson.  So in effect, by being willing to buy commercial paper issued by these companies, the Federal Reserve was telling the shell-shocked capital markets to "Please calm down! - Look!  We will buy assets from you if you get in a liquidity pinch yourself. So don't worry about buying commercial paper, because if you need to sell it you will always be able to look to us." This was just one small part of what was the implicit government guarantee of the financial system. It also is an indication of how quickly a financial crisis was going to translate into "real America".  Defaults of major US companies were imminent and would escalate rapidly.

By the way, I spoke to a couple of people recently who claim that they received no benefit from the bailout. I contend that while we can look at some evil individuals who unfairly benfited by this disastor, the biggest aggregate group of beneficiaries are : anyone with a bank account, retirement plan, money market account,  stocks, real estate and anyone who owns or works for a business who borrows money from anyone or who has customers with any of those assets.  In fact, I would go so far as to say anyone who relies on a functioning civilization was a beneficiary.

I am amazed at the number of people who have, say, a retirement income and bank accounts, and think they are insulated from this issue.   Just look at the balance sheet of a retirement fund or of a bank. You will not find your cash anywhere! Instead you will find things like stocks, real estate, business loans, commercial paper and deposits in other banks.

The Inequality Formula

As a follow-up to my discussion on the Pareto Distribution and the distribution of wealth in society, I note a recent article in Bloomberg Businessweek magazine from October 25, 2010.  ( http://www.businessweek.com/magazine/content/10_44/b4201008238184.htm ) This article "The Inequality Delusion" by Drake Bennet discusses an upcoming study by two psychologists [Dan Ariely from Duke and Michael Norton from Harvard Business School] on how wealth in the US is actually distributed and how starkly this distribution differs from most peoples' expectation. For example, when people in a large survey were asked what percentage of the nation's wealth was controlled by the richest 20%, the average response was 59%.  When asked what they believed would be an ideal percentage, the average response was that the richest 20% of the people should control just 32% of the nation's wealth.

The "actual" percentage of the nation's wealth controlled by the richest 20% is...... 84%!    Shocking!    Well, maybe not too shocking since this is essentially what Pareto found in his initial studies of the same phenomenon through history.  It is essentially the 80/20 rule as described by the Pareto Distribution.

I'll admit I was a little surprised by this article. First, do people on average really believe that the richest 20% of the people should control just 32% of the nation's wealth?  Wow!  Second, while my guess on the survey question would have been 80% because that is roughly what Pareto found, I am still surprised at how close it was to that number. As big a fan as I am about this whole concept, I feel there has got to be a tremendous data problem - specifically: "how do you measure wealth?" I would think that the variability of wealth measurement methods and quality of data would significantly shift the results from study to study. Also, socialist or communist societies have a whole different conception of wealth and ownership. My feeling is that in a communist society the same 80/20 rule may still hold, but only if you change the concept of wealth ownership to "ability to control resources" such as through political power. My understanding is that Pareto himself was socialist/communist earlier in his life but became disillusioned when he saw the politically powerful in these economic systems displaying the same wealth/power grabbing behavior as their non-socialist counterparts.