Monday, April 6, 2009

Reasoning By False Analogy

Ignoring current reality while drawing false lessons from history can be very dangerous. Just ask the French generals who overlooked rapid advances in mechanized warfare after World War One and built the Maginot Line, instead.

"World's Greatest Fortifications Guard France" - Modern Mechanix (1934)

This kind of action by backward example is called reasoning by false analogy and can lead to highly unexpected, nasty results. In World War Two it took Guderian's highly mobile blitzkrieg a mere six weeks to bring France to its knees; German tanks simply bypassed the static Line.

Today, the Fed and Treasury are institutionally scarred by - and scared to death of - the deflation monster which devoured the US economy during the Great Depression. Responding to the current crisis, they are throwing up vast walls of public money to surround failing private financial institutions, intending thus to prevent the monster from entering and mauling the real economy. That's a dangerous fallacy.

I agree that preserving the public's trust towards financial institutions is important; no one wants a repeat of 1930's bank runs and closures. But that's not enough - not by a long shot. What ails the economy today is completely different from what sickened it during the Great Depression and requires radical surgery, instead of massive doses of vitamin C.

Let's start with the diagnosis.

Today's problem is a rapid and accelerating depletion of the Earth's biosphere caused by the one-two combination punch of increased activity by a rising population. In plain language, more people wanting more "stuff".

This "illness" is aggravated by two relatively recent developments:
  • The adoption of dogmatic free-market ideology by the entire world. This is a false analogy tragedy because Adam Smith's invisible hand can no longer regulate a resource-limited world of 7 billion inhabitants, since it cannot exact the proper price for "common" goods like topsoil, water and a temperate climate. It's like this: scientific thought has advanced by quantum leaps, while "dismal" economists are still religiously adhering to the teachings of a gentleman who died in 1790, one hundred and fifteen years before Albert Einstein published his special theory of relativity.*
  • The creation and explosive misuse of credit derivatives like CDOs and CDSs provided an illusion of financial innovation, causing a vast expansion of debt versus income. Instead of financial innovation, however, all that happened was the ruinous mispricing of credit risk.
Data: FRB Z1 Release

The faster rate of biosphere degradation is firmly connected with the explosion of debt, since the latter enabled an inordinate acceleration of consumption and thus usage of resources and higher pollution.

Let's go back to the Fed and Treasury. Yes, it is likely that current initiatives will succeed in flooding the system with dollars; after all, it's just (fiat) money. And, yes, it is likely that they will thus engineer a "thaw" in money and credit markets and probably in equities, too. But if that's all the government does, then the cheer will be short-lived.

If we myopically focus on mere GDP boosting via renewed lending and consumption, then we will quickly suffer from a whiplash as the real economy continues to deteriorate, weighed down by the "external" biosphere costs that we have so far ignored in our global accounting books.

I don't know how soon we could, or should, declare a partial "victory" against credit market troubles. But I do know that if we do so and then rest on our laurels in the belief that we have successfully avoided the worst, then that would be our worst mistake. Because what we need, instead, is a radical break from our conventional growth-at-all-costs groupthink, a declaration of war against black energy, massive investments in green energy and organic food and, yes, a serious re-think of our current pension schemes that depend entirely on Permagrowth.

We've got to stop digging massive financial trenches and start building lots of solar, wind and organic farms.

Otherwise, best be on the lookout for the panzers.

...and oh,

P.S. I am personally much more impressed and touched by the message provided by Michelle Obama's planting of an organic vegetable garden in the White House than just about anything done by Bernanke, Geithner and Co.

* For historical context, in Smith's time stealing goods valued over 40 shillings carried a mandatory death sentence.


  1. Groupthink flourishes inside bureaucracies of all sizes. It is the bureaucratic edict of self preservation (by self I mean everything from ones job to the continued funding of a long since irrelevant department). Public accounting systems are at the root. Use it or lose it budget systems beget group think.

    To keep with your analogy: Even if the generals DO recognize the modern tank technology and are motivated to defend against it we will still be defenseless in guarding the Belgium border if the people who build our tanks still insist they be pulled by horses as the department of horse yoking has a powerful department head

  2. Since we will not... "stop digging massive financial trenches and start building lots of solar, wind and organic farms." we will see the other shoe drop on this economy.

    The "mule" (bureaucratic economic mavens) needs to be hit with a bigger stick, or to stay with the analogy, isn't yet serving wine to German officers in Parisian cafes. This reality (humiliation) should get clearer when the vaunted American consumer falters in the trenches. The downward pressure on wages and chronic high unemployment coupled with the new behavior of thrift should grind the "recovery" to a halt.

  3. Hel,
    Have you been reading Paul Craig Roberts' articles about the failure of Empty World economic models and the need for a new Full World model that accounts for all the depletion you mentioned? As someone said; modern economists, instead of simply adding, need to learn to subtract.

    Re: White House Garden, I think that was done deliberately in preparation for food shortages (not at the WH) so that Obama can get on TV and tell people to get busy just like Michelle and start help feeding themselves. I don't know if you noticed how she was wielding the shovel, rather clumsily; didn't strike me as something she has done much of before then.

  4. The Maginot line was very successful.
    France fell because the four roads through the hills of Luxemburg and Eastern Belgium were unguarded. The French carefully posted one reserve division to guard that section of the front, didn't give them any antitank guns and attillary, carefully didn't send any recon aircraft over the hills for four days, ignored the telephone and radio reports of four German armored divisions moving down the four roads, ignored reports that those four German armored divisions weren't anyplace else, either, and then they moved the French armor and first line divisions away from the supply lines up into the refugee crowded roads of western Belgium.

    Couldn't have done a better job if they had planned it out in advance.

  5. Great post, Hell.
    I'm really impressed, and agree with just about everything.
    And I think that people are ALREADY starting to behave like they know what's coming.
    Actually, what is coming will give us all collectively lots of occasions to show our solidarity, and REAL (not bogus...) COMPASSION.
    I hope that the human species is up to the challenge.
    If there's one thing that I've noticed, it's...
    HOW QUICKLY WE LEARN when we have a knife against our throats...
    And how much imagination and resourcefulness is unleashed too.

  6. Modern economic circumstances vs. France's WW2 reliance on an enemy playing by the rules of war established over centuries...

    Talk about false analogies!


    Might be interesting for the thirsty minds here. Michael Panzner presenting his book "When giants fall" and opinions and explaining how he sees the imminent future and the trends.

    4 parts and really long watching though if one watches all.

  8. "Because what we need, instead, is...a declaration of war against black energy, massive investments in green energy and organic food.."

    Hell, I agree. But for Debra's sake, I think it would be better to call it a revolution as opposed to a war, since the goal is more about changing hearts and minds than shock and awe.

    it's also my opinion that the high leverage point of this revolution deals with the organic food component.

    First, growing vegetables is something everyone can do (on one scale or another), and the benefits of doing so are manyfold:

    --19% of all black energy in the US is devoted to Agriculture, and it takes 10 calories of black energy to create ONE calorie of FOOD energy!!! So, every veggie grown at home is one teensy tiny step to re-balancing that equation.

    --growing veggies helps teach a long-lost skill, namely: Patience (and long term planning as well)

    --I probably don't need to mention the health benefits of eating homegrown produce.

    --and there's social consequences as well, since growing too many tomatoes MIGHT prompt you to turn the computer off and invite some real, flesh-and-blood people over to eat the excess. yadda yadda...


    I'd rather invest in MY dirt than YOUR ponzi scheme!!

  9. Right on Cotton. I would like to add that the space required for decent vegetable garden is minimal. I live in an apt and on a small terrace I can fit; 4 four to 5 tomato plants that hang upside down (great product btw). You could substitute squash or peepers for the tomato plants. Using cheap 5 gallon buckets I can grow herbs and pepper and even make my own compost. If you have a little more room you can use an old childrens splash pool to grow a good amount of cabbage and lettuce or whatever.

  10. @Hell,

    Sudden Debt really is a great site. You step back from the blizzard of numbers and look at the big picture. If a daytrader ever stopped by and read they'd get whiplash.

    @YYMO (from the last post's comments):

    "I think that will take a few years as China/Japan/OPEC can't afford to lose their reserves before an alternative is set up but that is something that is in the process of happening"

    I'm buying what you're selling! It has some justification, but mostly because its what I want to hear ;)

  11. Dink,
    Here's something you may not want to hear as much but it's a book (or at least the review of it) that <1/2 might be willing to look at. It's by a woman (the book, not the review) and it deals with the spiritual aspects of confronting industrial demise:

  12. Yoyomo, I'm interested in the book, but when I click on your link nothing happens...
    I'm not throwing any stones here, as I am a computer zero, but I'm interested in the link.
    Cotton, I responded to your bartering experience. Did you see my comment ?
    Thanks for the compliments, dink, as I assume perhaps wrongly that they refer to all the participants on this blog who FREELY give their minds over to the problems facing us.

  13. Debra,
    I don't know how to make active links, you'll have to cut and paste the URL into the address window yourself.

  14. Yymo,

    Not to pry, but is Yymo's <1/2 on board with your assessment of the future?

    Dink's <1/2 is not in agreement, which is odd after 16 years of being such an agreeable couple. When storing food was brought up the response "Hoarding?" was hissed. I had been unaware of the strongly held belief that people who thought this way were urine-drinking social perverts. It is hard to find middle ground with two such polar views. So the subject is ignored. Which is too bad because I really find it interesting and I know <1/2 could be really clever with plotting. We know each other too well to bring up a tangential subject "innocently".
    Example #1:
    Dink: "I wonder how much hot air balloons cost?"
    <1/2: "Civilization is not going to end"
    Example #2:
    Dink: "Long bows really had incredible range"
    <1/2: Civilization is NOT going to end"

  15. Dink, Yoyomo, you guys are fascinating.
    I presume that the fractions are a substitution for what literary types like me call "the other half" ?
    It took me a few minutes to figure this out.
    Mathematical shorthand is NOT my specialty...

  16. "Don't have one."

    Ah, so no editing of unusual or unpopular beliefs required.

    " presume that the fractions are a substitution for what literary types like me call "the other half""

    Correct. Say, do you know art history as well as lit? I took two art history courses back in the day and I want to find a painting that I vaguely remember. It was a landscape; on the closest hill was a happy couple (maybe a group) in fancy clothes having a picnic. In the background were enormous, dark storm clouds. The prof paused on the picture and announced that she always included this one because it was such a true representation of human nature (i.e. oblivious). Pretty sure it was the late Renaissance. Anyhoo, if it rings a bell let me know.

  17. Dink,
    Let me know if you have any luck with Carolyn Baker's book and you might want to check out her website, right now it has an article on the home page by Dimitry Orlov that I think will interest you:

    You might even be able to share it with you know who.

  18. Dink, I am an "amateur éclairé", self taught for art history.
    Your description could fit a lot of paintings...
    What country, for example ? Italy ?
    Could you try racking your brain a little more for more details ?
    I repeat, I am not a specialist, but if it is a FAMOUS painting, for example, it shouldn't be TOO hard to pinpoint...

  19. It certainly is a dangerous fallacy, but the bankers that run this country simply do not care. They will print their way out of trouble. It dont matter if every real indicator of production falls, they will use the printing press to pump up all numbers until all our problems appear to be papered over. And the public will buy all of it, and they will worship the bankers and their front man Obama. "So what if my standard of living has been cut in half, at least I got my 401k back!" Duh! I can just imagine the kind of garbage people are going to be spewing a year or two from now, and that's if we're extremely lucky.

    Best case scenario: 2 years from now all this printed money inflates GDP numbers, but wages stagnate and energy prices skyrocket. So the real economy contracts but on paper we are doing wonderfully. This is how it has been for the last 30 years and more. The bottom 90% has gotten poorer. Subtract the top 10% from the picture and it is obvious we are in a long steady decline. The only thing that will be different about this next phase of the decline will be that the lower half or two thirds of the top 10% will also be sacrificed. So 3 years from now, it will be the bottom 97% that is getting left behind, or thrown under the bus.

    But the media will never report the peaking of global energy resources. They simply will not ever frame the issue in any common sense way. Instead it will be "we are at war with ____" (Eastasia) or "we must tax all energy use and give the money to the top 2% because if we dont the earth will burn up from excess carbon." Whatever lie they can sell, they will. Anything except the truth. I have no trouble believing that the vast majority of people living today will go to their deaths never knowing how obvious it was that we had passed peak energy and how evil the elite were for trying to hide the truth through a million layers of control.