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The natural world is staggeringly complex, and yet amazingly elegant in how it manages the multitude of interconnected parts into organized, unified wholes that thrive. What is the secret for harnessing this elegance for use in human systems? Tim Winton found that observation of the most common patterns found in the natural world led to the development of high level principles which can then be used to address the most complex challenges that human systems face.
After learning some of the common patterns found in all natural systems, we can then begin to recognize these patterns in human systems , and learn how to balance the ones that are skewed, and to integrate in the ones might add a greater level of enduring health. We can “make a deeper difference by changing the system!”
PatternDynamics is a systems thinking tool for creating systems level change that Winton has been developing over 20 years as he’s worked in diverse fields, including: environmental services contractor, organic farmer, sustainability educator, designer, project manager, consultant, executive leadership, and corporate governance.
What is unique about PatternDynamics is that it combines the patterns of nature with the power of language, to produce a sustainability pattern language.
In a recent paper by Barrett Brown, referring to a study he had done in 2012 of top performing organizational leaders, he observed that these top leaders “use three powerful thinking tools to design their initiatives and guide execution. They are (a) Integral theory, (b) Complexity theory, and (c) Systems theory. These models help them to step back from the project, get up on to the balcony, and take a broad view of the whole situation. They use these tools to make sense of complex, rapidly changing situations and navigate through them securely.”
And famed Permaculture teacher Toby Hemenway (author of Gaia’s Garden)recently posted on his blog the following recommendation: “To enrich our ability to use recipes and put them into context, without engaging in a full-blown design analysis from scratch, we can use pattern languages. The term was coined by architect Christopher Alexander to mean a structured grammar of good design examples and practices in a given field—architecture, software design, urban planning, and so forth— that allow people with only modest training to solve complex problems in design. … Like recipes, pattern languages are plug-and-play rather than original designs, but they allow plenty of improvisation and flexibility in implementation, and can result in rich, detailed solutions that fit. A handbook of pattern languages for the basic human needs and societal functions, structured along permaculture principles, would be a worthy project for a generation of designers.”[my emphasis]
PatternDynamics is firmly rooted in Integral theory, Complexity theory, and Systems theory, and as well contains Permaculture’s emphasis on patterns and principles (PatternDynamics was developed during Tim’s time as Director of the Permaforest Trust, a 170 acre Permaculture education center in New South Wales, Australia). In addition a fifth strong influence was Alexander’s ideas on pattern languaging. These five robust theories and practical application tools provide a very firm foundation that will continue to support PatternDynamics long into the future as it continues to evolve. It is probably not the recipe book that Hemenway envisions, rather the patterns are more like a set of key ingredients from which we are invited to collaborate to co-create the needed recipes for a given context. The goal is to facilitate collective intelligence.
“The key to complexity is systems thinking, and the key to systems thinking is patterns. The key to patterns is using them as a language – an idea I borrowed from architect and mathematician Christopher Alexander’s book ‘Notes on the Synthesis of Form’.”
– Tim Winton
Systems thinking itself is complex and difficult to learn, which is why the series of Patterns in PatternDynamics can be so helpful in simplifying that complexity – “If we don’t have a symbol for something, it does not become enacted in our reality” Winton says.
Secondly, as these Patterns become part of a shared language, this gives us the ability to collaborate with others –hence the facilitation of collective intelligence. Noting the increased complexity in our human systems, Winton states that “No longer is any one person brilliant enough to solve the complex problems we face; we really have to use our collective intelligence.” This innovative method of facilitating collective intelligence is proposed as an essential 21st century skill.
Speaking for myself, after completing the Level II training in PatternDynamics, I notice that I am starting to see “wholes” much more often, in extremely diverse systems. Everything from systems at work in my own body, to systems in organizations I’m involved with, to the systemic problems facing our world, and all the way up to long term processes going on in our universe. Being able to see these wholes then helps the next step – ideas are flowing more easily on how to balance and integrate to improve the health of the systems I am involved with.
Therefore, it is with some excitement that I am preparing to host a One Day PatternDynamics Workshop on January 26, 2014 here in Bellingham, Washington. Click Here for more information about this event. A workshop is also being held in Oakland, CA on January18th – more info here.
To read a longer article I co-wrote about an introductory workshop I attended last year, go here: Integral Leadership Review
Productivity. Every employer loves it, and every employee is fascinated by it, especially if it comes in cute colors, a retina screen, and weighs under a pound… at least until such time as “productivity” results in the loss of the employee’s job, which in turn makes the employer love it even more as it results in even higher profits, even if it means one more pink slip and a 91 million people outside the labor force.
With a labor force already in turmoil as millions drop out every year never to be heard from again, made obscolete by the latest technological and computerized innovation, and students stuck in college where they pile up record amounts of student loans (at last check well over $1 trillion) hoping form some job, any job, upon graduation, unfortunately the future is not bright at all.
In a recently published paper, “The Future of Employment: How Susceptible are Jobs to Computerisation,” Oxford researchers Frey and Osborne, look at the probability of computerization by occuption. What they find is shocking for nearly half of the US labor force, and especially those in the transportation, production, office support, sales, service and extraction professions.
JPM’s Michael Cembalest summarizes it as follows:
Life after college: be prepared for technology to continue changing the job landscape
There’s plenty of data on unemployment rates and salaries by undergraduate major (the majors with the lowest unemployment rates and highest salaries: computer, chemical, electrical, civil and mechanical engineering; math/physics; and economics. Drama and film majors are a recipe for living at home). A more important long-run issue to think about may be how technology affects your career. Researchers at Oxford just published an analysis assessing what jobs might be computerized in the future. Their conclusion: a staggering 47% of the US workforce, spanning a range of career types. There are vigorous debates about outsourcing, but increasingly, computerization may grow as a factor affecting employment conditions.
In The Man in the White Suit, Alec Guinness invents a suit that never has to be cleaned or replaced. London’s tailors and dry cleaners angrily chase him down in the street to destroy his invention. They are relieved when the suit finally starts to unravel, since the fiber’s design is flawed. Productivity improvements are great things, but there might be a point at which too much power shifts to capital over labor. Anyway, when you think about a career, remember that in some professions, eventually a computer might be able to do it too, or reduce the economic value of you doing it (e.g., the impact of the internet on print journalism).
The good news: those iPad apps are cheap, and most unemployed workers – who were put out of a job thanks to one – can afford them. The bad news: anyone lamenting the return of America’s employment golden age, is kindly encouraged to exhale.
Medieval thinkers were tempted to believe that if you throw a rock it flies straight until it runs out of force, and then it falls straight down. Economists are tempted to think of prices as a linear function of the “money supply”, and interest rates to be based on “inflation expectations”, which is to say expectations of rising prices.
The medieval thinkers, and the economists are “not even wrong”, to borrow a phrase often attributed to physicist Wolfgang Pauli. Science has to begin by going out to reality and observing what happens. Anyone can see that in reality, these tempting assumptions do not fit what occurs.
In my series of essays on interest rates and prices, I argued that the system has positive feedback and resonance, and cannot be understood in terms of a linear model. When I began this series of papers, the rate of interest was still falling to hit a new all-time low. Then on May 5,2013, it began to shoot up. It rose 83% over a period of exactly four months. That may or may not have been the peak (it has subsided a little since then).
Several readers asked me if I thought this was the beginning of a new rising cycle, or if I thought this was the End (of the dollar). As I expressed in Part VI, the End will be driven by the withdrawal of the gold bid on the dollar. Since early August, gold has become more and more abundant in the market. I think it is safe to say that this is not the end of the dollar, just yet. The hyperinflationists’ stopped clock will have to remain wrong a while longer. I said that the rising rate was a correction.
I am quite confident of this prediction, for all the reasons I presented in the discussion of the falling cycle in Part V. But let’s look at the question from a different perspective, to see if we end up with the same conclusion.
In the gold standard, the rate of interest is the spread between the gold coin and the gold bond. If the rate is higher, that is equivalent to saying that the spread is wider. If the rate is lower, then this spread is narrower.
A wider spread offers more incentive for people to straddle it, an act that I define as arbitrage. Another way of saying this is that a higher rate offers more incentive for people to dishoard gold and lend it. If the rate falls, which is the same as saying if the spread narrows, then there is less incentive and people will revert to hoarding to avoid the risks and capital lock-up of lending. Savers who take the bid on the interest rate (which is equivalent to taking the ask on the bond) press the rate lower, which compresses the spread.
It goes almost without saying, that the spread could never be compressed to zero (by the way, this is true for all arbitrage in all free markets). There are forces tending to compress the spread, such as the desire to earn interest by savers. But the lower the rate of interest, the stronger the forces tending to widen the spread become. These include entrepreneurial demand for credit, and most importantly the time preference of the saver—his reluctance to delay gratification. There is no lending at zero interest and nearly zero lending at near-zero interest.
I emphasize that interest is a spread to put the focus on a universal principle of free markets. As I stated in my dissertation:
“All actions of all men in the markets are various forms of arbitrage.”
Arbitrage compresses the spread that is being straddled. It lifts up the price of the long leg, and pushes down the price of the short leg. If one buys eggs in the farm town, then the price of eggs there will rise. If one sells eggs in the city center, then the price there will fall.
In the gold standard, hoarding tends to lift the value of the gold coin and depress the value of the bond. Lending tends to depress the value of the coin and lift the value of the bond. The value of gold itself is the closest thing to constant in the market, so in effect these two arbitrages move the value of the bond. How is the value of the bond measured—against what is it compared? Gold is the unit of account, the numeraire.
The value of the bond can move much farther than the value of gold. But in this context it is important to be aware that gold is not fixed, like some kind of intrinsic value. An analogy would be that if you jump up, you push the Earth in the opposite direction. Its mass is so heavy that in most contexts you can safely ignore the fact that the Earth experiences an equal but opposite force. But this is not the same thing as saying the Earth is fixed in position in its orbit.
The regime of irredeemable money behaves quite differently than the gold standard (notwithstanding frivolous assertions by some economists that the euro “works like” the gold standard). The interest rate is still a spread. But what is it a spread between? Does arbitrage act on this spread? Is there an essential difference between this and the arbitrage in gold?
Analogous to gold, the rate of interest in paper currency is the spread between the dollar and the bond. There are a number of differences from gold. Most notably, there is little reason to hold the dollar in preference to the government bond. Think about that.
In the gold standard, if you don’t like the risk or interest of a bond, you can happily hold gold coins. But in irredeemable paper currency, the dollar is itself a credit instrument backed by said government bond. The dollar is the liability side of the Fed’s balance sheet, with the bond being the asset. Why would anyone hold a zero-yield paper credit instrument in preference to a non-zero-yield paper credit instrument (except as speculation—see below)? And that leads to the key identification.
The Fed is the arbitrager of this spread!
The Fed is buying bonds, which lifts up the value of the bond and pushes down the interest rate. Against these new assets, the Fed is issuing more dollars. This tends to depress the value of the dollar. The dollar has a lot of inertia, like gold. It has extremely high stocks to flows, like gold. But unlike gold, the dollar’s value does fall with its quantity (if not in the way that the quantity theory of money predicts). Whatever one might say about the marginal utility of gold, the dollar’s marginal utility certainly falls.
The Fed is involved in another arbitrage with the bond and the dollar. The Fed lends dollars to banks, so that they can buy the government bond (and other bonds). This lifts the value of the bond, just like the Fed’s own bond purchases.
Astute readers will note that when the Fed lends to banks to buy bonds, this is equivalent to stating that banks borrow from the Fed to buy bonds. The banks are borrowing short to lend long, also called duration mismatch.
This is not precisely an arbitrage between the dollar and the bond. It is an arbitrage between the short-term lending and long-term bond market. It is the spread between short- and long-term interest rates that is compressed in this trade.
One difference between gold and paper is that, in paper, there is a central planner who sets the short-term rate by diktat. Since 2008, Fed policy has pegged it to practically zero.
This makes for a lopsided “arbitrage”, which is not really an arbitrage. One side is not free to move, even the slight amount of a massive object. It is fixed by law, which is to say, force. The economy ought to allow free movement of all prices, and now one point is bolted down. All sorts of distortions will occur around it as tension builds.
I put “arbitrage” in scare quotes because it is not really arbitrage. The Fed uses force to hand money to those cronies who have access to this privilege. It is not arbitrage in the same way that a fence who sells stolen goods is not a trader.
In any case, the rate on the short end of the yield curve is fixed near zero today, while there is a pull on the long bond closer to it. Is there any wonder that the rate on the long bond has a propensity to fall?
Under the gold standard, borrowing short to lend long is certainly not necessary  However, in our paper system, it is an integral part of the system, by its very design.
The government offers antiseptic terms for egregious acts. For example, they use the pseudo-academic term “quantitative easing” to refer to the dishonest practice of monetizing the debt. Similarly, they use the dry euphemism “maturity transformation” to refer to borrowing short to lend long, i.e. duration mismatch. Perhaps the term “transmogrification” would be more appropriate, as this is nothing short of magic.
The saver is the owner of the money being lent out. It is his preference that the bank must respect, and it is for his benefit that the bank lends. When the saver says he may want his money back on demand, and the bank presumes to lend it for 30 years, the bank is not “transforming” anything except its fiduciary duty, its integrity, and its own soundness. Depositors would not entrust their savings to such reckless banks, without the soporific of deposit insurance to protect them from the consequences.
Under the gold standard, this irrational practice would exist on the fringe on the line between what is legal and what is not (except for the yield curve specialist, a topic I will treat in another paper), a get-rich-quick scheme—if it existed at all (our jobs as monetary economists are to bellow from the rooftops that this practice is destructive).
Today, duration mismatch is part of the official means of executing the Fed’s monetary policy.
I have already covered how duration mismatch misallocates the savers’ capital and when savers eventually pull it back, the result is that the bank fails. I want to focus here on another facet. Pseudo-arbitrage between short and long bonds destabilizes the yield curve.
By its very nature, borrowing short to lend long is a brittle business model. One is committed to a long-term investment, but this is at the mercy of the short-term funding market. If short-term rates rise, or if borrowing is temporarily not possible, then the practitioner of this financial voodoo may be forced to sell the long bond.
The original act of borrowing short to lend long causes the interest rate on the long bond to fall. If the Fed wants to tighten (not their policy post-2008!) and forces the short-term rate higher, then players of the duration mismatch game may get caught off guard. They may be reluctant to sell their long bonds at a loss, and hold on for a while. Or for any number of other proximate causes, the yield curve can become inverted.
Side note: an inverted yield curve is widely considered a harbinger of recession. The simple explanation is that the marginal source of credit in the economy is suddenly more expensive. This causes investment in everything to slow.
At times there is selling of the short bond, at times aggressive buying. Sometimes there is a steady buying ramp of the long bond. Sometimes there is a slow selling slide that turns into an avalanche. The yield curve moves and changes shape. As with the rate of interest, the economy does best when the curve is stable. Sudden balance sheet stress, selloffs, and volatility may benefit the speculators of the world, but of course, it can only hurt productive businesses that are financing factories, farms, mines, and hotels with credit.
Earlier, I referred to the only reason why someone would choose to own the Fed’s liability—the dollar—in preference to its asset. Unlike with gold, hoarding paper dollar bills serves no real purpose and incurs needless risk of loss by theft. The holder of dollars is no safer. He avoids no credit risk; he is exposed to the same risk as is the bondholder is exposed. The sole reason to prefer the dollar is speculation.
As I described in Theory of Interest and Prices in Paper Currency, the Fed destabilizes the rate of interest by its very existence, its very nature, and its purpose. Per the above discussion, the Fed and the speculators induce volatility in the yield curve, which can easily feed back into volatility in the underlying rate of interest.
The reason to sell the bond is to avoid losses if interest rates will rise. Speculators seek to front-run the Fed, duration mismatchers, and other speculators. If the Fed will “taper” its purchase of bonds, then that might lead to higher interest rates. Or at least, it might make other speculators sell. Every speculator wants to sell first.
Consider the case of large banks borrowing short to lend long. Let’s say that you have some information that their short-term funding is either going to become much harder to obtain, or at least significantly more expensive. What do you do?
You sell the bond. You, and many other speculators. Everyone sells the bond.
Or, what if you have information that you think will cause other speculators to sell bonds? It may not even be a legitimate factor, either because the rumor is untrue (e.g. “the world is selling Treasury bonds”) or because there is no valid economic reason to sell bonds based on it.
You sell the bond before they do, or you all try to sell first.
I have been documenting numerous cases in the gold market where traders use leverage to buy gold futures based on an announcement or non-announcement by the Fed. These moves reverse themselves quickly. But no one, especially if they are using leverage, wants to be on the wrong side of a $50 move in gold. You sell ahead of the crowd, and you buy ahead of the crowd. And they try to do it to you.
I think it is likely that one of these phenomena, or something similar, has driven the rate on the 10-year Treasury up by 80%.
I would like to leave you with one take-away from this paper and one from my series on the theory of interest and prices. In this paper, I want everyone to think about the difference between the following two statements:
- The dollar is falling in value
- The rate of interest in dollars must rise
It is tempting to assume that they are equivalent, but the rate of interest is purely internal to the “closed loop” dollar system. Unlike a free market, it does not operate under the forces of arbitrage. It operates by government diktats, and hordes of speculators feed on the spoils that fall like rotten food to the floor.
From my entire series, I would like the reader to check and challenge the sacred-cow premises of macroeconomics, the aggregates, the assumptions, the equations, and above all else, the linear thinking. I encourage you to think about what incentives are offered under each scenario to the market participants. No one even knows the true value of the monetary aggregate and there is endless debate even among economists. The shopkeeper, miner, farmer, warehouseman, manufacturer, or banker is not impelled to act based on such abstractions.
They react to the incentives of profit and loss. Even the consumer reacts to prices being lower in one particular store, or apples being cheaper than pears. If you can think through how a particular market event or change in government policy will remove old incentives and offer new incentives, then you can understand the likely first-order effects in the market. Of course each of these effects changes still other incentives.
It is not easy, but this is the approach that makes economics a proper science.
P.S. As I do my final edits on this paper (October 4, 2013), there is a selloff in short US T-Bills, leading to an inversion at the short end of the yield curve. This is due, of course, to the possible effect of the partial government shutdown. The government is not going to default. If this danger were real, then there would be much greater turmoil in every market (and much more buying of gold as the only way to avoid catastrophic losses). The selloff has two drivers. First, some holders of T-Bills need the cash on the maturity date. They would prefer to liquidate now and hold “cash” rather than incur the risk that they will not be paid on the maturity date. Second, of course speculators want to front-run this trade. I put “cash” in scare quotes because dollars in a bank account are the bank’s liability. The bank will not be able to honor this liability if its asset—the US Treasury bond—defaults. The “cash” will be worthless in the very scenario that bond sellers are hoping to avoid by their very sales. When the scare and the shutdown end, then the 30-day T-Bill will snap back to its typical rate near zero. Some clever speculators will make a killing on this move.
 See the Monetary Metals Supply and Demand Report
 I argue that it always fails in the end in Duration Mismatch Always Fails
- Theory of Interest and Prices in Paper Currency Part VI (The End) (keithweinereconomics.com)