A Song of Ice and Fire

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Every winter, we lose something here on Little River Farm. It’s like a tithe that nature takes, year after year after year. This winter was particularly tough. Polar vortex and all that, I suppose.

None of the bees made it.

Sigh. I’ve lost hives before. It happens. But it’s never easy. Never anything but sad. They work SO HARD at staying alive through a New England winter and they’re all boxed away for months and you can’t open the hive to check on them because that would weaken them for sure and it wouldn’t do any good anyway and so you wait and you worry and you do all you can to set up windbreaks and you don’t know if they’re hanging in there and it finally gets warm enough to crack open the hive and get them some help and … death. Nothing but death.

Always go to the funeral.

We respect our animals in life and in death. Especially in death. So I remove the bee husks and the old comb and I make a small fire and I give them to the flames. Because it doesn’t seem right to put bees into the ground. They are of the air in life, and they should be of the air in death.

And we begin again. Always.

But this isn’t a note about beginning anew after a polar vortex of a winter. Well, it kinda is, so hold that thought in the back of your head. But the narrative structure for this note isn’t about winter and ice and the tithe of death. It’s about winter and ice and the miracle of life.

There were two animals I was certain the winter would take from us, and those are the goldfish that live in the horses’ outdoor water trough. Yes, we put goldfish in the water trough last spring. The horses are careful not to eat them or drink them in, and the goldfish are great at keeping the trough clean. Not industrially clean, of course, but fingernail clean. The way a real, living farm should be.

I figured this was a brick of ice in the dead of winter. I figured there was no way on god’s green earth that two little fish could sit outside in what amounts to a big pail of water through a Connecticut winter. Good lord, we had DAYS and DAYS of sub-zero temperatures this January. And yet … there they were, glints of orange-red swimming around in the trough here in late March.

A miracle? Yes. But not the kind of miracle you’re thinking of. Not the miracle of some sort of cryogenic suspension, where the goldfish are like Captain America, thawed out from a giant block of ice after 40 years, ready to pick right back up fighting supervillains or eating algae or whatever it is one does after resurrection.

No, the miracle here is the non-linear nature of water.

See, we all know that when gases or liquids get colder, they get denser. They get heavier. The molecules in the gas and the liquid are less energetic as they cool off. They bounce around less. They sink. This is why pool water and lake water and ocean water gets colder the deeper you go. It’s a perfectly linear relationship … the colder the water, the heavier the water … the colder the water, the more it sinks.

But when water gets to 4 degrees centigrade, this nicely linear relationship between temperature and density stops happening. In fact, it REVERSES. It’s not only non-linear, it’s non-monotonic (a ten-dollar word that means reversal). As water gets colder than 4 degrees centigrade, it no longer gets heavier. It no longer gets denser. It no longer sinks.

Instead, this miraculous substance called water gets lighter as it nears its freezing point. It’s still a liquid. There are no solid ice crystals forming here that have a different density than liquid water. It’s still exactly the same substance in form and chemistry and everything else at 3 degrees centigrade as it was at 4 degrees centigrade, but somehow it is now lighter than it was before. And so it rises. And it rises still more at 2 degrees centrigrade. And still more at 1 degree centigrade. And so ice does not form at the bottom of a Connecticut pond or lake or water trough, but instead forms at the top of a Connecticut pond or lake or water trough, where it forms an insulating barrier against the cold air reducing the liquid water temperature still further. That’s how the goldfish survived. There was liquid water at the bottom of that deep horse trough, even as the polar vortex raged above.

Without this non-linear, non-monotonic property of water, life as we know it would hardly exist.

Every Ice Age would be every bit as much an extinction event as a giant meteor of death. Every lake or pond above or below a certain latitude would be as lifeless as the moon.

It’s a miracle of life that liquid water – the foundation of life on our planet – gets lighter instead of heavier right before it changes state into solid ice.

There’s no reason why this non-linear property of water should exist.

And yet it does.

If you were predicting the behavior of water from a theory of thermodynamics, there is no way you would predict 3-degrees cold water would be lighter than 4-degrees cold water.

And yet it is.

Facts don’t care about your feelings? Yeah, yeah … cute. Here’s the far more serious truth:

Facts don’t care about your theories.

The only way to learn the non-linear nature of water is through empirical observation, through actually living with water and ice rather than simply theorizing about water and ice. Because once you SEE that very cold water becomes lighter rather than heavier, then you KNOW that there must be something WRONG with your theory of thermodynamics, because this behavior is IMPOSSIBLE within a theory of thermodynamics. There must be something ELSE acting on the behavior of water than thermodynamics, something BIGGER and more FUNDAMENTAL than thermodynamics.

In the case of H2O, it’s the asymmetric positioning of the two hydrogen atoms connected to the single oxygen atom. It’s the atomic structure of the water molecule that creates the miracle of life.  

Same thing with economics.

Because money, like water, is non-linear.

Because you think you can explain and predict human behaviors around money based on a macro theory of monetarism (the supply and price of money), and usually that’s true, but sometimes it’s not.

Because there is a more fundamental theory of money – an atomic structure theory of money based on human risk-taking and human social narratives – that subsumes and improves on your macro theory of monetarism.

Does lowering the price of money from 8% to 7.5% create more risk-taking? Does it increase the velocity of money through the real economy as corporate and household risk-takers are willing to borrow and spend and invest MORE at 7.5% than they were at 8%? Yes.

How about lowering the price of money from 7.5% to 7%? Yes.

7% to 6.5%? to 6%? to 5.5%? to 4%? Yes, yes, yes, and yes.

It’s a nicely linear relationship.

It’s exactly as one would predict from a theory of molecules and thermodynamics monetarism and macroeconomics.

So I understand why central bankers believe that lowering the price of money from 1% to 0.5% would act on risk-taking in the same linear fashion. And from 0.5% to 0%. And in the case of Europe, from 0% to negative interest rates, and from slightly negative interest rates to really negative interest rates. They have a linear theory of monetarism and macroeconomics. Lower interest rates have a specific and direct relationship with risk-taking economic behavior and expectations. The lower the interest rate, the greater the spur to “inflation”, by which central bankers mean risk-taking economic behavior.

Inflation not being spurred? Lower the price of money more.

Inflation still not being spurred? Lower the price of money still more.

Inflation STILL not being spurred? Lower the price of money MOAR.

But it’s not working, people. Lower and lower interest rates are demonstrably not spurring risk-taking economic behavior in the real economy. Lower and lower interest rates are empirically not spurring inflation.

When the price of money gets really cold low, like close to zero degrees percent low, risk-taking behavior changes. The rational risk-taker in a zero interest rate world does NOT invest in property, plant and equipment. The rational risk-taker does NOT borrow more and spend more to invest in the future. No, the rational risk-taker believes the central bankers who say that interest rates will be ultra-low forever and ever amen, that future growth rates are moribund and miserable, that our world persists in a long gray slog of deflation just as far as the eye can see.

What do rational risk-takers do in a zero interest rate world? They buy back stock. They buy profitless revenue. They engage in financialization.

They minimize risk and maximize return. They are greedy AND they are fearful. They demonstrate the atomic behavior of rational greedy/fearful human beings since the dawn of freakin’ time.

THIS is water.

This is profit margin without labor productivity growth.

This is the zombiefication and the oligarchification of the US economy.

This is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction.

This is the profoundly repressive political equilibrium of an entrenched State and entrenched Oligarchy that masks itself in the common knowledge of “Yay, capitalism!” and “Yay, military!” and “Yay, college!“.

That’s a thick layer of ice above us, growing thicker by the day. But we are still the goldfish on Little River Farm, still swimming in a small pocket of water, not yet encased in a solid block of ice. We aren’t yet the bees. Not yet. What must we DO to avoid the bees’ fate? What must we DO to end this winter that is imposed on us?

We have to Break the Wheel.

We have to break the tyranny of ideas that nudge us into service to the entrenched State and the entrenched Oligarchy, without replacing those ideas with a tyranny of our own.

How do we do THAT?

Well … I know it’s all the rage to rip the Benioff/Weiss screenplay in the post-George RR Martin seasons. I’m pretty bummed myself. But this line by Tyrion in the finale shows the way.

What unites a people? Armies? Gold? Flags?

Stories.

There’s nothing more powerful in the world than a good story. Nothing can stop it. No enemy can defeat it.

How do we Break the Wheel?

Not by revolution. Not by dragon fire. It didn’t work for Daenarys, and it won’t work for us.

We break the wheel with a better story, with a better theory.

Because that’s what a theory is … a story about how the world works.

By the way, this is how science works. By the way, it’s always science that breaks the wheel.

The story of the Masters is that the market is a macro clockwork machine, governed by linear, mechanistic “laws”. I have a better story.

I tell you that the market is a BONFIRE.

From We’re Doing It Wrong:

Fire is not magic. Fire is not somehow separate from science or rigorous human examination. We know how to start fires. We know how to grow and diminish fires. We know how to put fires out. In a technical sense, Ray Dalio, you can classify fire as a machine.

But you’d never think that you could possess an algorithm that predicts the shape and form of a bonfire.

You’d never think that if only you stared at the fire long enough, and god knows humans have been staring at fires for tens of thousands of years, that somehow you’d divine some formula for predicting the shape of this or that lick of flame or the timing of this or that log collapsing in a burst of sparks.

No human can algorithmically PREDICT how a fire will burn. Neither can a computer. No matter how much computing power you throw at a bonfire, a general closed-end solution for a macro system like this simply does not exist.

But a really powerful computer can CALCULATE how a fire will burn. A really powerful computer can SIMULATE how a fire will burn. Not by looking for historical patterns in fire. Not by running econometric regressions. Not by figuring out the “secret formula” that “explains” a macro phenomenon like a bonfire. That’s the human way of seeing the world, and if you use your computing power to do more of that, you are wasting your time and your money. No, a really powerful computer can perceive the world differently. It can “see” every tiny piece of wood and every tiny volume of oxygen and every tiny erg of energy. It “knows” the rules for how wood and oxygen and heat interact. Most importantly – and most differently from humans – this really powerful computer can “see” all of these tiny pieces and “know” all of these tiny interactions at the same time. It can take a snapshot of ALL of this at time T and calculate what ALL of this looks like at time T+1, and then do that calculation again to figure out what ALL of this looks like at time T+2.

This is an atomic theory of markets. This is the intuition and the technology roadmap to provide a better theory. It’s not that macroeconomics and monetarism are wrong … there’s no such thing as right or wrong when it comes to theory. It’s that macroeconomics and monetarism are not as USEFUL a theory as one formed organically from the risk-taking economic behaviors of actual economic actors.

Look, central bank cultists will never change their beliefs that they are the thin blue line between order and chaos, or that academic economics is the One True Path for enlightenment and the maintenance of that thin blue line. Change isn’t going to come from attacking the Fed or from a snarky blogger. I mean, I did just call them cultists.

No, no …  change will come from a Fed economist reading this note (on her gmail account, of course) and dropping the assumption – because it IS an assumption – that, for all prices of money, there is a monotonic relationship between change in the price of money and change in the velocity of money employed for productive economic purposes. Change will come from this economist allowing for the possibility of a non-linear and non-monotonic relationship between interest rates and inflationary behaviors at very low interest rates, loosening her stochastic assumptions accordingly, and then TESTING this possibility against the actual empirical evidence of the past ten years. Change will come from this economist presenting her findings from within the proper academic forms as an extension and progression of what came before, so that the institutional imperative to self-servingly mansplain our place in the world (you’re welcome!) can be maintained.

Daenarys and her city-destroying dragons couldn’t break the wheel. Moana and her Maui-tolerating wayfinding could.

In a thousand small steps … this is how theory changes. This is how science advances. This is how progress is made. This is how the story that we tell ourselves about who we are evolves into something that subverts institutions from within, not something that attacks institutions from without.

As below, so above.

To be honest, it’s a longshot that we’ll be able to pull this off. After all, we’re not characters in a Disney movie. Or even an HBO show.

One of my favorite authors, Kurt Vonnegut, wrote a lot about theory and non-linear systems and humanity’s place in all that. You wouldn’t know it from a cursory read, because he could spin a yarn, but that’s what most of his books are about. Cat’s Cradle is the novel most obviously connected to my particular theme, as the plot is driven by the invention of a substance called ice-nine, an isotope of water that freezes at room temperature and replicates itself in any ordinary water it touches, thus spreading ice throughout all the liquid water in the world. You know, kinda like negative interest rates.

Along the way to the end of the world, there’s a nihilist religion called Bokononism to explore, with this wonderful quote:

The Fourteenth Book is entitled, “What can a Thoughtful Man Hope for Mankind on Earth, Given the Experience of the Past Million Years?”

It doesn’t take long to read The Fourteenth Book. It consists of one word and a period.

This is it: “Nothing.”

Vonnegut would probably say we don’t stand a chance against the Nudging State and the Nudging Oligarchy, armed to the teeth with narrative-controlling instruments that promote their Wheel-preserving ideas, convincing us to sign away our autonomy of mind.

Like how the narrative of Yay, capitalism! subverts our liberty (and responsibility) to Make.

Like how the narrative of Yay, military! subverts our liberty (and responsibility) to Protect.

Like how the narrative of Yay, college! subverts our liberty (and responsibility) to Teach.

Yeah, he’s probably right.

But then again, Kurt, why did you write?

It’s why I write, too.

I’m publishing this note on Memorial Day for a reason. You get it. I know you do.

We are the human animal.

We are non-linear.

We ARE a song of ice and fire.

It’s a song that has built cathedrals and fed billions and taken us to the moon.

It’s a song that can do all of that and more … far, far more … if only we remember the tune.

The Pack remembers.

Yours in service to the pack, – Ben


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Peter
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Peter

Loved it Ben !

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cameron judd
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cameron judd

Great note – thanks.

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Jane VanFossen
Member
Jane VanFossen

And this is why I subscribe to, read, and re-read Epsilon Theory.

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Hugh Fowler
Member
Hugh Fowler

Elegant writing. Here in the UK we are fighting Yay, Europe!

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Mark Kahn
Member
Mark Kahn

Really smart stuff. I’ll probably have more of my, as always, not-nearly-as-smart stuff to say after I’ve read it again / studied it, but even the first time through, you know this one is special.

Quick thoughts:

– I feel really bad about the bees (an early ET piece turned me into a huge bee fan)

– Good for the goldfish / what did they eat all winter?

– Love the macro clockwork machine versus bonfire analogy

– Brilliantly developed and argued, but the non-linearity of money should be obvious to the Fed by now or, at least, it should get that funny things happen around zero rates (like Newton’s laws in the subatomic world)

– I’ve seen change happen in the corporate world the way you describe it – it can happen, but as you note, it needs a high-level advocate and time.

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Michael
Member

Agree with you Mark – I also felt pretty sad about the bees…

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Peter Perez
Member
Peter Perez

Great piece, Ben! Non-linearity and the fallacy of extrapolating the present indefinitely into the future are like pride in a Greek tragedy. Felt like a mini-reread of “Ubiquity, Why Catastrophes Happen”. I’m reminded of the 1800s futurist who predicted that there would be 4 feet of horse dung in the streets of NYC by 1945 based upon population growth, need to move foodstuffs and waste around, etc….totally missing the invention of car/truck. Nuf sed.

I differ with your statement re low risk re stock buybacks versus investing in plant and equipment. It only looks risk-free/lower risk NOW because the consequences have as yet been realized. Here too, the non-linearity that is the unwind of bovine investor herding, complacency, lack of volatility, passive indexation, lulling of investors by way of political utility, etc. will eventually kick in an manifest itself in super-geometric fashion via the explosion of risk aversion…the equivalent of yelling “fire” in a crowded theatre. Haul-ass, bypass, and Re-gas!

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Ben Ray
Member
Ben Ray

Beautiful, very well written. The only macro/economic writing I read that stirs up real emotions.

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Michael Patton
Member
Michael Patton

Am I wrong to be troubled by how much sense this well-developed line of thinking continues to make, and how little our current reality and predictable (such as it is) future does?

Rhetorical question, of course.

Please keep up the excellent work, Dr. Downer, and I’ll keep reading.

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Sir Steven Wilkinson
Member

I loved this piece and as usual it has me staring out across the irish countryside wondering what other stories and narratives are gestating as suitable metaphores for our human reality. And then I realise, of course (Duh! as the two generations below me on the ladder might put it) that all systems are organic and bio-dynamic and we should never be surprised (Duh!) that life behaves according to the non-linear determinations of the natural world – with all its extraordinary potential for surprise, decimation and regeneration. Just ‚coz we don‘t understand it doesn‘t mean it ain‘t so. Or words to that effect.

One quibble: Tithes can‘t be extracted. They are always volontary. That is the point of them. Taxes, penalties, fees, fines, levies and even seigniorage can be demanded and extracted by force, but not tithes.

Best wishes and as always thank you for your service to the cause of truth-seeking.

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willem
Member

Bravo, I love how you thread together a relatable analogy between linear-ism and life, multiple Epsilon topics, and a relevant pop-culture meme. Pieces like these make me happy to continue paying for ET. Bravo.

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D_R_lowfade
Member
D_R_lowfade

A true masterpiece, Ben.

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Thich
Member
Thich

Ben, I have been reading your writings avidly since you started Epsilon Theory. I recently became a premium member. I can’t help but get the feeling that you no longer see any way out of the morass our system is in. The oligarchy has the world in a vise that is ever tightening. Money talks loudly…nothing else matters…definitely not the truth. Do you have any ideas as to how the system ultimately changes without wrenching the world through more catastrophic wars?

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