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Banbury Cross

a pillow for lost thoughts...

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A Call for Sane Banking

We have a somewhat conflicted variety of capitalism. Capital is supposed to be a surplus wealth for which its creators have no immediate use and so they set it aside and invest it in a worthy enterprise that will generate an additional income later on. But the machinations of the modern banking system and its never ending quest for liquidity are increasingly blurring the lines between the real and imaginary wealth and in the process make the tracking of capital rather difficult.

The mechanics of investing/loaning is not the rocket science. Joe has an extra $10,000 lying around, Carl has a great business idea that could multiply this $10,000 into $12,000 over the next 12 months, so Joe lends Carl the money for 12 months say at 5% interest and at the end of the year Joe collects his $500 in interest, Carl makes a nice overall profit of $1500 and everyone is happy. The problem is that in real life Joes with extra money do not have time to wait for Carls with brilliant ideas to waltz around and there arises the need for a middleman - the banking system. A banker is effectively a matchmaker who matches people with capital to people with ideas and takes a cut for this service.

But modern day finance has strayed far from that ideal. The funny monopoly money which central banks print at will these days gave investment banks an opportunity to turn the world's markets into giant casinos with little oversight or accountability. Trillions of dollars are swirling in the abstract monetary space without any backing and if there is collateral involved, you can bet that no one has any idea how much it is really worth. And I mean it - you can literally bet on it. The system got so far out of whack that the saver - the original creator of the capital - gets only a bit more than 0% interest for his or her effort these days. Who profits from the capital flows and how much is an issue that has been successfully obscured by the gargantuan amount of global "money printing" effort which makes any real accounting virtually impossible.

I think that the original sin that brought about this perversity happened when bankers in the Middle Ages realized that they could lend out the deposited money many times over and unless the depositors conspired and demanded all of their money back at the same time, no one would really find out. Say you have some extra money and deposit it at a local bank which then lends it out to some Carl and collects interest on it. Some of that interest goes to you - the capital creator - and some stays with the bank as a payment for this service. So far so good. However, at some point the bankers realized that they could make another loan against this deposit and just pocket the interest themselves this time. In other words, they learned they could "print money" for their own benefit.

Now in some instances printing money may be necessary - and perhaps even good for the larger economy. The crucial question is, however, who really has the right to extend our money supply and - even more importantly - who is supposed to benefit from this operation? In a democratic society I would assume that the right to create money belongs to the people themselves, although in practice they would probably be represented by some governmental institution, say the Treasury department.

The fractional reserve banking - which is the contemporary term for the system in which you loan our more money than you take in - is really a legalized form of counterfeiting, because bankers make no effort to share the interest collected from the "newly printed money" (which is what those unbacked subsequent loans are) with the depositors (the original providers of the capital) or with the Treasury (representing the people with whom the money printing rights should reside). And since the full reserve lending (where each dollar loaned out would be backed with a dollar deposited) may be economically too restrictive, we should look for a mechanism which would permit some money printing (to keep the economy well lubricated) but would do so so in a way that allowed for profit sharing with the depositors and the Treasury. The principle should be simple. The more often the bank loans out a given sum of money, the more profits it will have to share. This negative feedback loop itself should discourage excessive leverage (the multiple of the deposit that is being lent out) which nearly destroyed our current financial system.

So let us revisit the loan process and see how this scheme would work.

First, the recap of the actors.

Joe - the person who has capital
Carl - the person who has a business idea
Bank - which manages the loan
Treasury - which represents the people

In the present case Joe gets some interest on his mediated loan to Carl while the bank pockets all of the profits from subsequent loans. Let's suppose the interest rate for a loan (such as Carl's is 5%), the savings rate is 3% and the leverage is 10 (the bank lends any deposited money 10 times over). The profit sharing looks more or less like this:

1st loan (Joe gets 3%, the Bank gets 2%)
2nd-10th (Joe gets nothing, the Bank pockets all 5%)

Such division of spoils is conducive to higher and higher leverage and with it to riskier and riskier behavior. So what if we tried to tame this hazardous - almost gambling like - behavior by a distribution like this.

1st loan (Joe gets 3%, Bank 2%, Treasury gets nothing - no money was created)
2nd-3rd loan (Joe gets 2%, Bank gets 2%, Treasury gets 1%)
4th-5th loan (Joe gets 1%, Bank gets 3%, Treasury gets 2%)
6th-7th loan (Joe gets 0%, Bank gets 2%, Treasury gets 3%
8th-10th loan (Joe gets 0%, Bank gets 1%, Treasury gets 4%)

The above numbers are just made up, of course. They are whole for convenience. The actual interest rates would have to be finer and subject to expert discussion and/or some market mechanisms. But in this simple example you can actually do the math to see who ends up with what portion of the overall lending pie.

My point is that such a scheme would be fairer to both the creators of the capital and the taxpayers who get nothing under the current system although the money expansion is (or should be) their prerogative. Not to mention the fact that they implicitly guarantee the functionality of the banking system as a whole, so one would think they should be rewarded for it. Also note that the bank will think twice before going into very risky businesses because the higher its leverage, the more of its profits will have to be shared with the Treasury. At some point the bankers will have to conclude that the rewards are just not worth the risks, and stay away from leveraging their deposits to the point of near self destruction. Sure - they may lose some of their stellar profits, but over the course of time their profession may regain some of its lost respect.

And that is how it should be, in my humble opinion.

Complexity of connections

Multitude is not enough. If you put 10 billion ping pong balls in a container and shake it vigorously, you will still have only 10 billion ping pong balls. Nothing to write home about. To make something interesting happen, you need to add interactions, relationships, feed back loops between individual members. They are the ingredient that adds complexity to the mix.

Draw 10 circles on a piece of paper. Simple, right? Now think about the number of ways in which you can connect them. Soon you will realize that such exercise leads to mind boggling number of possibilities. Interconnectedness is that magical wand that can touch a mere quantity and conjure up a new quality out of it. Almost as if the connections made whole system undergo a phase change.

Carbon is not alive. Neither are protein molecules, amino acids or carbohydrates. But put enough of them together, stir the mix with a spatula of time and strange things will happen. Individual components will start exchanging signals, they'll become codependent and before you know it - life jumps from the crucible into its precarious existence. As if the complexity of interactions tripped up some invisible trigger.

Now think of living cells in your body. Neither of those cells is really you. None of them is even aware of itself. Each taken as an individual cell is just a simple living unit without any identity, feeling, mind or other human attribute. Yet add them all together, make them communicate and voila! A person arises. An entangled conglomerate of subsystems with a mind of its own.

Let's take it one step further: take several humans, place them together on a relatively warm blue planet and make them interact. A new entity arises again. Humankind. The sum of all people which can be viewed as one giant organism. In fact, there are some schools of thought which claim that this aggregate entity is in fact God. And I have to say I am not entirely opposed to that idea. The collective humankind does have a divine signature. It has a higher perspective than any individual and can make better judgements than individuals. None of us humans is God, of course. But together with all our interactions we may just as well be.

And a natural question is - what if humankind itself is but one building block of some higher form. Perhaps, one day, if we meet other civilizations and start interacting with them, a higher purpose will emerge. A pattern that we cannot comprehend on our own.

dd

The City of London Olympics

(Limping Duck Press Agency)

Ladies and gentlemen, sporting fans, channel surfers, Olympic fiends, esteemed couch potatoes - good afternoon to all of you from the Wembley Stadium in London where we'll soon be witnessing the world premiere of a new Olympic discipline - the free style money printing. As you might imagine, the inclusion of this extreme sport in the Olympic program was no easy battle. After all, the Olympic Committee is well known for its conservative stance in accepting new sports - just consider that among this year's rejects we can find such popular pastimes as arms wrestling, tax evasion, running with the bulls, cross country dishwasher smuggling and synchronized pancake flipping. However, the recent epic events in the financial world convinced the executive members that the world's top money printers deserve to have an opportunity to flex their muscles in the Olympic ring.

The preliminary rounds were fierce and highly competitive. And delivered a couple of surprises, too. Carlos Rodriguez, the deputy Treasury of the Mexican drug cartel Los Zetas, unexpectedly qualified from the second semifinal in which he outprinted the Head of the National Bank of Switzerland, although some tabloids later alleged that he used stacks of pre-printed bills concealed in the lining of his jacket. Mr Rodriguez is known in British sporting circles as an international ace in the closely related discipline of Money Laundering, but his occasional counterfeiting side jobs gave him enough expertise to oust his worthy Swiss opponent and secure the placement among the best of the contemporary money printing. This elite group is formed by Ben Bernanke, the chairman of the US Federal Reserve, Mervyn King representing the Bank of England, Mario Draghi, who will be printing for the European Union, and finally Masaaki Shirakawa, the weathered governor of the Bank of Japan.

Only few minutes are remaining to the start and the participants are already warming up on the pitch. Mr Bernanke is diligently working the crank of an old rotary drum borrowed from the New York Times museum, Mr Draghi churns up crisp duplicates of the Bikini Quarterly centerfold on his personal laser printer and Mr King walks around the field with palms covering his ears and mutters under his breath "CTRL-P, CTRL-P". On the other end of the training area, seemingly lost in his inner world, Mr Shirakawa creates colorful imprints of cranes and monkeys with a set of children's rubber stamps. Sitting on an empty H/P box to his right, Mr Rodriguez is quietly munching on a Snickers bar and maintains a focused if a bit gloomy expression on his face.

The honor of starting today's inaugural race falls to Zimbabwean president Robert Mugabe for his lifetime achievement in the field of runaway money printing. Mr Mugabe is already on the pitch and waiting for his starting pistol... Wait a minute, something is afoot. One of his bodyguards just literally pounced on the official who was approaching Mugabe with the ceremonial pistol and knocked him down on the ground. This must be be some kind of a misunderstanding. I see a minor confusion on the field. It appears that Mr Mugabe's security team just gave a new meaning to the phrase "jump the gun". OK, everything seems in order now, apologies are being offered... Mr Mugabe gingerly raises his doubly inspected pistol and - bang! - ladies and gentlemen - the race is on.

All five finalists have briskly approached their printers and copiers and got right down to business. There were a couple of elbow clashes at the start, a few seconds may have been lost here and there as several central bankers were a bit flustered about the location of the ON switch, but now the field of contestants has spread over the whole pitch and newly printed dollars started flying off the printing presses like it's 2009. As far as I can see, Japan seems to have the upper hand in this initial phase. The country's long tradition in money printing gives Mr Shirakawa an obvious edge and his Sony remote control makes absolutely no mistakes so far.

Carlos Rodriguez, who had been visibly falling behind, made several attempts to distract other players on the field. He was whistling cheap tunes from gold commercials, calling Mr Draghi very unpublishable names to his face and throwing spare change at Mr Bernanke's back. To add insult to injury, he used Canadian currency. No wonder he was reprimanded by the head umpire. Other than this the race has upheld high standards of fair play so far. Oh, so far indeed, I am sorry to report now that a deplorable and distinctly unolympic incident has just taken place. Carlos has really done it this time! Right in front of our cameras, he tried to ram a pair of hair curlers - probably stolen from the hotel - into Mr King's smoothly functioning printer and for that he is being sent off the field. Mr Rodriguez, in the Mexican underworld also known as the Goon from the Lagoon, is escorted out of the arena and the race will continue without him.

The mood in the stadium is gradually heating up. The prominent London bankers in the front rows are rooting for their own, chanting "in-fla-tion, in-fla-tion" in unison and looking forward to the flood of jolly liquidity which will soon buoy their institutional trading accounts. In the cheaper seats, however, the elation stumbles. The common Londoners who do not have their wealth stashed in inflation protected assets are looking considerably paler. Many are worried about the loss of purchasing power caused by the freshly printed money and some are quietly calculating how much they'll have to shell out for food and gas in the weeks to come.

Meanwhile elsewhere in the stadium, an interesting development is taking place. For a race of this duration and intensity one cannot expect the printer cartridges to last longer than several minutes. So here - in the middle of the race - one by one, the finalists have to push their equipment into the depot where it is immediately being surrounded by a team of highly trained mechanics. After a few seconds of a flitting commotion - a scene reminiscent of silent movies - the cartridges are replaced and the printers ready for more action. This well rehearsed and seamless operation would certainly impress even the most discerning Formula One aficionados.

We are rolling into the second half and the Japanese leader is slowly loosing his monetary steam. Ben and Mario, on the other hand, have found their rhythm and proceed now in a smooth robotic fashion. The moves of these remarkable financial athletes became well planned and highly efficient - perhaps even resembling interpretive dance from some distance. Their thumbs keep hitting the Print button with lethal frequency and surgical precision. It is clear that years of texting Timothy Geithner are finally paying off.

Oh, too bad now. Mr King, whose repaired printer was doing so well that he worked himself into the third position, is signaling to his support that he's got a bad case of a printer jam. Deeply frustrated Mervyn is walking around his machine and kicking it tentatively in several critical places. We see him opening the plastic cover and tinkering with the mechanisms inside. Our online microphones are picking up his call to the the service center as well as its prompt and courteous response: "If you are calling about opening a new account, please press or say 1; if you would like to report a problem with the current installation, please, press or say 2". But, rather surprisingly, Mr King is not pressing or saying 2. He appears to be tossing his mobile phone far into the stands and storming off the pitch almost simultaneously.

The race is now approaching its home stretch and the leading printers are literally drowning in their own money. Clearing it is obviously the key to success here. And we have to say that the Mediterranean crew of Mr Draghi is doing far superior job in removing the new bills from his printer's vicinity. Especially the Greek and Spanish sweepers have no problem disposing of any new funds that come within their reach. No problemo, senor. Mr Bernanke appears a bit overwhelmed at this point and clearly trails behind even though... - wait - oh my goodness - ladies and gentlemen, this is a game changer - crikey! - a formation of helicopters is now descending onto the field and loading up piles upon piles of Mr Bernanke's new money. Unbelievable! And Ben immediately uses this freed up space as an excuse to increase the volume on his beloved turbo-charged Canon from "post-lehman" setting to "pre-spain".

What a finish! This is getting more thrilling by the second. Bernanke takes off his double breasted suit, rolls up his sleeves and embarks on what I can only describe as a printing concert. Nay, this not money printing any more. This is money sprinting, ladies and gentlemen. The crowds are ecstatic, the pace is nearly suicidal. Bill after bill, Mario's lead is diminishing and the finish ribbon is within reach. The present financiers are squealing with excitement and American spectators are cheering their man on with deafening "Q-E! Q-E! Q-E!". Queen Elizabeth, unsure to whom the ovations belong, raises slightly from her seat in the Royal Loge and makes a non-committal bow in their general direction.

In the breathtaking photo finish Ben Bernanke snatches the gold, when his last one hundred dollar bill is shown to be just a tad more extended from the printing tray than Mario Draghi's. Yes, it is official now! The barbaric relic goes to Team USA, EU is left with the silver and Japan takes the bronz. Messrs. Blankfein and Dimon are patting each other on the shoulder of their pin striped suits and their shining faces are sending a big thank you onto the field. On a darker note, an unidentified man wearing an Occupy Wall Street t-shirt has just attempted to throw a bundle of home made tortillas into the VIP sector. He is now being handcuffed by the local police and loaded into a security van. No connection to Los Zetas has been established at this time.

And that's a wrap, ladies and gentlemen.

New Hradec

Pilgrimage is a very special kind of journey. We don't take it to photograph some stunning waterfalls, or study cocktail menus of Thai bartenders, we won't discover new Amazonian frogs while on it, and we certainly won't be able to collect seeds of rare alpine plants, we don't even make any business deals while traveling, there is simply no Earthly practical purpose to it. Pilgrimage is a ritual of sorts - a symbolic watering of our roots or an identity confirmation that will be chiseled deep into our character. It is a junket for higher purpose, whether that purpose is religious, cultural or personal. And upon completion, a silver fiber is ceremoniously drawn through our spine and stays there for ever.

Few years ago I stumbled upon a small town in Minnesota named New Prague. Naturally, such serendipity prompted a little Internet search trawling for other American towns whose name might betray a Czech origin. The crown jewel of that effort was discovery of New Hradec, a small community in North Dakota named after the capital of Eastern Bohemia, where most settlers in that region came from in the second half of the 19th century. Since that capital, Hradec Kralove, also happens to be my hometown, a trip to North Dakota became a looming pilgrimage of my life. It was several years in the making, but this Spring I finally mustered enough resolve to pull it off. I know that my ancestors watching me from their respective heavenly clouds would never forgive me if I didn't.

North Dakota is not usually on the top of the list of most desired vacation destinations. For the vast majority of people it probably ranks just slightly ahead of a weekend trip to an abandoned strip mine. But a true pilgrim is not dazed by such mundane considerations. There is that higher purpose, right? So one weekend this June, I packed up my small suitcase and landed at a quaint airport of Bismark, fully determined to reach New Hradec come hell, high water or prairie fire. I rented a small car there and the next day set out across the grasslands into the Dickinson area. The sky was brilliant, the Sun was shining, the surroundings were comfortingly green and the sense of adventure nearly intoxicating (fortunately for me the highway cops do not have a measuring device for that yet).

I think most people have a special soft spot for their hometown in their soul. Especially if they spent the first 18 years there. It's like the first love - nothing will ever take its place. For your regular average Joe the name Hradec means absolutely nothing (although for non-Czech speakers its rapid repetition might be a cool tongue twister). For me however it has a whole universe of meanings. It is a line in my birth certificate. It is the locale of my high school years. It is the chant we used to sing at the matches of my favorite soccer team. It is the sign on a railway station that I used to look for when returning from my studies in Prague. It is the egg from which I came. Those 6 letters are indelibly tattooed on my big toe.

That is why seeing them pop up in the middle of the North American prairie was an unusual and uplifting experience. The plane ticket from DC wasn't exactly cheap, but the jazzy dissonance of the familiar name and unfamiliar elements made this pilgrimage worth every penny. It was like flying across the whole Galaxy to some distant planet and finding Kentucky Fried Chicken there.

Imagine that.

cc

Fahrenheit 104

Someone famous once said that "home is where you can find a doorknob in the darkness". This past weekend I had an unexpected opportunity to test drive this piece of wisdom in real life conditions.

Washington area has been suffocating under a severe heat wave for quite a few weeks now. Some time in the middle of June, the Sun whipped out its best pom-poms and started flogging our little planet like there's no tomorrow. Day in and day out our skins were parboiled in an afternoon sauna. The heat was not only oppressive, but also persistent. Nay, habit forming. And as heat waves are wont, they generated a number of storms of matching ferocity. One of them rumbled into town on Friday and knocked down all that stood in its path. Primarily the power lines.

When I came home that night everything was cloaked in darkness. Even the traffic lights were ominously unblinking. So I inched my way upstairs and started fumbling for the door knob. Indeed, it was exactly where I left it in the morning. Moving blindly inside my apartment felt like an exercise in instrument flying. When I finally found the flashlight, I lit a few candles and calmly awaited the arrival of electric current. However, as the minutes dragged on and no available electrons came in sight I decided to call it a day and go to bed. Since my bedroom had turned into a kiln, sleeping in it was a straining and drawn out nightmare. I would compare it to swimming in a lukewarm vat filled with vegetable oil in which restless dreams float around like half baked fish hopelessly nibbling at the cool corral reef of imagination. No fun whatsoever.

The next morning it transpired that electrons were not expected to show up any time soon (the storm apparently decimated most of the DC area), so I hopped in the car and entered the rush hour like traffic heading for the hills.

This unenviable experience taught me two things though.

First. We worry about the wrong problems. We fret about the Greek and European debt. We are apprehensive about Syria and the deteriorating security situation in the Middle East. Yet we are oblivious of the fact that in the meantime our whole planet goes off its rocker. Arctic methane seeps away and the polar caps are becoming the World's least known vanishing act. I think we should get our priorities straight: just because something may go wrong over the course of the next decade rather than next Tuesday does not mean we should put it on the back burner and just let it fester. Yes, this may be a false alarm. But what have we got to lose? If all of this is just an innocent local instability, we will merely end up with a more sustainable way of life and cleaner air. We can rebuild the European banking system from the scratch if it collapses. Not so sure we can do the same with the climate.

Second - as I was stuck on my way to Frederick (obviously I was not the only one who figured out that skipping town was the correct solution) I pondered how fragile our civilization really was. How much we take certain things for granted. And how poorly we would deal with their loss. Some people slept in their cars that weekend. Some ate their emergency stash of dry or non perishable food. Some had to drive to far away restaurants. And this was just a little storm. What if we lost electricity for a month? How long would the facade of civility last? How little would it take to turn us from respectable citizens to prowling predators, hunting for food.

There is a Spanish proverb which says "Lo que separa la civilizacion de la anarquia son solo siete comidas" (Civilization and anarchy are only seven meals apart). Without electricity, it might be just five.

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