Kontent News

My take on the commodity supercycle zeitgeist...and the rise of the precious metals, uranium and alternate energy. Get ready for peak everything, the repricing of the planet and "black swans" all over the place..

Monday, March 31, 2008

Commodities cheap as, still.

“Today we find ourselves at a period of time which is, or rather close to it anyway, 2001/2002 when real commodity prices were the lowest they’ve been in the last 200 years which essentially puts them at the lowest price they’ve been in known history.”

Look out for the Rally?

Deflating the earnings bubble may well be a slow affair, barring a hard global landing, leaving room for bear-market rallies, even if the likely earnings fall points to new market lows later this year.

There is then typically a bear-market rally before the move to the lows. The market bottom occurs before the low in earnings. That low would provide the best entry point to what could be a large rally in non-US equities next year.

Sinclair on gold

I don't speak at "pay for seminars" --- haven't for years. I want to help others understand what is going on and how to make decisions for themselves when I am gone.

I am Not in the conspriacy business....I have friends that fight that battle. I only provide facts that I know through contacts, research, and years of experience.

I don't believe....I KNOW and I have for a long time that Gold would go to at least 1650. (More on why in a bit)

Once we get to 1650 I will take you one step at a time beyond that.

2011 is when this WILL happen based on hard market basics....not pulling from hat.

My suggestions are conservative, no pressure. Please get your house in order.

ALL derivative losses occured at the SAME time....and were made worth 11-12 cents on the dollar. We see now the story slowly being told.

The inventors of the first derivatives went to jail in 1992(Manco and Edelman spelling? - Southern District of NY) as the courts ruled they were a scam as they did not hold enough liquidity to create that much profit. However, years later people brought them back as they made so much profit. 40-50% of the earnings for most firms over the past few years.

---however LAW was not considered when they were created. Huge numbers of Homes can't go into foreclosure because it's been securitized and sold so many times....who owns the loan ???? - we are seeing this now in the news. This will probably change quickly as they will realize this fully and declare "economic emergency" and lobby to change the law quickly.

This change in WORLD finance (all over) has put us all in jeopardy.

.5200 on the USD Index highest probability. Strong battle will occur when it gets to .6200

Unlike 1980 after gold finishes it's great move - it will NOT go down. When many gold mining companies hedge their gold who is taking the other side of the deal??? - it's pretty much the same group Each time. When Ashanti Gold blew up do to their gold hedges a few years ago the details showed that Goldman Sachs was first adivsor....but was just acting on behalf of another entity...."The Carlyle Group"....(It is mentioned in fine print on many details of this company in the Grand Caymans). This is the company (or Carlyle acting for another group?) that is literally acquiring the world's future gold production through contracts with mining companies. This is NOT a conspiracy, it's not only legal, it's Brilliant !

(My join the dots is that likely another person/family/group who resides in the Caymans is using Carlyle as their front to do this both corporately and personally)

This group is so powerful (possibly the most wealthy company in the world but not mentioned in rankings as it's private) that they will NOT allow 1980 Gold drop to occur this time. They have so much at stake already, it won't be a replay. Gold won't crater. US Dollar won't tank completely as this company has and will have the majority of their wealth denominated in it.

This is why I say that Silver is a game. Though it will probably outpace gold on a percentage basis - it will drop and gold with stay high. However, a lot can be made in Silver but it's not the same situation as gold.

A new Vehicle will be introduced into financial markets.....just as Gold hits it's peak in early 2011. It will probably dip just a tad from there but this new vehicle will be financial instruments attaching the US Dollar to the gold price. The currency will IMMEDIATELY be strengthened and bad perception changed overnight. US Dollar collapse stopped and bull created. (Major impact on pysche). THIS WILL COME TO FRUITION.

Price is Preceding Time (Gold rocking to almost a 1000 now) .......so this would say that my 1650 conservative as my target is based more on the time of the event in 2011. ---- I will take you through it all and tell you within 50-100 dollars of the peak of Gold.

No particular gov't admin set this up, they have just been chapters that have been in the works for a long time.

How do I know this? I have connections in the highest places that have told me and have now allowed me to talk about it. (Few will actually believe or understand).......IT IS COMING - it matters not who knows now.

Weimar Republic Experience is the closest thing to what we are in. The Germans purposefully devauled their currency but it got out of hand and they couldn't control it. Their currency went to zilch. The USD decline could also get out of control........BUT that is exactly why they have the new mechanisim in place !!!!!!

Q&A Session was great.

Here a few comments,

US losing status as top dog. Economics: China will be #1, and India & US will duel for 2nd and 3rd. US does not believe this and does not know....it is unstoppable. All minerals will have HUGE upside, gold just one of them.

Right now Junior Miners have been underperforming despite Gold rocking. It is mainly due to ratio spreads. Short the Juniors and Go long the Major using Derivatives, instruments based on mathematical concept...but on form of momentum concept that is now shifting. Machines are about to bust. Underlying assets way up, they will pop like popcorn!

How High will Gold Go? Time is sooner, price is higher. There are points above 1650, but won't tell you yet verbally yet.

There will come a point (soon?) where dissent could be / will be put down in a very harsh way. Reference the Kent State type incident potential in the future.

Take for example the US/Canada military co-operation to deal with future civil disobedience that was just announced last week. This is but insight for what they are expecting in terms of cival unrest due to potential food shortages, rising costs, economic problems, etc.

The key is that the United States isn't going to fall completely apart - but it is going to go through some major change...prepare now.

The Fed's New Term Securities Auction Facility (TSAF) Explained

pite of the fact that yesterday (Thursday, March 27) was the first day of the Fed's new Term Securities Auction Facility, there was surprisingly little news about how the auction went. I did find this article from the Associated Press, which begins:
WASHINGTON (AP) - Big investment houses took the Federal Reserve up on a first-of-its-kind offer Thursday to let them borrow Treasury securities and put up risky home-loan packages as collateral. It was the latest effort to ease a painful credit crisis.
The whole idea of the TSAF is a little hard to understand, so I came up with this analogy - complete with pictures - to help visualize it:

Instead of talking about abstract concepts like investment houses and mortgage-backed securities, let's substitute something more concrete. Let's say instead of an investment bank, I'm an auto dealer. And instead of an inventory of mortgage-backed securities, I have an inventory of classic cars:

Most people don't appreciate it, but these cars are extremely valuable. After all - they're not making any more '59 Caddies! And based on my very complex, proprietary valuation model, the inventory you see above is worth a cool ten million dollars ($10,000,000).

The only problem is that recently the market for classic cars, like the market for MBS's, has seized up. In fact, if I were to put my inventory on the market, it is likely there would be no bids at all for my fabulous collection. If push came to shove, my collection might only be valued at ten cents on the dollar -- or less -- in a forced fire sale. Ten cents! This is ridiculous, as these assets clearly have value! Check out the tailfins:

The problem is that I need money to run my business. I've got rent to pay, a payroll to meet, inventory to float and bills, bills, bills. I need money! But none of my regular (sane) bankers are interested in doing business with me. That is, no one will loan me enough money so that I can operate. Without money, I'll go out of business. This is also the sad situation that many banks, saddled with inventories of toxic debt, find themselves in.

Luckily, this is where the Fed comes in. The Fed has prepared the TSAF to provide businesses like mine with a "booster shot" - just like the AP article insightfully points out:
The program was announced earlier this month by the Fed and is intended as a booster shot for financial institutions (car dealers like mine in this example) and for the troubled mortgage market (classic car market)...Big Wall Street investment firms (car dealers) can borrow much-in-demand Treasury securities from the Fed and put up more risky investments, including certain shunned mortgage-backed securities (classic car inventories) as collateral for the 28-day loans.
Basically, I can get a 28 day loan of Treasuries - the highest rated securities around. I'll pledge my classic car inventory (junk) to the Fed and in exchange, they'll give me the full value of my inventory - $10,000,000 - in Treasuries. Okay, probably not the full value, but close enough. Maybe the Fed will loan me 95% of the value. Much better than ten cents on the dollar. With these high quality assets on my books, regular banks will no longer be afraid of doing business with me, and will loan me the working capital I need to continue operations.

After 28 days, I'll return the Treasuries to the Fed, plus interest - one third of one percent, according to the article. The Fed will return my classic car inventory. If there are still no bids for my junk when I get it back from the Fed, not to worry. Both the Fed and I will pretend that it is still worth $10,000,000, and we'll do another loan, which will allow me to stay in business for another 28 days. Theoretically, we can keep doing this until the market has bounced back...or something else happens.

That is my honest understanding of how the TSAF works. Crazy world, isn't it?

James Grant, in this excellent interview at Bloomberg, explains what is happening in greater depth. The full interview runs about 15 minutes, and I highly recommend it. Paraphrasing Grant:
The Fed has gotten itself into a new line of work. Previously you could think of the Fed as an immense mutual fund that bought only Treasury securities. Not exactly, but that was kind of asset structure it had.

The Fed is a bank. On the assets side of its balance sheet are mainly Treasury securities. On the liabilities side are Federal Reserve Notes. That was then.

Since December when the Fed started getting into the business of helping to revivify the mortgage market (in our example, the classic car market), the Fed has taken on credit risk. That is to say it has accepted collateral against which it lends Treasury securities … and its collateral is something new and different. It is mortgage backed collateral (junk). The Fed preaches a good game of transparency, but it holds its cards rather close to its chest. We don't know exactly what kind of collateral the Fed is taking. We do know that it is taking new things - mortgage backed things.

Its website will tell you that it is giving these securities a very, very light haircut compared to the kind of discounts that Wall Street firms would take. The Fed, at least according to its website is much less aggressive in marking down the value of them. So one would expect that the banks and brokerage firms seeking accommodation would put forward their less desirable collateral.
In other words, the Fed is giving the best deal around on junk. No one else is buying. But as Grant notes,
The Fed is taking a great big risk with its own reputation and with the standing in the world of the US dollar. The Fed is the institution more than any other that symbolizes the standing of the dollar, such as that standing is these days...
The question is, why oh why is the Fed doing this? Is the Fed that fearful of deflation? That seems to be the standard line. But one thing that I have come to understand about the Fed in recent years that it is predicated upon deception. Look no further than the term of Alan Greenspan, who was the ultimate deceiver, for evidence.

Viewed from this perspective, what is the Fed's ultimate goal? As Grant correctly points out, savers are being decimated by the Fed's policy of low interest rates, high inflation and a weak dollar. But a nation's savings forms the necessary capital base for productive future investment. Capital investment is required for healthy, long term economic growth.

Asked in a different way, why is the Fed intent on destroying the US economy?

Sunday, March 30, 2008

The failure of neo-liberalism

By Phillip Blond
Tuesday, January 22, 2008


More and more, it appears that in the 21st century we are returning to the economics of the 19th, where wealth was overwhelmingly concentrated in the hands of a few owners and astute speculators.

Neither the Right nor the Left seem capable of creating a society in which all benefit from increased prosperity and economic security.

Right-wing claims that free markets will enrich all sections of society are palpably false, while the traditional European welfare state appears to penalize innovation and wealth-creation, thereby locking the poor and unskilled into institutionalized poverty and unemployment.

Thus in the new age of globalization, both ideologies create the same phenomenon: an underclass caught between welfare and low wages, a heavily indebted middle class increasingly subject to job and pension insecurity and a new class of the super rich who escape all rules of taxation and community.

It was in Britain that neo-liberalism first emerged in its decisive form. Confronted with union militancy and the apparent bankruptcy of the welfare state, the Conservative party under Margaret Thatcher was elected in 1979. In America, Ronald Reagan took office in 1981, and the Anglo-Saxon countries have pursued and advocated free market liberalization ever since.

Today, its reach extends as far as communist China, which, while eschewing political freedom, fervently preaches economic liberalization. This year even the French acknowledged free market supremacy, electing a president who has persistently denounced the costs of Gallic welfarism and praised the economic advantages of the Anglo-Saxon model.

But the benefits of free market liberalization depend on who you are, where you are and how much money or assets you had to begin with.

In terms of economic development, free market fundamentalism has been a disaster. The free market solutions applied to Russia during the Yeltsin years succeeded only in mass impoverishment, the creation of a hugely wealthy oligarchical class and the rise of an authoritarian government.

Similarly, the growth rates of Latin America and Africa, which had been higher than other developing nations, dropped by over 60 percent after they embraced IMF-sponsored neo-liberalism in the 1980's, and have now ground to a halt.

On an individual level, a similar story pertains. Real wage increases in the top 13 countries of the Organization for Economic Cooperation and Development (OECD) have been below the rate of inflation since about 1970.

Thus wage earners - rather than asset owners - have faced a persistent 30-year downward pressure on their standard of living. It comes as no surprise to learn that the golden age for the wage worker, expressed as a percentage share of GDP, was between 1945 and 1973, and not under economic liberalization.

Nobody questions that trade increases prosperity, and that the liberalization of credit and financial services allow hitherto excluded groups to supplement their wages by buying shares or houses and thus participating in the asset economy.

But the real story of neo-liberal success is not the extension of assets to all, but the huge and disproportionate share of wealth attained by the very rich. In the United States, between 1979 and 2004 the wealthiest 1 percent saw an increase in their share of national income of 78 percent, whereas 80 percent of the population saw an overall decrease in their income share by 15 percent. That's a wealth transfer from the large majority to a tiny minority of some $664 billion.

The traditional Left panicked in the face of neo-liberal hegemony and spoke in the 1980's of redistribution, higher taxes and restrictions on capital transfers. But, outside of Scandinavia, they were whistling in the wind: Traditional state-regulated economies appeared locked into high unemployment and low growth.

A new path for the Left was offered by the country that first experienced the new Right: the UK. By the late 1990's, Britain was exhausted by Thatcherism; its public services were failing and the country was socially and economically fragmented. Thus in 1997 New Labor was elected.

Under the guidance of Tony Blair and Gordon Brown, the new progressives promised that the benefits of rising prosperity would be applied to the public sector and the poor. Social exclusion would be tackled by opening up education and extending opportunity to all. The rest of the world was once more transfixed by the social experiment taking place in Britain. Could this seemingly exclusive neo-liberal circle be squared for the benefit of all?

Sadly, after 10 years the conclusion has to be no.

Poverty in Britain doubled under Thatcher, and this figure has become permanent under New Labor. The share of the wealth, excluding housing, enjoyed by the bottom half of the population has fallen from 12 percent in 1976 to just 1 percent now. Thirteen million people now live in relative poverty. Social mobility has declined to pre-war levels.

The least able children from the richest 20 percent of the population now overtake the most able children from the bottom 20 percent by the age of seven. Nearly half of the richest group go on to get university degrees while only 10 percent of the poorest manage to graduate. Clearly, the New Left has entrenched class division even more firmly than the neo-liberal Right.

This in a nutshell is the problem: Both Left and Right seem incapable of challenging monopoly capitalism. Neither welfarism nor statism can transform the lives of the poor, and neither, it seems, can neo-liberalism. Only a shared economy can correct the natural tendency of the free market to favor monopolies.

But we can only share if all own. Thus there is a radical and as yet unexplored possibility - that of a general and widely distributed ownership and use of assets, credit and capital. This would dissolve the conflict between capital and labor since it would be a market without monopoly and a state where waged labor - since it was the owner of capital - did not need state welfare.

Phillip Blond is a senior lecturer in philosophy and theology at the University of Cumbria.

Commodities to stay up -Nolan

Again this week, we see one of Wall Street’s most “elder leveraged speculators” fall into serious trouble. A strategy that had worked so nicely for almost a decade turned unworkable. While sharply reducing the risk profile and degree of leverage from the LTCM days, Meriwether’s bond fund was nonetheless leveraged 14.9 to 1 (according to Jenny Strasburg’s WSJ article). As was the case with the Peloton fund and others, the most aggressive use of leverage had navigated to the perceived safest (“money-like”) instruments – “His funds’ losing positions have included mortgage securities backed by Fannie Mae and Freddie Mac, trades tied to municipal bonds and triple-A-rated commercial mortgage-backed securities”.

Understandably, most fully expect Wall Street to rebound and the leveraged speculating community to emerge from current turmoil as it did following LTCM – albeit at a more measured pace. Some assume it’s merely a case of our policymakers “playing whack a mole” until they find the requisite instrument(s) to successfully beat down the sources of financial instability. Of course, I view things very differently, instead seeing Meriwether’s predicament as emblematic of an End of an Era - with huge ramifications for both the Financial and Economic Spheres. I would expect it will be quite some time before the marketplace (investors as well as lenders) grants Mr. Meriwether or similar leveraged strategies another shot at financial genius. Indeed, there is mounting evidence supporting the Bursting Hedge Fund Bubble Thesis – from the angle of the quality of underlying assets; from the capacity to leverage; from the ability to retain investors; and from a regulatory perspective. And keep in mind that the historic ballooning in the “leveraged speculating community” has been an absolutely instrumental – and extraordinarily opaque – facet of the Bubble in Wall Street finance and the overall Credit Bubble.

I would argue forcefully that the leveraged speculating community for some years now has assumed the key role of unappreciated marginal source of demand for risk assets – risky debt instruments financing asset inflation, in particular. Over time, Wall Street “alchemy” mastered the process of transforming virtually unlimited risky loans into perceived safe and liquid securities. A sizable – and growing - chunk of these securities were then purchased on leverage by the rapidly expanding speculator community, in the process fueling an increasingly maladjusted U.S. Bubble Economy. We’re now witnessing it all beginning to wind down. End of an Era.

It is today analytically imperative to differentiate the authorities’ focus on stabilizing marketplace liquidity from the Unfolding Bursting of the Wall Street Bubble. Our policymakers may be exerting meaningful impact on the former, yet the latter remains largely out of their control - and certainly thus far impervious to their actions. Especially when it comes to the key marketplace for agency securities, policymaker efforts are directed at sustaining perceived “moneyness” - through both governmental support (tacit guarantees and Fed liquidity operations) and a renewed bid for mortgages by the GSEs (Fannie, Freddie, and the FHLB). And while such efforts have important ramifications with regard to accommodating the ongoing de-leveraging process (and averting Credit system implosion), they are at the same time completely inadequate when it comes to generating sufficient new Credit to sustain U.S. Financial and Economic Bubbles. “Moneyness” will definitely not be retained in non-agency securitizations, especially as the economy falters.

Debt problems are accelerating and expanding from mortgages to home equity, auto, Credit card, student loans, small business finance, munis and corporate Credits. At the same time, Wall Street has been significantly tightening lending requirements for the leveraging of all types of debt instruments. While the focus has been on mortgage Credit, recent deterioration in other types of loans – and, importantly, the leveraged holders of large amounts of this debt – have major consequences for Credit Availability throughout the Economic Sphere. Housing markets and foreclosures are obviously major issues. Not commonly recognized is the now virtually across the board tightening in Credit throughout the securitization markets (consumer, student, muni, corporate, etc.), exerting more expansive headwinds upon the U.S. economy than even the tightening in mortgages (that predominantly impacted transactions and home prices).

February California median home prices declined $20,550 to $409,240. Median prices are now down $67,140 in two months and a stunning $179,730 since August. Prices are down 32% from June’s high, and are now even 13% below the level from three years ago. Granted, these median prices are impacted by the dearth of sales at the upper-end. Yet it’s clear that the California market is in the midst of an historic crash. The Credit standing of Golden State households, businesses, and various governmental agencies now deteriorates virtually by the day. I would argue the explosion over the past three years in “private-label” mortgages, Wall Street balance sheets, hedge fund assets, and California home prices were all part of the same Bubble. This Bubble inflated largely outside the banking system and outside GSE finance – and will now prove stubbornly unaffected by policy maneuvers.

Some argue rather forcefully that we’re now immersed in “debt deflation.” I understand the basic premise, but to examine double-digit growth in Bank Credit, GSE “books of business” and money fund assets provides a different perspective. To be sure, our Credit system continues to provide sufficient Credit to finance massive Current Account Deficits. And it is this ongoing outflow of dollar liquidity that stokes both indomitable dollar devaluation and global Credit excess. Many contend that inflationary pressures are poised to wane as the U.S. economy weakens. I’ll suggest that inflation dynamics will prove much more complex and uncooperative. There is further confirmation of this view - that the bursting of the Wall Street finance Bubble will have a significantly greater impact on asset prices than on general consumer pricing pressures.

The analysis gets much more challenging in the commodities markets. The simple view holds that commodities are just another Bubble waiting their turn to burst. This thinking gained greater acceptance last week, with the sharp reversal of prices and unwind of speculative positions. And it goes without saying that major speculative excess has developed throughout the commodities complex ("par for the course"). I am as well sympathetic to the view that liquidations by the leveraged speculating community could lead to some major price instability. Yet it’s my sense that there really is much more to the commodities story – and inflation, more generally – that is not widely appreciated.

The bursting of the Wall Street finance and U.S. Credit Bubbles marks an End of an Era. But the start of a deflationary spiral? Importantly, these bursting Bubbles are in the process of consummating the demise of the dollar as the world’s functioning “reserve currency” and monetary standard. Examining global markets, I note the ongoing strength of currencies in China, Russia, Brazil, and India, for example. Considering mounting financial and economic imbalances in all these economies – not too mention histories of less than exemplary monetary management – I can state categorically that these are fundamentally very weak currencies. Today, however, it’s all relative to the sickly dollar. In the face of rampant domestic Credit growth, these currencies nonetheless attract endless global finance and appreciate.

When it comes to Ending of Eras, I am increasingly fearful that we are falling deeper into a precarious period devoid of a functioning global currency regime necessary to discipline Credit excess and restrain mounting inflationary pressures. And as long as dollar liquidity inundates the world economy, domestic Credit systems across the globe enjoy the extraordinary capacity to inflate domestic Credit and use this new purchasing power for the benefit of their citizens and economies. And, in particular because of their enormous populations, as long as the Chinese and Indian Credit system enjoy the freedom to inflate at will there will remain significant upside pricing pressure for energy, food, and various goods and commodities in limited supply – hedge fund speculative excess and/or bust notwithstanding.

I throw this analysis out as food for thought. I am increasingly of the mind that commodities should be differentiated from U.S. financial assets when it comes to the consequences from the bursting of the Wall Street finance and leveraged speculating community Bubbles. Prices will likely remain hyper-volatile but (unBubble-like) well-supported by underlying fundamental factors. Similarly, I believe general inflationary pressures may likely prove more significantly influenced by runaway global Credit excesses than by the Wall Street and U.S. asset price busts. If this proves to be the case, perhaps the greater risk is a bursting of the Treasury Market Bubble. It may take some time, but an enormous supply of government debt is in the offing and – let’s face it – these instruments will become only less appealing over time. It also begs the question as to the advisability of aggressive Fed rate cuts. They are having little influence on the bursting Wall Street Bubbles but possibly huge effects on global inflationary forces. Little wonder the ECB is so hesitant to lower rates.

Saturday, March 29, 2008

Commodity market is no country for old men.

How about the zombie who, according to rumour, decided to electronically sell ±10,000 wheat contracts (spot month, short sale) even at when the bins were nearly empty? Apparently the trade was done in the wee small hours of the morning and, of course, it was unwound hours later (at a loss of one or two hundred million) and one more speculator bit the dust.

Meanwhile platinum swings a hundred dollars a day and amplitudes in grain markets are sometimes greater in a day than their prices were two years ago.

Wheat used to trade in increments of half a cent; now we're getting increments of close to 10 cents.

Silver, which was friendless at $4 five years ago, unobtrusively moved through $20 before a savage pullback. God only knows what gold will do as and when it gets well clear of the magic $1,000 number.

Finally peak oil seems to have arrived. The only thing that will stop the price rising will be serious declines in US consumption, because it appears nothing will stop the rest of the world consuming more. And more.

While establishment economists suggest, hope, and dream that the commodity boom is over, in all likelihood it's just beginning. That ill-advised short wheat trade is just a manifestation of frustration, incredulity, and, probably, a harbinger of things to come. Just as a lot of smart investors intended to "get out of" sub-prime products before any trouble started but were all caught instead, so a lot of smart investors have been caught short gold, grains, and so on. As always, they lament that the pullbacks have not been deep enough, or long enough, to permit covering (or going long).

And just as the people long sub-prime stuff found that there were no bids when they tried to exit, so the commodity shorts will find offerings scarce when they try to cover.

Yet for the moment, even as manifestations of inflation intensify, the popular wisdom is that commodities have been in a bubble phase. Nobody is worried about the integrity of money. Nobody sees well-publicized financial upheavals as propelling the flight out of money; rather, economic gurus argue that safety lies in holding cash or bonds.

The latter remain strong and it's still the mortgage/sub-prime/Bear Stearns/hedge fund stuff that makes the headlines. Soon enough it will be derivatives, and then perhaps people will grasp that this is a money problem more than anything else.

In fact the monetary system is moving into its death throes. Back in the early 1960s, when the first cracks in Bretton Woods and the US dollar appeared, the predecessors to the G7 cooked up the General Agreement to Borrow (GAB) with a whopping $6 billion aid package. Another innovation that was supposed to solve the world's problems was the introduction of Special Drawing Rights (advertised as "paper gold").

That's all ancient history; now the masters of the universe throw $100 billion here and $300 billion there. (The 40-year surge in the size of aid packages is yet another measure of inflation.)

The usefulness of the International Monetary Fund has faded; there is certainly no way it will be permitted to discipline its most truant member. Whatever, some members would like to recover their gold from the IMF, while others would like to use IMF gold to suppress the gold price. Either way, there's a good chance that the IMF will be gone within the decade.

Moving to a different arena, we paid a visit, after a generation's absence, to the recent PDAC (Prospectors and Developers) convention in Toronto. What a change. A generation ago it was like a produce market with a few hundred grizzled prospectors from Chibougamou, Timmins, and Yellowknife all trying to sell claims to Noranda, Conwest, Kerr Addison, and the like. We once even cut a property deal in the smoke-filled, alcoholic haze of the Royal York Hotel's Library Bar.

But during this last visit we didn't see any prospectors, just 20,000 slick, expensively dressed men and women working out of 400 booths selling stock, not mineral claims.

Just as investment banks have been selling dubious black-box paper, so an army of mining promoters has been selling dream paper: "We have the mother lode!" Canada has more than 150 uranium stocks but less than half a dozen uranium mines. Gold isn't any better. It costs about $500,000 a year just to keep a small mining company afloat (the annual burn rate) and lots, lots
more for the bigger ones. Collectively they have been pulling billions out of the market for years with pitiful results.

The days of investment dealer black-box paper are over, credit is tighter (even though marginally less expensive), and promotional mining la-la-land looks to be in for a shakeout.

We all seek refuge somewhere. Bond guys cannot believe stocks, gold guys think that "gold in the ground" is undervalued, and financial services guys are in shock. The hyperinflation guys (that's us) cannot believe bonds but see the resilience in solid stocks and commodities as a perfectly logical flight out of money. Strong manufacturers with sophisticated assets and proprietary
wealth (such as P&G or CAT) will thrive and prosper, along with resources, long after the money is gone.

Gold, the real thing, will probably outperform most shares.

A New Era in the Energy Sector

by Joseph Dancy

Last month we delivered a lecture at Southern Methodist University to our Oil & Gas Law class on the 'New Era of Oil: The Age of Scarcity'. This is not a standard law school topic, but relevant when discussing the legal history and development of market demand prorationing, allowables, and conservation regulations.

Our thesis is that we are entering the fourth era of the oil age – one the world economy has never experienced before. This era will cause many disruptions, but will also create investment opportunities that arise only once every few decades.

From the discovery of crude oil in the Drake well in Pennsylvania in 1859 until the East Texas Field discovery and development in the early 1930’s we had a situation where supply was growing exponentially. Increases in demand did not keep pace so the price of crude oil plummeted. Governors shut in oil fields to prevent overproduction and waste. Arising from these problems the Texas Railroad Commission and other regulators obtained the statutory authority to restrict incremental oil production to match global demand.

The second era lasted 1930 to 1972 as state regulators like the Texas Railroad Commission restricted production to stabilize the price. When the production of crude oil peaked in the U.S. in 1972 the role of the Railroad Commission in restricting production passed to the Organization of Petroleum Exporting Countries – the third era of oil. In each of the first three oil eras we had excess productive capacity to meet the rising global demand and any short term shortages that occurred.

Going forward we find ourselves in the position where global demand for crude oil is now approaching the ability of the world’s producers to extract production – and soon demand will exceed productive capacity. For the first time ever we will have no excess global productive capacity to meet growing demand. In such an era – never seen before in the global economy.

We expect the following:

(1) wildly volatile crude oil prices - mostly to the upside,
(2) resource nationalization - the material is too valuable to export,
(3) irrational hoarding behavior by consumers,
(4) a spillover of price volatility into the markets for other energy sources (natural gas especially),
(5) a wild frenzy to acquire domestic oil and gas resources (property deals and deals on Wall Street),
(6) a melt-up of the energy and energy services sector,
(7) a focus on energy conservation,
(8) new opportunities in the solar and wind energy sectors,
(9) more attention on biofuels (emphasized by the 2007 Energy Act) - which incidentally will drive grain prices to record levels, and
(10) as a result of the extreme increases in food and fuel prices we expect to see food shortages, instability, riots, and the like in less developed countries.

One of the most significant developments we expect to see, besides much higher energy prices and volatility, will be the interconnection of the global energy and agricultural markets – tied together by biofuel initiatives. Adequate capital has not been allocated to the energy and agricultural sectors in the face of global physical and political challenges – and that historic misallocation creates great opportunities for business in these sectors. The energy and agriculture markets are quickly converging, which points to much higher prices for both commodities.

Because of these trends we remain heavily over-weighted in the energy and agricultural sectors. The evidence of a new era for both energy and agriculture – reflected in global production and demand data – is compelling.

Friday, March 28, 2008

Goldbugs right bigtime --looking back at 2005

o a small but extremely avid subculture in the American financial community, gold doesn't mean bling, or King Midas, or them thar hills. Gold is money; and not just money, but the one true money. The gold subculture divides along several lines -- some of its members are gold speculators, some gold hoarders, some gold philosophers and some outright nut jobs -- but it unites behind a single idea: Paper money issued by governments, when not redeemable for actual gold, is fraudulent. Most of us accept the existence of dollar bills unconsciously. To the gold faithful, however, a dollar bill is ''ink money,'' or better yet, ''fiat currency,'' a nearly constant term of abuse at gold conferences and in gold chat rooms. ''Fiat currency -- it's a floating abstraction,'' Doug Casey, a star speaker on the gold circuit, bellowed at me over the phone. ''What's its worth? I don't know what it's worth! It's a figment of some government bureaucrat's imagination!''

The ''gold bugs,'' as they often are referred to with more than a hint of disdain, find gold appealing because they believe it represents the one enduring form of nonstate money. ''Money is far too important to be left in the hands of bankers, Congress or the Federal Reserve System,'' Gary North, a legendary gold bug who has edited financial newsletters for decades, told me via e-mail. North's Web commentaries include everything from advice regarding prostate problems (saw palmetto has helped his immensely) to a recently completed 700-page ''economic commentary'' on the Gospel of Luke, which he encourages readers to download onto their hard drives, in case he were to ''drop dead and the site is taken down for any reason.'' But the focus of his writings is politics, and North's politics aren't hard to pin down. His is the fierce libertarianism of the ardent gold bug.

I had sought out Casey and North, two leading voices among gold enthusiasts, because after 20 years during which paper assets -- stocks, bonds, and the world's leading ''fiat currency,'' the dollar -- soared, gold was making a comeback. If you bought $10,000 worth of gold in 1980, by 2001 you would have lost $6,800. But then the long bull market in stocks ended, and the dollar, responding to the growing debt burden of the average American, not to mention the federal debt and our trade deficit, began a steep decline. And so, starting in 2001, gold, which like many commodities moves in the opposite direction of the dollar, began to recover some of its lost glamour as a store of value. The price of gold broke through the $300 barrier in February 2002, then the $400 barrier at the end of 2003. Could this be the dawn of the apocalypse that the gold bugs, whose prevailing attitude might best be described as a wishful pessimism, have been predicting? Could the dollar collapse, leaving only gold?

''I will accept questions by e-mail,'' North wrote me, adding, ''I will answer the following type question: 'In your article on [ ], you write that [ ]. But what about this? How could this work?''' I apparently phrased my first questions according to protocol, because North e-mailed me back, relaying his nine-point plan for returning gold to its proper status as the only money. Among his ideas: ''Government collects tax payments in gold. . . . Abolish legal tender law. . . . Let anyone set up a bank/warehouse company who wants to.'' Gold bugs are notoriously squirrelly, and North had warned me ahead of time: no questions regarding the future price of gold, and all questions must hew closely to his published work. When I e-mailed him again, asking whether the rising price of gold might be signaling doom, I must have crossed some invisible line. His one-sentence reply read simply, ''Here endeth the lesson.''

For the past 70 years, the United States has been conducting an experiment regarding the dollar. The experiment asks: Can the United States manage its currency responsibly, without having that currency backed by gold? The U.S. effectively went off the gold standard twice in the 20th century, and both times responsible men in positions of power foresaw cataclysm. ''This is the end of Western civilization!'' Lewis Douglas, Franklin Roosevelt's budget director, declared in 1933, when Roosevelt terminated the right of American citizens to demand gold in exchange for their dollars. ''Pravda would write that this was a sign of the collapse of capitalism,'' Arthur Burns, chairman of the Federal Reserve, warned Richard Nixon in 1971, when Nixon terminated the right of our international trading partners to demand gold in exchange for their dollars.

In spirit, the gold bugs are the heirs to Douglas and Burns. Every day is the end of Western civilization -- or should be, now that our currencies float free of gold. In fact, the recent weakness of the dollar has become an idée fixe within the gold community, as it opens up one possible route back to an economic system ballasted by gold. Representative Ron Paul, a Republican from Texas who is gold's lonely advocate in Congress, put it to me this way: ''We will go back to the gold standard, even if it takes the near-destruction of the dollar to get there.''

James Sinclair is a 64-year-old American businessman in a tan blazer and navy blue slacks. From his manner and dress, he could be host to an Amway seminar. But when he speaks, he sounds more like a karma yogi. It's as if you're watching a movie dubbed with the wrong soundtrack. ''Silence is deep rest,'' Sinclair told me as we waited for sandwiches at a deli. ''It's the only way to restructure ourselves.'' Among the most famous gold speculators, Sinclair proclaimed in the 70's that gold, then at $150 a troy ounce, would hit $900. (It eventually peaked at $887.50; he sold his position the following day, for a profit of more than $15 million.) Then, with some analysts predicting that gold could go as high as $2,000, he declared the gold bull market dead. (Within months, he was proved right.) In 2001, with gold near its bear-market lows, Sinclair told Forbes magazine that it could hit $430. On the day I met him, gold was trading at $434.

Sinclair remains a star attraction at gold conferences around the world, but in the 1980's he sold his brokerage firm and took his wife and two of his daughters to the foothills of the Berkshires, where he lives on a 40-acre equestrian compound featuring its own 9,000-gallon water system, its own electrical system and a shooting range. (''I like to cut a target every now and again,'' he told me. ''Get out my aggressions.'') Sinclair's private office sports the typical C.E.O. blandishments -- a massive mahogany desk, a wall-mounted flat-panel computer monitor -- but also a profusion of religious items. Incense always burns, and a temple gong sits in the corner, along with a prominently displayed statue of Ganesh. Behind the desk there is a full-color portrait of Bhagavan Sri Sathya Baba, whom Sinclair visits frequently in India. ''I am an enquiring soul,'' he replied, when I asked if he was Hindu. ''All the great minds have wandered the Indus Valley.''

Perhaps because he has found spiritual satisfaction elsewhere, Sinclair regards gold with dispassion. ''Gold is not to be loved or hated, accepted or refused,'' he said. ''Gold is not barbaric or angelic. It fixes nothing in itself. But it is a mirror.'' Sinclair sees the health of the dollar reflected in the price of gold, and the health of the dollar is now in foreign hands. ''We're not talking about what I want, but about what is,'' he told me, as he picked through a tuna salad. ''If we go over $529, that is not good news,'' he said, referring to the price of gold. ''Anyone cheering for a high price of gold should get on Prozac.'' Sinclair says that when the dollar acts successfully as the world's currency, gold naturally returns to its status as a mere commodity. In the parlance, it demonetizes -- it loses out to the dollar as the world's reserve currency. But a mismanaged dollar, he said, could cause gold to remonetize. Our world would look very different then. ''The first sign is the foreign banks will diversify out of dollars. Then they will cease buying dollars. And then they will sell them.'' What could happen then? ''Stagflation. . . . Expansion of U.S. federal deficit. Expenses rise and incomes drop.''

Are we talking apocalypse? ''The most likely crisis is the collapse in the common stock of the operating entity. In this case, the operating entity is the United States, and the common stock is its currency.'' We had made our way up a hill, to Sinclair's koi pond and its accompanying meditation gazebo. As if on cue, what appeared to be a military airplane flew across the sky. ''That's carrying Iraqi supplies,'' Sinclair told me. ''We have war and monetary easing at the same time,'' he said, shaking his head. ''Everything has its season. That includes gold. Do I have a bet on gold? You know I do. Will I one day unravel that bet? You know I will.''

The Daily Reckoning is a freewheeling Web site for libertarians, gold bugs and doom enthusiasts of every stripe. Its editorial director is Addison Wiggin, and before we met, I pictured an ''Addison Wiggin'' as an ancient gold-hoarding Yankee, and the offices of The Daily Reckoning as a cinder-block bunker patrolled by Minutemen. I was wrong on both counts. Wiggin is a sober, black-clad 37-year-old who is active in libertarian circles. The Daily Reckoning, meanwhile, is nestled in the lovely Mt. Vernon section of Baltimore, and its interior could pass for any 1990's dot-com, with a glass-enclosed conference room, exposed brick walls and a couple of nerdy 20-somethings in sneakers and T-shirts.

The narrative Wiggin spun out for me over lunch is repeated, nearly verbatim, by almost everyone in the gold community. ''This is the blow-off phase for the Great Dollar Era. We're in an unsustainable trend right now,'' Wiggin told me, ticking off the miscalculations that have brought us to the brink of an economic apocalypse. To begin with, the U.S. has become the world's biggest debtor, with three outstanding obligations at alarming highs: consumer debt, or our mortgages and credit cards; the federal deficit; and our current account deficit with foreign countries. Federal Reserve Chairman Alan Greenspan, Wiggin continued, has simply shifted one bubble -- the 90's bubble in stocks and bonds -- into another, in real estate and ''overconsumption,'' or the American propensity to pay for an ever-more-lavish lifestyle on credit.

But the real nightmare involves the U.S. dollar. If Asian central banks weary of buying Treasury bonds -- an asset denominated in the weakening dollar -- then look out below. ''What is that Dylan Thomas quote?'' Wiggin wondered over his fusilli. ''The dollar will not go gently into that great night.''

Wiggin offered up his analysis with a confident and steady aplomb. And for good reason. While no one in the mainstream financial elite seriously advocates a return to the gold standard -- the modern global economy is too fluid and dynamic for such austere discipline -- at this moment, the gold bugs' grim prognosis for the dollar happens to align with a more mainstream view. A low-level panic about the debt crisis, and its possible effect on the American economy, is gathering strength. ''Our little post-bubble workout is not over, not by any stretch of the imagination,'' Stephen Roach, the chief economist at Morgan Stanley and himself a noted pessimist, told me recently by phone. Roach says he firmly believes that an adjustment is necessary and inevitable, and that when it comes, it will be very, very painful. From appearances, Warren Buffett, the savviest investor who ever lived, agrees. His company, Berkshire Hathaway, has placed a $21 billion bet against the U.S. dollar.

Meanwhile, the general tone is darkening. In February, Paul Volcker, the former Federal Reserve chairman, publicly stated in a speech that ''there are disturbing trends'' undergirding the U.S. economy, including ''huge imbalances, disequilibria, risks.'' These demand ''a strong sense of monetary and fiscal discipline,'' he said, gently chiding both the U.S. government and its citizens to live within their means. Volcker, a man known for his prudence and a cautious tone, let his words ring ominously. ''Altogether, the circumstances seem to me as dangerous and intractable as any I can remember,'' Volcker continued, referring to the very same warning signs as Addison Wiggin, ''and I can remember quite a lot.''

Recently, Comptroller General David Walker, surveying America's debt crisis, uttered a one-word synopsis for the long-term future: ''Argentina.''

Money is entirely conventional. It's a system of equivalence, a medium of exchange. In a society of any sophistication whatsoever, money is used reflexively. You hand me 50 cowrie shells, I give you a head of cattle. I give you a 20, you give me a tuna on rye and some change. As the greatest theorist of money, the German sociologist Georg Simmel, recognized, money is only money when it is in motion: ''When money stands still, it is no longer money according to its specific value and significance.'' Furthermore, the set of conventions that lend money its credibility as a medium of exchange must be universal and stable, so that the shells for which I relinquished my good cow today will be worth as much tomorrow, when I exchange them for something else. Money is built on motion and trust.

Gold, like everything else, is a commodity whose price is established by supply and demand. But gold is unlike everything else in that an ancient fantasy of solidity attaches to it. We produce things, but to exchange them efficiently, we throw over them what economists refer to as ''the veil of money.'' Interest rate swaps, swap curves, swaptions -- the veil only thickens with time. If the gold bugs are apocalyptic, it's worth recalling the etymology of the word ''apocalypse'': to uncover or reveal. Gold holds out the promise, however chimerical, that one day we might pierce the veil of money.

On the final leg of my tour of gold bugs, I visited the Blanchard Company in New Orleans. Blanchard is the largest retailer of gold to the American public, and it is owned and run by Donald Doyle, a soft-spoken man who might well be the living embodiment of the metal he sells: there is something soft but indestructible about his courtly Southern manner. After talking gold for the better part of an hour, we descended to the company vault. There he picked up two coins and placed one into each of my hands. They were ''Saint-Gaudens,'' named after the great American sculptor who designed them for Teddy Roosevelt. They had a face value of $20 and a value based on the amount of gold they contain -- probably a few hundred dollars. But the ornate coins were impossible to stack, and had been discontinued after a short run. On the open market now, thanks to their rarity, the coins together might fetch $800,000. They were heavy, and transfixingly beautiful, and even as I did the math in my head -- five coins, Brooklyn town house -- I heard Doyle say over my shoulder, ''And they sure feel good in your hands, don't they?''

32.9 billion a day to keep credit inflated

WASHINGTON (AP) - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed's effort to aid the financial system.

On Wednesday alone, lending reached $37 billion.

The Fed, for the first time, agreed on March 16 to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Last week, Goldman Sachs, Lehman Brothers and Morgan Stanley (MS) said they had begun to test the new lending mechanism. The Fed does not release the identity of the borrowers using the facility.

The Fed created a way for investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

WASHINGTON (AP) - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans.

The central bank says those firms averaged $32.9 billion in daily borrowing over the past week from the Fed's new lending facility. The report Thursday does not identify the borrowers.

The lending program is part of the Fed's major effort to help the financial system.

Tuesday, March 25, 2008

Black Swans Everywhere

After a one-day reprieve from total meltdown in the financial markets, news media cheerleaders for the most reckless gang of bankers in world history declared the crisis over on Good Friday (with the markets safely closed). Whew, that's a relief. Problem solved. And just in time for baseball season, too, so none of the Banker Boyz have to sell their sky box leases.

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

What is meant by "meltdown," by the way, since the word is used so promiscuously by myself and others. I'd define it as the shock of recognition that many big institutions are worse than flat broke and are therefore powerless to conduct normal operations. By "worse than flat broke" I mean they are so deep in hock that all the accountants who ever lived, in the life of this universe and several others like it, using the fastest parallel processing computers ever built, could not keep up with their compounding accelerating losses (now approaching the speed of light).
The current vacation from reality on Wall Street may last a few more days, or even a couple weeks, but it seems as though a whole flock of black swan events is circling the sky over Financial-land and is about to blot out the sun. By black swan, I refer to the concept popularized by Nassim Nicholas Taleb in his recent book of that name, namely unexpected events of great power that tend to change the course of history.
For the moment, with the crisis "contained," and the Boyz getting ready to air out their Hampton villas for the coming season, we are once again primed to be blindsided by potent random events that nobody saw coming. The trouble is, there are enough potent potential fiascos already visible on the horizon.
The mortgage fiasco is still just gathering steam as it moves from the non-payment stage to the default and repossession level on the grand scale. Even the political wish to bail out feckless mortgage holders will stumble on the mammoth clerical task of administrating the process, especially since we've barely begun to sort out who actually holds the mortgages after they've been minced into a fine mirepoix of securities off-loaded onto countless dupe "investors" ranging from municipal funds in obscure corners of foreign nations to countless public employee retirement plans.
No matter how the authorities try to "nationalize" the sucking chest wound of bad mortgages, the body of finance will flat-line -- and the American public will get stuck with the bill from the intensive care unit. Those who, for some weird reason, continue to pay their way and meet their obligations, will be none too pleased to pay for misdeeds of the deadbeats and their banker-lenders. This portends a taxpayer rebellion, which may translate into a voter rebellion.
It's too bad the current presidential candidates have been unable to address the unfolding economic nightmare. Their collective silence on the matter suggests that they don't have a clue what to say about it. As the nightmare plays out and black swans flock in to blot out the sun, and the hedge funds come a'tumbling down, and more big banks blunder into black holes, and businesses big and small across the land shutter up their operations, and the unemployment rolls swell, and families are thrown out of their houses even when bailouts are supposed to be saving them (but the bureaucracy can't get the paperwork done in time) -- well now, they are going to be one pissed off bunch of people. What will they do at the conventions? Our outside the conventions?
In the deeper background of all this is the all-important oil story that nobody in politics or the media wants to pay attention to. Notice that in the fervid unloading of assets this past week, as investors dumped their positions in the commodities markets, the price of oil remained stubbornly above $100-a-barrel when it was all over on Thursday afternoon. Well, maybe they'll ratchet down a little further this week, but the trend line will prove to continue remorselessly upward in the months ahead.
Peak oil is for real. The supply can't keep up with global demand, even if it dips in the USA. And more portentous sub-plots develop in the story every month. Export rates are falling at a steeper rate than depletion rates. The exporting nations are not only buying more cars and running more air-conditioners, they also need to use more energy to lift the oil they've got out of the ground.
Another sub-plot is the fact that the equipment used world-wide to drill for oil and recover oil and move oil around the planet -- all that equipment is now so old and rusty that it can barely do the job, and it is going to start failing altogether unless investments are made to replace it, which nobody is making.
By the way, Americans blame the familiar private oil companies for all the trouble with oil in their lives -- Exxon-Mobil, Shell, et al -- but they don't seem to know that oil nationalism is in the driver's seat now. The old private "majors" are only producing five percent of the world's oil. The rest is coming from the national companies -- Aramco, Petrobras, Pemex, et blah blah -- and the very operations of the oil markets are entering a phase of radical instability as they move away from auctioning their stuff on the futures markets and start making long-term favored customer contracts instead.
The bottom line is that high prices for oil is hardly the only thing America has to worry about. Pretty soon the US will have to worry about getting the oil at any price -- meaning, we're in for shortages and supply disruptions sooner rather than later.
Also unbeknownst to most of America, the financial markets reflect all this instability around the basic resource of oil because industrial economies like ours are set up in such a way that they can't run without cheap and reliable supplies of the stuff. So the least little twitter in the reality-based world of peak oil means that everything to do with money and capital investment will naturally go batshit, since our expectations for increased wealth -- i.e. "growth" -- are predicated on the activities driven by oil.
It will be interesting to see what new machinations are unveiled this week. Whatever else this catastrophe is, it's a good show from the cheap seats.

The Shape Of The Future - Very different!!!

By Peter L. Bernstein

Three months ago, we wrote, "[T]he economic malaise will not be brief, even though its depth is uncertain. The process is going to be like water torture - drip by drip by drip over an extended period of time until all these excesses are squeezed out of the system and new and happier horizons can open up." This metaphor should now form the basis for all decisions, strategies, and analysis. Recessions matter, but the important features of the problems faced by the American economy are not in the short run. The crucial issue is the nature of the new longer-run environment that we are convinced is now a reality. This environment is still in its infancy, but its principal features are already identifiable.

Too few people are thinking along these terms. The short run always tends to dominate mass thinking in any case, but in an odd way the short run is irrelevant to the current situation. The short run is a creature of the immediate past. The longer run will be a profound break from the past. Indeed, the longer run in this instance is going to evolve as it is going to evolve whether we have a perceptible recession in 2008 or whether we squeeze by with a minimum of negative numbers.

Why are we so emphatic about this viewpoint? As Goldilocks shreds, we have to start thinking about what kind of long-term environment is going to replace it. Shifts to new environments are always attenuated. They are also rare across time, which means most of us have limited experience with this phenomenon. New environments often tend to sneak up on us and do not announce themselves with a fanfare. Most of us are unaware of what has happened until enough time passes to provide good perspective.

Imagine, for example, what would have happened if investors had been willing to think through the powerful positive implications of the disinflationary forces that set in during the early 1980s after Paul Volcker had turned the tide of inflation. Instead, backward-focused investors in fear of renewed outbreaks of inflation ignored the way these new trends would lead to a radical improvement in economic stability and opportunity. The record of long-term interest rates in those years is eloquent testimony to the bias toward the past: although yields on ten-year Treasuries broke briefly below 8% in the wake of the oil price break in 1986, they were back up over 8% in 1987 and averaged over 8% for the next two years. Meanwhile, inflation averaged only 4.3%. Clearly, nobody was willing even to think about what the victory over inflation could produce. Yet it would lead to Goldilocks - a remarkable change in the nature of the whole world - would miraculously emerge from the disinflationary environment.

The discussion that follows begins with a few generalities about when and why old environments fade away and begin to yield to new environments. We analyzed this matter some time ago, but recent events provide a better perspective to our line of argument. We go on to explore how much of the old environment has disappeared, which then leads us to some speculation about how the new régime is likely to develop.
The dynamic process: Familiar facts in a new setting

Economic environments do not have a specified life cycle, like the business cycle. As I have argued elsewhere, economic régimes tend to persist as long as people are still trying to figure out what is actually going on. This effort strengthens the underlying characteristics of the environment and extends its life expectancy. Change, therefore, is unlikely until people finally arrive at the belief they understand what it is all about. Such a process has no definable rhythm. The arrival of understanding could come sooner or later, depending on the circumstances. Furthermore, this process applies to all environments, both prosperous and depressed, to the 1920s as well as to the 1930s, to the years from 1949 to 1969 as well as to the devastating decade that followed.

The 1920s were doomed at the moment when the New Era became a common phrase and Irving Fisher explained that prosperity would last forever. The Great Depression continued until unremitting deflation and waves of bank failures convinced a new administration that the tie to gold at $20.67 an ounce was stifling the economy. In addition, a total reversal of tax-raising fiscal policy and restrictive monetary policy was both essential and urgent. The postwar prosperity of 1949-1969 lasted for over twenty years because it was grounded in doubt as everybody kept waiting for an inflation that failed to show up. Inflation remained low, to general surprise, even though output growth was high. Once people got the idea that high output would not automatically cause inflation, the sense grew that now nothing could go wrong - and so we entered another régime marked by the aggressiveness of monetary policy and war finance in the 1970s. The resulting inflation would rage for ten years before people recognized that a profound transformation of the conduct and targets of monetary policy was essential. The outcome, as mentioned above, was the transition decade of declining inflation in the 1980s, leading in turn to Goldilocks after about 1989.

The Goldilocks environment was so benign it appeared to be a long sequence of happy surprises. Goldilocks was aptly named: low volatility in capital markets and in the real economy, low inflation, central banks in firm control, a healthy appetite for risk-taking in the business world that led to revolutionary technological change, the transformation of the "emerging" economies into "developing" economies, and the resulting boom in globalization.

After the bursting of the dot.com bubble in 2000, the business sector of the real economy resisted the fever for devil-may-care risk-taking that ultimately infused the financial markets. As a result, Goldilocks had remarkable longevity. Its death-knell would wait until the financial markets finally got the message that high risks were not really high risks in a low-risk economy. Then the fundamental stability and growth momentum of the global economic system created a bulging appetite for risk-taking that led investors around the world to gorge on anything that looked risky. A point came when any trigger would justify ever-greater risk-taking. The actual trigger did not have to be housing, but (with hindsight) we can see housing was a logical candidate. No one seemed to doubt that home prices could ever stop rising. Debt had no ceilings. Just to make everything appear even better, housing requires financing, which was like handing a delicious and multi-layered chocolate cake to the world of finance and financial engineering. Professional investors learned how to clothe high risks in a low-risk format for sale to the Great Unwashed, and to a goodly number of the Washed as well.

In the aftermath of the fervor for risk-taking, Wall Street and the mortgage banks have created many deep-seated problems for themselves. As an unhappy side effect, the business sector, a relatively innocent observer, is going to have to absorb much of the pain of curtailed consumer budgets and fewer exports to foreign nations affected by the turmoil in the U. S.
The aftermath: An introduction

Human nature develops odd biases. In terms of the economy, memories of past environments are more heavily weighted by the disasters than by the positive achievements of the period. These disasters linger long in collective memories, influencing public policy and investment practice for extended periods of time.

Fear of the double-digit unemployment rates of the Great Depression dominated economic policy from the end of the depression in 1933 to the late 1970s. As late as 1978, with inflation raging around 8%, Congress enacted the Humphrey-Hawkins Full Employment Act, providing for "the right of all Americans able, willing, and seeking work to full opportunity for useful paid employment at full rates of compensation." Paul Volcker's great achievement (and courage) were in his conviction he would never defeat inflation as long as he had to tread softly in limiting possible increases in unemployment. That constraint had to change. Volcker saw no alternative if he was to win the battle in which he had been put in command. As he carried out his campaign, the unemployment rate soared from under 5% in 1979 to nearly 11% in 1982, but inflation dropped from a peak of over 14% to less than 6% over the same period.

Today's central bankers may make interesting observations about influencing inflation expectations, but everyone knows they must ultimately have the courage to see unemployment increase if their policies to contain inflation are to carry credibility and actually influence expectations. The Fed is in an uncomfortable position at this very moment, because the tradeoff has taken on an unusual complexity, with the job market softening while lingering symptoms of inflation are still visible.

As we now move on into the post-Goldilocks environment, which unhappy memories are going to weigh heaviest? Worries about inflation are not about to vanish, but new elements are going to join in. Clearly, everything that led up to the credit crisis and the problems of home ownership will remain a central focus of attention for a long time.

In addition, as we emphasized in our issue of August 15 of last year ("Memory Banks and Economic Policy"), the increased income inequality generated by Goldilocks has become a widespread popular concern, already making vibrations among members of Congress and candidates for higher office. As Bill Gross himself put it in strong words last August, "So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today's imbalances." The rhetoric of the election campaign is full of such talk. This concern will influence tax policy and spending policy for a long time to come.
The aftermath: The particulars

The repercussions in the financial system are our main concern here. Most of the current flood of analyses of the state of the credit markets concentrate on the problems of the present. This kind of information is little help. We need to develop a sense of how this situation is likely to evolve over time. To accomplish that goal, our primary task is to discover where the roots of the new régime are being planted.

We now set out our own views along these lines. We begin with a few generalities. These generalities will lay the basis for the particulars that follow.

Credit is always and everywhere a matter of trust. Where there is trust, anything goes, as the recent proliferation of so many structured financial instruments vividly demonstrates. When trust vanishes, the revival of the buoyant credit creation of the past becomes extraordinarily difficult. But without credit creation, economic growth and risk-taking are stifled.

Liquidity is also a matter of trust to some degree. But liquidity has another feature that few people notice. Liquidity is a function of laziness. By this I mean that liquidity is an inverse function of the amount of research required to understand the character of a financial instrument. A dollar bill requires no research. A bank draft requires less research than my personal check. Commercial paper issued by JP Morgan requires less research than paper issued by a bank in the boondocks. Buying shares of GE requires less research than buying shares of a start-up high-tech company. A bond without an MBIA (once-upon-a-time anyway) guarantee or a high S&P/Moody's rating requires less research than a bond without a guarantee or lacking a set of letters beginning with "A" from the rating agencies. The less research we are required to perform, the more liquid the instrument - the more rapidly that instrument can change hands and the lower the risk premium in its expected returns.

This emphasis on trust and liquidity in a well-functioning credit market provides useful insights into what is happening. Trust has vanished in many areas where it was taken for granted just a few months back. And when the ratings of S&P and its competitors lost credibility, paper that had traded on sight lost the liquidity it once enjoyed because now it involved far more research than in the past. These words are just an elaborate way of explaining why credit spreads were so narrow just nine months ago and so wide in today's markets.

This abrupt shift in viewpoints has caused snarls in many areas of the credit markets. Over the longer-run, the most serious of these blockages is the disruption in the process of securitization. Securitization works only in an atmosphere of trust and where the paper involves a minimum of research. Without securitization, and without the lively derivatives markets that developed around the securitization process, the entire credit system loses an immense source of capacity, hindering deserving borrowers in search of financing and, as a result, the pace of economic growth.

Until the system can restore trust and the related willingness to buy instruments on the basis of limited research (or even no research), the credit markets are going function below optimal levels. But restoring trust and liquidity is no simple matter. Securitization broke the old personal relationship between lender and borrower, greatly expanding the market for credit in the process. The old-fashioned way - when lender and borrower were essentially on a face-to-face relationship - was slower, more cumbersome, and, most important, far more limited in terms of capacity.

In my days as a commercial banker, back in the late 1940s, the president of my bank said to me, "Remember this. I much prefer the customer to be angry at you because you denied him credit than for you to be angry at him because he failed to repay when due." That attitude sounds quaint today, but it was very much in the spirit of a time where jokes about bankers' glass eyes were legion. As the market for glass eyes revives - and it is reviving as we speak -new credit creation will inevitably slow down. As Woody Brock recently emphasized, "the combination of diminished bank capital and tighter lending standards could prove fatal to credit creation."

Now, it would be naïve to project this set of conditions into the indefinite future. Trust will regenerate over time, and the burdens of research will lighten. The pace of change in that direction, however, will be slow, a matter of years rather than months. An entire structure has crumbled and has to be rebuilt, brick-by-brick. Nor will that process necessarily be smooth. The impact of unforeseen but inevitable credit problems will loom large, detouring and delaying the pace and patterns of recovery on each occasion.

There could be bright spots as well. Our whole argument rests on the proposition that the demand for credit is going to exceed the supply, which is blocked by lack of trust and an increased burden of research. But a case where supply fails to respond to an excess of demand is rare in our system. People in finance have extraordinary energy for innovation in new products, new concepts, new paths to ultimate objectives. For example, hedge funds and sovereign wealth funds are already functioning as sources of credit, although a bump along the way might turn them off as well.

These widespread and complex problems originated from an unanticipated sequence of shocks involving banking institutions believed to be impervious to losses in the billions and major impairments of equity capital. As we emphasized above, new régimes are colored by the unhappy memories of the preceding régime, and those memories linger on for extended periods of time. The plight of Citicorp and Merrill Lynch reaching for massive help from foreign government investment funds was an event nobody could have foreseen - but few will forget. How the mighty had fallen!
The critical ingredient in the state of distress

The sequence of events that caused the economy to lose its forward momentum over the course of 2007 was unique. This fact is central to our entire argument here. The cause was not too much inventory, not overexpansion in industrial capacity, not a sustained burst of inflation requiring a determined move to tight money and higher rates at the Fed.

The root of today's problems in the financial markets and in the economy as a whole is the household sector. The point needs no elaboration, but its significance cannot be minimized. As we have argued on more than one occasion, the shrinkage in the personal savings rate is not the result of consumer profligacy, as other commentators persist in describing it. Rather, the savings rate has been suppressed by a slowdown in the growth of household incomes. The shortfall between income and outlay has been met by borrowing, and in particular by borrowing against the family real estate. Now the opportunity to borrow has shrunk dramatically, an outcome that will profoundly change the household's spending power and spending patterns. But the impact is not just on the household. A slowdown in the growth of consumer spending has ominous implications for the entire global economy - and, along the way, the U. S. federal deficit, soon to be overburdened by spiraling benefit obligations. This predicament is not a short-run matter, unless home prices abruptly reverse themselves and head back into the stratosphere - which is hardly likely.
The bottom line

The central message of our analysis is not that the origin of today's difficulties is uniquely in the household sector or that the residue of these difficulties has scrambled the whole credit structure in the financial markets. Everybody knows about these troubles.

On the other hand, too few observes have noted how the consequences of these developments are going to require an extended period of time before the blockages they impose have been eliminated. But that is not all they have missed. This extended period of difficulty is going to bring about a new economic régime, different in many aspects from the experience of most people alive today. Along the way, we will have to pass through a transition period that harks back to an unfamiliar past in both the financial system and in the household sector.

But this, too, shall pass. Yes, glassy-eyed bankers, prudent consumers, and a reformulated globalization can keep a lid on economic activity around the world for quite a while. What develops from that transition, however, should resemble what took place over the course of the 1980s. Without anyone realizing it, the errors of the past, drip by drip by drip, were buried and a new and better system took their place.


The world's markets gambled on financial alchemy. They lost.
By Iain MacWhirter

COME BACK Karl Marx, all is forgiven. Just when everyone thought that the German philosopher's critique of capitalism had been buried with the Soviet Union, suddenly capitalism reverts to type. It has laid a colossal, global egg and plunged the world economy into precisely the kind of crisis he forecast.

The irony, though, is that this time it isn't the working classes who are demanding that the state should take over, but the banks. The capitalists are throwing themselves on the mercy of government, demanding subsidies and protection from the capitalist market - it's socialism for the banks. Hedge fund managers of the world unite, you have nothing to lose but your bonuses.

On Friday, the heads of the big five British banks demanded - and got - another £5 billion in "emergency liquidity" from the Bank of England to add to the £5bn they received earlier in the week. But like militant shop stewards they complained it wasn't enough. "Look how much the banks are getting in Europe and America," they whinged. Hundreds of billions of dollars and euros are being thrown at banks in an attempt to save them from themselves.

The quaint idea that loss-making companies should fail, to ensure the health and vitality of the capitalist system, has quietly been discarded. The banks, we are told, are "too big to fail", which means that they have to be taken into public ownership - like Northern Rock - or have their debts underwritten by government, like Bear Stearns, which comes to much the same thing. The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

Which takes us back to Marx. The crisis that is rocking the world is a classic example of the kind of shocks and dislocations that Marx said were an essential feature of a competitive capitalist economy. The falling rate of profit that results from too much investment piling into new technologies and commodities forces capital to engage in a constant search for profit. (Personally the shocks were are seeing are the result of gross imbalances introduced by the corruption that croney capitalism introduces through protracted malinvestment - Jesse)

As it becomes harder and harder to make money out of making things - just look at the collapse in prices of computers over the last decade - so exotic financial derivatives have been created to boost wealth without engaging in recognisable economic activity. Speculation takes over. British manufacturing has collapsed to a fraction of what it was 20 years ago, and a vast financial services sector has grown up in its place making money largely out of inflation in house prices, ie debt.

Moreover, with globalisation, trillions of dollars have been washing around the world markets looking for a home. This has created a monster: the market in financial derivatives; a Pandora's box of inscrutable financial instruments governed by supposedly failsafe mathematical formulae. Collateralised debt obligations - implicated in the subprime mortgage crisis - are at least rooted in nominal house prices, but they have been detached from the actual mortgages and sold as commodities in the securities market.

Credit default swaps have created a $45 trillion global industry based on nothing at all, merely speculating on the movements of currencies and commodity prices. A credit default swap is a kind of insurance contract taken out between two bankers who bet on the price of an asset. They don't need to own the asset, and there is no actual loss if the default happens. But the contracts can be traded, allowing the swappers to create value out of nothing but their own agreement.

According to the Bank for International Settlement in Basel, the global derivatives market is worth some $516 trillion - 10 times the value of all the world's stock markets put together. And much of it is based on very little but leveraged optimism; pieces of paper theoretically based on the price of an empty house in Cleveland, Ohio.

Billions have been magicked out of nothing by this financial alchemy, but in the end, there is no way of turning dross into gold, and the reckoning had to come. And someone had to pay - which is where we, the people, come in.

As happened in the 1930s, the whole system is collapsing. We are faced with the choice of colossal bank defaults or hyper inflation: saving the banks or saving our savings. The central bankers decided that they would rather save the banks. So our governments are using public money to bolster banking balance sheets and allowing inflation to rip so that the banks' losses will be devalued, along with the pound in your pocket.

So what happens now? Or as Lenin said, What Is To Be Done? Well, not Communism for a start. Central control and outright state ownership along Soviet lines is no longer a viable political option - an undemocratic public monopoly is almost as bad as a private one. The fact that the banks are currently in league with western governments to create a kind of financial communism is doubly disturbing.

Instead of just propping up bankrupt banks, the governments should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets, and refitting western economies to combat climate change. It needs a kind of green New Deal - an update on Roosevelt's imaginative policies of the 1930s fought tooth and nail by the banks.

They want unlimited access to public money to save themselves from the consequences of their own actions; welfare for the wealthy. This is above all a political, not an economic problem. There needs to be a political mobilisation of public opinion to force the banks and the government to bring the people into the equation. Unfortunately, the party that used to perform this function, Labour, has largely been bought out by the banks. They have privatised the government, even as they have socialised the financial markets.

You never see what kills you

I'm sure there are oh at least one thousand people alive and observing the current day and age and even participating a little; one thousand who have the brains to work this out.

The current banking system has got itself into a logical bind, you see. Well, that is, I don't think that many WILL actually see...

Some historians believe that history takes vast new courses only due to technology, and not to the politics or the morals, hazardous or otherwise.

Look at some wildly extreme examples:

Given that we have just left Easter, a time commemorating when someone disappeared from a burial crypt and was claimed by some followers and some opponents, to have actually survived death and appeared again in some kind of wall-penetrating yet seemingly physical way... Had this have been an event re-achievable by a truly wide cross-section of the entire world, well just imagine it - all the deeds and misdeeds of normally mortal people would be cause for concern indeed from that point on!

I would be investing in powerful painkillers and psychology books, in such circumstances, so great should be the need for them that I could envisage.

As it is however, what was a truly widespread innovation among the sons of men, was the invention of the horseshoe - possessed initially by the Visigoths - which led directly to the ultimate collapse of the Roman Empire.

History and economics and social conduct are all part of a complex and variegated topographical framework. It is certain that both the weaknesses of the pre-fall Roman social and political panorama can supply numerous pages of description of scholarly interest.

In the same way that the basic engineering of a steam engine was known at the time, but took almost two thousand years to be applied by humans properly or even understood for the power that it afforded, it may only be a small step that eludes people's intellectual grasp that provides the difference between the status quo and some genuine New World Order.

Octavian, the Venerated Caesar, pronounced the first real New World Order.

He was young but gifted with extraordinary insight.

You cannot compare people like Cheney or Bush or Obama to an Octavian. And therein lies one clue.

It is an absurdity to think that empty heads such as these or the media-obvious loud mouthed egocentric self-opinionated but crass wealthy, can command and control the whole world. History runs its course at first seemingly very slowly.

Octavian, were he to live today, would once again have to deal with and make allies of lesser men than himself.

Jesus Christ, were he a real individual with volition, would, I submit, be taken to a radical thought, to resurrect Octavian, in this day.

Nay, a thousand Octavians, just for good measure. Spinning webs, one by one.

Not this particular trading day, will you see the results. but you will see the results.

The man in the street is soon feasted on mortgage bankruptcies and the illusion of private palaces. After the feast, the fast.

He wants but some bread and some fishes.

And dreams of heaven. Aboveall, this he craves. And such cannot be provided by the smaller kinds of men. When Wall Street was great, it provided such dreams. And in cases it actualized them too.

Never abandon the hope of winning by investing money; but seek out those of the most courageous thinking, however. They can provide, what none else may. People misunderstand the Greeks when they say 'Christos.' They mean it only, is divine, that is a thought which reaches the heavens and is entertained by what is itself immortal. Even in the most common of the Christian bybli, it says 'render unto Caeser, that which is Caeser's.' It does not avoid the mundane, nor knowledge thereof.

Were Jesus to have had a nephew whom he adopted as Caesar did Octavian, such an Octavian, I dare say, could wait a long time to exact a MUCH more exacting account.

Why the Fed does not see that revenge can visit them as uneasily, I cannot say. But I would refer them to the chapters in The Republic, which deal with the last days of Democracy, how it happens, and what happens to those who took the high moral ground whilst banging the lowliest serving wenches and debasing the currency. These things are the most certain things of all in history. The Tzar's Winter Palace events, the Killing Fields, The Holocaust. History is almost ONLY about such things. Will they never learn. These things are CERTAIN.

Friday, March 21, 2008

The weak hands club

Commentary: Contrarian analysis suggests gold's plunge a mere correction in an ongoing bull market.
By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) -- If gold bullion's plunge over the last couple of days is enough to scare you into selling, then join the club.
The club of weak hands, that is.
The very purpose of sharp corrections during major bull markets is to transfer ownership from weak to strong hands, thereby preparing for the next leg up. And a contrarian analysis of current sentiment among gold timing newsletters points to gold's recent plunge as just a correction.
Consider the last time that gold bullion suffered a one-day plunge as big as it suffered on Wednesday,
when gold for April delivery fell by 5.9%. That occurred in May 2006, nearly two years ago.
Far from precipitating a major bear market, however, that month's correction prepared the foundation that enabled gold to eventually surpass its previous all-time highs.
According to contrarian analysts, one way to tell whether a scary decline is the beginning of a bear market, as opposed to a mere correction, is by analyzing sentiment that prevails among gold timers. Mere corrections have two distinctive sentiment characteristics: Before the correction begins, bullishness must not have reached excessive levels; and once the decline is underway, there must be an eagerness to jump on the bearish bandwagon.
Both of these hallmarks were present during the May 2006 correction, leading contrarians at the time to be bullish. ( Read June 2, 2006, column.)
At least one of these hallmarks exists today, furthermore, and the jury is out on the second.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. Prior to the current gold correction beginning, the HGNSI stood at 65.4%. That's nearly 35 percentage points below the HGNSI's all-time high of 90%.
What will be crucial to watch for in upcoming sessions is how quickly the gold timing newsletters run for the exits. To the extent they do, confidence will grow even more that this is a mere correction in an ongoing bull market.
But with early precincts reporting, things are looking good: In the wake of Wednesday's plunge alone, the HGNSI dropped more than 15 percentage points.

The Fed's New Tricks Are Creating Disaster

Frank Shostak

The Federal Reserve is trying a range of new tricks to push new forms of lending as a means of preventing what they fear may otherwise be a major collapse in financial markets. What all these strategies have in common is an unwillingness to come to terms with the reality that the crisis is based on real factors and can't be merely papered over without grave consequence to economic health.

Thus, last Tuesday (March 11), in response to the looming troubles with the Bear Stearns investment bank, the US central bank said that it would offer primary dealers up to $200 billion in Treasury securities for 28 days in exchange for triple A rated mortgage backed securities (MBS) as collateral. As the problems with Bear Stearns intensified and clients started to pull out cash the Fed announced that it was ready to do much more.

Last Sunday, March 16, the Fed announced it would provide direct loans to investment banks through the discount window for the first time since the Great Depression. The Fed has agreed to lend investment banks against a large variety of paper securities including a big chunk of difficult-to-trade securities.

This move by the Fed came in response to Bear Stearns's cash holdings dropping from $17 billion on March 11 to $2 billion on March 14.

The fact that Bear Stearns was rapidly losing cash posed a serious threat to the repo market. In this market, banks and securities firms extend and receive short-term loans that are backed by securities. Fed officials feared that Bear Stearns's dwindled cash situation posed a risk that it would not be able to honor its indebtedness. This in turn could undermine the confidence in the large $4.5 trillion repo market and further damage the credit market.

In the end, Fed officials orchestrated the selling of the Bear Stearns to JP Morgan Chase Co for $2 a share, or $236 million. Note that on December 20, 2007, Bear shares closed at $91.42. The main reason given for this deal was to prevent further uncertainty that was poised to destabilize financial markets.

Most commentators have endlessly praised the innovative methods that Bernanke and his colleagues are introducing to counter the financial crisis. Bernanke, who has written a lot about the causes of the Great Depression, is regarded as the ultimate expert on how to counter the current economic crisis. In short, most commentators are of the view that the man knows what he is doing and he will be able to fix the current financial problems.

Bernanke is of the view that by means of aggressive monetary policy the credit markets can be normalized. Once credit markets are brought back to normalcy, this will play an important role in preventing serious economic crisis. Remember Bernanke's financial accelerator model: a minor shock in the financial sector could result in large damage to the real economy.

In short, Bernanke, by means of his so-called "innovative" policy of fixing the symptoms of the disease, believes he can cure the disease.

What is the source of the disease and why are investment banks so heavily infected by it? The root of the problem is the Fed's very loose interest rate policy and strong monetary pumping from January 2001 to June 2004. The federal funds rate target was lowered from 6.5% to 1%. It is this that has given rise to various malinvestments, which we label here as bubble activities.

We define a bubble as the outcome of activities that have emerged on the back of loose monetary policy of the central bank. In the absence of monetary pumping, these activities would not have emerged. Since bubble activities are not self-funded, their emergence must come at the expense of various self-funded or productive activities. This means that less real saving is left for real wealth-generators, which in turn undermines real wealth formation. (Monetary pumping gives rise to misallocation of resources, which as a rule manifests itself through a relative increase in nonproductive activities against productive activities.)

When new money is created out of thin air, its effect is not felt instantaneously across all the market sectors. The effect moves from one individual to another individual and thus from one market to another market. Monetary pumping then generates bubble activities across all markets as time goes by.

As with any other business, participants in financial markets like investment banks are trying to "make money." It is this that gives rise to the creation of various products like collateralized debt obligations (CDO) and mortgage-backed securities (MBS) in order to secure as big a slice as possible of the pool of newly created money. (Financial entrepreneurs are basically trying to exploit opportunities created by the Fed's loose monetary stance and get as much as possible out of the expanded pool of money.)

As long as the Fed kept pushing money into the system to support the low interest rate target, various activities that sprang up on the back of the loose stance appeared to be for real. When money is plentiful and interest rates are extremely low, investment in various relatively high-yielding assets like CDO's and MBS's that masquerade as top-notch grade investment becomes very attractive. The prompt payment of interest and a very low rate of defaults further reinforce the attractiveness of financially engineered investment products. However, once the central bank tightens its monetary stance — i.e., reduces monetary pumping — this undermines various bubble activities.

The damage from the loose monetary policies of the Fed from January 2001 to June 2004 cannot be undone by trying to fix symptoms. Various activities or financial bubbles that sprang up on the back of loose monetary policies have weakened the bottom line of the economy. This fact cannot be undone by another dosage of policies that attempt to suppress the symptoms. If anything, such policies are likely only to weaken the bottom line further.

Remember that nonproductive activities are not self funded. Their existence is made possible by the diversion of real funding from wealth-generating activities. The diversion of real funding in turn was made possible by loose monetary policy. Hence the tightening in monetary stance from June 2004 to September 2007 is what is currently undermining various false activities.

Monetary policy manifests itself through the prices of various goods and assets. A price of a good is the number of dollars per unit of a good. When the growth momentum of money supply strengthens, this lifts the number of dollars paid per unit of a good generated by a particular activity — i.e., prices go up. Conversely a tighter monetary stance that slows the flow of money puts downward pressure on the prices of assets, or the prices of the goods of various activities.

A tighter monetary stance generates two things. It weakens the supply of real savings to nonproductive activities and weakens the flow of money to these activities. (Remember that real savings are diverted to bubble activities from wealth-generating activities by means of loose monetary policy.)

A diminished flow of real savings starts to undermine the existence of false activities and their solvency becomes questionable. A fall in the flow of money in turn puts downward pressure on the prices of goods of these activities. In fact, prices of goods that emanate from false activities have a tendency to fall sharply during the economic bust. This in turn reduces the flow of investors' money to these activities. As a result the prices of the stocks of bubble activities also tends to fall sharply, which puts more pressure on these activities. (With the value of their assets falling, misdirected investments can now only secure less funding from lenders.)

In contrast, wealth-generating activities that do not need an expansion of money for their existence actually start to gain strength. A fall in the prices of their goods is likely to be less severe than that seen in the prices of the goods of bubble activities. In fact their prices may not fall at all. Remember that wealth generators are engaged in the production of goods and services that are on the highest priority list of consumers. In contrast, bubble investments are engaged in the production of goods and services that are on the low priority list of consumers.

As consumers' real incomes fall because of the damaging effect from loose monetary policy, goods and services produced by various bubble investments may not feature at all on consumers' priority list.

We suspect that at the moment a tighter stance from June 2004 to September 2007 is dominating the current economic scene. So-called economic growth is always assessed in terms of GDP, which is the amount of money spent on final goods and services. The pace of monetary pumping sets the rate of growth of GDP. A stronger money rate of growth tends to be followed by a stronger GDP rate of growth, while a weakening in the money rate of growth is followed by a weakening in the growth momentum of GDP.

The engine of economic growth is not money, however, but real savings. If the pool of real saving is declining or stagnating, then the economy — also in terms of GDP — will follow suit, irrespective of what the Fed is doing.

How a particular sector responds to a tighter monetary stance depends on the extent to which that sector has been infected by bubble investments. The larger the percentage of bubble activities vis-à-vis all activities in a particular sector, the more severe the effect of a tighter stance. $10 $7

If the pool of real savings is still expanding, then it means that bubble investments in general do not dominate the economic scene. (They can still be dominant in a particular sector or sectors.) This means that commercial bank expansion of credit is not going to collapse and the growth momentum of money is likely to hold its ground.

However, if the pool of real savings is falling or stagnating, this could mean that bubble activities are dominating the scene, which in turn raises the likelihood that the commercial banks' expansion of credit will come to a halt. Obviously one can always argue that the Fed could open the money spigots in a big way and flood the economy with money. There is no doubt that the Fed could do it. This does not mean, however, that banks will embark on an expansion of credit if the pool of real savings is falling.

Obviously, then, if the pool of real saving is still healthy, Bernanke's policies might "work." In short, after a time lag, financial markets might start zooming ahead and the real economy will follow suit. We suggest that if this were to happen, the recovery shouldn't be attributed to Bernanke's policies but, rather, understood to have happened despite his policies.

In the alternative scenario, to which we assign a fairly high likelihood, the pool of real savings is actually falling or stagnating. In the framework of the alternative scenario, Bernanke's policies will only do further damage to the stock of savings and sound capital investment, and plunge the economy into a severe and prolonged crisis.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail and see his outstanding Mises.org Daily Articles Archive. Comment on the blog.

Thursday, March 20, 2008

The Collapse of American Power


In his famous book, The Collapse of British Power (1972), Correlli Barnett reports that in the opening days of World War II Great Britain only had enough gold and foreign exchange to finance war expenditures for a few months. The British turned to the Americans to finance their ability to wage war. Barnett writes that this dependency signaled the end of British power.

From their inception, America's 21st century wars against Afghanistan and Iraq have been red ink wars financed by foreigners, principally the Chinese and Japanese, who purchase the US Treasury bonds that the US government issues to finance its red ink budgets.

The Bush administration forecasts a $410 billion federal budget deficit for this year, an indication that, as the US saving rate is approximately zero, the US is not only dependent on foreigners to finance its wars but also dependent on foreigners to finance part of the US government's domestic expenditures. Foreign borrowing is paying US government salaries--perhaps that of the President himself--or funding the expenditures of the various cabinet departments. Financially, the US is not an independent country.

The Bush administration's $410 billion deficit forecast is based on the unrealistic assumption of 2.7% GDP growth in 2008, whereas in actual fact the US economy has fallen into a recession that could be severe. There will be no 2.7% growth, and the actual deficit will be substantially larger than $410 billion.

Just as the government's budget is in disarray, so is the US dollar which continues to decline in value in relation to other currencies. The dollar is under pressure not only from budget deficits, but also from very large trade deficits and from inflation expectations resulting from the Federal Reserve's effort to stabilize the very troubled financial system with large injections of liquidity.

A troubled currency and financial system and large budget and trade deficits do not present an attractive face to creditors. Yet Washington in its hubris seems to believe that the US can forever rely on the Chinese, Japanese and Saudis to finance America's life beyond its means. Imagine the shock when the day arrives that a US Treasury auction of new debt instruments is not fully subscribed.

The US has squandered $500 billion dollars on a war that serves no American purpose. Moreover, the $500 billion is only the out-of-pocket costs. It does not include the replacement cost of the destroyed equipment, the future costs of care for veterans, the cost of the interests on the loans that have financed the war, or the lost US GDP from diverting scarce resources to war. Experts who are not part of the government's spin machine estimate the cost of the Iraq war to be as much as $3 trillion.

The Republican candidate for President said he would be content to continue the war for 100 years. With what resources? When America's creditors consider our behavior they see total fiscal irresponsibility. They see a deluded country that acts as if it is a privilege for foreigners to lend to it, and a deluded country that believes that foreigners will continue to accumulate US debt until the end of time.

The fact of the matter is that the US is bankrupt. David M. Walker, Comptroller General of the US and head of the Government Accountability Office, in his December 17, 2007, report to the US Congress on the financial statements of the US government noted that "the federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007." In everyday language, the US government cannot pass an audit.

Moreover, the GAO report pointed out that the accrued liabilities of the federal government "totaled approximately $53 trillion as of September 30, 2007." No funds have been set aside against this mind boggling liability.

Just so the reader understands, $53 trillion is $53,000 billion.

Frustrated by speaking to deaf ears, Walker recently resigned as head of the Government Accountability Office.

As of March 17, 2008, one Swiss franc is worth more than $1 dollar. In 1970, the exchange rate was 4.2 Swiss francs to the dollar. In 1970, $1 purchased 360 Japanese yen. Today $1 dollar purchases less than 100 yen.

If you were a creditor, would you want to hold debt in a currency that has such a poor record against the currency of a small island country that was nuked and defeated in WW II, or against a small landlocked European country that clings to its independence and is not a member of the EU?

Would you want to hold the debt of a country whose imports exceed its industrial production? According to the latest US statistics as reported in the February 28 issue of Manufacturing and Technology News, in 2007 imports were 14 percent of US GDP and US manufacturing comprised 12% of US GDP. A country whose imports exceed its industrial production cannot close its trade deficit by exporting more.

The dollar has even collapsed in value against the euro, the currency of a make-believe country that does not exist: the European Union. France, Germany, Italy, England and the other members of the EU still exist as sovereign nations. England even retains its own currency. Yet the euro hits new highs daily against the dollar.

Noam Chomsky recently wrote that America thinks that it owns the world. That is definitely the view of the neoconized Bush administration. But the fact of the matter is that the US owes the world. The US "superpower" cannot even finance its own domestic operations, much less its gratuitous wars except via the kindness of foreigners to lend it money that cannot be repaid.

The US will never repay the loans. The American economy has been devastated by offshoring, by foreign competition, and by the importation of foreigners on work visas, while it holds to a free trade ideology that benefits corporate fat cats and shareholders at the expense of American labor. The dollar is failing in its role as reserve currency and will soon be abandoned.

When the dollar ceases to be the reserve currency, the US will no longer be able to pay its bills by borrowing more from foreigners.

I sometimes wonder if the bankrupt "superpower" will be able to scrape together the resources to bring home the troops stationed in its hundreds of bases overseas, or whether they will just be abandoned.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

RE: I might add, for those who missed it

Monday, March 17, 2008

America was conned - who will pay?

The South Sea Bubble ended in riots as trust was lost. Wall Street also duped the public
Larry Elliott, economics editor

Bear Stearns marks the moment when the global financial crisis went critical. Up until last Friday, it had been possible - just about - to believe that the worst was over and that things were about to get better. That pretence was stripped away when JP Morgan, at the behest of the Federal Reserve, stepped in when the hedge funds pulled the plug on the fifth-biggest US investment bank.

It is now clear that no end is in sight to the turmoil, and the reason for that is that the Fed and the US treasury are no closer to solving the underlying problem than they were eight months ago. The crisis will only end when house prices stop falling and banks stop racking up huge losses on their loans. Doing that, however, will require the US government to intervene directly in the real estate market to end the wave of foreclosures. Ideologically, it is ill-equipped to take that step and, as a result, property prices will fall and the financial meltdown will go on and on.

Ultimately, though, action will be taken because there will be political pressure for it. Indeed, it is somewhat surprising that there is not already rioting in the streets, given the gigantic fraud perpetrated by the financial elite at the expense of ordinary Americans.

The US has just had its weakest period of expansion since the 1950s. Consumption growth has been poor. Investment growth has been modest. Exports have been sluggish. But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital.


For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it's payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

The debate now is not about whether the US is in recession but how deep and long that recession will be. Super-bears have started to say that this is perhaps "The Big One", by which they mean the onset of a new Great Depression. The need to rescue Bear Stearns has done little to still those voices.

As the economics team at HSBC recently pointed out, there has been a "catastrophic breakdown" of trust, and when that has happened in the past - the US in the 1930s, Japan in the 1990s - chucking extra money at the banks in the hope that they will start lending again proves ineffective.

It's not hard to see why trust has become such a rare commodity: Wall Street at the height of the securitisation mania had, in effect, become London at the time of the South Sea Bubble crisis in 1720. Vast quantities of funny paper were changing hands even though those involved in the deals had no idea of their true worth. Nor did they care. Inevitably, now the bubble has burst and the huge Ponzi securitisation scam has been exposed, there has been a reaction. The securitisation market is dead, there is less money sloshing round the system, banks are hoarding their cash.

Having allowed the housing boom to rage out of control for too long and then delaying cuts in interest rates until the housing market was gripped by recessionary forces, the Fed is now trying to make up for lost time with a burst of hyperactivity. It will cut interest rates on Wednesday and keep cutting them: financial markets expect the Fed funds rate to be 1% by the summer, and they are probably right. In most downturns, easier monetary policy does the trick. Lower interest rates make it cheaper to borrow and also change the trade-off between saving and spending. This may not be the usual sort of downturn, however, with consumers going through a period of debt revulsion after the excesses of recent years, even so the consensus is that after two or three quarters of falling output, a slow and sluggish recovery will be under way.


These hopes are likely to be dashed, unless there is intervention at home and internationally to tackle the crisis. Domestically, the priority should be to stop homes that have been foreclosed being auctioned on the open market, since by selling them at a 50% discount property prices are driven down. The US does not seem to have learned the lessons from Japan, which encouraged a fire sale of property in the 1990s and was sucked into a classic debt deflation trap as a result. Those who argue, with some force, that it would be counter-productive to intervene in the market because the US needs to work the rottenness out of its system must recognise that the cold turkey option will be very long and painful.

The second form of intervention should be to shore up the dollar, the collapse of which is worrying countries that rely heavily on exports and is the main reason for the surge in commodity prices. Co-ordinated intervention by the major central banks needs to be at the top of the agenda at next month's G7 meeting in Washington, and there could be action even sooner if the dollar continues to tank.

In the longer term, lessons must be learnt from the turmoil. One is that you don't solve the problems of a collapsing bubble by blowing up another, which is what Alan Greenspan did after the dotcom fiasco in 2001 - the most irresponsible behaviour of any central banker in living memory.

The second lesson is that there has to be far stricter regulation not just of the US real estate market but of Wall Street, to prevent the return of irresponsible lending as soon as the recovery is firmly under way. If this is, heaven help us, The Big One, one of the only consolations will be that the repugnance at the orgy of speculation that has sapped the strength of the US economy will put a new New Deal on the political agenda.

But for this to happen there has to be a political response and even though this year's presidential election will be held in the shadow of recession, there appears not to be a potential FDR among the contenders for the White House. Yet if this crisis really does get as bad as some are forecasting, the public will rightly demand more than a slap on the wrist for Wall Street.

Global systemic crisis – End of 2008: Pension funds go off the rails

According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners. In this 23rd edition of the GEAB, our team anticipates the evolution of the upcoming pension fund crisis, details which countries are the most exposed (in particular in Europe) and provides a number of operational and strategic recommendations to face the situation.

Meanwhile, in the present issue (on subscription), LEAP/E2020 anticipates what the global systemic crisis (now obvious to everyone) will bring along in the next few months, as regards in particular to the negative side effects of the US Federal Reserve's bank loans currently contributing to weaken even more the US financial system, and as regards also to bank exposure in the US and in the most exposed European countries. Simultaneously our team analyses the effect of today's US economic and financial crisis on the probability and consequences of an attack on Iran by Israel and the US before the next US presidential election.

In any event, with the announcement of an emergency plan to save the US 5th largest private bank, Bear Stearns (1) (preluding to its being sold or its failing in the coming weeks), it turned out that a large financial institution indeed went bankrupt in the first quarter of 2008, as anticipated by our team in GEAB N°19 (2).

Meanwhile, the US dollar resumed plummeting against Euro, Yen, Yuan; gold soared over 1,000 USD per ounce, oil reached 110 USD per barrel, global stock markets lost 20 percent in three months, and the Fed's most recent attempt to stop the financial crisis through a 200 billion USD bank loan plan has already proved to fail... the bases of the financial and economic order that prevailed in the last decades are collapsing under our eyes, at an increasing pace… all the signs of a systemic crisis are gathered (3).

The whole world is now aware that we are faced to a crisis of unprecedented scope and nature. This level of awareness enables our team to refine some of their anticipations. About currencies for instance, our team undertook to review their estimation of the value of the US dollar against the three other strategic currencies - Euro, Yen and Yuan. LEAP/E2020 now estimates that the EURUSD exchange rate will reach 1.75 at the end of 2008 (instead of the 1.70 estimation made in 2006); the USDYEN rate should fall down to 90 and the USDYUAN down to 6 (4).

US Dollar Index (benchmark currency basket (5)) on 03/14/2008 - Source FxStreet
Faced to the extent of the Very Great US Depression currently unfolding (6), LEAP/E2020 is glad that the US authorities took into consideration the numerous protests (7) and decided to maintain the publication of US economic indicators on the website EconomicIndicators.Gov. In such difficult times, it is important that statistical information on the US economy remains easily available to everyone. The money of a great number of private and public, individual and collective operators depends on this transparency.

In the same sense, the Federal Reserve of Atlanta distributes for free a DVD entitled « Crisis Preparedness: Reconnecting the Financial Lifeline » and designed to help operators of all kinds to anticipate a crisis and get prepared to it (8). In the perspective of a collapse of the real economy in the US (expected to happen in September 2008 according to LEAP/E2020's anticipations (9)), these official advices take a special meaning. For instance, like we have been repeating for months, the DVD keeps saying that in the event of a severe crisis « Cash becomes king », whether the crisis is linked to a natural disaster or a human-made one, as shown by the fact that US insurers have already lost more money because of the subprime crisis than because of the Katrina hurricane, though the worse natural disaster in the history of the US (10).

Non-Borrowed reserves of US depository institutions (1950 – 02/2008) - Source Federal reserve of Saint Louis
To finish with, graphics such as the one above illustrate in a striking manner that the situation is infinitely worse that what the cleverest leader (and they are not many) can imagine. It shows that the US financial system, and that of a large part of the world, is lethally hurt. US banks have no more money; it is as simple and dramatic as that. Contagion will now enter a second phase of development, generating a new series of bank failures by this summer, as anticipated in GEAB N°20, entailing a dislocation of the global financial system in the second semester of 2008.


(1) Source: Reuters, 03/14/2008

(2) In GEAB N°19 we said it would take place in February ; it is on March 14th that this first large US bank defaulted. We remind that from now on, according to our November 2007 anticipations, more US, EU and Asian banks will follow.

(3) As a matter of fact, this CNN/Money title is very lucid: « Issue N°1: America's money ». Source: CNN/Money. That is indeed what it is all about: the pure and simple evaporation of thousands of billions of US Dollars illusively accumulated all those years on the accounts of financial institutions, companies, individuals and governments, scattered all over the world. That is exactly the problem detected in the first GEABs at the beginning of 2006.

(4) LEAP/E2020 wishes to stress the fact that in the case of a combined US/Israel attack on Iran this year, our US dollar index estimations for the end of 2008 presented in GEAB N°23 would be even worse. About the rumours suggesting that a concerted action of the central banks will put a stop to the plummeting of the US currency, they do not have any basis: a similar action can no longer be implemented because central banks now have diverging interests due to the decoupling of the world's largest economic regions, as anticipated by LEAP/E2020 many months ago. The collapse of the US Dollar is the result of a US economy in recession and a related devaluation by 50 percent against the other big currencies.

(5) Dollar Index currencies: Euro, Yen, Canadian Dollar, British Pound, Swiss Franc and Swedish Crown. If the Chinese Yuan was added to this list, the US dollar index would fall even more dramatically.

(6) Some websites are even specialised on this subject, such as Depression2.TV whose sub-title is clear: « Surviving the second great depression ».

(7) Excerpt of the announcement posted in the website EconomicIndicators.gov : « ... ESA (Economics and Statistics Administration) initially planned to discontinue the service due to cost concerns but given the feedback ESA received, the decision has been made to continue the site and improve its functionality... ».

(8) Source: Banking Information, Federal Reserve Bank of Atlanta (to order the DVD, here is the direct link)

(9) See GEAB N°22

(9) Source: Bloomberg, 03/14/2008

Clear and Present Danger

We expect officials to lower the funds rate by a full point to 2% at Tuesday's meeting

The Federal Open Market Committee will convene next week amid continued intense strains in financial markets and signs that economic activity is grinding to a halt. Events bearing on the outlook have worsened substantially since monetary policymakers dropped the funds rate to 3% in late January. The self-feeding downturn now in place shows signs of becoming deeply entrenched, while the ongoing marked deterioration in financial conditions is reinforcing the recessionary dynamic.

Strong consideration ought to be given to an even larger reduction

In this situation, aggressive policy action is warranted and we expect officials to lower the funds rate by a full point to 2% at Tuesday's meeting. Strong consideration ought to be given to an even larger reduction. Such a rate cut coupled with other ongoing policy actions may not be sufficient to stabilize the financial system over even a short horizon. As a result, the accompanying statement likely will higWight policymakers' commitment to pursue a set of policies necessary to secure stability. What is uncertain is whether or not the official communique will detail the various policies under consideration.

Policymakers gradually have signaled their willingness to adopt a more aggressive tack and it is now time to intensify further those efforts. The expansion of T AF, the introduction of the securities lending facility and today' s action to prevent a primary dealer from collapsing are examples of the Fed's more urgent approach to the current crisis.

The financial setting remains on tenterhooks and ongoing instability points to a prolonged adjustment period and uncomfortably elevated probabilities for highly destabilizing outcomes

A functioning financial system is the lifeblood of the U.S. economy and severely challenged market function, clunky intermediation and battered credit market conditions pose a clear and present danger to the economy.

...Bear Steams underscores the current fragility of the system. The Fed has not lent funds in such a capacity for at least several decades and possibly since the Great Depression. The interconnectivity of major financial institutions due to derivatives may have been a contributing factor in the Fed's decision. We cannot be certain, but the spider web of counterparty contracts throughout the financial sector could mean that the failure of one large institution puts the entire system at risk.

Our financial conditions index (FCI) finished February two standard deviations below its norm and has deteriorated considerably further in recent weeks

Our financial conditions index (FCI) provides a framework from which to measure the degree of stress in the broad financial backdrop. The index currently appears to be hovering near minus 2 1/2 sigma, or a level not experienced since the "capital crunch" ofthe early 1990s. Then, as now, the financial sector was saddled with assets that were not performing as anticipated and these problems weighed on the entire economy for an extended period.

While financial conditions as gauged by our index are not yet as restrictive as in that episode, strains in key asset markets are more severe. Dislocations in the mortgage and investment-grade credit markets remain considerable. For instance, the spread between rates on conforming mortgages and the lO-year Treasury still is near its widest level in the past decade, while the cost of buying protection on an index of 125 investment-grade credits has more than doubled so far this year.

Monetary policy cannot be considered to be even remotely close to properly calibrated until strains in the financial system ease

The level of the funds rate -including 0% provides only a partial glimpse of policy's effective stance. Policy is transmitted via the financial system, primarily asset prices, and with actions to date having failed to steady, much less improve, the flnanciallandscape, policy is not positioned to promote moderate growth over time. Until policy is positioned in such a fashion that it first provides a modicum of financial stability and then promotes a more normal set of financial conditions, forecasts of improved economic performance will be just that.

Absent a steadying in the financial backdrop, conditions have the potential to supercharge the increasingly visible self-feeding downturn in the real economy

Consumer spending is slowing quickly. Household demand expanded by a solid 3% plus clip throughout the bulk of expansion but downshifted to 1.9% in the prior quarter and according to this week's retail sales data is inching ahead in Q 1. Core sales were unchanged in February and have increased by a scant 0.2% annualized in the past three months. Real income expectations - spending's primary driver - are fading fast and today's update on this front from the University of Michigan is consistent with an additional deceleration in outlays ahead.

Slowing consumer expenditures will result in a cascade of adverse developments

Weaker spending growth will reduce firms' profit expectations, which in tum will cap businesses' willingness to add to headcount, inventories and the capital stock. The latest canvassing of smaIl firms suggests this process already is under way. Overall optimism has dropped sharply and expansion plans among these firms are probing levels experienced during the past two recessions. At the same time, businesses are not inclined to build inventories, suggesting that the spike in January stockpiles is unlikely to prove durable.

Left unchecked, this toxic background has the potential to fuel a recession unlike any the United States has endured in the past quarter century

The damage already done to the economic outlook is substantial and with the current negative feedback loop putting down deeper and deeper roots by the day, the scope of actions needed to sever this vicious circle is surging.

Continuation of current financial disruptions would usher in a dis inflationary undertow

Ongoing developments also are threat to medium-term price stability. An inflation backdrop that does not distort economic decision making cannot be achieved without financial stability. In this context, while current consumer inflation rates may be higher than many policymakers would prefer, continuation of current financial disruptions would usher in a dis inflationary undertow.

A world addicted to easy credit must go cold turkey

It's only mid-March, but this is one of Wall Street's sweatiest weekends. Traders' shirts are drenched in the perspiration of unpleasant possibilities. The collapse of once-mighty Bear Stearns is another reminder that the unwinding of the Great Debt Delusion still has a long way to go and many more victims to claim.
Brassneck: Contempt for politicians will benefit the economy
Three Line Whip: What ever happened to Northern Rock?
Read more from Jeff Randall

When, several years from now, economic historians tot up the final casualty list, a trail of destruction will stretch from mobile homes in America's Budweiser belt to the council estates of fish-and-chip Britain. The credit crunch travels with alarming ease.

Alistair Darling's Budget-day boast that Britain is well placed to cope with this turmoil was irrefutable proof of his intellectual bankruptcy. He was either whistling in the dark or wilfully insulting voters' intelligence. Be under no illusion, Friday's dramatic events in New York were neither an aberration nor confined to the surreal world of investment banking. The pain will be lasting and felt by millions who had no idea they were playing with financial fireworks.

When dealers arrive at their desks tomorrow morning, the first question will be: Who's next? Is it just Bear Stearns that has run out of cash, or are other great institutions staring into empty coffers? Investors are already betting that Lehman Brothers, another premier league player, has its financials caught in a mangle.

The US locomotive, for so long the engine of global consumption, is not just grinding to a halt, it is falling apart. The New York Times reports this weekend: "Everything seems to be going wrong… People are buying less, but most things are costing more. Mortgage rates are rising, the dollar is falling and prices of key commodities are leaping from one record high to the next."

Where now are the financiers, regulators and politicians who peddled the inanity, "we mustn't talk ourselves into recession"? Of all the vacuous comments made by officialdom, this one, given the rapid spread of financial disruption, grates more than most. Nobody is talking anyone into anything - it's too late for that. Our jeopardy is very real. Recession, if it comes, will be the result not of idle chatter but a conspiracy of silence. It underpinned the fantasy.

For too long, those who warned that the borrowing bubble would burst with terrible consequences were dismissed as congenital gloomsters. Greedy lenders, their irresponsible customers and incompetent ministers formed an unholy alliance to perpetuate a myth: that consumers, companies and governments could keep spending more than they earned and suffer no penalty.

We heard new and intriguing justifications for excess. Banks seemed able to acquire rubbish and recycle it as triple-A securities. It was a sophisticated version of the second-hand shop that advertises: "We buy unwanted junk and sell valuable antiques." Instruments of financial leverage became so complicated that even those trading them did not fully understand how the system worked. All they cared about was the potency of magic that enabled welfare claimants to borrow five or six times the income they were not earning and still make the numbers add up.

So clever were the designers of this wizardry that, though it failed the common sense test, they were able to fool supervisors, credit committees, external auditors, shareholders and regulators - even themselves! Disbelief was suspended by all concerned.

An important pre-condition for a faith in easy money is a complete disregard for the lessons of history. The bulls at Bear Stearns, it seems, were too busy spending their jackpot bonuses to read how and why boom turned to bust at Barings. Picking through the wreckage of his family's bank, two years after it went under, Peter Baring told a Bank of England inquiry that while Nick Leeson was making extraordinary (and wholly illusory) profits, the company's directors concluded that "it was not actually terribly difficult to make money in the securities business".

For securities in the Nineties, read sub-prime in the Noughties. When it looks too good to be true, it usually is. Bear Stearns has suffered crippling losses on mortgage-linked investments. In the same way that Northern Rock lost the confidence of British savers, Bear Stearns eventually exhausted the trust of hedge funds and its other commercial lenders. For a bank that trades by borrowing 30 times its equity base, this was the kiss of death.

Three years ago, Paul Volcker, a former chairman of the Federal Reserve, warned that the US was "an economy on thin ice". In particular he was worried that Americans had become hooked on living imprudently by using their homes as cash machines. He wrote in The Washington Post: "Personal savings in the United States have practically disappeared… we are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security."

Does that sound familiar? I'm afraid so. Here in the United Kingdom we have been living a similar dream. Unable to fund all spending ambitions from income, too many Britons have cashed in part of their bricks and mortar for a blast of instant gratification. Worse still, so has the Government. Unwilling to live within its means, even with revenues of about £600 billion a year, Gordon Brown's Circus and its troupe of performing puppets must borrow more than £40 billion next year to make ends meet. Its budgetary indiscipline makes us all more vulnerable to a sharp downturn.

Credit markets have frozen because it is unclear how many more of the big banks, if any, are bluffing. Nobody wants to be caught out trading with a loser. So cash is being hoarded. At the start of last week, the boss of Bear Stearns told the market that his firm was safe. But when lenders called that bluff, the cupboard was bare.

Central banks are trying to calm jitters by pouring billions of dollars into money markets to increase liquidity. Last week another $200 billion was dropped into the system. That was quickly swallowed up amidst screams for yet more emergency injections. Debt junkies, like heroin addicts, demand ever bigger fixes.

And this brings us to the heart of the matter. The rational response to financial pain is risk reduction. But if the pain is removed, or even suppressed, then so is fear. When individuals or institutions believe they will always be bailed out, they lose the incentive to reform. Delinquency is, in effect, encouraged.

In the end, the patient is so full of painkillers that they become part of the problem. The only way forward is for all palliatives to be washed out of the system. Sooner or later borrowers and lenders must address the real cause of discomfort. For many of Wall Street's finest, it will feel like cold turkey.

Saturday, March 15, 2008

Just The End of Your Way of Life?

Craig Harris
Mar 14, 2008

[Craig, we truly appreciate your taking time to give us your highly-respected and valuable insights to share with our 321gold readers]

I haven't written anything for public consumption in a while, because I've been busy living in what I like to call, "the real world" and making my living by trading my own money. That's what I do these days. I'm a fly on the wall with electronic access to the dens of thieves.

If I come out on top then I transfer those digits for things I need.

Yes I'm still long gold from $290, and crude from $60 but whatever, I've been doing ok. I've been doing ok that is, if the money I have was worth what it used to be, but it isn't. So rather than just slap a label on what it is when words have already arguably lost their meaning, let's discuss it.

I am personally more concerned about quality of life issues than I am about money given the current circumstances.

The last time when I wrote publicly, I was talking about the decline of the empire and the end of the pre eminence of the US dollar...war, that sort of thing.

So that's what's going on now, what I was talking about then.

The US is currently in what I like to call a period of "decay". It is in a period of decay in every possible way. If you live in the real world like I do, it is evident. If you consume a diet of the corporate media cheerleading squad, then you don't live in the real world and it could be difficult for us to communicate during the rest of this essay. We've got people charged with cleaning up the corrupt broken system going out with an $80,000 hooker bill and being replaced by a blind man. The current El Presidente is a wind-up doll for a bunch that should all be in orange jumpsuits. It would be comical if it weren't so sad to watch it all go down. It is a modern day tragedy being played out in real time in the context of a giant government/corporate media theatre production.

It's amazing to me how people who are into politics or religion or whatever will violently oppose some opinions, when people simply report the facts they see around them. Anyway, again... another subject. Politics and religion are both the same thing. They are both simply effective methods to control large masses of people. I just figured that one out not too long ago when I was into my learning the history of the world project. It has always been that way and always will be.

So anyway, that's all I do to make my living. I assimilate the facts I see around me and invest accordingly. I keep a diary of what I think and why, and I even publish it. If I'm right I make money and if I'm wrong I lose money. I like it that way. It keeps me honest.

That's one reason I don't write a lot publicly these days. It is becoming increasingly difficult for people who live in the real world to communicate with those who don't, and there is an increasing number of those who don't just simply because most people believe what they are told and the lies they are being told are now monumental. Astronomical in size. That's one of those universal rules about human beings; the majority will always go along with whatever you tell them. That's just the way it always has been and always will be. All good propagandists know that.

For those who do think for themselves and live in the real world however, everything that is happening today has been entirely predictable and even expected. I mean, the corporate media will say "no one ever saw this" or "they never saw that" and really the case is they just choose not to have those people appear. That's a whole subject in itself however.

I was noting to my subscribers the other evening that if you take a look at a picture of a pump price for gas from ten years ago until now, that's around an 18% increase annualized every year for ten years. All the other prices in the real world have risen at commensurate levels like healthcare and all the big items people like me in the real world need to spend money on.

Furthermore, if you plot energy in the last five years, the numbers are bigger. If you plot the last two the numbers are bigger yet. The last one, bigger yet. So what we have here in the real world are prices accelerating at an ever-increasing double-digit rate. Call that what you want. We have real wages basically constant and good jobs are harder to come by. We have a middle class that is going away. We have the majority of the citizens having their wealth, if they still have any, confiscated due to the ravages of inflation, or with toxic financial contact with the healthcare/pharma, legal or government money machines. So in the "not real world" big brother and his corporate media outlets wants you to believe that there really hasn't been much inflation or any significant changes to the status quoand that lie is so big that you may even believe it.

So if you do, then you don't live in the real world and we cannot communicate effectively because what you think you know is the product of a corporate boardroom. What I know is the product of living.

The other big thing that has happened since I last wrote is that the guys on Wall Street figured out how to loan a bunch of money to people that had no ability or even real desire to repay that money except for the fact that house prices were sure to go ever higher which is the definition of a mania. So working through a little bit of that math, with an estimated 30% of homeowners currently upside down on their mortgages, that works out to around ten trillion dollars of real estate still to be walked away from according to simple math and a few basic assumptions I worked out the other night.

In the "not real world" they have told you from the outset that first there was no real estate bubble, then that there might have been one, then that it would be over quickly and now they aren't sure when it will be over and the PR firms are busy working on what to tell you next.

It's not going to be over any time soon. The big question in my mind is whether the whole thing is about to go kaput or if we are just going to witness a continuous decay as the wealth shifts into a very small percentage of the population... as the middle class flames out. Again, that is a subject in itself. That is the subject of the Straussian nightmare; a change in the form of government that is pitched as the same thing as the old government.

So on top of this Wall Street genius of loaning money to people who could not pay, you have the cure for all this mess being printing more money (creating more debt). So they're going to fix a problem of too much debt by creating more debt. Perfect. They're even monetizing it by taking nearly worthless debt for brand new money created with the push of a button and an organized media campaign to tell you what they did and why it was good and why it was not monetization or covert nationalization of the banking system. It is what it is, call it what you want.

So the idea is that by pushing buttons you can cure these ills, but the reality is that big pile of new money is diluting the old money and sending the US dollar into the toilet. I mean, they're pitching it as all good, and what's left of the free markets are in sharp disagreement with the party line.

Now; the only reason the USA has gotten away with the idea that this balance sheet was compatible with the idea of being the world's reserve currency was that the USA was the global kingpin, the Mac daddy... until the empire did what all empires do and that's get too big for their britches.

Then they always start going off expanding the empire into places that are too expensive to maintain, imposing their will on people who don't want their will imposed on, and then that all gets so expensive and they start making so many enemies they start going bankrupt. That's what always happens. It always does. That's probably another one of those human nature things.

So in the real world right now, we have a situation where the banks are bankrupt, the government is bankrupt, the people are bankrupt, and the cure for this is to lower interest rates and create more money (debt) by pushing a button... diluting the value of the money further and causing everything we have going on now. It all makes sense here in the real world. All the pieces to the puzzle fit and none don't.

So is this stagflation or is this hyperinflation? Well, I'm not carrying a wheelbarrow around with my money in it yet, but I do know the prices and costs of everything I need to live are going up at an ever-increasing rate.
The shape of that curve is a polynomial consistent with ever accelerating inflation which some would call hyperinflation. I know that if I earn a 20% return, then I might be keeping up with the increase in the costs of everything I need to maintain my personal status quo. If you can balance a checkbook and multiply, then you know. If you are one of the ones who believe everything you're told, then you have to not believe your lying eyes or not be able to balance a checkbook.

When the cure for all problems can only be to lower interest rates and dilute the supply of the money by creating more money, then that is a vicious cycle consistent with acceleration or hyperinflation.

I really don't like it when people casually compare what is going on right now to 1929, because in 1929 the cure was basically to spend less and now the cure is basically to spend more. Even worse, being the geniuses we are, we figured out a way to amplify spending, called derivatives. They're based on the real thing but amplifiedlike 100 times. So we've already been doing the "cure" for so long that maybe the patient is no longer responding?

So what we are currently seeing, in both gold and crude oil is a loss of confidence. It's a loss of confidence that this whole thing makes any sense.

It's a loss of confidence in the absurd idea that you can create wealth by pushing a button. Since this whole thing now relies solely on confidence and not any intrinsic value, commodities, especially gold and crude oil, are acting as alternative wealth storage devices to paper currency.

If you have a bushel of corn, then you know what that is. You can eat it, or do a bunch of other stuff with it. With a piece of paper with a picture and official looking numbers on it, well you aren't as sure as you were yesterday what you can do with that. There will be no run on the banks this time around, because the banks can always be refilled with ever more worthless money. Instead of a run on the banks, there will be a run on the dollar. A run on the dollar (or run into commodities) is the modern equivalent to a run on the banks back then, for the reasons I'll get into shortly.

So there is a loss of confidence roughly equal to people's confidence in the government and the banking system. This decreased confidence is fueled by the fact that they are creating too much money. The idea with fiat money is that you only grow the amount of it as the total output of the economy increases otherwise you are diluting it. The thought experiment for that goes like this. You have one giant pile of stuff, and one giant pile of money. Right now there is enough money so that one-dollar gets one pound of stuff. Now, if you double the amount of that money, then it takes two dollars to equal one pound of that stuff. Unless the pound of stuff doubles in size, you have just caused 100% price inflation. So, operations like just zapping a half a trillion or so into existence out of thin air means just a bigger pile of money going after the same amount of stuff. So that's what we have going on now. These are financial engineering acts of desperation to save a system by giving it more of what got it to this point in the first place... debt. So when regular people like me think about that, they think, that doesn't make any sense, and they lose confidence.

That's in the real world. On TV things are still good though. So if you don't like what you're reading here, then go turn on the TV. You'll feel better.

I hate to simplify things too much, but this is the reason Mr. Greenspan called gold the conscience of the central bankers back in the 60's before he lost his mind or whatever happened. Maybe he couldn't resist the power of the ring or something... I don't know. Anyway, it's their conscience because they can't just zap gold into existence with the stroke of a pen.

Guess what? They can zap money into existence now. Poof - you've got money.

Any amount you want. That's why this is fundamentally different from the great depression. This time, they can just increase the giant pile of money. they can just drop it out of helicopters if they have to. They even said so... and it isn't going to buy as much stuff. It doesn't already.

So you still have the same basic problem from a human standpoint. That's the really interesting thing. In other words, whether you have a deflation like in the 30's or an inflation like now, the people suffer similar effects. It's hard to find a job, you can't make ends meet, city and government functions and services are understaffed and underfunded, and you are hungry. They are both a state of decay. Both usually end in war too.

The last one did. This one is different however in a lot of ways... and it's much more serious. It is fundamentally different because it is the end of the world's first experiment in government by the people and it has been replaced by something new.

So if you're into labels, then maybe you can find a label for what to call this. I like to quote Lenin on that:

"Fascism is capitalism in decay." -Vladimir Lenin

So I really don't want to get into all that implies in a short essay, but I will condense it all and say the US is in a state of decay. Political, socioeconomic, leadership, influence, status, any label you can think of.

The US is losing power and influence in the world, and it only has 5% of the world's populationand they're all bankrupt. I like to think of it like a continuum from the US coming out on top after WWII to a banana republic run by El Presidente. That's what I call them now, whoever he or she is, El Presidente because that's what they are. A corporate spokesman who is put there, bought and paid for by Acme corp.

The country has lost its way and is increasingly operating at the whim of the corporate lobbyists and special interests that own the politicians as the stench of it all starts to smell so foul that even the corporate media disinformation campaign can't convince your lying eyes. It is not what it appears to be. It is Rome circa 400's. It has already bankrupted itself policing an unsustainably large global empire. You have to live through the decline.

So that all gets into people living in the real world versus those who are not. Again, it's safe to say that the world is voting with its dollars... and the 5% of the world's population are going down hard on 95% leverage. They aren't going to like it either.

Tune in next time to hear which states secede first.

Tuesday, March 11, 2008

the next bomb

ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.
"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.
Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.
Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.
Derivatives bubble explodes five times bigger in five years
Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:
Sarbanes-Oxley increased corporate disclosures and government oversight
Federal Reserve's cheap money policies created the subprime-housing boom
War budgets burdened the U.S. Treasury and future entitlements programs
Trade deficits with China and others destroyed the value of the U.S. dollar
Oil and commodity rich nations demanding equity payments rather than debt
In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
U.S. annual gross domestic product is about $15 trillion
U.S. money supply is also about $15 trillion
Current proposed U.S. federal budget is $3 trillion
U.S. government's maximum legal debt is $9 trillion
U.S. mutual fund companies manage about $12 trillion
World's GDPs for all nations is approximately $50 trillion
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
Total value of the world's real estate is estimated at about $75 trillion
Total value of world's stock and bond markets is more than $100 trillion
BIS valuation of world's derivatives back in 2002 was about $100 trillion
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion
Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.
Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."
Bubbles, domino effects and the 'bad 2%'
However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.
This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:
"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."
Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.
World's newest and biggest 'black market'
The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.
Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.
Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.
BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."
That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.
And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode.
Comments? Yes, we want to hear your thoughts. Tell us what you think about derivatives: as "financial weapons of mass destruction;" as a "shadow banking system;" as a "black market;" as the next big bubble dangerously exposing us to that unpredictable "bad 2%."

Monday, March 10, 2008

The dude on inflation

Paper money eventually returns to its intrinsic value ---- zero. Voltaire

A friend recently asked me when is a day or so longer than a few weeks? When the Dude says he'll write again within that time.

Another friend of mine, and all around bright fellow, has, through a few days of debate on the causes of rising prices, inspired me to finally start posting again.

I find it fascinating how different minds think about the same issue. The "bones of contention" in any debate, assuming (and this is a big IF) the issue has been properly defined, reveal the differing underlying beliefs.

After going back and forth on the issue of the necessary causes of rising prices, I saw his underlying assumption: some force, such as might occur if a market was "cornered," a la the Hunt's silver play of a few decades past, must come into play in order for prices to rise. Thus he kept, quite reasonably, under that view, asking for the mechanism that drove prices higher.

Throughout the exchange I found myself at something of a loss for words. It seemed obvious to me that prices should be rising, yet I couldn't explain the basis of my view to an inquiring mind. Finally, having spent a few days pondering why I thought higher prices were so obvious but he didn't, the answer came to me- he was assuming that the unit of account and medium of exchange was of stable value, while I had accepted Voltaire's view, above, as true- paper money, such as the US$, was returning to its intrinsic value, zero.

In my next response to him, I inverted the arrow of causality: The better question to ask is how the price (which is simply the relation of a good/service to a unit of account of minute intrinsic, but some implied value) of any good stays the same over time instead of rising. That seems to me a more difficult question to answer.

That is, in a fiat money system, price stability is a low entropy configuration requiring some enforcement to maintain, inflation, i.e. a shift in a currency's perceived value towards its intrinsic value, is a shift to a configuration of greater entropy.

For those unfamiliar with the concept, entropy can be thought to rise as potential dissipates. A state of higher entropy is, in a sense, more disordered than a state of lower entropy. The second law of thermodynamics states that the world acts spontaneously to minimize potentials- tends to a state of higher entropy. For instance, an ice cube placed on a table at room temperature will melt without being heated or a concentration of gas, perhaps enclosed in a chamber under the same pressure as the surrounding room, will diffuse through the room over time after the chamber is opened.

Voltaire's view, which I share, implies that some ordering force must be applied to maintain the value of paper money. Remove the ordering force and paper money will begin losing value just as the ice cube on the table in your room (assuming you can afford heating oil these days) will begin to melt if heat is not constantly drawn from it.

This line of thought reminded me of my recent read of Greenspan's The Age of Turbulence- particularly his oft expressed sense that a well functioning, efficient economy (however one might define such terms) was a "natural" occurrence, at least in the west, due, as he notes in relating his observations of Russia's shift to Capitalism, to our long standing traditions of valuing private property, etc. An inefficient economy in the US, according to Greenspan, is a result of restrictions or rules which impede the transition to its natural state. Free the markets, and, he avers, things will sort themselves out.

This runs counter to the second law of thermodynamics. Of course, we are not bits of ice or molecules of gas, thus this law should only be assumed to operate on our physical beings (for instance the entropic process by which every ordered biological entity is always tending to death and disintegration, mitigated only temporarily by regular additions of energy (food), water and air).

Yet, it seems to me one can imagine this law operating on cultures as well. As the fall of myriad cultures over history seems to attest, humans, barring organizing forces, (which might be internal, such as simple faith that "the system" is working, or external, such as the imposition of sanctions on certain behaviors, what we call the justice system) are always tending towards the "noble savage." Our current state of, despite the occasional war, and other atrocities, high level cooperation is the "un-natural" or low entropy state, always pregnant with a return to barbarism.

Returning to the topic at hand (I need to force myself to stop digressing, or expressing my natural mental entropy) it seems to me that Central Banking in America at least, has forgotten its primary function by assuming that zero inflation under a fiat money system was a "natural" result. The Fed or Treasury would need to "do something wrong" to ignite inflation.

Au contraire, say I, the natural value of these colored, variously numbered pieces of paper in my pocket is almost nil. The Fed needs to "do something right," i.e. enforce the view that paper money has value, in order to stop inflation from occurring. Acting as if external imbalances never need to be resolved, blocking the mortgage market from clearing, and cutting interest rates ever closer to zero (etc.) don't seem to me to be policies that will stall the now accelerating entropic process of the US$ finding its intrinsic value.

p.s. I'm not arguing that restrictions are necessarily a good thing, the fewer the better, so long as the really important ones, like maintaining a stable unit of account, are enforced.

The Face-Slap Theory


Friday's employment report — which was so weak that it had many economists declaring that we're already in a recession — was bad news. But it was actually less disturbing than what's going on in the financial markets.

The scariest thing I've read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we're in the midst of a financial meltdown.

To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.

As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn't spread to other financial markets or to the economy as a whole.

Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.

The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.

Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.

But again, the respite was only temporary. Last month another market you've never heard of, the $300 billion market for auction-rate securities (don't ask), suffered the equivalent of a bank run. Last week two big financial companies announced that they had been unable to raise the cash demanded by their lenders. Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.

One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that's sure to worsen the economic downturn.

What's going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”

A report released last Friday by JPMorgan Chase was even blunter. It described what's happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn't have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)

The Fed's latest plan to break this vicious circle is — as the financial Web site interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street's pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks' financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it's a drop in the bucket.

The only way the Fed's action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.

But slap-in-the-face only works if the market's problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that's hard to believe.

The third time could be the charm. But I doubt it. Soon, we'll probably have to do something real about reducing the risks investors face.

A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.

Nobody wants to put taxpayers on the hook for the financial industry's follies; we can all hope that, in the end, a bailout won't be necessary. But hope is not a plan.

Sunday, March 09, 2008

Aussie doze into disaster

Im even having problems with my own family trying to reign in a 15 year term family trust investment adviser (and family friend) with a stellar track history, while trying to convince my siblings that this is different and that funds that name themselves "conservative" are in fact prone to up to 50% losses in the next 12 months, the sentiment is Australia is still very adamant that this is just a correction and we will be back to growth in a few months

Its like running an election campaign :), but when you dissect the various funds make up, the reality I am finding is horrendously risky . There are funds actually called "conservative funds" lol, when you look below the covers you find that that some of the gearing approaches 50%, there are many folks in Australia that are going to lose a large portion of the superannuation (401k in US terms) and they charge fees between 2-4% annually even if they do lose most your money. Some of the strictly conservative funds hold stock like Macquarie Bank (one of the most highly leveraged investment banks in the world). Because its been such a performer over the last 15 years they perceive this as conservative !

All the research is teaching me how exposed most Australians are to the kind of "shock and awe" event that we have been discussing for the last few years. it almost impossible to get the investment profiles of these funds, so I have been doing it via forensically tracing the share registrars and sub notices etc folks like Colonial who say market a fund as so called "conservative" in order to chase returns have warped are basically overweight financial s, their investors are consoling are still consoling themselves by the so called "conservative" tags are showing 3 months losses of 13-25% and if our "good time" investment adviser is anything to go by they haven't gone much below the branding themselves.

Even the Aussie golds producers are exposed to massive leverage from these funds , we both know the history and volatility of the gold market, so many folk are leveraging themselves into gold stocks like Lihir and Newcrest and track gold via USD gold not realizing that AUD gold is showing half the USD return on gold than AUD over 10, 5 , 2, 1, 3mth periods . Folks are reading Sinclair, Puplava etc and not realisng that AUD currency strength is discounting returns by 50% and $1500 gold could be matched by 1.50 AUD by 2011.

The invest in the metal not the stock or at least diversify is totally lost on them.

Its going to be allot uglier than even I think we realized most Aussie investor have no idea how much they are about to lose.

Saturday, March 08, 2008

Blowed up real good

March 07, 2008

"Stability is destabilizing" - Hyman Minsky

Before I became a wheeler-dealer online stock trader (eight years paycheck free!), I made my living building and running large computer models of oceans and atmospheres. The bigger and more complex the model, the greater the chance of "something going wrong" (i.e. the model becoming numerically unstable). This means some or many of the model values would go to infinity, whereupon the programs would halt.

It was a numerical, not a physics, problem. Though journal editors didn't like me describing how some particular model had "blowed up real good", they had started generating values (of say velocity) which went exponentially larger in an explosive way.

Typically, just before the models would go berserk, they would start exhibiting unusual behaviour. This meant they would develop swings in value, both in time and in "neighbouring" grid points. The swings would amplify and then something else would go unstable. Things that shouldn't correlate (move together) often started to quite strongly.

All manner of models are susceptible, and making them larger often didn't help. Global fluid models can go unstable just as easily as closed ones.

So, I would then look over the models, and then try to enhance, damp, smooth, decorrelate, or whatever, to try and get the models to work. It wasn't easy, and certain aspects of fluid modelling are considered insoluble. You just have to try and minimize the damage and get the things working.

When I left the field after cashing in on (or more correctly out of) the Tech Boom of the late nineties, I thought I was done with numerical instability. Which brings us to the main point; timeseries of financial instruments are starting to look a lot like those fluid models about to go unstable.

Bonds drop a point in one day, recover the next, silver drops 30 cents as funds exit en masse, and so on. The financial model analogy is not so far fetched. There are hundreds, if not thousands, of computers doing dynamic risk hedging every day of the week, all interacting and buying and selling protection of one sort or another.

There are hedge funds trading hundreds of billions of dollars in a heartbeat waiting to jump on the next trend. Governments of all size are trying to "do something" to manipulate their currencies and respective economies. It's a potent combination, and getting bigger every day. And previously "uncorrelated" financial instruments of many kinds suddenly are. Quite strongly.

One of the recent advances made in fluid numerical modelling was stability analysis. You'd look at the equations and the way they were implemented and look for unstable "modes". This was often done after a particular mode had made it's presence known in a more painful way. And, as the models got more complex, so did the stability analysis to the point where it really wasn't of much help.

The models I ran could therefore go unstable purely by their own internal structure. Run along fine for a while, and then,"pffft", off they'd go. No external shock was needed to get the ball rolling. Equivalently, the 10 sigma event which may create financial havoc may lie within.
In ocean modelling, it is possible to smooth out bottom topography, limit changes in model variables to small increments, and force conditions back to "long term averages". The price paid for such levels of adjustment is that you are effectively introducing fictitious forces, and the models then often bear little resemblance to reality.

Financial markets, unfortunately, also look a lot like these kinds of models at times. The heavy hand of stability has been all too evident in the financial markets (e.g. volatility indices) the past few years, to the point where the "real" economy is probably totally skewed.

As an another example, in the book "Competion" by James Case, there is a reproduction of Senator Moynihan's argument against the balanced budget proposal of the 1980's. It shows 100 years of US GDP growth smoothed out after WW II with the introduction of Keynesian stimulus. This has been trumpeted as a good thing. I wonder. When I did similar things in the models, it oftentimes meant that the imbalances responsible for the natural variability built up over time. Then they became a bigger problem.

The ultimate cause of the problems in fluid models is limitations of computer size and speed . You have to represent the aggregate of all the fluid processes in a particular (often spatially large) grid box to a few numbers. The real world "sorts itself out" on smaller scales not resolved by the computer models.

The equivalent financial problem today is too much wealth and power in too few hands. The system accomodates the accumulation of great wealth, and legislation designed to prevent financial excesses has all but been eliminated.

There are now few "independent" economies or other anchors (like gold used to be) which could counterbalance a disruption in another area. And this hugely macro economy has been stabilized all too well to the point where the building imbalances may ensure that "something's gotta give".

And how, pray tell, does this help us make better investment decisions? Well first, you can probably count on a whole lot more volatility ahead. It isn't a time to be sticking your financial neck out to the point where a sudden wild swing can wipe you out. One strike and you're out in this league. Margin bad, liquidity good.

Dave Ramsden

Second, the financial "mode" which ultimately "goes exponential" may never be fully identified. There's no point trying to understand potential causation. "Safe" financial strategies may backfire as easily as "risky" ones. Stay flexible.

Third, big models are the sum of a lot of smaller, separate processes. After a period of huge frustration, we'd often break the models down into simpler, localized versions and try to understand and cure the problems there. Often, that was all we could do. Some bigger models never did work.

Led by cheap energy and technological advances, a long period of economic integration is now under stress. I see a potential process of dis-integration ahead. Lots of "paper promises" by large institutions are breaking down. There've been recent recent bank runs and halts on fund redemptions. The underlying economic model shows signs of breaking down (or breaking up).

Big institutions are under pressure to prevent a global meltdown. Personally, I see the unfolding crisis as beyond anyone's understanding or control. That's certainly what the timeseries data says to my eye. How bad the crisis will get, what form it will take, or how long to unfold are anybody's guesses, but I wouldn't count on government to supply your basic needs in ten years or so.

So, be prepared for a return of the 70's catch phrase "small is beautiful", only in this case, it might be more akin to "small is all we got". Who knows how local economies will need to get to reach sustainable equilibria.

And, if things get really bad, prepare yourself to participate in a very local economy, so have resources close to hand. Your financial institution may not answer the phone one day, so have some of your assets in real, physical form.

The adjustment to a new economic world will take a while. Problem solvers, like investors, are going to have to come to their senses one at a time. Big economies are ultimately built out of small, resilient ones, and a lot of competitive smaller players would really help the process.

Maybe by then there'll be a new macro paradigm to replace the discredited ones, with even some Minsky baked into official economic models. Ones that won't blow up real good.

Friday, March 07, 2008

Jim Willie nails it..

- Posted Friday, 7 March 2008 | Digg This Article | Source: GoldSeek.com

The title should really be “Psychology of 1000-20-100” to give respect to the major signpost price targets. The $1000 gold target is within reach. The $20 silver target has been breached. The $100 crude oil price has been breached. Before long, all three price levels will serve as support. When a gold target of $1000 was proposed three to four years ago, most people dominated (or bound) by conventional thinking dismissed such talk as silly, irresponsible, even ludicrous. Not any more! The same goes for silver and crude oil with their respective distant price targets, each attained. Profound market psychology is in the process of changing. Many new wrong analyses will come to the table, like so many casseroles containing rancid meat and rotten vegetables as ingredients. They will maintain that now these three goals have been met, the great selloff can begin. They will be dead wrong. The great commodity bull market is entering into its second crucial phase, marked by a failing US financial system, a USDollar in freefall, an insolvent US banking system, a perfect storm in US housing, the beginning of an endless USEconomic recession, inept banking leadership, and equally bankrupt economic stewardship. As the futility of policy measures becomes recognized, as rescue packages have almost no effect, as various markets refuse to stabilize, the gold price will rise further. In time the steps will be massive, like $100 in a single day. My guess is the year 2009 will see such days. Already, in the last two weeks we have been treated to two different days with at least a $1 range in the silver price. Volatility is here, to the upside, crushing shorts, lifting spirits for bulls.


Numerous vicious cycles have begun to strike at the core of the US system, both the economy and the banking system. They are each powerful. They will not relent. They will inflict horrendous damage. They will rip apart the ramparts of the USEconomy, then the fabric of American life. My colleague Roger Wiegand has been vocal in his dire warnings, one of few who see the upcoming carnage, disruption, and chaos. When people ask whether the USDollar has hit bottom, a simple question goes out as my reply. HAS ANYTHING BEEN FIXED? HAVE ALL DESPERATE MEASURES BEEN INVOKED? The answer to the first question is NO WAY! and to the second question NOT EVEN CLOSE! So the declines will continue, as US economic, banking, and political leaders squirm in reaction to utter futility in their policies to date, and continued futility in their upcoming policies. Their errors are many, in prescribing solutions which are more of the same inflationary wallpaper, which demonstrate no conceivable depth of understanding for the corner they have painted the United States into. YOU CANNOT FIX INFLATION PROBLEMS WITH MORE INFLATION, any more than you can treat an alcoholic with a morning whisky chaser! This 2008 year the system breaks, and it is breaking on almost all fronts. Feedback loops are kicking into gear, and they are incredibly powerful, vicious, and difficult to interrupt.

During my 20 years in Boston, on at least four or five occasions, residents were treated to Nor’Easters, nasty storms off the Atlantic Coast that resembles an egg beater. Storms would lift moisture from the ocean, circulate air in the upper lofts, as warm air current would come north from New York, cold air would come south from Montreal, and heavy water-filled air would come east from the ocean itself. Storms would sometimes last for days on end, dumping wave after wave of snow. The most beautiful aspect of the storms in my view was the bluish hue of the snow itself, having taken and deposited blue algae from the ocean water. In certain sunlight afterward, the awesome display of nature was something to behold. The Nor’Easter storm was a vicious circle. People would ask if the storm would ever end. Eventually, one of the three directions of wind strength would prevail, usually the south along the eastern seaboard. My imagination marvels at the power of nature embedded in rare weather systems. In the last few years, other vicious cycles have captured my attention. The Halloween Nor’Easter off the east coast in November 1991 was devastating (shown below). Its story was told in a movie called The Perfect Storm in 2000. This killer storm was an unusual Nor’easter that escaped the tropical zone, absorbed one hurricane, and ultimately evolved into a small hurricane late in its life cycle. Damage totaled $208 million while the death toll climbed to 12 people. The hurricane was the second costliest storm of the season, behind only Hurricane Bob.


The HOUSING vicious cycle will ensure steady decline in home prices. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for housing. The answer is NO.

The BANK vicious cycle will ensure steady losses in bonds and portfolios. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for banking. The answer is NO.

The RECESSION vicious cycle will ensure steady decline in USDollar value, since it is the stock of the Untied States. Numerous factors are at work to keep the damaging process caught in cycle after cycle. Questions continue on whether the worst is over for the USEconomy. The answer is NO.


The end result of these vicious cycles is round after round of harmful blows to the USDollar. A perfect storm has fully developed. After forming, it is gathering power. The psychology behind the storm becomes intense when the feedback loops become clear. Remarkably, parallel vicious cycles work to render horrible damage on both the tangible economy, with the housing market as foundation, and the financial sector, with the banking industry as foundation. Reaction by the financial markets to the US housing market decline, the US bank system meltdown, and the USEconomic recession, whose collective report card will increasingly be perceived through the USDollar lens, might resemble what is seen in the movie by actors heart-throb George Clooney and bad boy Mark Wahlberg. Giant waves overtake their tiny fishing vessel, much like similar images of FOREX waves of US$ exchange rate declines overwhelming the USEconomy. Never does prosperity come amidst a powerful currency decline. Instead of slower economic growth bringing down prices, the opposite will occur. The falling USDollar will force commodity and energy prices higher, the ugly consequence of decades of import dependence. Most economic policy directed by US banking and political leaders has fostered that dependence. Case in point is rising gasoline prices, amidst falling volume demand!!! Bernanke has it wrong. Next comes picking the rancid fruit from the withered industrial vines.

The final arbiter will be the gold price, along with its sibling the silver price. Great difficulty comes in fighting US giant corporations. The big US banks freely sell fraudulent bonds on a global scale with impunity, protected by the USGovt and US Congress. The big US corporations enjoy advantages with capitalization from a brisk bond and stock market, from size, and from the ability to subsidize losses. Mostly honest firms, they are hard to compete against. However, Microsoft does stand out, with a recent $1.35 billion fine imposed by the European Commission for chronic foul play of some monopoly shade. Microsoft treats the string of similar rulings with contempt, regarding such levies as mere cost of doing business. The big US Military cannot be opposed on its terms, but can suffer from being bogged down in guerrilla wars, not to mention the devastating ignored effects of sand damage. That leaves the USDollar as the remaining vulnerable to wave after wave of selling, from foreign disgust, utter shock over the seemingly unstoppable deterioration, and basic good judgment to sell the stock in “USA Inc” which is the USDollar itself. The reality is that the Untied States are gradually morphing into a Third World nation, complete with a puppet leadership.

A bearish triangle was much more prominent within what mistakenly was identified as a double bottom reversal pattern. The primary trend exerted itself in strong terms. The breakdown was sudden. The 20-week moving average proved formidable as resistance. USFed Chairman Bernanke and the minion knights of his Knothead Table gave a full green light for continued interest rate cuts, acknowledging the USEconomic distress, fully aware of the bank insolvency. They recklessly opened the door to heavy volume USDollar sales. The world noticed, did not blink, and hit the SELL button. Buttressed by continued monetary ease, unleashed waves of monetary inflation, complete with attendant rabid price inflation, factors behind the gold bull are increasing in number. Gold will surpass the $1000 mark within weeks. Continue to watch silver, whose ratio with gold will surely improve. In other words, silver gains will outpace those of gold. The desperate central banks have no silver to dump on the market.

By the way, the announcement of Intl Monetary Fund gold sales is huge bullish. The Swiss announcement of heavy gold sales last summer was also bullish. These are desperate signals, as they are running out of gold bullion to dump. IN BASIC TERMS, THEY ARE DESPERATE. The Euro Central Bank will be the last to cut official interest rates. The gold bull will return to European shores sooner than Trichet might expect. That event will usher in the gold price vaulting past the millennium mark.

Tuesday, March 04, 2008

Faber Video

faber video

Ebola of the Financial kind

March 3 (Bloomberg) -- The extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records last week, as the debt-market slump prompted banks, hedge funds and other investors to shun the securities.

The extra yields, or spreads, over benchmarks have surged since mid-2007 as a weakening U.S. economy erodes confidence in the bonds' credit quality and as losses on debt investments lead to forced sales and reduced demand. The spread widening may herald more losses for the world's largest banks, which have reported more than $180 billion in mortgage-related losses.

``People are calling it financial Ebola,'' Ed Steffelin, a senior managing director at GSC Group in New York, said in a telephone interview last week, referring to the deadly, contagious virus named after the Ebola River Valley in the Democratic Republic of the Congo.

Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31, according to Lehman Brothers Holdings Inc. index data.

A basis point is 0.01 percentage point.

Subprime Bonds

Deerfield Capital Corp., a Chicago-based investor in mortgage- and asset-backed bonds, last week said it's sold ``substantially all,'' or $1.3 billion, of its residential bonds that lack guarantees from government-linked entities such as Washington-based Fannie Mae this year through Feb. 15.

The company needed to ``increase our liquidity position'' at a faster pace than originally planned as prices fell for the securities, which Deerfield used as collateral for loans, Chief Executive Officer Jonathan Trutter said in a Feb. 29 statement. Deerfield reported a $110 million fourth-quarter loss and sold the securities this quarter at a loss of about $152 million.

Spreads for three-year AAA bonds backed by U.S. subprime or home-equity loans rose to 380 basis points, up from 250 basis points, according to Deutsche Bank, Germany's biggest bank. Default rates on subprime mortgages, sold to borrowers with poor credit or high debt, have surged to records.

Commercial Mortgages

Such securities lost 5.9 percent last month, when price drops and interest payments are considered, according to Lehman Brothers data. They have cost investors 9.3 percent so far this year and 18.1 percent over the past 12 months.

It's become difficult, if not impossible, for investors to determine how much holdings of mortgage- or asset-backed bonds are worth because new issuance and trading has nearly ceased, according to bond buyers such as Sanjeev Handa, head of global public markets at TIAA-CREF, and Thornburg Mortgage Inc., the Santa Fe, New Mexico-based mortgage investor.

AAA rated commercial-mortgage securities slumped 3.5 percent last month and have dropped 4.7 percent so far this year, according to a Lehman Brothers index. AA securities fell 10.3 percent in February and have lost 15.6 percent this year, according to an index from the New York-based company.

Top-rated credit-card and auto securities last month returned 0.04 percent and 0.06 percent, respectively, according to Lehman. They've returned 1.9 percent and 0.79 percent this year. Swap rates are the fixed yields paid in return for floating-rate payments based on short-term interest rates.

Underscoring how credit-concerns are only one issue for securitized debt, spreads over the 3-month Libor on AAA rated, two-year bonds backed by government-guaranteed student loans entered this month at 60 basis points, up from 40 basis points at the end of 2007, according to Deutsche Bank data.

European Spreads

Spreads on European securities also jumped again last month, according to a Merrill Lynch & Co. report today. Reaching new highs were: AAA bonds comprised of U.K. prime mortgages, credit cards, and commercial mortgages; Dutch home mortgages; and ``eurozone'' auto loans. Some spreads were in or near ``improbable three-digit territory,'' compared with less than 25 basis points a year earlier, the report said.

The widening has been ``in almost complete disregard for credit fundamentals in Europe,'' analysts including Altynay Davletova, Caspar Cook and Alexander Batchvarov wrote.

Peloton Partners LLP, the London-based hedge-fund manager, said last week that tumbling prices for U.S. home-loan securities and ``severely tightening terms'' on bond-secured lending from banks is forcing it to liquidate a $1.8 billion asset-backed fund.

Margin Calls

The fund owned about $17 billion of securities backed by Alt-A, subprime and other U.S. mortgage debt, along with bets against about $6 billion of subprime-loan bonds, according to people who have seen the firm's positions. Alt-A mortgages fall between prime and subprime loans in terms of expected defaults.

Deerfield said last week that some banks have stopped lending against mortgage securities -- even the bonds backed by non-subprime loans that the company owned -- while other lenders have ``significantly'' increased collateral demands.

Thornburg, which today said it's failed to meet $270 million of margin calls, said last week that AAA rated Alt-A mortgage securities tumbled 10 percent to 15 percent in the first 27 days of February. Mortgage-bond prices fell further in the last two days of the month, the company said today.

Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers, Bear Stearns Cos. and Merrill Lynch today had their profit estimates for 2008 and 2009 cut by Sanford C. Bernstein & Co.'s Brad Hintz, who cited more writedowns for the world's largest securities firms and a market recovery that may take three years. In the last two weeks, at least seven analysts have cut their first-quarter profit estimates for the brokers.

Sunday, March 02, 2008

The Russians on men and women

I consider it my duty to express profound acknowledgement to all participants of the Discussion Club as well as to the readers who shared their comments in private correspondence. Your opinions, remarks, comments, and questions were by far not the least of the things laid down in the foundation for the enhancements of the second edition. A special thanks to Leonid Ivanov for his help.
I'd like to express special gratitude to Irina Patseva, without whose moral support, this Treatise could have never been issued.

To the English reader

The original essay was written in Russian and at first was intended only for the Russian audience. Russian folklore (fairy tales, jokes, anecdotes, humor and etc.) is widely used in the manuscript. In this translation whenever possible we tried to explain such places or alter them to make it clearer for the English readers. We thank you for any comments and remarks regarding translation quality. So, let's begin...

A few words about human ethology
Foreword written to the publication of this book in Bulgaria in 2002

Traditional psychology as well as other sciences of human beings were always interested in the issue of proportion of biological and non-biological bases in man's behavior. At different times either biological or non-biological influence was considered as predominantly meaningful. In the 19th and at beginning of the 20th centuries there was commonly accepted opinion of biological component prevalence. As one of the most notorious (though, not the only) representative of these views one might call Sigmund Fried. However, constantly speaking actually about instincts ("libido" and "mortido") and their influence on a man even he did not take an attempt to research its physical nature and genesis. That's why there is no surprise that his conclusions and findings did not look really convincing and were constantly criticized. In addition, Eugenics based on a similar paradigm seriously discredited itself by the ties with despotic regimes using it for ideological support to conduct policy of violence and persecution. That's why beginning with the 1920s of the 20th century a pendulum swung into the opposite direction and as usual in such cases, overflew the golden middle. Up to the most recent time the concept of mighty domination of socially based component in human behavior was totally prevailing. Sometimes this concept is called a concept of "Tabula Rasa", i.e. "Blank List". It was suggested within the scope of this concept that at birth a man is a blank list where society and environment write one or the other rules of behavior and thus whatever is written will make a kind of human being. However, as time passed the inability to explain clearly and without strained interpretation the whole range of human behavioral reactions within the scope of this concept became more and more evident. At the same time, a lot of these seemingly unexplainable behavioral reactions of a human being find more or less natural explanation within the scope of hypothesis of presence of a powerful layer of inborn behavioral schemes in a human being! That's why at the very end of the 20th century the extremes in interpretation of human behavior were started to be removed, and a view of a human being as a creature in no small degree biological, born with a far from insignificant luggage of built-in behavioral schemes have begun to find wider and wider support. Nearly the most determinant contribution to this view was made by a science called ETHOLOGY and other disciplines branched from it. Ethology studies instinctive bases of behavior of living creatures by comparing the behavior of various species between themselves. A human being for ethologist is just another mammal having a fair conceit of oneself, but in reality only one of a species sharing equal rights with all other biological species.
Comparing behaviors of the specimens belonging to the various zoological species from the most primitive to the most complex scientists discover striking similarities and conformity which are evidence of existence common behavioral principles involving all members of zoological domain including humans. Such research methods are very productive and widespread in other sciences. For example, astronomers know much more about Sun's internal structure then geologists about Earth's inner structure. This happens because there are a lot of stars and all of them are way different. There is a lot to uncover by comparing them. But the Earth is unique and there is nothing to compare it. The same applies to studying a man. Restricting ourselves to study the one alone we take a risk to remain greatly limited in our comprehension of it.
However, studying ethology of humans is not simple. Besides objective difficulties deriving from powerful effect of brain masking and modifying many instinctive exhibits, researchers regularly get in conflict with public unacceptance of ethological method applied to the humans. Many people deem unacceptable and feel even insulted by the very fact of comparing human behavior with an animal. And this has its own ethological explanation! It consists of the effect of the instinct of ethological isolation of the species. The detailed examination of it is out of the scope of the book. The essence of this instinct can be expressed by motto "love your own kind but hate a different one". "Different ones" in our case are presented by apes and monkeys. Hostile attitude to them spreads as well on the thesis of relationship between our behavior and theirs. Despite up to this day non-stopping (due to the same hostility) attempts to overthrow Darwin theory, it is firmly and irrevocably accepted by the scientific community, and majority of the educated people completely agrees with their descent from the apes, however even a thought that one or another feeling is a call of instinct as before causes strong protests among many people, mostly getting no rational explanation. Meanwhile, the root of this hostility lies in subconscious unacceptance of our relationship with the apes. Please remember about that, my dear readers.
What else can an ethologist tell about a human being? A lot! He can tell about aggressiveness and about the nature of authority, about innate morality and the forces behind nationalism, and even about the oddity of love! And exactly the oddity of love we are going to discuss in this book.

About the subject
Question to an Armenian radio station:
How to avoid pregnancy?
Answer: Drink mineral water.
Question: When - before or after?
Answer: Instead of.
(old anecdote)

In my point of view all attempts of the society to enlighten the young and older people in sexual matters are extremely lop-sided. While the issues of the techniques of sexual intercourse, pregnancy prevention and the ways to avoid contracting sexually transmitted diseases are widely presented and available, the choice of partner is discussed casually, lacking the system, contradictory, and unconvincingly by the reason of subjective and purely speculative argumentation. Oh yes, discussing sexual techniques is damn pleasant but the majority of the tragedies on sexual ground happens not because the sex itself is not done RIGHT but because it is done with not the right partners. In fact, all the advice regarding choosing the partner are boiled down to hard way learning and staying away which in no way can guarantee that everything will be OK. From another point of view, while trying out the advice one might lose not one but many really suitable matches.
During the whole written history of human civilization, it was widely accepted to trust a feeling of love in choice of a partner. Moreover, in the last decades love as a conjuration became opposite to one minute passion and was counted as a guarantee of unerring choice. However, it hasn't been precisely proven so far that this trust is fully justified. The difference between big love and momentary chemistry is purely quantitative but not qualitative. Instead, the sensations arising from it are explained and colorfully described, but the basic logic of this event is left behind the scenes or is simply negated as something supernatural. There is no need to look for a mystery where one does not exist. In reality, all these irrational things of love are rational, logical, and wise in their own way. In order to see this rationality it is necessary to move from civilized society's coordinate system to one of primeval-herd. Below, I will try to show how to do it and prove the correctness of such transition. To be certain we shall speak about instinctive bases of conjugal behavior of human beings in terms of biological species. The process of sexual intercourse will not be examined. We are also not interested in FEELING itself, i.e. that sensations experienced by the lovers and physiological mechanisms which cause it.
I am sure that knowledge of this logic will not impoverish the perception of love, as one of the most beautiful feelings, like knowledge of flower structure does not hinder a botanist to be delighted with its beauty and like knowledge of harmony rules and musical instrument design does not hinder a musician to enjoy a masterpiece performance.
The instinctive bases of human being's conjugal behavior are studied by science called ETHOLOGY. However, there are practically no popular publications on this topic and I hope that this article will fill a gap in the lack of them in some way.

Why, properly speaking, is reproduction needed?
Who has come in this world - his grief is clear
He must come back to nonexistence.
(Omar Khaiam)

During the lifetime of any being its genetic material is gradually distorted, faults accumulate in it and as a result its viability diminishes and finally it dies. We will not examine the other theories of obsolescence as this is out of scope of this article. The phenomenon of reproduction of all known beings lies in the fact that the descendants obtain genes practically free of these accrued faults. Otherwise children would have inherited not only the body features but also age. So the rising generation would have faded out very quickly and probably it would have never started in the first place.
Briefly speaking:
Reproduction is the method of genetic material refinement from faults, i.e. the kind of way to live eternally.

Budding and sexual reproduction.
The best way of multiplication is division.
(from the talk of two amoebas).

Vegetative reproduction is just a simple division of cells, however this process only seems to be simple, but it is very complicated in fact. Genetic material is not simply duplicated but after the cells bifurcate chromosomes intricately exchange their different parts and as a result of this the defective genes are excluded from being forwarded to the next generations. Only after this, does a cell split into two. Nevertheless there is a very high probability that all genes in a chromosome's spirals happen to be damaged and it will be impossible to get non-damaged one.
As the way to eliminate or to significantly decrease this probability, nature came to the sexual process. Its main difference from vegetative is that two non-identical genetic sets from two different specimens with absent correspondingly damaged genes participate in exchange. Besides, it becomes possible to build the features and characteristics from different parents and this simplifies adaptation to ever-changing environmental conditions.
The advantages of sexual process are costly. Vegetative process is more simple and reliable, that's why many beings still practice reproduction in both ways. The sexual process is usually resorted with deterioration of living conditions, when the faults in genes become more often and the necessity to change something in life becomes more obvious. When everything is fine, simple division is the way to go.
Briefly speaking:
Despite the complexity in implementation, sexual reproduction provides higher quality refinement of genetic material from generation to generation.
It also creates higher diversion of properties, characteristics, and features in specimens and that gives significant advantages for adaptation to ever-changing environmental conditions.

About hermaphrodites and evolution of reproduction methods.
Do not multiply the fundamentals needlessly.
(W. Occam)

There must participate two different specimens in the sexual process but it follows from nowhere that they must be of two DIFFERENT genders. Hermaphrodites use sexual reproduction but of one sex! Each hermaphrodite individual has complete set of genitals and can equally play a role of a male or female and it is not unusual for the specimen to do it simultaneously. For example, some species of snails can copulate in large groups jointed in long ribbons or rings.
Hermaphroditism is not so bad. It is more reliable and simple than different genders. In fact, if we were normally hermaphrodites, our conjugal life would have become easier but probably not poorer. Judge for yourself, in spite of double the chance to find life's companion we would have had simplified acquaintance and courting procedures at least. Then why don't unisexual creatures dominate on Earth? From this point, the most interesting things begin!
Life on Earth was conceived approximately 3 - 3.5 billion years ago and reproduced vegetatively at first. The moment of "invention" of sexual reproduction is not certain, but the first cellular organisms, which appeared about 800 million years ago, used sexual reproduction, at least occasionally. Most of those organisms like snails, worms, etc., that survived to our days, were mostly hermaphrodites, i.e. obviously unisexual beings appeared much earlier. Their predominance ended in the Silurian period (approximately 400 million years ago). Along with them, the predominance of unisexual propagation came to an end. Since that time, dioecious reproduction is a rule because it has important advantages. What advantages?
One of them is very obvious. Some hermaphrodites (but not all) are able to copulate with themselves, and unlike masturbators can have posterity. Of course such an extreme incest contradicts the sense of dioecious propagation and should be prevented somehow because this kind of "sexual" reproduction is barely different from vegetative. However, real hermaphrodites practice self-copulation very seldom and generally for a very valid reason - absence of another being within its reach. Otherwise, some safety mechanisms eliminating self-fertilization are triggered. Initially, sex specialization is one of such mechanisms but this is not enough to squeeze out hermaphrodites.

About different genders and sexual selection.
- Do you love me?
- Yes!
- Ah! But where are the bees?
(From the talk of two flowers)

Since old fellow Darwin, it is usual to believe (partially against his opinion) that natural selection is based on casual, spontaneous death of creatures which are not adapted enough to living conditions. Such selection together with variability was called evolutionary force. Meanwhile, this way of selection is very inefficient. The man himself acts with far greater efficiency selecting new breeds of animals and plants. He achieves results in a few generations rather than in hundreds of thousands of years. The essence of such selection is to choose deliberately the parents of initial species, who carry the desired properties and disallow a reproduction of another beings without such properties. Actually there is no need to kill these outsiders. What humanism! Besides, a chance still remains to correct "judicial mistake" if this is going to occur.
Obviously, the usage of the same selection methods by nature itself can accelerate the pace of evolution and thus, improve the ability of the species to adapt to ever-changing environmental conditions. However, how can nature implement this in reality? It needs to have some kind of Judge, making the decisions of who deserves and who does not. The easiest way is to apply a hypothesis of God's existence, but this is a way to avert the answer. It is acceptable that this Judge is not alone. The most important is that they all should judge more or less by the same laws.
And there are a lot of judges and they are named "female". They pass a verdict which males will last in descendants and which will not. That's why such selection is called sexual. It is interesting that Darwin himself paid great attention to sexual selection but this did not find the proper response with the other scientists.
Can there be a sexual selection among hermaphrodites? Let us imagine a unisexual being which should have been rejected as sire. It is refused time after time but finally after some refusals, it finds the same loser and ... they will agree someway. In the world of different sexes, one outcast male can not help another one in bringing offspring but there are no outcast females in the animal world because one male can mate with many females. And usually it is still far from the limit of its fertilizing productivity. Taking into account that the number of males in population usually equals the number of females, hence male fertilizing potentials are in extreme abundance and it means that females always have more or less wide choices of a mating partner. This choice might be disguised or hidden but nonetheless it always exists.
Exclusion of females for the same purpose of selection from the reproduction process is too risky because their unborn cubs cannot be born by another female. A female gives birth by herself to as many offspring as she can and simply physically cannot substitute another female. A male is a different matter! All non-conceived cubs by one particular male will be conceived by another one with pleasure (and who would refuse...?)
That's exactly how it happens in reality. The 1/6 seal males fertilize 5/6 of females, the others have to pretend that they do not need this at all... Even more extreme disproportions are known among sea lions where 4% of males mate with 88% of females! The same picture is typical for all gregarious animals. Amongst the species which live in pairs, especially birds, it is customary to fertilize before a pair (family) is formed and sometimes after but with another male, often in sight of a "lawful husband". In other words, the pair is formed for doing household chores but fertilization is often done under gregarious laws. Besides, males are born in slightly higher numbers than females (and the more males are born the worse the living conditions for the species are). All this leaves room for choice even among strictly paired animals.
Plants, even diclinous ones, are not able to make such selection (see epigraph), that's why complete heterothallism in the floral world did not become dominant and probably remains as one of the ways preventing self-fertilization.
Thus, gender differentiation assumes some explicit or implicit form of copulative polygyny, but the fundamental principle of dioecious propagation is the principle of female's irreplaceability.

For accelerating selection and making it purposeful, some part of possibly potent males by all means will be excluded from reproduction process, with the growing share of the others.
From the principle of female's irreplaceability follows the fundamental differences between males and females behavior. As females are of a far greater value for the population and males are born in significantly higher numbers than needed to sustain specimen reproduction, thus, their personal value for the species is far lower. This circumstance is fixed in appropriate instincts which require from female to be more careful, avoid risk, take care of themselves in the first place and demand caring from surrounding people. For example, it is well in line with this instinct that women are more egocentric and trust more intuition and feelings than logic. Intuition and feelings are based on practical experience, including the experience of a whole species, so they are proved with practice and considered to be something more reliable. We will return to this subject below any number of times but once and look it through with greater details at the end.
Briefly speaking:
Dioecious propagation provides much faster pace of natural evolution by setting up effective sexual selection under which some part of males purposefully rejected.

About variety and risk
Without any born to creep - the others cannot fly.
(it is ascribed to Maxim Gorky)

If all the specimens are look-alikes like nuts on a conveyer belt, then all the hassle about choice does not make any sense. In order for the selection to make any sense, there has to be a due variety of specimens. Of course, after hundreds and thousands generations it is possible to form some optimum features and properties, which will provide the highest viability of each specimen and thus, the highest viability of a whole species but ...
As a matter of fact, the conditions which affect the very existence of species are anything but permanent, and a direction of future changes is totally unpredictable by nature, despite its so-called wisdom. That is why specimens are needed with non-optimized, needless, and perhaps, harmful features and properties for the current conditions. If the conditions change some of these features and properties might happen to be extremely useful. Giving birth to such creatures, nature definitely takes a risk - they are currently less viable, but it is necessary to take a risk since "no risk - no champagne". Nature does not know any other way "to predict the future" except hit and miss despite of whatever it is ascribed.
Is there any other way to minimize undesired consequences of such risk? How to make the consequences of such chaotic experiments (mostly misses) less threatening for the viability of the whole species?
Elementary! If possible, females should not deviate from the optimum but instead, males should become the objects of experiments, because unsuitable males can be easily excluded from the reproductive process without a danger of decreasing the number of children in a whole population. On the other hand, just a few outstanding males can father all the children in a population.
It was noticed long ago that the ratio of newborn males to newborn females strongly depends on living conditions of the species. Under unfavorable conditions a share of newborn males increases, thus, variety increases, selection speeds up and toughens and this in turn leads to the faster adaptation to the new conditions. Under favorable conditions a share of newborn females increases and that creates possibilities for fast proliferation of species.
Briefly speaking:
To increase the effectiveness of sexual selection, males, as objects of choice, must own a widespread variety of different features, properties, and qualities up to the explicit non-optimum of certain specimens, in order to cover the widest possible spectrum of future probable species demands.
This diversity can only be chaotically random due to the impossibility for natural evolution to predict the future thoughtfully.
On the other hand, females do not need to be extremely diverse because it is too risky, and carrying out the advantages of such diversion will fail due to the small numbers of descendants from each one.

About conjugal strategy

A lecture in a zoological college: Lecturer: A good sire-bull should make up to twelve copulations a day.
A woman's voice from the first row: What? How many did you say?
Lecturer: Up to twelve.
A woman's voice from the first row: Would you please repeat it louder for the people in the last row!
A man's voice from the last row: Excuse me, is it meant to be with one cow or with twelve?
Lecturer: With twelve, of course!
A man's voice from the last row: Would you please repeat it louder for the people in the first row!
(an old student anecdote)

Why cannot women and men find each other even if they are so eager for each other's companionship? That is so because they make a search based on different criteria as they pursue the different goals in their eagerness. Moreover, this eagerness for each other is not unconditionally friendly and resembles people's behavior on a market. Seller and buyer are eager to find each other and strike a deal as well, but each of them tries his or her best to get the maximum profit from the deal, frequently without any consideration of another party's possible losses. Nature, alas, is devoid of sentiments...
As it has been mentioned above, the principle of gender separation assumes that the small group of males fertilizes the disproportionately large share of females forcing the major part of male population to pose themselves as hopeless bachelors. Such strategy allows to quickly adopt new and useful features and properties in descendants and saves females from reproduction of useless genes.
To achieve this, males and females should have significantly different behavior while searching for their nuptial partners.
Every male should be eager to change females as often as possible, considering himself as the carrier of uniquely useful genes. Let's imagine that one man somehow has a gene with immunity, let's say, to AIDS. It is extremely necessary to spread this gene among the population! But he is, such a scoundrel, faithful to one woman only. How many children can be born by one female? OK, 10, maximum 20 and according to the genetic rules only half of them will inherit this gene. This is a crime in face of the species! However, if one tried to behave like a sultan, he can father possibly 1000 or even up to 2000 children. This is something ... Therefore public opinion treats male infidelity pretty repressively as it is not without a reason. This is an instinctive program and so to say, it is very sane from the biological point of view. Male should not confine his sexual expansion. There are females for this.
Thus, the instinctive goal of male conjugal behavior is More female's bodies, pretty and different.

And what if a female has such a unique gene? What should her behavior be in order not to sink this gene into oblivion, but rather transfer it to the future generations? In general, it is also possible to increase the number of children but ... Will the frequent changing of the males help a woman to increase the number of children? Absolutely not, but this could significantly lower the quality of children! That's why public opinion treats women's infidelity with much louder condemnation. A woman unscrupulous in her sexual partners does not take care of her future children! If a man transferring his genes fathered a child with an unsuitable woman, he did not lose anything. He can repeat the same literally the very next day with a better woman, it found. But a woman conceived from an unsuitable man cannot correct her fault so soon (nature does not know abortion). Moreover, the number of such trials is very limited in general. To fix her genes in descendants more reliably, a woman should strengthen the severity of selection for the candidates, in order not to mix her own, supposedly unique genes with any other male genes deemed unfit. However, she should be attractive to all men in order to have a possibility to choose from. The more men are attracted to her the wider the choice that she has. The ideal case is to make all men fall in love with her, but admit only one, or maybe, none at all. The copulation itself is an almost incidental side effect of the seduction process.
So, the instinctive goal of female conjugal behavior is more man's hearts, nice and different.

After a man's heart is captured, a woman can lose any active interest in him, just continue keeping him for her collection, meanwhile seducing the others.
It is necessary to make a point that only the base of the differences of conjugal strategy is described here. Below we will look at instinctive factors which fill this base with specific content.

Briefly speaking:
In order to implement the advantages of sexual selection, male should be eager to mate as much as possible. They are the fighters for QUANTITY of offspring because their qualitative mating potentials are practically unlimited.
To achieve the same goal, females having limited childbearing potential, are eager to get the best quality of posterity. Due to this fact, only females are the selecting subjects and they are interested in the maximum widening of the pool of potential partners in order to ease the choice of one with the best qualities while denying all others.
About our primeval "ego".
Within me are two "egos"--two poles of the planet,
Two different men, two enemies,
When one of them is rushing to the ballet
The other one is rushing to the races...
(V. Vysotcky)

It is well-known that a man belongs to the species of HOMO SAPIENS of the primate group. Classified relationship with other Primates is determined by greater or lesser similarity of genetic material, which is expressed externally in the resemblance of our physical constitution. For example, the genes of man and a chimpanzee resemble each other in more than 95% of the cases. However, species-specific attributes are not only the physical features, but are also behaviors and habits (hunting methods, marriage rituals, etc) as well.
As all species-specific attributes are hard-coded and passed by inheritance only, (that's why they are species-specific!) so behavior appropriate to the species is inherited as well. For example, the ability of the hunting dogs to make the stance is transmitted by inheritance and especially tightly linked to hunting breeds. Another example of an instinctively conditioned reflex is lowering the eyes as an acknowledgement of subjugation to another. This is typical for Primates, including humans. In the same situation, the dogs lower their tails. This kind of inherited behavior is commonly called "instinctive" and its separate aspects are called "instincts". There is a term "inherent behavior model" which denotes such instinctive behavior programs. Such an interesting act for our topic as a kiss is part of congenital conjugal ritual of Primates, which is derived from the feeding ritual.
To what degree is all of this related to human beings? The man has a mind, some kind of laws, all which make following one's instincts not compulsory. However, a man evolved into a modern being and became truly rational only 30-40 thousands years ago but our historical epoch is only 5 - 7 thousands years old. Meanwhile, the evolution of Primates began approximately in the Tertiary period, 20 - 30 millions years ago and such important instincts as obedience to animal hierarchy have existed almost for as long as life itself.
For sure, during such short evolutionary periods of time instincts cannot vanish. They are slowly and gradually formed by evolution and as morphological attributes, disappear only as slowly as they accumulate. So instincts do not ask whether a man can live without them. They are just acting up when they find it necessary. Unreasonable and unexplainable from a rational point of view, instinctive motivation is very logical and explainable in a primeval coordinates system, and it was expedient in primeval times. But in contemporary situations, the behavior realized by instincts is not always adequate and we are often bewildered how evil and blind love can be...
Monkey instincts will live inside of us for as long as we belong to a group of Primates because they are hard-coded in genetic memory. If mankind succeeds in getting rid of some important monkey instincts and fixes the changes in the genes, then man will pertain to another species and probably will be separate from Primates. Development of humanity demanded other than primeval-gregarious forms of marriage, but instincts do not disappear from subconsciousness so easily and keep working, even if their time past long ago.
Individual mind cannot change it's own instinctive programs in any way and moreover it does not know about their existence! It can only to disobey them in some cases but the next time instinct will want to do the same thing again. The lowest level of subconsciousness - instincts, they carry out available programs directly and without alternatives. Programs of middle level of subconsciousness such as traditions and habits can be modified with time. Mind also widely use fixed behavior programs but they are just "food for thoughts" for it. Mind does not exactly carries out the programs but more improvises on a theme.
Instincts direct us by means of emotions not bothering themselves with motives. The instincts, inducing a woman to beautify herself with cosmetics, do not inform her why she should do this - she just wants this and that's all. Logical sense of this is obvious - to attract men's attention but most of women will categorically deny this saying that they are doing this for their own pleasure. However, normal men do not do the same "for themselves"! Such behavior program does not exist in their instincts. By the way, many modern men treat a woman with cosmetics negatively but instinct does not want to know about this. Also it is worth to pay attention that the lower a cultural level of a woman the brighter her cosmetics and she applies it in a bigger quantity. In this case instinctive motives are neither restricted nor corrected by her mind.
Neural structures which fulfill the instincts, arose in the deepest antiquity. Thinking, analyzing or even simply extrapolate is absolutely impossible task for them. They are triggered whenever schematic and static template fitted in instinct matches some kind of external signal attributes which can by chance look like actually required. However, having free and direct access to the motivational centers of brain instincts can evoke the FEELING of it's correctness on any subject. This influence can resemble some narcotic intoxication. Narcotic illusions can also be perceived as high level wisdom. That is why love has no "wisdom". It has only a feeling of wisdom. Actually love evaluate the object of choice very superficially according to a strict (sometimes stupid) genetic program which sets a strategy for choosing a marriage partner. The mind is left nothing to do but to find a way to justify the answer. It is in nature of any person to look for ways to justify the answer when he tries to explain his instinctively motivational behavior.
Real picture of individual behavior becomes more complicated and confused not only because of two "egos" coexisting side by side but also because there is no clearly marked border between them. Instinctive and rational motivations can get intricately mixed. Besides that, for each particular case a person has several instinctive programs of behavior, which appeared at different evolutionary time and sometimes contradicting one another.
Briefly speaking:
A human is born with a lot of behavioral programs given at birth. Those programs appeared at different evolutionary time and due to this fact they often contradict each other.
Mechanisms of carrying out the congenital behavioral programs are capable only of frivolous analysis of the surrounding, which suggests an only formally superficial comparison of the surrounding with the schematic signal attributes fitted in these programs.
Adequate resemblance of the external conditions with these signal attributes creates one or another emotion inducing a human to carrying out an appropriate instinctive program.
The real motivations of the actions are not realized. To explain instinctively motivational behavior, the remotely occasional arguments are drawn which have much closer resemblance with just a desire to justify the answer no matter what.

About hierarchy in a herd.
Impudence is a second fortune.
(commonly known banality)

In theater as in life, the most demanding
person is the one who has not paid for a
(a French proverb)

There are no equal rights anywhere at all. Those outraged by unfairness in our society can comfort themselves with a fact that in a world of all other animals the situation is much worse.
While feeding a group of mice, it can be noticed soon that every time the best and the biggest pieces always fall to the share of the same specimens. These ones occupy the best places for resting and have the highest number of mating.
The other ones are satisfied with remnants after the first ones, the third ones - with whatever left after the second ooonnes and so on... I.e., there is a certain hierarchy within a group.
One of the most magnificent description of hierarchical relations was given by V. R. Dolnik [1], I just can't agree with his statement that human hierarchy is formed only by men (see below in details).
Such hierarchy is known among all kind of beings which lead even rudimentary grouping lifestyle. Even amoebas have rudimentary hierarchy. The places (ranks) in this hierarchy commonly marked by letters of the Greek alphabet: alpha is a high-ranking specimen, omega is correspondingly a low-ranking specimen. However, this definition system is not completely fine, in the large groups hierarchical structure divest its linearity of alphabetical row and becomes more reminiscent of pyramid where several beings can have practically equal rank. Highest rank beings are also called "hierarch", "dominant". V.R. Dolnik suggested to use the term "ringleader" - rather roughly but true.
Obvious the rank in such hierarchy has a huge significance for each member therefore the members of a group constantly compete with each other for rank advancement or rank preservation. The higher the rank the fiercer the struggle. Sometimes it might happen that alpha takes from life less then beta because it is too busy with struggle. However, alpha reserves the right, at least theoretical, to take away any piece from beta.
The rank of a being in a group depends on correlation of ranking potentials of this being with the other specimen in the group, so the same being can have different ranks in different groups.
But what is ranking potential? Obviously it is closely linked with physical strength but it is not determined by it unequivocally. Wasps ranking potential, for example, is identified by the number of bristles on particular body parts. Rooster's ranking potential is identified by the height of his comb. The number of bristles (height of comb) just shows the rank but does not determine it and the other beings are guided by these attributes which are coded by the same genes as ranking potential. The same happens with the other animals but not all of them identify ranking potential in a such simple way. Even among the animals with not too high organization (for example mouse) good physical strength only allows avoiding the lowest places in hierarchy but does not guarantee the highest. The higher animal's level of development the weaker correlation between ranking potential and physical strength.
Since very different species, especially including very primitive ones which are incapable of learning, possess hierarchical behavior, so it is possible to admit surely that the base of a ranking potential is given to a being with its birth (maybe together with bristles or something like that). Specific low- or high-ranking behavior is started showing from the first days of life. Thus, behavior of a being inside the hierarchy is controlled by indigenous behavioral mechanisms, i.e. by instincts.
Victor Dolnik calls this ranking potential "the power of IMPORTUNATENESS". Well-known psychologist Vladimir Levi calls it "power of IMPUDENCE" and that is possibly more precise. They prove that the crucial component of ranking potential is ASSURANCE in a own superiority, possibly and very often, not supported by any real merits and even totally groundless. Indeed, assurance of one person can hypnotize the other one and including himself or herself. It can be assurance of a student before passing the exam, or a driver in front of a policeman, or guru in front of believer, or a politician facing a crowd, or a leader of a sect facing his followers, and etc... <...>
Usually, alpha concentrates on internal struggle with greater determination, persistence and pleasure which often turns into end in itself. This struggle is much less pleasant for omega - he is more inclined to yield. From here there is one more parameter affecting ranking potential - ranking potential is a degree of compliance (or vice versa - degree of propensity to conflict). Acceptable volume of conflict tension is directly linked with ranking potential for each being - the lower ranking potential the less intensive conflict causes the sense of discomfort.
The number of vacancies on hierarchical Olypmus is limited by default and does not depend on average ranking potential. In other words, increasing ranking potential of all beings in the group the number of high-ranking beings will not increase. The same hierarchy will be formed but probably even tougher and more aggressive.
Different degree of individuals' compliance has a very important biological meaning. It allows to decrease tension of internal struggle within a group and thus avoiding needless death of its members. The spreading of the conflicts in such community or a group, even if they arise, are restricted to the closest neighbors in hierarchy instead of everybody-against-everyone. Besides, altruism of "omegas" opens a possibility to consolidate the efforts of all members of the group on its fight for survival which is particularly important for species possessing no big physical abilities. Exactly this circumstance combined with "alphas'" higher death rate (in part due to the conflicts between themselves) prevents unlimited growth of the average ranking potential of the species. Not only the strongest specimens survived, but also the strongest and the most organized groups.
In fact, there are two possible ways to congregate a group - the military and voluntary. The first approach assumes rigid hierarchical structure of subordinance with ruthless suppression of any disobedience of subordinates. The second is based on altruism assuming sincere and volunteer help of group members up to self-sacrifice. The first approach is predominant among more primitive species as the more native for basic instincts, reliably implemented in reality, and requiring no any kind of substantial intellect. But it becomes ineffective for organization with very complex collaborative behavior. Obviously that living in extremely dangerous (in terms of predators) Savannah, our ancestors went the most of the evolutional path using the military form of group consolidation. Altruism became a relatively mass phenomenon only when development of intellect made very complex behavioral schemes possible. In its turn, widespeading of altruistic forms of behavior even more complicated human behavior and created prerequisites for even faster acceleration of social evolution that set Humans apart from the rest of the animal world. Thus altruistic behavioral programs appeared in comparatively later evolutional time and did not have enough time to be firmly embedded in genes. Therefore, altruism, so essential for mankind, has to be conveyed by non-genetic means, those which form a notion of "culture". However, the stronger the genetic base of altruism the higher the cultural level under the same conditions.
Ranking potential can be initial (inborn), actual and visual. Initial is given at birth and is not subjected to upbringing or environmental influence but rather mainly determined by genetic inheritance and less by conditions of prenatal development. Actual ranking potential greatly depends on circumstances. It is determined by initial ranking potential and by specific situation in which the being finds itself. Circumstances can either hinder the realization of inborn ranking potential or encourage its full disclosure and even strengthening. For humans actual ranking potential is typically 2/3 based on heredity and 1/3 on conditions of growing up and care. However, this is just averaged statistical data and for a specific person this correlation can be different.
Since ranking potential is defined by different attributes, including ones which are not interrelated to each other the real hierarchical portrait of a specimen can be MOSAIC, i.e. when some attributes point to a high rank but others to low rank. For instance, untidiness is an indication of a low rank. Noticing untidy person we usually not without grounds judge him as loser who achieved almost nothing in life, i.e. as low-ranking. However, once he demands to let him cut a line in bold-faced and aggressive form then the majority of the people agree to yield his demand thus admitting his higher rank! Even though, the social status of this person can be extremely low!
Here is another example (although fiction but it has many parallels with reality). An old song about a brave captain of a ship says that:

... he survived fifteen shipwrecks,
pirate assaults, drowning, and shark attacks
but he was never scared.

Here we see a person who takes relatively high-level position (captain!), who is capable to fight and survive and that means this person has high enough ranking potential. However, here we can mention low primativeness of our hero and that will be discussed later. But here is how the same person behaves himself with women:

...he blushed fifteen times,
stuttered and turned pale,
and never dared to smile nor say "hi" to her.

But this behavior is mostly typical for a low-ranking being! At the same time there are plenty of men who are at ease and very bold with women but desperately chicken-hearted and compliant when it is necessary to put up a real fight. From mosaic of the ranking potential as general notion is derived a notion of visual ranking potential as a sum of signaling attributes, possibly secondary ones, expressed prominently enough for triggering the other specimen's instincts. A good example of the visual rank is a low-ranking rooster with a glued-up big comb. Such one is perceived by all other roosters as high-ranking but once the added comb is removed, its status plummets down. One more example, a person suffering from narcissism (a person who is "in love with himself") can produce an impression of high-ranking on some people. But at the same time he can be completely deprived of ability to fight for his place under the sun that is the very essence of high rank. On the other hand, a friendly person, even quite successful in life, can make an impression of low-ranking.
Moreover, different specimens can be impressed by different signs of ranking potential, i.e. sensitivity of the different specimens to the different signaling attributes comprising the pattern of the specimen's image can vary. Visual rank can be equal to actual rank but might be not. As it was mentioned above, this happens because the neural structures implementing instinctive behavioral models arose in the deepest antiquity. They are relatively primitive and react on surrounding conditions very superficially and stereotypically. A specimen can be low-ranking by nature but possess one or two visual attributes of a high rank. Then these one or two distinctively visual (signaling) attributes can have an affect on someone, despite of the objectively low-ranking potential of their owner. Alas! Even their own primeval goals are achieved by instinctive programs only on average and with high inaccuracy due to the primitive mechanisms of their realization.
Briefly speaking:
Humans as all other gregarious animals have propensity to form hierarchical social structures where behavior is regulated by proper instincts.
The ability to take a certain rank in a hierarchy called ranking potential. Ranking potential is defined by many parameters, starting with physical power, but for highly organized creatures, it is mainly defined by an individual's profound confidence (primarily, innate) in his/her right to be above others, probably neither supported by any real merits nor having any grounds.
Other most important elements of the rank potential also are: conflictability, i.e. a desire to initiate conflicts; then, conflict endurance, i.e. ability to withstand conflicts dictated by someone else; then, the degree of compliancy (or incompliancy)- that can be either closely connected with the above named factors or can be an independent phenomenon.
Due to the certain independence of the factors affecting ranking potential there is a possibility that hierarchical status will be revealed as mosaic, i.e. when some attributes point to a high-ranking potential but others to a low and thus, it is acceptable to judge about ranking potential as a general notion.
Right from its birth every specimen has a certain ranking potential which is conditioned as much by hereditary factors as conditions of prenatal development and serves as a foundation for the actual rank in the adulthood.
Actual ranking potential depends also on conditions of growing up, upbringing and formation of personality. All these can either suppress or empower inborn bases of ranking potential.
Visual ranking potential is defined by presence in specimen of one or more secondary but nonetheless clearly expressed attributes of high- or low-ranking potential.
Visual ranking potential often can be illusive, i.e. not corresponding to the real ability of a specimen to ranking struggle.

About primativeness and culture
What is the difference between woman's logic and
iron logic?
- Woman's does not rust.
(an old anecdote)

To the English reader: "Primative" - is NOT misspelled "primitive"! This is a scientific term offered by the author, originating from "primary" and "primates", that is described below.

In contrast to the majority of animals, different people are subject to instinct's influence with different degree. If someone is not subjected to instinct's influence completely, but lives by rational thinking that means such a person is absolutely non-primative (in real life such people do not exist). The other man that is directed in life only by feelings, that is to say is fully subject to the instincts, is absolutely primative (such people sometimes exist in real life). D. Zaraiski introduces a term "power of the model", which is an index of ability of a given behavioral program to dominate among similar ones. This is because for each situation a brain usually has several behavioral programs, among which there are both innate and obtained, and which one of them will be accepted for execution under other equal conditions depends on the power of each behavioral model. So, primativeness is a degree of domination (power) of instinctive over rational models.
Rudiments of non-primative behavior are observed among many higher-level animals, more significant traces of it are seen among Primates, but only in human society did non-primativeness become relatively mass phenomenon.
The term "primativeness" is not identical to the term "culture". Culture is kind of a derivative of primativeness. Among artistic people, even with a highest level of culture and decency, the people with high primativeness are predominant as such people live in a world of feelings.
Although a term "culture" is intuitively clear without any explanations, it is very difficult to give it a precise definition. It is obvious only that culture is a product of upbringing and education (in the broad sense) and primativeness is something inborn. Primeval motivation of a cultural man is suppressed by upbringing and is replaced by requirements of the laws and societal traditions. However, it can appear on occasions when the laws and traditions do not determine the situation strictly and leave some freedom, and also under influence of alcohol or in times of strong stress. The higher the primativeness, the more often and stronger the appearances are. The old dispute about physicists and lyric poets is actually a dispute about primativeness.
The primativeness correlates more with emotionality than with culture. Instinctive programs, when finding resemblance of internal signaling attributes with some factors of outside situation, create corresponding emotions and a highly primative person gladly submits to them. A low primative person, feeling the same forceful emotions, is capable of acting contrary to them.
As ranking potential, the degree of primativeness is basically determined genetically and by uterine growth conditions. It changes inconsiderably during upbringing and education, however, it can have influence on the behavioral manageability and the ability and propensity to certain kind of education. It can happen that a man with a strong scientific education does not trust his knowledge in everyday matters, relying more on feelings, and vice versa. A man with very low primativeness lives kind of outside of primeval hierarchy. On the other hand, a highly primative person is very sensitive to the rank of the people around, recognizing the smallest display of concession as a signal for beginning of hierarchical attack, but meeting someone with superior rank causes him a will paralysis and vile toadying.
The higher the inborn primativeness the greater the pedagogical efforts are needed to make a cultured person. In the next generation, everything repeats once more. The man whose culture achieved only by immense pedagogical efforts can have extremely uncultured children because the base remained the same. A newborn child, of course, has no mind and therefore lives according to instincts regardless of the level of inborn primativeness, but soon this level will begin revealing itself. There is a very important nuance: primativeness is not an indicator of a power or a weakness of one's mind. It is a degree of confidence to one's mind in practical cases. Highly primative but highly intellectual scientist can easily combine strong scientific knowledge with sincere religious faith which dates back to the instinct of submission to alpha.
As was mentioned above, women trust intuition and feelings more than logical conclusions, this composes a so-called woman's logic. I.e. the highly primative specimens are prevalent among women. It is known that girls study better than boys in schools, universities and other institutions even in ones with technical majors. While studying, not only theory is lectured, but also practical tasks are solved, and laboratory works are held. And girls are doing this better than boys! But when the time comes to utilize the knowledge in practice, the much needed thought does not come to mind.
The fact that women are more religious is also caused by higher primativeness - there is no rank higher than God's, but it does not really matter whether a God exists or not in the first place.
Undisputedly, a man as a social being is very multidimensional and is not completely fitted into the three dimensional space: low-high primativeness, alpha-omega, and high-low culture. However, the events interesting to us occur exactly in this space. And also it is worth to make a point that primativeness is a general notion, showing average power of all instinctive behavioral programs. However there are quite a lot of such programs, including contradictory ones, and each can have different power, and that tangles up even more the observable scene.
Briefly speaking:
Primativeness is an indicator of power of inborn behavioral programs relative to rationally motivated behavior.
Externally it is expressed in an inclination to emotionally based actions and has only an indirect relationship with intellect and culture themselves as well as to temperament in the choleric - phlegmatic axis.

About princes and princesses
THE WOMAN - is a female who has a MAN;
THE MAN - is a male who has MONEY.
(an anecdote)

What a pity that generals get married while in
lieutenant's rank!
(from the conversation of two old virgins)

Such exclusively important for all animate world process as reproduction could not be left without the control of the instincts. Correspondingly, love, as the strongest feeling, is a voice of the same primeval instinct that forces to prefer the best being of another sex for mating. And what are the criteria of this preference? It is unnecessary to prove that these criteria are kept unchanged since primeval-herd times when all the instincts were formed. It is possible to say that during its formation the instincts "took a photo" of the situation existed at that moment and keep verifying with this "picture" for as long as the species exist. Thus, the instincts allow choosing a perfect partner from the primeval point of view. The simplest and the most demonstrative attribute of such superiority in primeval hierarchy is a high rank. Though it is very obvious that rank, strictly speaking, is more of visually superficial indicator of preference but it is almost impossible to imagine anything better in unwise nature. External attractiveness (beauty) is less reliable in this sense. In general, the number of couplations is the simplest and clearest quantitative index of a male's rank in hierarchy. For females this correlation is very weak and, perhaps, inverse.
It is customary to think that alpha simply takes away a female from beta (gamma...) just as food, however, the rules of behavior in a hierarchy are obeyed by all the members of a group including females. That means there is not needed to take female away in most cases. She herself, complying with an internal instinctive program, prefers high-ranking male. Not in vain, speaking about ideal groom, women mention word "prince". Real prince is not a plebian job and usually he is a real candidate to become king.
Sure, it is not the only tendency. For instance, there is an "instinct of fresh blood preference" manifesting itself as sexual curiosity. The goal of this instinct is a counteraction to mating with close relatives unavoidable in isolated groups. According to it, under other equal conditions the preference can be given to a new and unusual partner desirably from outside of the group. The instinct is clearly seen in male's behavior, since it conforms well to the principal of unlimited sexual expansion. In female's behavior it is seen with some limitations. These limitations mandatorily include ranking potential of a "guest" that should be not lower than certain minimum. And of course, these tendencies are combined with individual tastes and sympathies. It is important to emphasize that the high rank of a male does not give a GUARANTEE of access to the certain female, but it is a weighty factor raising PROBABILITY of this event. A correlational factor between sexual attractiveness of male and his rank is different among the species, and substantially non-linear. Males of the first several ranks of hierarchy can be almost indistinguishable by their sexual attractiveness for females. Therefore dominant males must fend away sub-dominant males from females. However, beginning approximately from the middle of hierarchy and below sexual attractiveness of males decreases so much that dominant can afford not to worry. It is highly probable that such male will not be admitted by females themselves. To the English reader: Now let us tell you a couple of words about such picturesque character of Russian anecdotes, as the captain Rzhevsky. Captain Rzhevsky was a hussar. Hussars were an elite kind of cavalry in Russia in 19th century. Only tall, healthy, often handsome men were accepted. Beautiful uniform along with a huge mustache made them very popular among women. Soon the word "hussar" became synonymous to Don Juan. Captain Rzhevsky completely matches this definition. Along with phenomenal success among women, he was distinguished with self-confidence, vulgarity and ignorance, which he was not ashamed of. This character is very much like 19th century captain Frank Drebin from the popular movie series "Naked Gun". For example, one of anecdotes of a series about captain Rzhevsky:
Once captain Rzhevsky was dancing on ball with a noble young lady.
Subbenly she is telling him politely:
- Ah! I am not feeling well. Would you eexcuse me for minute, I need some
fresh air?...
- Captain: OK, go. But be quick on it. JJust fart off and be back.
Cornet Obolensky is more delcate character of these anecdotes.

Now for illustration, an old but very demonstrative for our topic anecdote:

Once cornet Obolensky asked captain Rzhevsky:
Captain, sir! Would you share your experience in seducing women so quickly!
- But what's here to explain? Come up tttoo a lady and ask: "Ma'am! May I stick
it in?"
- But captain! That's a sure way to be slapped in the face for such
- Well, there could be a slap in the face. But nonetheless, I somehow still
manage to stick it in.

And now let's imagine that cornet followed the captain's example. Imagined? So what? You are absolutely right. He will get slapped in his face. However, it does not follow from the text that cornet is less attractive than captain and moreover, he is obviously more civilized and decent. Also let's imagine that captain expressed his proposition in oversophisticate and delicate phrases. Will he get a rejection? Of course not, but even more possible consent. But what if cornet will propose in the same refined language? In this case he might not get slapped in his face immediately but the final result probably will be the same though for some time he will be kept on a short string and jerked around. And he will be ridiculed. I.e. actually it does not have any serious significance for a woman HOW a man expresses his desire but it is extremely important for her WHO does it.

If a man has a high rank ("captain") then women will forgive him almost any behavior and almost any weaknesses; if he has a low rank ("cornet") then even complete impeccability will not help him.
Moreover, captain really does not see any problems with this. Neither he has them personally nor he even suspects that the other men might have them. Because he does not assert any efforts to conquering women (moreover, women themself often put up certain efforts to win him) and he sincerely thinks that women treat all other men the same. But who of these two will be a better husband (faithful, decent, hard-working...)? Anyone but the captain! But whom will women want to marry the most? You are right, the captain. And in addition to this, in original (movie "Hussar ballad") the captain Rzhevsky was an open and convinced opponent of Hymen.
It is said that women love masters. This is true, but it is only individual case. Even possession of "strong elbows" i.e. the ability and readiness to fight for one's own interests, is an individual case in conjugal relationships. Love, as a call of instinct, can not contemplate and that's why it is often triggered on visual rank rather than on actual one. It happens that "captain" looks like pitiful whiner crying that he is so perfect and superior but the ungifted people around do not appreciate him; or like capricious child with child-women egoistic character and all people tiptoe around eagering to please him in every possible way (any other cases are possible). The main thing is that he is sincerely sure in his own superiority. It is obvious that such whiner and moaner is not the worthiest family continuer (even from primeval point of view) and the actual rank of these people as an indicator of their ability to succeed in life is very low. However, instinct formally reacts to the above mentioned assurance which is the main signaling attribute of a high rank. Since instinct does not bother itself with explanations and mind does not usually recognize such self-assurance as a merit so everybody feels hymned in poems and in prose a mystical and enigmatical sensation of love choice - because it is wanted against common sense and it is unclear what for.
Whom do men love? A Princess is not necessarily required. Men's instinctive criteria of preference are simpler and radically different from women's ones. The main woman's qualities attracting men are the newness, availability and physical perfection. Of course, if all these qualities are combined in one woman then her attractiveness will be the highest and such woman will be the center of men's attention in the first place but only until either gaining access to her body or making sure of no chances to get it. However, this is correct only in respect of women as sexual partners. Men choose wives by rational judgement (only those who have choice and enough brain). The sensational criteria of men's preference of women are much fuzzier due to the higher diversity of men (and hence, their tastes) and less desperate necessity to make a choice. A male does not have to choose a females since he needs them all without any distinction. But women's rank, having big importance in relations between women, is relatively less important for a man. For sure, high ranking woman can turn men's heads more quickly but modest and shy (low ranking) wives were valued at all times. It is well-known that women much more often than men fall in love with their chiefs, bosses, tutors, and etc. whose high visual rank is manifested by their position and partially age.
If high rank is a key to women's hearts for a man ensuring his freedom of choice but for a woman her high rank is a source of problems with men. Average-ranking men are not acceptable for her neither sexually nor platonically (not to mention low-ranking ones) but high-ranking men are very scares and most of them are easy-riders. And if they are not easy-riders then they are hopelessly engaged and not free. Low-ranking woman as every woman preferring "alpha" is still open-minded toward "omega". In some circumstances she can forgive a man his low rank and therefore his other strengths get the chance to be appreciated.
Briefly speaking:
Emotional choice of a marriage partner (sympathy, crush, infatuation, love - depending on the strength of feelings) is implemented in accordance with a system of instinctive criteria of evaluating a potential partner.
In woman's emotional choice of a man the following has the highest significance - man's instinctive hierarchical status (including purely visual rank) that might not coincide with his social status. His physical characteristics takes the second preference.
In man's emotional choice of a woman the following has the most important meaning in equal degree - women's novelty, accessibility, and physical characteristics.
I'd like to remind that we settled not to examine the rational choice in this Treatise.

About the struggle of two "egos"
And I'm fighting, suppressing the scoundrel inside of me
Oh, my anxious fate!
I am afraid of the error, it might happen that
I am suppressing not the right "ego"
(V. Vysotsky)

Back in the Soviet era a poll was held among the students of Leningrad's universities. First, they were asked what personal strengths and qualities they would like to find in the future spouse and second, what qualities in the opposite sex they were attracted to. The priorities ranked as follows (see table 1, 2):

Table 1. Young men opinion Successful girl Desirable wife
1 Beautiful Honest, fair +16
2 Cheerful Cheerful 0
3 Likes to dance Hardworking +7
4 With a sense of humour Self-controlled +11
5 Brave Energetic +2
6 Clever Likes her job +8
7 Tries to help the other
8 Energetic
9 Tries to help the other -2
10 Hardworking Clever -4
11 With a sense of humour -7
12 Strong-willed Strong-willed 0
13 Beautiful -12
14 Likes her job Brave -9
15 Self-controlled Likes to dance -12
16 Honest, Fair Tall +1
17 Tall

Table 2. Opinions of the girls Young man with success Desirable husband
1 Energetic Hardworking +13
2 Cheerful Honest, fair +11
3 Handsome Clever +5
4 Likes to dance Self-controlled +12
5 Tall Brave +6
6 With a sense of humour Strong-willed +4
7 Tries to help the other Cheerful -5
8 Clever Likes his job +5
9 Honest, fair Tries to help the other -2
10 Strong-willed
11 Brave Energetic -10
13 Likes his job
14 Hardworking With a sense of humour -8
15 Likes to dance -11
16 Self-controlled Tall -11
17 Handsome -14

It was not the goal of the poll to find out the attitude to primeval rank. Otherwise, such feature as "to take everything of one's own from life" (and why not somebody's own as well, just to oneself) probably would have taken the first place in the left columns. But even without this, it is obvious that the left columns reflect the primeval ideals and the values of the family life are reflected in the right. Especially it is necessary to emphasize the liking to dance. While it is almost useless in family life, the dancing technique has important ritual meaning. Dance is a part of conjugal ritual of many animals including Primates. The non-dancing one does not demonstrate conjugal behavior and from primeval point of view looks like not sexually mature. It is very indicative that such qualities as hard-working and self-controlling take the last rows of the left columns. "Omegas" were the most uncomplaining in the primeval group and worked more than others... Also it is easy to notice that the left and the right columns are upside-down mirror reflections of each other. It is especially typical for polled women. Men's attitude toward women is a bit more consistent and that confirms the thesis that men trust more to their mind, i.e. they are less primative.
It seems like an "upturning" of the requirements of mind and instinct is the main reason of difficulties in a search for a partner for highly educated people. Traditionally, it is customary to assume that the problem is in the high level of requirements. Taken alone, these requirements might not be so high after all, but they are very conflicting. The heart wants something that is justly rejected by the mind and the wishes of the mind do not satisfy the heart. Indeed, such qualities as kindness, decency, honesty, respect, tactfulness, clear conscience are considered to be the attributes of well-educated, polite, honest man and a good husband, but at the same time from the primeval point of view these are the attributes of low rank in the hierarchy!!!
In the course of this argumentation, the seditious idea is creeping in that the former practice of joining a man and a wife by parental will is not so bad despite its obvious disadvantages. Of course, in terms of the present cult of love, it is stupid to stand up for its revival. This will not cause anything more than a storm of protests and a lot of mockery. Neither can I imagine how this can be implemented in real life now. But in the case of parents, who, searching for the matches for their children, evaluate the candidates from the civilized standpoints, even if they keep in mind their own interests, they thus make a self-selection of HOMO SAPIENS in the direction of increasing culture and development of civilization. Trusting a call of instincts, mankind is drifting slowly back, to the primeval herd,

And in my opinion, we already observe some attributes of such a drift. Intelligence, sensitivity, mutual respect becomes unfashionable. Opposite to this, brutal force and aggression, indulgence in a riot of desires and incontinence pours in from screens and pages. Writing off all this on the influence of everyday culture is incorrect. Household culture - is the generalized reflection of natural culture of all people. "Soap operas" are most popular among the elderly people whose whole conscious life passed in the soviet time, when totally different ideals were being cultivated.
Lessening of the above mentioned selection at first leads to the growth of primativeness and average ranking potential, and then on this basis to the declining of the cultural level. And afterward, perhaps, Einstein will happen to be right, the fourth (if not already the third) world war will be fought with cudgels...
Briefly speaking:
Following the instincts (i.e. feelings) in choice of nuptial partner contradicts the contemporary ideals of monogamous marriage, neither does it promote the selection of HOMO SAPIENS in the direction of the growth of altruism and the cultural level;
however, it can contribute to the growth of average physiological indicators known as and called acceleration.

About alcohol
Our consciousness is determined by three things:
Being, beating, and drinking.
(ascribed to Karl Marx)

In the course of the above mentioned poll, the attitude to alcohol was examined as well but for unknown reasons it did not get in to the tables. It was found that the girls would like to have a non-drinking husband, but in reality man's sobriety did not give him any advantages and on the contrary invoked some kind of suspicion. Suppressing the mind, alcohol introduces a kind of bestiality in a human image that is so amiable to primeval instincts. You could also notice how often this fateful decision for each man (and for the whole mankind...) is taken in a drunken state and how close relationship between sex and alcohol is. Love, and without Champagne?!
Tests on animals give very interesting results: Alcohol raises the low rank, and diminishes the high one!

This is one of the reasons of ineffectiveness of the "dry laws" and other measures struggling for a sober way of life. Without releasing primeval instincts and raising the ranking potential, which is achievable by the alcohol in the easiest way, mankind would have faced difficulties with its own reproduction. And the biggest difficulties would have occurred with the worthiest people who personify civilized society - low ranked and low primative persons. We can only regret the negative effects of alcohol consumption and that it is mostly used by the people who do not need any releasing of primeval instincts.
Since there are no alcoholics among animals hence sexual selection does not recognize what it is, and thus, the fact that a certain man is addicted to alcohol or simply a drunkard practically does not affect his popularity among women. Moreover, a majority of women who got stuck with such husbands, put up roughly the same pretext: "I thought he would start a family life (become a father and so on) and quit drinking." But there is no clear answer to the question: "Why did you jump to this conclusion?"
Briefly speaking:
Alcohol, by releasing at large primeval instincts and leveling ranking potentials, eases sexual intimacy, thus increasing the chance for low ranking people, however negative consequences of alcohol consumption are widely known.
Since instinctive sexual selection does not know anything about alcoholism, symptoms of alcohol abuse do not hamper subconscious preference of the potential partner.

About Bastard and Fatherless Children.
A sleeping Reason gives birth to monsters.
(Francisco Goya)

It is obvious that the fathers of such children are mainly "captains" - regardless if it was done in marriage or not. Even when an out of wedlock child grows up in a two parent family, (with a step-father who might not be aware...) people around notice the "difficulty" of the child. It is commonly known that out of wedlock children are often regular clients of the criminal groups. Usually under the euphemism "difficulty" we mean the inability to control a child by civilized methods, which confirms his high ranking potential.
The "difficulty" and criminality of a child is usually written off to the problems of upbringing in such conditions. For sure such pedagogical problems exist in reality but these are not the problems responsible for the forming of specific low or high ranking mentality. It is the game of genetic inheritance. Please tell yourself if a man who deserts a pregnant woman is decent? At least not very. However, males in the primeval herd did it exactly this way. But do the features, which caused his indecency, have the right to be genetically transferred?
I will remind once more that the initial ranking potential is something inborn and it is well seen at the infant stage. High or low primativeness is displayed at a later time. As was mentioned the higher the primativeness of a child, the more pedagogical efforts should be exerted for bearing a decent and educated person. It is also important that a tutor should have a ranking potential not lower then a child, (it is usually said that a "tutor should be authoritative over the child"), otherwise all these pedagogical efforts will lead nowhere.
Researches of monozygotic twins separated in babyhood show that the role of heredity in the educational process is diminished and there is no way to correct (nor to damage) everything by education. Quite often such twins living separately in different countries behave themselves like they grew up in one family side by side. This detraction of the role of heredity in a world and especially in Marxist pedagogy goes back to idealistic and utopian conceptions of the past - forerunners of Marxism.
We can accept as proven the fact that friendliness or its main components are predetermined genetically. A man bred out a dog selecting the friendliest wolf cubs for reproduction.
Briefly speaking:
Conceiving a child by reason of love (against the popular thesis) IS NOT the circumstance contributing by itself to the appearance in a child of such qualities as love to the people around and high morals. Since the women tend to fall in love with the egoistic men the child conceived because of love will be more inclined to the same egoism.
Conception of the parent showing UNSEXUAL love to the people in general, (altruism) contributes of the appearance of this quality in a child.

About the husbands and the lovers
Who is a lover??
- Just the same, as husband, but he
does not need to wash the dishes.

All the illnesses are caused by nerves.
But only syphilis - by love.
(an old medical anecdote)

Here we will not examine a lover like a sponsor or a source of material welfare but let's consider a lover only as the means to satisfy a woman's sexual desires.
It has been proven that any woman can be physiologically satisfied by any man (if we don't take into account medical pathologies like complete absence of genitals). Most cases of dissatisfaction are in nervous and psychological sphere. Something to notice is that the majority of dissatisfied women get satisfaction doing masturbation. It is not a penis that satisfies a woman but a MAN. And he satisfies not as a physical body but as IMAGE, which meets more or less some criteria. If this image fits these criteria quite sufficiently, a woman starts getting a "tuning" to this probably fantasized man. It can be a kind of amorousness, interest, curiosity or anything else... Without this "tuning", satisfaction can be problematic particularly to highly primative women. But if some women can "tune" easily to any man, the others can somehow "tune" to only one of hundreds. Obviously the first probably have low-ranking potential and/or low primativeness while for the second they are high. The "tuning" appears more often with a man whose ranking potential is not lower than that of the female and his behavior goes along with the primeval conjugal rituals. The cases when there is no satisfaction with a husband but rape satisfies instead illustrate that well because a rape is usually performed in a swine-like fashion like it was done in a primeval herd by the high-ranking males. By the way, such a phenomenon is not the last reason why women often do not report a rape to police and in some cases even protect and cover the rapists! Married by the rational decision of the mind, a woman can remain dissatisfied at least for the first time until she gets used to this man. As a proverb says, love comes with habit.
Do you want to force a husband to wash clothes, to clean floors or to look after the baby, etc? Did high-ranking males in primeval herd do such a contemptible job? If you succeed in this (but this is unlikely if he was not inclined to it by himself) your mind probably will be satisfied for some time. However, your primeval "ego" will immediately recognize the lowering of the rank of this male... and you will want to get a lover.
Briefly speaking:
Most probably a woman's sexual satisfaction comes from a subconsciously attractive man even though on a conscious level he might be unpleasant even disgusting. If there is no such subconscious attractiveness of the man (even giving him a logically high mark) then the attempt to achieve sexual satisfaction only by perfecting sexual technique might not give a result. Most likely is the allurement of high-ranking and highly primative men, which are dominant among the most successful lovers.
Even with all the positive sides, getting married by the rational reasons (for kind, honest, decent ...) might be filled with problems of your sexual satisfaction during the first time.

So, of whom are there more?
I had forty surnames
I had seven passports
Seventy women loved me
I had two hundred enemies...
(V. Vysotsky)

In mass media and in informal conversations the opinion is often expressed that loneliness of women is caused by the lack of men. However, there is a well-known fact that there are more boys born than girls! The results of a census in Russia clearly show that the initial predominance of boys remains until the age of 35, from 35 to 45 men and women are approximately equal in numbers and then women dominance becomes obvious. The fact that there are more women than men ON AVERAGE perplexes the society. Women over 50 (who are really much more than men) are not the objects of any real interest as conjugal and sexual partners. But the men are prevalent in their reproductive age. That means that the average statistical woman has a choice during the whole reproductive period and that probably has a very profound biological meaning. Details
I suppose that there is a strong visual selection here - women always tell about their marital problems often and without any uneasiness, but having such problems for men was always shameful and therefore carefully hidden. If a child does not cry, a mother does not realize. A men's deficit could take place if one woman would have been able to marry a few men even unofficially. In this case the other women actually would not have gotten any man. However, in reality women are more inclined to congregate in the secret harems of high ranking married men and they often exhibit such an enviable loyalty that it leaves nothing to do for the other available men. And such women are considered to be single! Meanwhile if the number of men and women is approximately equal (not counting the percentage and even this is on the women's side) so according to "the law of connected vessels" the bigger number of women in single men harems the more other men are forced to pose as staunch bachelors. As a rule, a man who is a lover of a married woman is married himself and he is never faithful so much to both of them that the other women would have no chances.
Briefly speaking:
The public opinion that it is hard to get married for women because of the lack of men is a mass delusion based on superficial knowledge of statistics, intensified by men's unwillingness to disclose their sexual and marital problems.
Origin of family, prostitution, and promiscuity
Dedicated to the cherished memory of F. Engels...

Research of conjugal behavior on animals shows that a family should be distinguished as a household unit and grouping of specimens with the purpose of mating. The fact that in reality both roles are very often combined does not mean that there cannot be any other way.
For instance, those species where one parent is capable of upbringing the offspring alone, family as a household team mostly consists from this parent and its offspring. That means that a male-female union here pursues only the goal of mating and has nothing to do with the family itself, as we understand it. The same can be said about the species practicing R-strategy of reproduction where the parents do not take any care of their posterity. This is one pole of the conjugal world.
For the other species, upbringing of offspring becomes impossible without outside help and thus there is a reason to bring in the second parent as a helper. Species with a strictly paired family structure (for example, birds, especially nesting birds) are another pole of the conjugal world. Here the mating and upbringing of posterity looks as something naturally inseparable. However, as it was mentioned before in such conjugated families spouses do not always keep copulative fidelity. Up to one quarter of all the chicks might be conceived from someone other then the "lawful husband", although from a household point of view such couples might represent idyllic picture.
Well, the second parent is not the only possible helper in this business. Grandmothers and sisters can be brought in and a kindergarten of some sort can be created and so on. For example, a female hare nurtures with milk the first found baby hare regardless of its relationship to her. But which way is more preferable? If the main parent (i.e. the one who fulfills the major part of the job of caring for offspring, most often it is a female but sometimes it can be a male) needs only some additional help that does not play a principally important role, then the help from the whole group in general is preferable. This is done by the canines for example. However if the required help borders on self-sacrifice then this way becomes unreliable. A personal commitment is required here.
How was our predecessor's business being done? Probably the "main parent" was female. It is obvious as well that not every grandmother lived to see her grandchildren, the sisters have their own children and clearly women are worse hunters then men. At the same time a child or a fetus devoid of sufficient proteinaceous food could seriously suffer from malnutrition. In these conditions the help from the men had to play the main role, though not excluding secondary help from the other members of the group.
A typical feature of the hominid behavior is the complete absence of instinctive programs of male's caring for babies and for females outside of rut period. When our predecessors did not differ from regular apes there was no necessity in these programs. Females managed quite well themselves or with minor help from grandmothers. But when our primogenitors became bipedal and the volume of the brain began to increase (with the corresponding intellectual growth) the female started failing to manage alone. From one point the size of the fetus head increased, from another point upright stance narrowed the pelvis of primeval women. This complicated child labor to the point that the child had to be born very prematurely in biological terms and that meant helpless to follow in the tribal paths. From the third point, the growth of intellect entails prolongation of the period for brain formation and training, i.e. an even longer lasting childhood and period of child's helplessness. In fact, humans have the longest childhood relative to their lifetime among all animals. Human childhood comprises approximately from one-fifth to one-quarter of the whole life. Of course, the children of our primogenitors had a shorter childhood. If a contemporary child is helpless almost up to six years old then helplessness of HOMO ERECTUS lasted probably up to two years old, which is long enough.
So we have: a child with the mother who needed prolonged and serious care, forming a smart brain required proteinaceous food (meaning meat) that could not be obtained by a mother burdened by a helpless child, but a male did not have an instinct of caring for the female. Intellect that would have been enable to make such a rational decision was rudimental and was incapable of such action. So what to do?
Since instinctive behavioral programs cannot appear out of nowhere, hence it is required to find out what other instinctive action could serve as the bases for the appearing of instincts of caring for females and babies in primeval males. What can serve as a base for developing an instinct of fatherhood? The most realistic way is sexual affection. However, there is one very important obstacle in the way of using it. The problem is that for most species female's (and often male's) sexual activity is obviously of cyclical nature. Their sexual readiness lasts only for several days during a year; outside of this period (period of rut) the females of such species are absolutely incapable of copulation. Nonetheless, this is the most effective way since sexual attraction is one of the strongest. Probably, one of the ways, if not the only way, is increasing the time limits of rut (specifically, widening the time limits of female's ability to copulate without being fertilized) and concealing the external attributes of the very moment of ovulation itself (see 2 for details). And in reality women are unique among the animated world in their sexual readiness around the year. If a male's year-round sexual readiness is reasonably frequent, then menstruation is known only among females of the HOMO SAPIEN species and none other.
Now a female has something to offer! Thus a male gets a stimulus for her nourishing and other ways of caring for her during the whole reproductive period, (and other manners of caring for her) and by the way the fertilization of this female in general may not be expected. To be more specific, a male in accordance with principle of unlimited sexual expansion, desires the maximum number of fertilized females and is somehow subconsciously interested in impregnating this female. Especially if one keeps in mind that alimony was paid not for the number of children but for the number of copulations. But a primal woman needed only one conception a year for childbirth and not just from anyone but from one the strongest and highest ranking. But who is going to feed her?
Getting a high-ranking male as a breadwinner is a dream but with almost no chances of realization. As a getter, he is not really bad at all (including at the expense of robbery of low-ranking males) but he is in high demand neither is he physically able to feed and support all the females who want him. But maybe only one or two favorite wives. Neither he has any stimulus to this. Why should he pay for copulation if he has it for free? If it were possible to own him monopolistically (as it was said - it would have been the ultimate dream come true) then all the problems would have been solved once and for all. However such monopolistic ownership of a high-ranking male was virtually impossible. Even the "favorite wife" could not rely on him. Of course, she could rely on his preferential (once again - not monopolistic) treatment, but not on his sexual fidelity. Sure it seems like a female does not need much of sexual fidelity itself. At least once a year he will find a time to fertilize her. However, sexual infidelity of such male had certain serious consequences for the female. First, there was the risk of loosing her "favorite wife" status. Second, there was a risk for her of diminishing sexual activity from this male and that means insufficiency of pleasures (low-ranking males are bad substitutes and they do not deliver such satisfaction). And even furthermore, the loss of the "favorite wife" status means lowering her own rank in the hierarchy. But here we are talking only about the "favorite wives" which were mostly the females with high enough ranking potential. What to do for the others?
It is very simple! For conceiving a child and for one's own enjoyment, a high-ranking male was preferred, invoking the jealousy of his "favorite wives" and at the same time deceiving several low-ranking males pouring gifts in wavering hope for a long awaited sexual act that was delayed by the female for as long as possible, up to the complete avoidance in favor of a high-ranking male. But all these low-ranking males simply did not have any other choice but to pay for their access to the body. Even considering that he probably will not be the father of most of the children of this primeval woman. In reality such practice is a paradigm of polyandry. I'd like to point out that this necessity for females to have a breadwinner opened a gate for low-ranking males to have a real chance to transfer their altruistic genes to the descendants. Isn't this connected to the abrupt acceleration of social evolution of mankind observed in the last couple of hundred thousand years based on the strengthening altruistic tendencies in people's behavior?
Furthermore, during the development of humanity, during the transition from gathering to agrarian society (sometimes called the "Neolithic revolution") at some moment getting food from several different men became unnecessary, one became enough, or a rich one became enough for a few females, and even she became herself an economically more viable subject. In these conditions the disappearance of necessity to get food from a few men lead to the automatic disappearance of necessity to give herself to the many men! Due to this fact, our ancestors' desire to secure a nuptial union (either monogamous or polygynous) seems like natural. This not only reflected the new economic realities but hampered the spread of venereal diseases. Automatically it also met some ideals of justice - instead of the primeval "one male has everything, others - nothing, "there appeared" a woman to every man." I have no intentions of exaggerating the influence of ideas of equality on people of the Neolithic revolution, but in this case the equality happened as a side-effect of the above mentioned factors and taken alone was not really meaningful. Moreover, at the beginning there was a predominance of polygyny as more habitual for high-ranking males, but seriously unfair for low-ranking ones.
There is one more important thing to notice. The attitude toward a female as a thing that can be bought (and that does not object to being bought) multiplied by the absence of the male's instinct of caring for the female lead at last to the system known as patriarchy. Matriarchy as the a mass phenomenon did not exist among our ancestors at least for the last ten million years since they moved to the Savannah and probably it never existed at all. There was no instinctive, economic, or any other presuppositions for that. (see 1 for details) And even otherwise, by the reason of high danger living in the Savannah, the role of males as defenders increased together with a kind of militarization of the population, resulting in giving privileges to the defenders (including at the expense of the female's rights). The practice of tracing a relationship based on the mother's genealogy among few peoples reflected only the impossibility of establishing a firm fatherhood under active promiscuity and nothing more. But nonetheless, since patriarchy formed relatively late, it was fixed in instincts weakly and thus could not void the fundamental principle of the female irreplaceability, that is at least half a billion years old. But every time the juridical pressure diminished, the woman became a selecting subject. Let's remember medieval knights. Moreover, even in the midst of patriarchy, a groom himself did not select a bride. It was done by a third party. (usually by parents)
Briefly speaking:
The beginnings of bringing males to take part in the baby's upbringing appeared among our predecessors with the transition to upright posture and bipedal gait and the increasing of the brain size resulting in a complete helplessness and prolonged childhood of the newly born. This created a necessity for material support of primeval females during pregnancy and the raising of the child, which could not have survived without such support.
The stimulus for such male support could be (and became!) only the constant sexual readiness of the primeval women, which is not seen among any other species.
As a result, the copulation became used for two independent purposes: one as before - to conceive the children and another - to pay for the material welfare provided by males. Because of weak inter-dependency of these tasks it is not mandatory to have the same males in both cases, i.e. a peculiar mixture of polygyny and polyandry took place and the polyandry component was based mainly on the material reasons.
The transition to the contemporary monogamous or polygamous marriage was promoted by the economic development of the mankind liberating a woman from the necessity of giving herself to many men.

More about choice

Who makes a choice? In the animal world it is always a female who chooses the male. If a male chooses this will conflict with the fundamental principle of gender separation - a principle of female's irreplaceability. Those few species where visually a male makes a choice can be considered as a short-term evolutionary deviation and even there the female's choice is probably rather camouflaged. For example, a female can make no choice by herself but instead she can provoke males to fight each other and then prefer a winner (or might become capricious and not prefer anyone at all...). The main feature of the selection is that there are a few males on "input" but only one on "output" and the mechanism of this selection significantly varies from species to species. It is obvious that exactly such reflected selection takes place among people. It is considered indecent and even impossible for a woman to make a choice directly without a preceding competition or even fight among men, even if in absentia or imaginary (let us recall medieval knights). Afterwards it is very hard for her not to prefer a man who demonstrates the behavior of a winner.
As we already clarified above, a woman, building her relationship with the men, instinctively pursues two, perhaps loosely connected, goals. Form one side she wants to get as much as possible material benefits from the men (not only instinctively but consciously as well!), from the other side she wants the one who would win her heart. In primeval times any kind of convergence of these goals in one male were possible only for very few females, the majority of others achieved those goals by promiscuity - the impossibility of being fully provided by one high-ranking male, was compensated by the high number of low-ranking males, at the same time given a chance a high-ranking male was usually preferred for sexual service.
However, with the growth of economic development of humanity the necessary conditions for arranging permanent conjugal relationships in a form of monogamous or polygamous marriage. Hence, free changing of the partners after creating a union was prohibited either legally or traditionally. Naturally, the sexual relationships outside of the marital union as the rule were forbidden. Historically this happened at a very late time and that's why it was not fixed in instincts - feelings as usually continued existing in a "primeval herd" state.
In these conditions if potential spouses were given any freedom of choice, then the future wife was put into a very complicated and mostly contradictory situation. From one side she needs a HUSBAND, i.e. who is an assistant in family business and who is able to treat her as a HUMAN BEING but from the other side, since copulating was allowed only with the husband, she wanted someone with whom it would be pleasant, someone she would feel for from the bottom of her heart. As a rule this is a high-ranking male.
At the same time (again, if any freedom of choice was given) it was considered preferable and purposeful to make a choice based on a call of love, which was in full accordance with the instinct of sexual preference, and that's why there was no cause for any objections from those getting married. But by this, family values as a way of mutual upbringing of the children and other mutual support were actually supposed to be left out of consideration. More specifically, it was suggested to rely on luck, though marriage was meant to be for life (the span of a lifetime was necessitated by economic reasons). Although divorce could be permitted but one way or another, it was condemned. Specifically it was suggested to strive for love to the very end. Alas, we well know where it leads in reality. A bewildered mind confuses everything, once and for all, making at last a random or a known non-optimal decision.
Since now personal freedom and with it a freedom of choosing a partner is uplifted into a cult, nothing restrains instinctive calls. Naturally, all women wish to choose a high-ranking man naively thinking that they can easily set a monopoly possession on him. Since in most of the countries a monogamous marriage is established and high-ranking men aren't enough for every women then a deceiving situation appears that it is the men who choose. The fact that not all men can choose goes almost unnoticed. Low-ranking men shamefully keep silence about their personal problems. Yes, having a big success with women, high-ranking men indeed have a possibility of a widespread choice and can realize their choice without burdening themselves with thoughts of a long-term relationship ("HE HAS TAKEN" for his wife... - this is said about them). A dominant man objectively does not need a marriage. Such a man can get whatever he wants from women. Without any problems he will find a woman (and not one) who will cook for him, wash his clothes, serve sexually, and will resignedly raise his children alone, despairingly dreaming about him as a husband.
It is worse for women. The instinct of sexual preference requires choosing high-ranking men, but the reality of contemporary life requires creating a family. By my estimates, high-ranking men are about 10-20% of all men. Therefore all women desiring high ranking dominants create the contest of 5-10 women per vacancy. The so desired men for monogamous families actually are not enough for all - this is the source of all groans about the lack of men. This is another example of visual selection - women's stares get fixed only on captains, the memory carefully stores only their images (although not always pleasant) and speaking about the men "in general" women unconsciously mean only them. Plus of course there is objective selection, which will be described below. In a primeval herd this 10-20% of males would have fertilized all females, all females would have been satisfied, including sexually as well. However, one wants him to belong only to herself, isn't that true? But he has a different opinion regarding this ...
The low-ranking men are in the worst position. Everybody gets at them - omega is beaten by everyone, but concerning women - they get "only grief". However, from the side of family values they are more preferable over "alphas" . At least, they are more faithful. Their problem and the reason for loneliness is they do not excite any interest in women. Therefore, among the men liked by women there are really only a few decent ones.
A low-ranking man mainly needs a marriage only for getting sex and having children. Without marriage he is "slapped in his face" and even in family life he is constantly in danger being deprived even if he gets his luck and succeeds in getting married. (But is it really a luck if such men do not get good wives?). So a low-ranking man is sometimes allowed to have sex in exchange for doing other home chores, with which he copes better then high ranking ones. Due to egocentrism and visual selection, women are biased to exaggerate men's inability to self-service as well as the burden of women's fate. Thus, cooking and washing are not the main motive for low-ranking men to get married.
Briefly speaking:
The recommendation of "getting married because of love" basically is very contradictory and only leads to confusion, perplexity, and disappointment.
There are two types of old bachelors: high-ranking, who do not need a marriage and low-ranking, who would not mind getting married, but with all their strengths are not needed by anybody...

What the men having no luck should do
It's better be forgiven later then missed now.
(from Murphy laws)

It is obvious that it has a sense to recommend something to "cornets" because "captains" easily manage without any advice. By the way it make no sense to ask advice from "captain" either or it will be like in the anecdote. "Captains" conduct themselves with women very differently and their high rank is denoted not so much by their relaxed behavior but by a subtle self-assured mimic and specific face expression.
The root of your problems regarding relationships with the women is in your low primeval status and you would like, of course, to raise it. I can tell how to do this right on the spot: you need to become rich or famous (for example - to make a career). It is also possiblllee to get drunk but this will not help for a long time. It is well known that the women love money very much but not everyone guesses that wealth is not the end goal for a woman but it is also an attribute of high primeval rank and women love not only money but also the men who managed to make them. Getting wealthy for low-ranking men was next to impossible in primeval herd. Higher superiors would have plundered everything. In contemporary society it is possible to achieve certain wealth but if your real rank is way below your wealth you might face with her infidelity later. It is pleasant to milk a breadwinner encouraging him with sex but she'd like to have someone different as a lover.
As far as the glory the best way is to become a pop super-star, and save you God from committing heroic deeds risking your own life. Readiness for self-sacrifice is definitely an attribute of a low rank but foul readiness to expose the others (to rule over the others) is the attribute of a high rank!
As it was mentioned above it is typical for people to have different levels of primativeness. The primativeness of animals, especially primitive ones, is always close to maximum. I will remind that a low primative man follows his mind rather than his instinctive programs in everyday life. Since instinctive nuptial rituals are dialogic like password-response, the unconformity of such man behavior to these rituals can seriously complicate his quest for a life companion. Such man may not be apprehended as a sexually mature male.
It is said that women love with ears. To say more this is typical not only for people! Songbird males sing the songs only for attraction of females. For the same purpose grasshoppers cricks, frog male croaks, male cat yawls in march and etc., etc., etc. It is not worth to mention the pop-stars. They are one of the most favorite category of men among women... And yea, they sing mainly about love!
What is more important for success - high rank or high primativeness? For sure, high rank! Captain is forgiven for everything including low primativeness. Moreover, high ranking men with low primativeness have often particular charm and have a big success with respectable decent women. However, they are not the ones who have the biggest harems. However primativeness is inborn feature and it is very difficult to change it even by hard training especially you do not have artistic gift.
Low chances can be compensated by the big number of attempts. Do not hesitate to use favorite women's tactic - having several romances in parallel but take certain measures to prevent crisscrossing of them. At least, you will gain practical experience and probably obtain lacking self-assurance. One of the other ways of gaining experience is to date by classified personal ads but do not treat them seriously. They are extremely ineffective as a search method for a life partner.
Of course, women tend to make fun of low-ranking men but treat this philosophically and do not quit attempting. In any case neither make a tragedy out of this nor fall into depression. Considering that we live in the world of probability and chance, and as it was mentioned above, high rank by itself is not a guarantee for the total success, and right contrary, low rank is not guarantee of a complete failure. All these are the factors which seriously affect the likelihood of mutuality. Besides that there exist an instinct of sexual curiosity...
And one more thing, if your rank is low try not to waste your time on high ranking women.
And now some real advice.
It does make sense to try some psychological training to raise self-confidence. However, be careful and picky in choosing such type of training and its instructor. If the instructor is really high-level specialist then your chances to raise up your rank (at least visual one) are high enough. Virtuosos can help you in acquiring the above mentioned hardly noticeable self-assured mimicry. For example the following exercise can be recommended: looking at woman think where to kiss her, looking at man think where to hit him. I emphasize that this should be only imaginable exercise. The results maybe noticeable in about couple months. However, be careful with training on men. High-ranking man can apprehend too brave stare as a challenge for hierarchical duel and accept it! But this can be totally out of your plans. Because by hierarchical "etiquette" low-ranking male must lower his eyes when dominant is looking at him.
Trying to display your high rank to women, do not be malignant and aggressive! Remember that the root of high-ranking potential is in the high self-esteem and following from it self-assurance. Probably opposite to it, malignancy is destiny of low-ranking men. Cheerful happiness of self-assured person having success in life, having to some degree everything from life, is not afraid of getting in contact with others, this is a lifestyle and behavior one should try to achieve. Moreover, even the most highly primative woman has some kind of rational thinking and open aggressor can invoke purely rational antipathy.
Never condemn your beloved ones for making eye contacts with other men and perhaps dating not only you, even if you are kept at certain distance - nature made mostly them responsible for the choice, although a lot of water under the bridge since ancient times. And never condemn your wives for irresistible desire to be attractive to all the men - it does not mean infidelity. Remember that without serious reasons a woman will never introduce anything dangerous in her life.
However! Do not waste your time if you see that the distance between you is not getting shorter for a long time - that means that you are kept just for collection. In this case she does not need you but only the signs of your care. Actually the need for signs of men's care for most of the women is the end in itself, the kind of psychological food. And dosed favor is given you in order to make this source of care not drying up for as long as possible. It is proven that very long courting do not lead to successful marriages. And even if you succeed in such case then for the rest of your life you will be considered like half a loaf is better than no bread.
If the initiative of your dates or other contacts (for example by phone) is always going from you but she in the best case scenario just mercifully does not refuse, this is the exact sign that your relationships are hopeless. In this case you are just a specimen of her collection or even maybe, the source of the gifts.
Making the gifts and giving a hand, try to be within limits of the ritual. No way this should look like a sincere self- sacrifice. Gifts should be presented with careless ease. She might be pleased to see how you kill yourself trying to get what she wants because it means that her goal regarding you is achieved but this pleasure of hers will not end up in a pleasure for you. As a rule, accepting gifts, woman does not feel obligated. For example, if a woman asks you to do her a favor that humiliates you one way or another and there is no possibility to decline then the formality and ritual meaning of your submission must be heavily emphasized. Do not rush to accomplish the favor with slavish obligingness - this is the way it is done by low-ranking men but instead do it condescendingly. Thus your submission completely loses its hierarchical nature and becomes nothing more than purely conjugal ritual.
Never try really proving that you are hard-working, sober, careful, responsive, and etc. By doing this you will neither break her heart nor probably capture her mind especially if she has never been married.
As it was said above, different kinds of parallel promiscuity usually platonic are typical for women. So they are inclined to try a few men simultaneously. And if she keeps the sufficient distance with all the tried men except perhaps one, this is the NORM and usual practice which allows to widen the pool of candidates. Such practice in combination with egocentrism is apprehended as craftiness. This term is not really exact because often she does not know herself who will become her choice until the last moment (although as a rule she knows well who is not going to be her choice) and after the choice is done she does not always realize clearly why one is chosen over others. So do not make the scandals and do not strain your relationship over this issue. According to the instincts women simply must behave this way.
"Admitting to body" can be used as one of the most powerful (though risky for the women themselves as well) ways of men's seduction. In these cases, a woman comparatively easy agrees for a short-term intimate relationship which do not suppose their further development and deepening. The main subconscious goal of such sexual connection is to bind a man to herself and at the same time satisfy the instinct of sexual curiosity. On a rational level, woman usually explains such behavior as "having fun". However, after very short period of time (very often on the very next day) you might be refused in continuation of this intimate relationship, possibly with the offer "to stay as friends". Poor thing, if you managed to fall in love with her. In such case the outlooks of reciprocity are next to illusory and negligibly small. Briefly speaking, do not rush to fall in love with a woman only because she had sex with you several times. It might be only a bait with nothing following after but painfully stinging fishing hook. Sure, it does not mean that one should decline closeness. The bait should be accurately eaten without biting a hook (meaning without loosing one's head).
The less we love a woman the more she likes us... This can be applied to Pushkin himself but such recommendations as "never pay attention to her" or "show her the place", "shout" and etc. are suitable for captains and work well in their implementation. Dominant male does need to love women. They love him anyway. And if your rank is low then your deliberate inattention will go unnoticed but your attempt to "put her in the place" will be growl of paper tiger and will cause nothing more then smile or righteous anger.
About woman infidelity. Without examining explicit or implicit prostitution, i.e. sexual intercourse for material welfare, then a woman has liaisons in most of the cases when she is not satisfied with the rank of her husband, especially if the power of her innate program of sexual curiosity is increased. And if you do not satisfy your wife sexually but somebody does then the reason is neither in his special ability nor in the size of his genitals but exactly in the rank. Even the potency is not the first in the list of reasons for infidelity. If she is not suited with something else (low intellect, abusive manners, laziness, and etc.) she will probably leave you rather then start having extra marital love affairs.
Women have propensity to whimper about difficulties of getting married. However, do not apprehend this too literally and do not make illusions that women will rush to you pushing rivals aside (of course, if you are not a pop-star or someone similar with the highest rank). Women even trying to be attractive to all men, nonetheless will keep sitting up until senility and waiting until somebody will conquer them (and they will put up a defense! - the fortitude of which will be inversely proportional to man's rank), thus proving by this his primeval right of close contact, even if there are no chances left. In reality, they want to get married much less than they talk about it. Especially if they are over 30, in this case, besides other things, unwillingness to change habitual way of life is triggered into action (that is also typical for men as well).
Saying "no men" or "nobody pays attention" a woman deliberately or inadvertently cheats. A woman of reproduction age getting ABSOLUTELY no men's attention is something practically impossible (if only men physically exist within a few kilometers). At least she will be accosted by a drunk. Such statements should be comprehended as "not enough real men" or "not enough admirers" and there is none suitable enough among them (and we know who this suitable is). And admirers, like money cannot be TOO much. So, courting a woman, even ugly, never assume that she does not have other admirers, but better consider that you're only one of possible candidates.
However, be careful if a woman is overlooked or competition for her is clearly weak! It is good if only the reason for this is in her unappealing look. Otherwise, the reasons can be very serious. If women reject men for discordance with primeval criteria, then men judging by the mind reject women for more objective shortcomings. The same is true for divorced women. Good wives are tried not to lose. It is advisable to find out the reason for divorce.
Do not be modest and do not criticize yourself. If you have something to be proud of, do not put telling it off thinking that this is going to be a pleasant surprise for her. This later time can never come to true. Also do not assume that she will recognize your strengths herself - notorious women's insight is nothing more than myth. Illusion of women's insight is created by ability to read well gestures and mimicry as ancient nonverbal language. However, only current state of a man but not his biography or moral cast can be determined by gestures. As it was mentioned above, women, following the feelings, evaluate men very superficially. I do not say about all women but an average woman is not so insightful at all which is caused by her egocentrism. If it were not true women would not have suffered from pickpockets in public transportation.
A woman evaluating your strengths (as they are catered for her) probably compares them not with her own strengths and weaknesses (according to the principal of female irreplaceability, her own strengths and weaknesses are less important comparing with the very fact of the women existence) but with the strengths of the other men (also the way the strengths are shown to her).
Please note how shamelessly experienced Don-Jovans glorify themselves not hesitating to lie under some circumstances. Of course, I cannot recommend a lie as a method but whatever you have should be shown at its best. And it is not worth to forget old fellow Karnegy - "Going fishing I take worms with me, though I personally prefer strawberry with cream". I.e., the things that you like might not be of a dislike for others.
Be careful with admitting of love! This can be the end because the conjugal goal of a woman's behavior is to make men fall in love with her and if this goal is achieved then further relationships can get uninteresting for her. You will be flabbily kept just for collection. The very fact that hearing of such admittance is very pleasant for a woman is just a satisfaction of a person who achieved the goal.

Practical conclusions for lonely women
What should a hen running from a cock think about?
-Am I running too fast?
(an anecdote)

As it was mentioned above a male can fertilize the maximum number of females if it cares for each female only minimally needed amount of time. This is the reason for preference of easily available women by men. In other words, after the body was obtained he may lose any interest because the goal is achieved and it is time to take care of another woman. So, we can advise women to avoid intimate contact and even hints at it for as long as possible (of course, except the cases when you need only THIS). If you worry that without THIS he will abandon you that means that he will leave you anyway, and after THIS even faster. By the way, men's love is more transient than women's but often is more powerful. To say, it blazes up brighter but burns down faster. The sense of this for men is the same - not to waste time.
Do not condemn your men for looking on other women. There is nothing terrible if he does nothing more than looking on them. You also assert all the efforts to make men looking on you (and the more and longer the better) even if you are married for a long time. To forbid men to look on other women is equal forbidding you to look nice and attractive (attract men's looks).
Slightly simplifying we can say the following: all women like the same men. If you like one man it is very likely that other women also like him, if you do not like a man it is very likely that none of women ever likes him at all. So, if you feel that you have to compete with other women for any particular man, you should know that you will have to compete for the rest of your life even if you succeed in marring him. And if you see that a man looks like a good one but you feel no call of heart, do not comfort your soul with thoughts that another woman will like him. It is very probably that this good man is doomed for loneliness. At school, when mind is not ripened yet, such "anisotropy of sympathies" is well displayed. All girls in the class like 1-2 boys who are objectively not the best. The interests of boys are distributed on girls although not uniformly but more evenly.
For men such phenomenon also takes place though it is less typical. Men's tastes of women are much more diverse.
Do not be born nice but be born happy. This proverb is very correct since it reflects the circumstance that men like beautiful women and that's why there is extremely fierce competition for such women where only high-ranking males win. The word "male" rather than "man" is much more suitable here because well-bred, cultured and honest man as a rule does not have high rank in primeval hierarchy and primeval swines hopelessly block him from you, who is so pretty. Besides this, such fierce competition for beautiful women cause women to get illusionary feeling of infinitely wide and unlimited in time freedom of choice. When such illusion disappears the bitter feeling of aimlessly spent years and undeserved resentment toward ALL men is left. But meanwhile there were the same men with insignificant differences flickering in front of your eyes. The men of the other type were busy with those who were less pretty.
So, do not get your whole mind fastened on your look! Subconsciously evaluating a man from primeval point of view you likely involuntarily attribute to men the same customs and try to increase your own primeval attractiveness missing men's rationality. Yes, there are men who react only on this but do you need them?
Having perfected your appearance to the best you can achieve a reverse result! Looking prodigiously fashionable and refined you provoke a feeling of your inaccessibility (maybe, a real one). And inaccessible women are not preferred by men, especially by low-ranking ones. How a poet said:

... So inaccessible for men
That their look cause spleen...

So the more stylish you look, the higher concentration of "easy-riders" is around you. Of course, we mean here an extreme degree of stylishness, I do not campaign for slovenliness.
Men follow their mind in higher degree, justly considering some elements of primeval marital ritual impolite, uncultured, tactless, humiliating and so on. You often expect that until the loss of the memory a man will be storming the inaccessible barriers built by you (and the lower the man's rank the higher the barrier's height) but he will consider impolite and humiliating to bother you. Found your defensive reaction, a man might decide that he is unpleasant and annoying to you and will leave in order not to give you unpleasant feelings with his presence. And he is absolutely right from rational point of view! Highly primative and high-ranking man simply does not care that he can be disgusting and his importunate annoyance blocks the reason of your mind, thus achieving the desired result. Those importunate annoyances are the most ancient ritual!
Low-primative man discards such impolite rituals and assumes that mutual intimacy of intelligent people should be reciprocal since it is necessary for both.
For example, according to the instinctive ritual you switch your attitude from warm (for baiting) to cold and you are puzzled why he does not fight for you? But a low-primative man is puzzled - why did you suddenly become so cold without any reason? He does not suspect that this has to be done according to the ritual and he is suppose to start conquering you without taking into account any possible impoliteness and humiliation.
This does not mean that you should be sexually easily accessible! We are speaking about barriers on the way of intimacy of souls but not bodies.
About man's infidelity. It has been already mentioned above that the instinctive limitations of sexual expansion are absent in men. However, there are two serious issues. First, this expansion can be released only by a man with high rank. Low-ranking man maybe also would like but... Women, whose husbands suddenly became rich, notice that he started betraying or even left for good. This man did not change. The explanation is easy. His rank increased and women began to love him. To love and not only to sell themselves. Second issue, absence of instinctive limitations does not mean the absence of rational ones. Men follow mind much more than women do. You will laugh but men sometimes deliberately do not allow themselves to betray due to moral and ethical considerations! Of course, if you suit him comprehensively.
About personal ads in classifieds. Men resort to it if their rank is low or they have some problems in biography (conviction, for example). If you write in your personal ad that you want "a kind, honest, etc." then having met exactly such man you will probably find that you have no feelings toward him. And regarding former criminals, be aware that anti-social behavior often is an attribute of high rank. Be careful! Furthermore, you want this man to be well-off. It is understandable but men perceive such your requirement with abhorrence justly supposing that love for money is prostitution (but maybe, you had in mind only his high rank, i. e. ability to "take everything from life").
Your 40 year birthday is very close but you still have no man. Have you already agreed for any man? But what do you mean "any man"? Actually lowering the requirements for the desired husband a woman usually lessens the requirements to civilized part of his personality but not to primeval because it is difficult consciously to lower requirements for something what you cannot realize by your mind.
If you really want to get married but not only chat about it you should take initiative in your own hands. The one, who needs something more, speaks louder about it. However, do not try to storm porutchiks. This is hopeless and not original. If you really want to get married but do not want to act, this is, sorry to say, self-delusion. Sometimes it can be enough just to lower the speed of running away but I warn once more about inadmissibility of early intimate contact. Almost every man always agree for that and almost with every woman. His agreement for an intimate contact does not affect the outlook of long-term relationships. Here an analogy can be drawn with your reaction on his signs of attention - you will accept them but this does not mean anything.
Do you find this to be humiliating and cannot "step over yourself"? I can just feel sorry for you. Decent men do not want to stoop either, especially taking into account that men are less interested in long-term relationships. Trusting woman's "nature", i.e. instinctive behavioral program, that proposes defensive and waiting role of woman toward men, you will again and again recreate primeval environment around yourself where there was no monogamy marriage and a female was taken by the most aggressive and bold male. Expecting such one to be decent is, at least, naive. Speaking in other words, if you are going to sit and wait until somebody finds you then you most likely will be found by a real "male" ("easy rider").
It makes sense to trust your heart only if your goal is maximum of momentary (especially sexual) sensations. Even in this case if you do not want to bear a difficult child or moreover, if you worry about growing aggressiveness of mankind, it is better to protect yourself from pregnancy. To build a stable family the voice of heart cannot be trusted. Since turned on instinct blocks your judgement you should try to resort to the help of other people who can judge with common sense.
If mulling over the perspectives of marriage you have a goal to become a Grand-Lady at any price, you, of course, need a high-ranking dominant despite of all the dangers connected with him. But even in this case it is better not to trust the heart. It can call you to the self-enamoured grumbler whose behavior has some resemblance with behavior of a real dominant. Meanwhile, the main value of high-ranking person is his ability to succeed in life, may not exist. It might happen that your beloved one will have neither the advantages of a faithful family man credited to low-ranking males nor the ability to take everything from life pertaining to high-ranking ones but will have only high-ranking arrogance and nothing more.
Women who were caught by dishonest womanizer often tell the following:"Yes, I understand that he lies to me, that all his nice and tender words are lie but I cannot do anything with me!" This is an example of highly primative behavior. Subconsciousness, realizing instinctive marital ritual, neither can reason by itself nor is interested in opinion of mind. The main thing for it is the match with template. And when it matches the feelings start working with all the cylinders firing! Trusting her mind, low-primative woman will not be caught in this trap - primeval sorcery might not affect her.
What lies more often a heart or a mind? A lie can be different. Rational judgement is based on knowledge gained during upbringing, education and on one's own and other's life experience. If because of any reasons the mind is weak it can deceive (lets say, fail) due to its weakness. It can fail to "calculate" all the consequences of the situation. That's why with passing years and gaining some experience the number of failures decreases. Experience does not affect instinctive programs at all. And heart does not lie because... it does not promise anything at all! Even if it promises then it promises nothing more than the moment of bliss. Since monogamy marriage is not foreseen in instinctive programs as well as participation of males in children upbringing, so it is easy to imagine the following evolution of events.
From all the above mentioned does not follow that I appeal to you to reject high-ranking men and to prefer low-ranking ones. Low-ranking man is not necessarily educated, cultured and honest. There are some very odious persons among them especially at the bottom of hierarchical pyramid and vice versa, not every dominant is cad. Quite the contrary, I call you upon not to pay any attention to the rank! What I mean is that you should not come under the influence of hypnosis of high-ranking male blocking the perception of objective advantages and weaknesses. The present touting of low-ranking men's virtues in the text is created to compensate dominating everywhere strongly biased opinion in favor of high-ranking males. But even if I'd like to recommend someone then it would have been the low primative men regardless the rank. Another point is that the heart does not understand them but the triumph of mind is possible only with the appropriate genetic base...
Of course high-ranking men have not only imperfections and weaknesses. Many of them are very good breadwinners and if you are lucky and his rank is real, you will be much better off behind him. However, high-ranking male is usually always egoistic and the material welfare which he gets may be handed down not to you or not only to you. Moreover, his ability to accommodate himself in life can play a trick with you, he will accommodate himself and succeed in life at your own.

About valor and humiliation

As it was mentioned above, the number of copulations is the clearest quantitative index of a rank. By allowing a male to approach her, a female acknowledges her lower rank. Therefore consent for copulation is one of the most striking signs of acknowledgment of submission. That's why the talks about sex among men are often characterized by bragging and scorning to women and among captains - not only chats. The usual component of curse is the phrase like "F@@k you" that has unambiguous purpose to humiliate an opponent. Though, it seems what can be humiliating in a natural physiological act? Their desire to humiliate even more is considered to be a kind of valor because, although it is sad but humiliation of the people around one is the most widespread way of increasing one's own rank. Especially if it concerns a sexual partner. Of course, women are offended when they are humiliated, but just try to take away such a humiliating man from a highly primative woman. She will fight but will not give him up.
Due to the same reason, men practicing masturbation are scorned. Women's masturbation does not cause such scorn even though it is barely less widespread then men's. The logic is the same: one masturbates -> means that one has no woman -> low-ranking one has no woman...
Briefly speaking:
Aura of indignity, humiliation and secrecy surrounding human sexual relationships arises from the closest connection of these relationships with hierarchical ones. Moreover, sexual failures are most hidden by men as an attribute of a low rank in hierarchy.
Women's secrecy goes back to the times of gregarious promiscuity when one breadwinner did not have to know about the number of others.

Ethological continuation

About optical illusions and observational selection
- What are you looking for?
- I have lost the keys.
- And where have you lost them?
- Over there.
- Why are you searching them here?
- There is more light here.
(an old anecdote)

Public opinion is full of the prejudices, especially in this sphere. For example, the women are sure that it is much easier for a man to find a woman than for a woman to find a man, although sociological research proves otherwise, the majority of women are sure that it is a man who chooses a woman, even though in reality it is exactly the opposite. In order to clarify the mechanism of origination of such illusions let us imagine the following example, overdone for simplicity:
There are one hundred men and the same number of women living in some village. Five out of these hundred men are arrant Lovelaces who change the women once a month in average. The other men stay home and rarely hang out. After a not so long period of time these Lovelaces will date all the women but the others will meet no more than one. As a result women meeting each other will be telling approximately the following: I dated six men and five of them were such a ... Of course they will come up with the wrong conclusion -- that 5/6 of all men are skunks, cheats, old foxes, easy riders and so on.
Mentioned above, observational selection is objective. It means that even impartial robots would have fallen into this trap. Besides there is also subjective selection which is derived from the peculiarity of human memory - emotionally meaningful events are remembered at their best. Those 5 Lovelaces will be mostly well remembered for a long time because they excited bright emotions. As a result the only one more or less decent man out of these six will not even be recalled.
It is very difficult not to fall under the influence of such illusions for an unprepared man. Mass media also endorses the distortion of a statistical situation preferring to inform about rare, unusual, untypical events and creating the illusion of their mass character and typicality.

About specifics of behaviour
I am a weak and helpless woman, I won't let you!
I've already sued three tenants, and for such words
of yours you will be crawling at my feet!
(A.P.Chekhov. "Helpless creature")

So, biological roles of males and females are drastically different. Lower viability of males due to, in part, more risky behavior, was mentioned above. Obviously, the differences in behavior do not end here and certainly should suit the biological roles. Since the personal value of each female is higher than that of the male because males are born in much higher numbers than needed for fertilization of all females, then there dominate in female behavior the care for herself (and demand of such care from people around her), caution, avoiding risk, and if a self-sacrifice needed then it must be only for the sake of her children as the final goal of caring for herself. Societal traditions are solitary with women primacy because naturally they go back to instinctive behavioral programs - women and children are saved first from a sinking ship. Besides, while there is a great number of the laws and resolutions showing concern for women one way or another, there is none for men. The law takes care either of a PERSON (any person) or a woman.
For example, marriage legislation of Russia and especially legislative practice in this sphere are openly discriminative toward men but nobody pays attention to it. For millions of years everybody got used to this. If a man killed another man in self-defense he would face long and not necessarily successful judicial hardships in Russia. Under the same circumstances a woman probably will be acquitted even without getting a court hearing. And moreover she will be praised. There are many public organizations and movements struggling for the rights of women but there is nothing heard about the same for men. In mass media women's problems are discussed deeper and more attentively than men's are. This is in addition to the fact that even without this, the women are idealized by both men and women and this also goes back to the principle of female's irreplaceability.
It is possible even to speak about men's "presumption of guilt". A husband beats his wife - he is blamed, a wife beats her husband - again, a man is blamed; rape - a man is blamed; divorce - the same; a woman cannot get married - once again, the men are to blame. Yea, men, those villains are to blame for women's unemployment as well. Examples abound. Innocence of a man should be proven every time in such cases. Should you fail to prove it - you are guilty by default! It is the most fertile ground for abuse. Why take care of men if even nature does not take care of them!
I think everybody will agree with the following:
Women take supernormal care about their health and it seems like men have the goal of shortening their lives. It is well-known that men resort to suicide three to five times more often than women.
Men have a strongly developed investigative instinct and women a have propensity to known and tested actions (let it be worse but the good old way). Women typically have the primacy of tactic over the strategy - this minimizes the losses in case of failure though it does not allow to score a big victory in case of success. One today is worth two tomorrows.
Women have a clear inclination to keep low profile satisfying with dull enough life. This can explain for example lower public and business activity of women. Women's soaking in everyday life is a secondary reason (behavior of unmarried women is slightly different in this sense from married). The most outstanding people (that means "more poped out") both genius and scoundrels are men in general. The one who does pop out, takes a risk.
Women trust intuition and feelings more than logical conclusions. Intuition is based on a past experience and feelings as a voice of instincts are based on experience of a whole species and therefore it is more reliable on average because it was tested by practice. Due to the same reason women better than men comprehend the language of gestures and body language as the ancient means of communication.
Women are more subject to herd instinct and authorities because majority is usually more often right on average than minority, and authority is a person supported by majority. Also it is possible to mention a higher than men's sexual corporate solidarity among women for as long as it does not contradict the personal interests.
Average man is more lazy than average woman. It does not mean the absence of lazy people among women but on average it is true. Women's anti-laziness is one of the demonstrations of her concern for herself and for her children. It is not so important for a man to take care of himself. However, laziness is the mother of progress.
Taking a risk to incur anger I will make a point that burden of notorious "women's fate" is very often exaggerated. And it is so, in order to be pitied even more. This exaggeration in the end goes back to the principle of female's irreplaceability and is tightly interconnected with egocentrism that will be described a bit further.
Women are not kinder than men! Illusion of women's kindness is caused by instinct of motherhood but it is not identical to kindness and works only in favor of the children.

Victor Dolnik deems that primates' hierarchy is formed by males only. Regarding macaques it might be true but for people it is clearly incorrect. Neither the differences in levels of inclination to conflicts among women nor the differences in power of elbows need any proof. Another thing is that women's hierarchical struggle is not characterized as an open one and generally speaking, is less dangerous for life because of irreplaceability of every female. We can also agree that women's hierarchy is built independently from men's, but they are closely linked together. Anyway, a comparison of male's and female's rank is totally correct. Ranking potential of some ladies is out of limits and easily can get above average men's ranking potential. Let us recall a famous "Tale about a fisherman and a golden fish" by A.S. Pushkin. Ranking potential of the old woman was much higher than of the old fisherman and that coupled with egocentrism lead to what it had lead. Should we throw away the fairy entourage the described situation becomes real and not so rare at all! A children's hierarchy also exists and in general independently from an adult one. However, not any grown-up can tame every high-ranking teenager. Forget about teenagers! Even high-ranking cat is capable of winding its master round its little finger...

About egocentrism
Self-loving is the only romance that lasts for a life.
(Oscar Wild)

Egocentrism is inability to WISH to put oneself in another's place or to get in another's shoes. Egoism is unwillingness to divest oneself of one's own interests. There are the terms "reflection" and "empathy" in psychology. The first term means the ability to adequate self- evaluation in eyes of other people, the second term means ability to apprehend emotions of others. Egocentric has both abilities diminished. Non-egocentric person sometimes is called reflective but this is not quite correct.
I do not allege that there are no egocentric persons among men (moreover, the champions of egocentrism have to be looked only among men!) but it is more typical for women in average. Whatever is said about women's emotionality, empathy is the ability to evaluate the emotions of others correctly but not intemperance of one's own reactions on the environment. The ability to read gestures and mimicry helps to read the emotions of others but in order to read the mimicry one has to want doing this in the first place! Meanwhile, the surrounding world and especially the inner world of the others is not interested for egocentric. He is interested only in the world of oneself, right up to self-admiration. This is indirectly proven by women's love to mirrors.
Here is the following anecdotal scene for illustration:
- Honey! In such weather a dog owner wiiilll not kick his dog out!
Egocentric person can answer: Then go without a dog...
Egoist will probably respond: You aren't made of sugar! You will not get dissolved...
Here is another scene. A bus stopped abruptly. Egocentric women yelled: "Driver! You are carrying a human cargo!" Men: "What is a crazy person running in front of the bus?"
Egocentric did not even try to put oneself in another person shoes or understand what his/her problem is all about. The point is not in the fact that he is incapable of doing this! It simply did not come to his mind. On the contrary, egoist understood everything but deliberately disregarded the troubles of another one. Egoism is one of the important demonstrations of a high rank.
Egocentric is not necessarily a nasty person! He is just insensitive. For example, he can pour out tons of kindness on the person who does not need this without feeling its irrelevance. And also oppressing somebody he sincerely does not notice the inconvenience which he causes. As a sort of this feature we can mention the extreme restraining of egocentric people in expression of gratitude to the other people.
And egocentric can simultaneously be an egoist (what a horror!).
It is determinate that egocentric people are robed in a crowd (transport, shops) more often and they do not notice or feel anything at the very moment.
It is proven that propensity to egocentrism is handed down genetically from generation to generation even among men meaning that reasonably deep and ancient brain structures are responsible for this.
In an age of from 3 to 5 years egocentric children usually do not ask WHY or they do it very rarely although their development does not fall behind from their peers in any other way. They are not so interested in surrounding world as in their own world.. From the biological point of view feminine egocentrism is justified, and moreover, more or less NORMAL!!!,

if every female is objectively irreplaceable then nature forbids women from thinking seriously of anything but their own interests or interests of their children as well as concealing their problems. For this males are especially created.
Try mentally to change the roles of old man and old woman in mentioned above "Fairytale about a fisherman and a golden fish". Can't make it? Don't you say this cannot happen? Correct, this would have been too untruthful even for a folktale. Since the folklore is already touched it is worth to pay attention that if a fairytale presents such character as stepmother then by all means she is nasty, evil-minded stepfather is not quite typical character for folktales. The reason is not in malignancy itself but in absence of concern for the other people and stepchildren needs. The fact that mass media much more often reveals cases about stepfathers' brutality is the result of the mentioned above men's presumption of guiltiness. Folktales are more reliable statistically. If a folktale does not adequately model the relationships between people it will be not a fairytale that can teach children about real life but an idle fantastic absurd. The thesis about statistical reliability of folklore is correct although its correctness varies for all kind of folklore such as anecdotes, verses and etc.
Why does unbearable moral working environment quite often exist in purely women teams or staffs? Because nobody wants to make any sacrifices for the sake of others.
Lower egocentrism can be seen among women who drive car. Driving a car in a traffic is impossible without constant forecasting of the other drivers' actions and concern about predictability of one's own actions. That is incompatible with egocentrism. Women's unwillingness to use rear view mirrors became household word. That's why the average egocentric woman feels quite uncomfortably behind a driving wheel writing this off to the boorishness of male drivers (again, here is a presumption of male guilt!) and therefore decline to drive voluntarily. However, if she drives a car (of course, it is worth to see HOW well) then the level of her egocentrism is lower than average. But this does not guarantee the absence of any other imperfections or weaknesses. However, this egocentrism in reasonable doses is included as a necessary piquant flavor in the notion of femininity.

Ethological sketches.
All people are equal. However, some of them are more equal.
(Suggested by G. Orowell)

The subject of primeval hierarchy in our society is extremely interesting itself and perhaps deserves a separate treatise. That's why I suggest in the end to step aside from gender relationships and to look at relationships of the people in general. Especially as this will allow us better understand gender relationships as well.
Primeval hierarchy explicitly or implicitly runs through our society. We can observe this in relatively pure form inside many children groups, especially in orphanages, when mind is not fully developed yet. Gregarious hierarchy and propensity to be influenced by an authoritarian leader without any critical judgment of the one are the instinctive behavioral programs without any rational restrictions. By the way, the children from decent families very rarely find themselves in the orphanages. Therefore, this specific behavior is significantly predetermined genetically. Provoking anti-social behavior of teenagers (and not only them), unmotivated cruelty, baiting of "omegas" (who are objectively not the worse children) are the demonstration of a hierarchical struggle. A low-ranked child occupies not the best place in a street hierarchy hence there is no rational sense for him to take part in it. A low-primative child will do exactly this. He will distance himself from such hierarchy. A highly-primative child cannot do the same since his instinct powerfully requires taking part in hierarchy irrespectively how bad he feels in it. There was a perfect movie after R. Bykov "Scarecrow" where this primeval relations were shown with scientific accuracy. Unfortunately, the end of the film is not plausible. In reality, such repentance of hierarchical leaders is impossible.
Among adults hierarchy is well seen in conditions when civil rights are restricted one way or another. This is, for example, prisons; our army with all its violence and hazing; groups of people with a low culture and especially, criminal gangs, where each new person is evaluated from the point of his rank, and where there is extreme intolerance even to the hint of disrespect.
* * *
Inability to feel the own guilt is typical for high-ranking people (especially for egocentric). It is exactly "inability" and exactly "to feel". In other words, their brains have no convolutions creating the sense of guilt. Under pressure of logical evidence he might agree with accusations (in case he cannot keep silence) but he will never sense any guilt. Striking example - J. Stalin. While making the mistakes he was sincerely sure that the "enemies" are guilty in it. And such his assurance was transferred to almost all the country.
Very often a highly primative man subconsciously apprehends a respectful attitude as an attribute of a lower rank and he starts giving orders to this person turning to humiliating submission to a person with a higher rank. There is no middle point for such people: either to order or to submit.
This is the ground where hostility of low-cultured people to "eggheads" is based on. Demonstrating by his culture and education what looks like not high rank such man will never agree with the role of "omega". But this perplexes the instincts and invokes a desire to show "omega" his place. However, there is no precise dependency of cultural level from educational level and fulfilled work, rather it is only probable. An uneducated person may be highly cultured, which is based on low primativeness. It is appropriate to repeat once more here that a low rank is not equal to the high culture. High culture is perceived as low rank but the contrary is not necessary.
* * *
Probably each of Russian people observed the following situation at least once. A ticket collector has boarded a public transport and is trying to check the ticket at the passenger with a higher rank who has no ticket. A ticket collector cannot do anything and he looks pitiful despite of his position. This passenger radiates so abysmal and impudent assurance of his victory that some strange and even mystical force makes a ticket collector step back. On a rational level this ticket collector decides not to get involved with this passenger. A high-ranking person can easily stand a conflict with such tension that can cause extreme discomfort for low-ranking one.
* * *
Hierarchical struggle is often confused with the aspiration for "one's own significance". A person worrying about his own significance does not need to humiliate the other people, in contrary the easiest way to raise one own rank in hierarchy is to humiliate the people around. I think each of us observed many times and even experienced oneself such aspiration of the some people to humiliate the others.
* * *
It is easier to keep the rank than to raise it therefore artificially created hierarchies can substitute natural and self-organized ones to some degree. This "level of degree" is determined with by initial ranking potential of a person leading the group and if it is insufficient then there appears a so-called informal leader and the group can be disband.
Social position and primeval rank are quite closely interconnected but do not strictly determine one another. A person taking high post, increases his rank by this. From another point, low initial ranking potential almost prevent a good career growth. Even if due to some occasional reasons a man with low ranking potential takes high post, he will not keep it for long or in any case, will not grow any further.
* * *
Depending on absence or presence of other qualities and attributes a person with a high rank occupying a high position in society can be either a LEADER (also called charismatic personality) or a TYRANT. Leader is usually a person with decreased primativeness, not really aggressive with subordinates, and even capable to some self-sacrifice. Tyrant is usually coward (resulting from his high primativeness) but aggressive. Leader is most likely a case of a person with increased but not necessarily very high rank and exactly with a real rank but not only visual one and for sure with low primativeness. There are many well-known examples when a man occupying high position is henpecked by his wife. This can never happen with the tyrants (to be more specific, henpecking means that the rank of the wife is higher than the husband's one combined with the wife's high primativeness). Tyrant somehow heading a group lives purely by his own interests and in time of danger when the group asks him for protection he can show the cowardice and a desire to hide behind the backs of the other people (strong self-preservation instinct!). Meanwhile, tyrants take the high posts not less but more often than real leaders. In hard times real leaders become apparent and tyrants fall out... That's why a famous joke of comedian M. Zhvanetsky "I directed you - I will take responsibility for everything!" causes laugh since typical leader is very often tyrant who does not want to suffer for the other people. It was written by a poet about such situation:
It would've been better to send him to logistics
He was brave only with us
He was awarded with execution
By a tribunal for self-shooting
I will remind you that this song of V. Vysotsky was about a head of a prison who was sent to front together with the prisoners. He was certainly a dominant, at least due to his high position. However, suddenly on the other side of a front line there appears something that absolutely does not care about his high rank and a powerful instinct of self-preservation is triggered in our hero...
At the same time very low rank is also contraindicated for a leader as the party starts playing the king's role or control and management over the group gets completely lost. Obvious case is Russian tzar Nicholas II. Even his undoubtedly high level of culture did not help him. Here is one of disadvantages of a monarchical state - there is a certain probability that it may be headed by a person with unacceptably low rank. The consequences of this are well known from the history. In the other cases it is necessary to fight for a high position what sifts out very low-ranking people. A famous book after Niccolo Makaivelly presents a set of recommendations (like that: a sovereign should never justify for his action) for keeping a visual rank of a leader on a reasonably high level.
* * *
"The main point in dispute is to jump to personal attacks at the right moment..." (M. Zhanetsky). Getting to personality, a participant changes the focus from the subject of the dispute to uncovering ranking potentials. And if opponent's ranking potential happened to be lower then he instinctively subjects to higher rank thus admitting his defeat in dispute though he might be right in essence of this matter.
* * *
There is a widespread opinion among the vulgar public that it is necessary to beat a wife from time to time. By this a husband beating his wife demonstrates kind of high rank (visual, of course). And this can even attract a low cultural woman especially with high primativeness (masochism probably grows on this ground). Such woman rushes to defend her man as soon as the first hair falls down from his head despite asking to punish him only a moment before. Highly cultural and especially low-primative woman will not act this way. And actual rank of this man can be quite low. Even his buddies may have no respect for him. However, it is appropriate to mention that the instinct cannot analyze anything it just reacts on some key attributes, in this case - aweless attitude to a woman (if he beats -> he does not appreciate -> he has many women -> alpha has many women).
Here is the similar Russian picture: a drunk man in a public transportation is brawling and swearing. Women start yelling: "Are there any real men? Make him quiet!". Finally, a couple strong men or policemen get the unruly passenger down, as suddenly the very same women begin protecting him! Paradox? NO! Anti-social behavior is one of the strongest attribute of high rank and physical power demonstrated by the real men in enforcing the order has relatively loose correlation with high rank. Moreover, defending someone but themselves these men demonstrated a certain self-sacrifice that is an attribute of low rank. If they were able to nail the villain down only by glaring that would have been totally different thing. By the way, observing such gratitude real men will not get involved in fight next time. Women suddenly start feeling sorry for this cad. While he was dangerous the positive feelings were overcast by fear. But as soon as the danger disappeared highly primative mind started justifying the answer (since it was necessary to justify positive feeling toward obviously negative personality) and found that the most suitable word for this situation was "pity". Somehow these women are not pitiful for other people which were threatened by this cad.

About aggressiveness and crime
Never pull apart the fighting people - they
are probably soul mates...
(ascribed to ancient Sumerians)

Ethological basics of agressiveness are described in K. Lorenz [9] and V. Dolnik's book [1]. I will allow to share some of my own considerations on this subject.
In the root of many crimes against a person lies a contradiction between criminal's high initial ranking potential and his low social status. This can happen if a man has no any other strengths than primeval impudence that is not enough thanks God for a good career in a modern society. If such situation combines with high primativeness then this man tries to realize his demand to dominate by any means. However, if his social status is low then these means are not a lot. That's the way he comes to crime as a method of realization of ranking ambitions.
In our Russian police high-primative dominants are prevalent that's why law-abiding population is afraid of police almost as much as of criminals. For these people service in police is also a way to realize their ranking ambitions and it is very bad that the form of realization is barely different from the form of criminals...
High aggressiveness of teenagers and their impudence towards adults is explained by that a teenager has to make his way in hierarchy from the bottom up. But this is very difficult because adults occupying the high stages of hierarchy make all the efforts to keep it that way. By making anti-social action a person declares to the people around: " I am alpha, I am above society, I do not want to submit to you but you should submit to me or prove that your rank is higher". I.e. anti-social behavior (contraposition of oneself to the people in a society) has very deep instinctive roots which are as deep as the aspiration to build the hierarchy.
How to recognize the rank of a person next to you? The closer your ranking potentials the harder it is to do, at least from the beginning. Besides obvious assurance and forwardness, high rank is shown indirectly (at least at men) by custom to undo a few upper buttons or to wear the clothes unfastened. And vice versa, fully fastened clothes, quiet voice and a custom to fold the arms mean low potential. But dangerous aggressiveness is typical for dominants with high primativeness.
And if meeting somebody, your eyes as magnetized lowers down, be sure that there is alpha in front of you. But he will stare right into others eyes gladly, noting with pleasure that the eyes are lowered down acknowledging his superiority. It is very important for him, since aggressive and highly primative dominant (tyrant) is usually coward and keeps power over the people only because they submit to him voluntarily. In mentioned above experiments with cocks researchers glued the combs to dominants and despite of their excellent fighting abilities they were downgraded. And this is so because nobody submitted to them voluntarily.
And what if one will try not to subjugate to people? If you rank is low it is extremely risky! No, there is no need to get humiliated either. You should avoid such situations. Your suddenly boiled over pride can give out one impulse of confliction but probably you will not be able to withstand its continuation. But he has already revealed your rank and he knows for sure that you will give up sooner or later. And a conflict is his environment, he gets high because of it. He will refuse to struggle with something what is out of his power (for example with power of nature) but you are right in his mercy! It is necessary to bridle such people but this should be done not by you. Owning a victory over you (and this is almost inevitable), he will harden even more in his aggressiveness. Getting involved into conflict with high-ranking ones is worth only when you are absolutely sure in your victory.
What can be advised in this case? Commonly known advice is not to show the fear. This is true! If you fear that means that you admit your lower rank and hence, you are an easy prey. However, never try to pose as a high-ranking one without a good training. There is a high chance it will not work but an aggression will be provoked. Omega would-be alpha should be punished. The best way is not allow to have your rank revealed at all and to show that you do not play into hierarchical games. For example, if it is possible, do not pay any attention to him or show that you do not care. Without knowing your rank, such a one may not get into conflict because he is coward in a sense that he does not engage into fight unless sure of victory. But he gets such assurance only after your low rank is recognized. Afterwards he will not retreat halfway.

About religion, art, and advertising

Religion as a system of undoubtedly civilized norms (I mean of course the big universally recognized global religions) could not have carried out civilizing functions if God had not had the highest rank, the highest position. Otherwise, a highly primative society with low culture could not be persuaded that making harm to the fellowman was inappropriate since from pragmatically egoistic points of view it was exactly right! At least, in the nearest future. But the fact that it harmed as much personally him as the whole humanity could be simply neither accepted nor realized by a certain individual. In practice, the super-hierarch was anthropomorphized with humanistic qualities which were being digested by congregation as samples for repetition because of his highest hierarchical status.
It is worth to pay attention that practically all religions appeared in the low levels of the society. It was extremely important for a person with low-ranking potential to have somebody "above" and at the same time it was wanted this one above to be just, kind, and merciful.
Aura of assurance which circumfluenting most of "saint books" (for example the Vedas) is the inexhaustible source of authority together with complete incomprehensibility of the content. Sense and value of these books are entirely lost for a modern man (not researcher) that's why their influence cannot be explained by the value of the contained information. On the contrary, self-criticism and public doubts which are typical for a real science severely damage the attitude to it from unscientific public.
Talented piece of art is also able to convince in anything as it directly affects subconsciously instinctive mechanism of brain. This is the purpose and the social destination of art - to convince in anything that is otherwise impossible to persuade or to prove logically (for whatever reason) in any way. However, whatever is proven this way is not always good in reality.
Modern advertising shamelessly and impudently exploits instinctive programs. Instincts are devoid the ability to rational analysis. So, finding the right hacking tool (template) to a man's instinctive programs makes possible to force a person to want virtually anything. The main point is to demonstrate assurance. Any proofs or detailed explanations beyond that is redundant. It is necessary to pay attention how the commercials are done. As a rule they are pretty illogical but very emotional. Information is presented in a very high pace, often tangled but attention is diverted with something flashing. Often text is read with a speed of machine gun. All this based on the fact that subconscious with its templates works much quicker than mind and if a mind is not given a chance and/or time to look into the situation (and probably to protest) thus making possible to instilled anything to man. The most deceptive mode of advertisement perception is to pay no attention to it. In fact, only mind misses it and it goes directly to subconscious. And that's what really needed.