Thou shalt have no other distribution before me, for I am a jealous limit theorem.

-- Cosima Shalizi

That's a punch-line from one of his stats rants on power laws.

The austerity measures in Europe seem to have percolated throughout the world, reducing world trade volume. Global consumer goods firms have recently stated that the future looks ungood for a while (Unilever discussing its 2011 results).

Perhaps due to this contraction in global aggregate demand, the FAO food price index continues to fall from its 2011 all-time highs. Lower inflation will be welcome to savers who currently watching their bank savings depreciate at 3% a year ( 3% US year-over-year all urban consumer goods - 0.0tiny bank deposit rates ).

Global liquidity appears to be returning as the TED spread has fallen from its recent highs.

Accordingly, global bank stocks have risen in response. Perhaps we have seen the trough in global bank stocks' valuations? This depends in part on global trade volumes, which has not been encouraging.

In the US, the bank industry has been in a continual consolidation since the early 1980's.

This is likely to continue apace as the recent crisis has not yet resulted in any material changes affecting banking's economies of scale. With more future mergers and acquisitions, the more aggressive mid-sized banks and global banks will continue to grow.

Granted, we have yet to see how the Fed will unwind its bank reserves balances, so one should view US banks as a decade-level or longer investment. Likewise, continued weakness in GDP growth may incite Congress to enact knee-jerk regulations.

For January, TTF beat out the S&P500 by a few tens of basis points, and continued to outpace the index.

Goldman Sachs' US Weekly Kickstart PDF says that corporate profits in the US may have just peaked. While that's most likely due to increased chances of EU's Aggregate Demand contraction spreading to the US, bigger factors seem to have been at work. Why have profits been so high compared to nominal GDP?

While some firms may occasionally luck into windfalls, those profits don't last unless the company has a good defense. The above chart shows that the balance between offense and defense has swung back towards defense over the past twenty years.

This back and forth has probably been happening since time immemorial. We can see the same process in war technology, a quick summary could be:

1. first there were bunches of people fighting; then we had cities and people attacking those cities;
2. cities replied by building some walls and getting together and forming treaties / states;
3. people attacked the walls with ladders, the treaties with politics;
4. cities got better architecture and could afford to build some huge walls that prevented a bunch of guys on horses from doing anything other than camping outside and waiting;
5. the siege guys then got gunpowder and added sappers and miners; Vauban added defense-in-depth to the city-coalitions which made getting the guys on horses near the loot even more difficult;
6. the cities got bigger, people attacked their supply routes, whether by land or sea;
7. we then added planes so we just do a fly-by and bomb the cities into submission; then cities added anti-aircraft weapons and their own fighter jets; then we added ICBMs;
8. which we replied with ABMs;
9. the cost of those systems bankrupted at least country, so we started total war, attacking difficult to defend positions / symbols of power;
10. then we extended monitoring and started running ad-hoc strikes and extrajudicial executions on a global scale.

Similarly, a rough history of commerce offense and defense looks like:

1. people live near each other and start trading things;
2. some people trade better or make better products, outcompeting others;
3. people form companies to share skills and costs of production;
4. competition increases; some competitors petition local government for monopolies and preferential treatment;
5. to avoid monopolies and limit new competitors, similar producers form guilds;
6. shipping costs fall enough to cause city guilds to compete on production costs;
7. guilds fall, competition via price, quality, and politics resumes;
8. shipping, manufacturing, and information costs fall further, scaling out production/sales, allowing marketing to use branding;
9. taking advantage of lower shipping costs, unskilled labor migrates freely, competing for jobs;
10. with capital scarce and labor plentiful, companies focus on capital use to the detriment of worker safety;
11. labor unionizes, gains safety and pay concessions;
12. with global telecommunications and containerization, shipping costs fall further, companies move production to whereever's cheapest;

Taking a somewhat medieval view, perhaps our corporations have recently gotten better "moats" as Warren Buffett calls them. What new moat-like technology have we seen arise in the past 20 years?

The rise of Intellectual Property and credible killer lawsuits has certainly limited competition to those who can afford to compete on those grounds. Despite some governmental response ( frivolous lawsuit legislation ), the patent-hoarding and lawsuits by major companies continues apace.

Courtesy of information technology, we have better monitoring, so companies can react defensively faster and shutdown more attacks before they gain traction. We also have a better theoretical and practical understanding of network effects across a customer base. Adding these two together, we may also better estimate the cost to assail a competitor's position and thus spend less in protracted battles that senselessly reduce the profits of the combatants.

There may be other defenses at work or at non-work as the case may be. Since the profits necessarily have not ended up in the hands of government or labor, then perhaps those have eroded?

With government, perhaps we've seen better regulatory capture by industry. The continual failure of government to use finance for anything other than a cash spigot would be one example. With a somewhat equal historical relationship to government, the gains of US oil companies on the backs of global consumers have in the last decade generated the largest profits ever.

As for labor, we've seen the pricing power of several unions eroded over time, this seems more due to US companies shifting out of internationally-competed low-skill labor industries to higher skill industries.

However, the second largest profits ever ( and perhaps the most potent gains against consumers ) have come from better attacks on family budgets by targeting the weakest links.

Talked with a jaded Russian ex-pat last night about the current state of life in Russia. To start off, he introduced the concept of a крыша ( literally, a roof ).

When it rains, you need a roof to protect you. Likewise in Russia, you need a крыша to protect you from the depredations of others.

When Yeltsin chose a relatively unknown Putin as successor, Yeltsin created a problem for Russia because Putin brought his FSB friends into power. These were people who are not averse to using every force available to get what they want.

The apartment bombings were FSB operations to swing public opinion.

The Kursk sinking was a US - Russian incident which resulted in payment to Russia to keep it quiet.

You have to pay rent for your roof, e.g. purchase a Mercedes 600 for a well-connected person's daughter's boyfriend. People talk about this, and it becomes known that you should either be left alone.

-- received Russian world view

The social currency of protection acts as a tax system with seemingly large differentials in tax rates. Defense costs more than offensive power, so a roof with a credible second strike capability will cost less in protection money than a defense-oriented one.

Since first strikes can be stealthy, the second striker needs to have good knowledge of local conditions, so the local roof has an advantage over the remote who has a higher chance of striking the wrong person.

This yields a trade-off between extracting local rents and the possibility of a non-local building an information network and offering protection for less. Also, too high rent without a credible second strike means the local roof has higher odds of being deposed.

How much choice you have in terms of protection?

The great liability of the engineer compared to men of other professions is that his works are out in the open where all can see them. His acts, step by step, are in hard substance. He cannot bury his mistakes in the grave like the doctors. He cannot argue them into thin air or blame the judge like the lawyers. He cannot, like the architects, cover his failures with trees and vines. He cannot, like the politicians, screen his shortcomings by blaming his opponents and hope the people will forget. The engineer simply cannot deny he did it. If his works do not work, he is damned.

On the other hand, unlike the doctor his is not a life among the weak. Unlike the soldier, destruction is not his purpose. Unlike the lawyer, quarrels are not his daily bread. To the engineer falls the job of clothing the bare bones of science with life, comfort, and hope. No doubt as years go by the people forget which engineer did it, even if they ever knew. Or some politician puts hs name on it. Or they credit it to some promoter who used other people's money... But the engineer himself looks back at the the unending stream of goodness which flows from his successes with satisfactions that few professions may know. And the verdict of his fellow professionals is all the accolade he wants

-- Herbert Hoover

With the MegaUpload prosecution, we get a media story of a hacker with criminal record, who's making tons of money in a new industry that people don't know much about. Talking with people, it seems that people hearing this story have switched away from innocent-until-proven-guilty to assuming that he's guilty.

We saw a similar effect with Cisco when they accused a Nigerian who used to work for Cisco with hacking them 97 times. People heard that story and just assumed that Peter Alfred-Adekeye was guilty. Only he wasn't; Cisco trumped up all the charges against him.

However, despite my belief that Kim Schmitz is innocent until proven guilty, I believe he will be found guilty. In today's world, it seems quite difficult to be 100% law-abiding, so while Cisco couldn't make anything stick on one of their engineers, I'm fairly confident that the various Security Squads in the US will be able to find something.

Likewise, back in the early 80's, IBM could have easily depicted Apple as two loser hippie felons who built illegal weapons of mass phone fraud. Those charges would have stuck and we would not have the 2nd most profitable company of all time (and perhaps #1 by next quarter).

Since every Accused likely has some dirt on them, maybe it is correct that everyone has optimized their brains by updating their defaults to Guilty-of-Something.

What happens when we take the next step and we all assume that everyone is guilty?

For example, Stanley Ho operated Macau's gambling monopoly for many years, and has passed control on to his daughter, Pansy. Trying to expand to the US, the Nevada Gaming Commission granted her a license, while New Jersey denied her due to "extensive ties" to Organized Crime. Which implies that all the New Jersey casinos are just so much cleaner that it's like night and day.

In everyone-is-guilty, we know that she's corrupt, the Gaming Commission's corrupt, everyone's corrupt, so just give her the license.

Similarly, we know that Politicians have to know as much as possible about the motivations of their various constituencies, legal or otherwise. When we observe Organized Crime in our cities, we should fire our Politicians because either they were effective, knew about it, and did nothing, OR they were ineffective, didn't know about it, and should be fired on those grounds alone.

It seems like both innocent-until-guilty and everyones-guilty work; it's just the current halfway position of guilty-with-a-slight-chance-of-innocence which doesn't work.

Advice from Francis Ford Coppola:

I'm going to tell you the story of how I prepared the actors of "The Godfather." Of course, we were all nervous about Marlon Brando. As theatre students in the '50s, we looked at him as the greatest. And there was going to be the first time when all the actors were going to meet. Of course, Al Pacino, Jimmy Caan, Bobby Duvall, Johnny Cazale -- everyone just admired Marlon. He was the Godfather. I knew that, and I said, "I can use this." Napoleon once said, "Use the weapons at hand," and this is what a film director has to do everyday. So what I did is I arranged for the first meeting as an improvisation.

I said, "I want you to come and be hungry." And they came to a restaurant that I had arranged, the back room of the restaurant, just a table that looked like a home. Marlon, I had sit at the head of the table, and to his right I put Al Pacino, and to his left I put Jimmy Caan. I put Bobby Duvall, and I put Johnny Cazale, and I had my sister Talia, who played Connie, serve the food.

They had a dinner improvisation together, and after awhile everyone is relating to Marlon as the father, and Jimmy Caan is trying to impress him with jokes, and Al Pacino is trying to impress him by being intense and quiet, and my sister was so frightened -- she was serving the food. And after that dinner they were the characters. So one tip I give you is, with improvisations, they really stick if there's something sensual connected with them, like food or eating or making something with their hands.

-- 99% interview

Now that the world's fully socialist regimes have burnt up or self-imploded, let's look at Marx's economic claim that the means of production will eventually be owned by the proletariat.

Throughout the 19th century, interest rates in Western Europe had been falling ( see AHistoryOfInterestRates ). Capital was getting cheaper by the year, and by the latter part of the century long-term rates on sovereign debt were below 3%. At the same time, Marx witnessed the unprecedented gains and growth of the Industrial Revolution, so it's not surprising that he thought the cost of capital could fall to zero.

Of course, he was extrapolating from a region where he had data to a region that did not, so his work needs to be read more as sci-fi rather than economics. Thinking from a possible-future perspective, what do see today?

From the early 1980's to the mid-2000's, global interest rates fell ( Bernanke's 'Global Savings Glut' ), echoing the falling rates of the 19th century. With the rise of the Internet, the costs of financial transactions, educational content, and computing have all fallen.

Perhaps the most lucrative goods demanded in the future will be producible by people with an education gained from online content and working on cheap computers. With capital requirements so low, the workers will own the means of production, and Marx's Revolution will have arrived.

Given History, that future state seems unlikely. Whenever one good becomes unscarce, it seems we either introduce some artificial scarcity (branding, cartels, etc.), or another good becomes the scarcity bottleneck.

An alternative future has the same cheap computers and education, with ideas ubiquitous. Everything online is easy and free. However, if you want to do it in the real world, it's much more difficult due to the higher relative capital and global security costs.

A Matrix-like future because it just seemed cheaper that way.

The Most Human Human by Brian Christian

Ever go fishing and you catch a fish small enough so you can reel it in before it's exhausted? You take the hook out of it and put it into a bucket where it spends the last few moments of its life trying to breathe.

It seems to only know that to get more air, it has to swim forward, so it flops around madly. As an 8-year-old, this can be funny to watch. Maybe later on you start cheering for the fish, 'come on, just relax and breathe, you can do it.' They never make it, so it just becomes sad, and you don't really want to look into the bucket anymore.

This book ends up being an object lesson in scarcity: what happens when something that previously was scarce becomes ubiquitous?

In the art world, painters used to have a monopoly on 2d images. Then photography arrived and a whole bunch of them avoided that competition by generating non-realistic works.

Computers are scarcity-killers for whatever tasks can be automated. Christian will apparently keep responding to this by trying to push the bar higher. Maybe one day, he'll figure out a different way.

I think the odd fetishization of analytical thinking, and the concomitant denigration of the creatural -- that is, animal -- and embodied aspect of life is something we'd do well to leave behind.

-- The Migratory Soul

You can almost think of the rise of AI not as an infection or cancer of the job market -- the disease is efficiency -- but as a kind of maggot therapy: it consumes only those portions that are no longer human, restoring us to health.

-- Site-Specificity vs Pure Technique

it was "like watching an extremely large and powerful predator get torn to pieces by an even larger and more powerful predator."

-- Getting Out of Book

conversations between pairs of signers, as Rochester Institute of Technology research Jonathan Schull observed, "involve more continuous simultaneous and overlapping signing among interlocutors" than spoken conversations.

-- Barging In

"An explosion in a shingle factory."

-- Julian Street on Duchamp's Nude Descending a Staircase, Not Staying Intact

"He who cannot draw on three thousand years is living hand to mouth."

-- Goethe, High Surprised

I prefer to think of the long-term future of AI as neither heaven nor hell but a kind of purgatory: the place where flawed, good-hearted go to be purified -- and tested -- and to come out better on the other side.

-- Conclusion

They immediately unplugged Deep Blue, dismantled it, and boxed up the logs they'd promised to make public.

-- Conclusion

Running The World by David Rothkopf

Rothkopf wrote a breezy history of the National Security Council over-filled with "relationship" and overt political bias. He has no model with which to evaluate the effectiveness of any particular administration's NSC, so you just get political stories. Which can be entertaining at times, however only because you're imagining what's actually occurring.

This staff (the NSC) was initially envisioned as a tiny advisory team, a few professionals, most perhaps military men, who could help support the president in administering the national security side of the government. Over time -- and this is much of the story of the NSC -- this group has inexorably gained power.

-- The Committee in charge of running the world

When we examine the evolution of the national security apparatus of the US government from 1947 to the present, we discover that no other factor is more central to determining whether we succeed or fail in preserving or advancing our national interests and ideals than the character of the people we put in the positions to lead us.

-- Washington's Choice

Truman entered the nation's highest office utterly unprepared for it by his 1944 running mate. The two had met formally only twice between January 1945, when Truman took the oath of office as vice president, and Roosevelt's death in April. Truman was not briefed on the details of the atomic bomb, the Yalta summit, or the secret agreements Roosevelt had reached with with other world leaders before assuming office.
Along with the new president, others in the government had seen the consequences of Roosevelt's management style and determined that something needed to be done so that should the US ever again face similar crises, the system of government would ensure a better process, capturing the views of more of the best minds available before decisions were to be made.

-- Greatness thrust upon them

one of the first laws of Washington: "Where you stand depends on where you sit."

-- Greatness thrust upon them

In 1964, not only were the generals who had overthrown Diem themselves overthrown, but by summer's end there were seven governments of South Vietnam. American military strength had doubled again from the end of 1962 and had reached over 22,000 troops.

-- Bound in Lilliput

The good policy paper laid out the issue and then provided a lot of good detailed background and technical background and political background and then it stated assumptions and stated goals so that if people quibbled about those assumptions or goals you could have a debate.

-- America in Decline, The NSC Ascendant

Carter wrote, "It will always be one of my proudest moments and one of the great achievements in the history of the United States Senate."

-- A superpower in search of itself

"It all became more of a political issue -- more important to be able to fight the political battles regarding budgets and legislation and so forth. And of course, since the end of the Cold War, it is more of a political issue because it is no longer even clear what national security is."

-- Harold Brown, in A superpower in search of itself

In fact, all told, estimates of criminal prosecutions against Reagan administration officials exceed 130, by far the high for the modern era, and in all likelihood, ever.

-- Morning in America, Twilight in the NSC

(Philip) Zelikow states that because the internal disputes (over Germany's reunification) never leaked into the press, the hostility dissipated and interagency coordination on Germany went on to work smoothly.

-- Across a bright line in history

the work that the elder President Bush (41) and his team did in building that international support was vital in helping to pay for (the) first Gulf War and in sending two vital messages that the Bush team felt were central to their vision of the "new world order".

-- Across a bright line in history

Bob Gates says that the reason the political scientists at Texas A&M don't let him into their classrooms even though he is president of the university is "because I basically tell the kids to throw out their org charts and their textbooks, because I say the thing you really have to understand about Washington, DC, is that at the top level, how things work depends on personality."

-- Across a bright line in history

"First of all, I think it's a question of decision cycles. Decision cycles sped up so much that the way we do business at the State Department is now too slow."

-- Marc Grossman, in A Thumb on the scales