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Sunday, March 13, 2016

An Interview With One Of The More Robust Intellectuals Of Australia - Satyajit Das

I was very surprised that Satyajit agreed to an interview, mostly because we write predominantly about menswear, and it is probably one of the few subject matters I don't think he delves deep into. Below are a few questions I felt compelled to ask him and I hope all of our blog readers take the time to read his most recent book A Banquet Of Consequences, not because he asked me to plug his book but because I have almost finished it and I find it extremely interesting in giving a birdseye view of the global economy right now.

In backgammon you can’t strategise the unknown and you can only play the game whilst you are in it. Do you agree it’s impossible to work out or plan for a cataclysmic event until it’s actually upon you?

Answering a question at a news briefing on February 12, 2002 about the lack of evidence linking the government of Iraq with the supply of weapons of mass destruction to terrorist groups, Secretary of Defence Donald Rumsfeld said:

“there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know.”

I would add there is a fourth: unknown knowns – things you don’t know that you know. It is the best way to think about risk.

Interestingly, the statement, which attracted much commentary and became the title of a documentary on Rumsfeld by Director Errol Morris, was actually not original. It was commonly used inside NASA. Rumsfeld himself cited NASA administrator William Graham as the original source of the statement.

In a more formal economic or financial sense, we distinguish between risk and uncertainty. English economist John Maynard Keyes explained it as follows in 1937:

"By, uncertain knowledge, …I do not mean merely to distinguish what is known for certain what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."

If the cataclysmic event you are talking about is an unknown unknown or uncertain, then, by definition, it is unlikely that you can plan for it. Mike Tyson put it fairly bluntly when he said that everybody has a plan until they get punched in the face. It is a bit like that.

The interesting question is how one should live in a world which is like that. The idea that you should plan like you are going to live forever and live like you will die tomorrow has merit.

Bankers and the like always throw around the term ‘equities’ very loosely but there are so many uses of this term. What exactly do equities mean and how does this term correlate directly to the original etymology of the word equity?

Equity in finance traditionally refers to shares and stocks. Interestingly, it has now come to mean your capital or wealth; for example the equity in your property being the difference between its current value and what you may owe on it. In this financial context, it is of course a proxy for value or worth. Equity also of course means fairness and justness. If I remember correctly, then the word originates from the French equité, whose Latin root means even or just. So you are right. The word is ambiguous, like most language especially when it is to do with finance.

Equity in the sense of shares is synonymous with capitalism. But close examination highlights some interesting conceptual dilemmas.

Shares represent a residual claim. This means that their rights on a company’s earnings, cash flow and assets rank after all other claims or liabilities which must be first discharged in full. In effect, they are the last in line.

Today, due to low interest rates and low property rental yields, investors are looking at shares as a source of stable income (from the dividends). Financial advisors recommend them for this purpose. But as last in line for both dividends and capital return your risk is very high. The capital value of the shares can fluctuate a lot. In addition, shares are perpetual and you can only exit if you can find someone else to buy it from you. This is not assured. These uncertainties are ignored.

Another interesting thing about shares is that they are equated to ownership through voting powers. In reality, this is only relevant in very limited circumstances and few investors, even large ones, hold a high enough number of shares to be influential.

Ultimately, shares like all financial instruments represent claims on the underlying business, its earning, cash and assets. However, equity markets have increasingly decoupled from the real economy. Equity prices do not correlate to fundamental economic factors, such as nominal gross domestic product or economic growth, or, sometimes, earnings. Given that shares represent claims on the real economy, this is puzzling.

Increasingly, trading in financial claims, like shares, has become more important than the real underlying business itself; that is, financial engineering has assumed a more important role than real engineering. One indicator is that a greater proportion of the rewards now accrue to financial people rather than to engineers etc, in the real economy. That can’t be healthy in the long run.

So you are right equity as a term is very complex.

I notice my customers are like Pavlov’s dogs when it comes to discounts. How do you feel about discounting products and why do, according to some of my retail friends, Australian companies tend to discount too frequently and too heavily compared to their USA counterparts?

You are just highlighting the current reality that few businesses have pricing power. The reasons are complex.

First, there is now massive oversupply relative to demand in many industries. Industries over-invested anticipating stronger growth in demand than eventuated. Also in heavy industries policy driven investment in places like China created overcapacity which creates pricing pressures.

Second, wages adjusted for inflation around the world have not grown for most people. US incomes are at the level of the 1970s. Elsewhere we find the position to be similar.

A few professions and the better off have captured most of the gains. A winner take all is pervasive.

This means most people have limited purchasing power. At the same time, everybody is told every second of the day that they have to have certain things to be socially acceptable – live like the Kardashians (whoever they are!). So discounts are needed to match these very disparate forces. But, I guess, it is better than armed robbery.

Third, access to online shopping and comparisons has made markets which were local global. This is exacerbated by changes in currency values which create an environment of constant pricing pressures.

Fourth, a combination of factors, primarily globalisation of markets and supply chains, has created highly competitive markets, which drives down prices.

There is a dark side to this, primarily the exploitation of vulnerable workers in many countries. But most people choose to believe that the low cost of the things they buy is somehow disconnected from the fact that it requires below poverty wages for the people used to make it often in dangerous conditions.

Fifth, there has been a deep cultural change brought about by the Internet which is not well understood. Much of it is based on free services or things you don’t pay for directly or obviously. Now we all know you are going to pay or someone is going to pay but we choose to suspend disbelief. This leads to an expectation of getting something for nothing and also a lack of respect for intellectual property.

But this has consequences.

Take my work. I worked out that get paid a few cents an hour for writing books. I also write regularly for a few well known online sites but most of it is unpaid. This has two consequences. First, if I didn’t do it as a hobby then I couldn’t afford to do it. Second, just as importantly by writing I am displacing a paid journalist.

I get asked to speak. For example, I was invited to speak at the Sydney Writers’ festival. It is two 1 hour talks plus another event. I will not get paid but it will take me probably 4 weeks to prepare for these. The organisers and my publishers appeal to vanity. It for profile and will get my work better known – I know both to be factually untrue.

I am now reassessing my writing and speaking activities. I am not important and my ideas aren’t that interesting. But if all people with ideas withdraw in this way what is the consequence?

Take your work, If you cannot economically continue your business and cease isn’t that a loss in many ways to your customers.

I don’t think people make the connection. So ultimately they will have less. The model relies on other people coming along you don’t understand the dynamics. They lose happily and willingly. It is scorched earth strategy. I don’t know how long it can continue.

You say growth may end or stagnate - why do we have to fear this? Someone once told me that there was a period of 300 years that the price of milk did not rise in England. Yet these days we seem to find it alarming if prices don’t move up or down. Is it Armageddon if we choose to get off debt-heroin?

Growth isn’t important per se. Ordinary people would find little correlation between their personal well being and GDP growth.

Measurement is also arbitrary. Arguably it doesn’t measure anything really meaningful. GDP does not discriminate between income and expenditure on war, consumption, healthcare and aged care. Expenditure following war or a natural disaster, such as an earthquake, hurricane or storm, may increase GDP but produces no real net change, rebuilding what was destroyed. GDP does not take into account depletion of natural resources, especially non-renewable elements. It incorrectly accounts for environment despoliation, with the cost of causing and correcting the damage both recorded as economic activity.

But we have a society hooked on the idea of growth. It is seen as driving better living standards in the form of higher profits and wages.

There is a subtler reason as well. In most societies, redistribution of wealth is needed to keep social pressures in check. Redistribution is easier in a growing economy. The better off can just grow their share of the pie at a slower rate than less fortunate members of society to enable redistribution which is painless. If there is no growth then redistribution requires a real transfer of wealth which is more difficult as someone has to lose. The same process is evident between richer and poorer countries.

Once you have an over indebted economy, which is the case on average globally, growth and inflation become critical. It is needed to bring borrowing levels under control. As the level of debt stays unchanged if you don’t have growth or inflation your income doesn’t grow to be able to pay back your borrowing. Worse, if the economy shrinks and prices being to fall (deflation), then your ability to service your debt falls triggering bankruptcy.

So low or no growth is not necessarily a problem. In nature, growth is only a temporary phase which ceases at maturity. It may have positive effects on the environment or conservation of scarce resources. But the current economic, political and social system is predicated on endless economic expansion and related improvements in living standards. In his novel about the depression The Grapes of Wrath, John Steinbeck identified this tendency: “when the monster stops growing, it dies. It can’t stay one size.”

An astute friend of mine said if the world shits itself again there'll be another World War to sort out the debts. Do you agree? Why do people always resort to such dire measures when they consider catastrophes? Do you believe in the Murakami quip that in every human's heart their lies a belief that the end of the world is coming?

Financially, it is important to understand that the improvement since 2009 in share and real estate prices is artificial, engineered by low rates and money printing activities of central bankers. Few of the problems that triggered the problems of 2008 have been resolved.

By postponing the inevitable, they have ensured that the adjustment will be very painful. A slow, controlled correction of the financial, economic, resource and environmental excesses now would be serious but manageable. If changes are not made, then the forced correction will be dramatic and violent, with unknown consequences.

So the day of reckoning awaits us. The current game is trying to defer the timing some more. As Ayn Rand put it: “you can avoid reality but not the consequences of reality”.

This time around it will be more severe for a number of reasons. Debt has actually increased not decreased. Policy weapons (like lower interest rates, more money being injected into the economy, more government spending) are constrained – the ammunition has been spent. Emerging markets (like China) which helped cushion the 2008 problems are now a source of troubles. There is now increasing scepticism about policy makers and governments and a loss of trust in institutions. The geopolitical environment has also deteriorated.

The real concern, I have, is how ordinary people everywhere will react. In advanced economies, the majority of people face increasing difficulty in finding secure jobs, earning a reasonable wage, financing and keeping adequate housing, and building up adequate savings for a life after work. Future generations face diminished prospects, and will be forced to bear the costs of the problems created by their predecessors. I am not sure you can keep doing this.

I worry that participation in the democratic farces around the world (voting) has plunged. I think that is part of the disengagement of ordinary people. But this anger if it’s not channelled into the political process is powerful and dangerous. Historian A.J.P. Taylor writing about the 1930s noted that: “the saving, investing middle class, everywhere the pillar of stability and respectability…was now utterly destroyed... they became resentful … violent and irresponsible…ready to follows the first demagogic saviour”. That movie didn’t exactly end well. But it is exactly what is starting to happen now.

A worrying thing is the elites, who move in their own circles and indulge in group think, seem oblivious to developments. This year, at Davos, Steven Schwartzman, the billionaire/ CEO of Blackstone actually said the following: “I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side... Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is that happening, why is that happening?” Given the decline in living standards of ‘ordinary people’, the reaction I would have thought is obvious and the harbinger of the worse things to come.

Now the question is how do you deal with these pressures? I think one option is repression. In Japan, the government had a number of vocal press critics of the government failed economic policies (Abe-nomics) fired from their jobs. Ultimately, refocusing attention away from economics to a common external enemy is an age-old and trusted political gambit. Without the Falklands, I doubt whether Margaret Thatcher would have remained in power. So the risk of conflict is increasing.

Murakami is probably talking about something slightly different. He is concerned about human beings, supposedly unique, self awareness of mortality.

I read your books and you have a tremendous ability to refer to loads of facts or what appear to be facts. How do you know if the numbers you quote or the systems you describe are indeed correct? For example - you said 85% of all debt raised was used for non plant and equipment. Why not 86%?

The reviewer in the New York Times of A Banquet of Consequence (it was released as The Age of Stagnation in the US to avoid it being confused as a cookbook) objected to the “blizzard of facts”. He also implied that I was a Malthusian, suicidal village idiot. It has ensured the book’s total failure in North.

I happen to think that facts or accurate data are important.

In Chapter 5 Running on Empty I look at the effects of scarce resources on future growth levels and the impact of manmade environmental change on economic activity. Perhaps the most interesting statistics are on fuel efficiency. Coal provides 50–100 percent more energy than the wood it replaced. Oil and gas provide 3–6 times more energy per weight than coal. In contrast, ethanol, a bio fuel, has 30 percent less energy density than gasoline and 12 percent less than diesel fuel. Lower energy density reduces the attraction of electric cars because a battery only has one-sixth the joules per kilogram compared to gasoline, reducing the range between recharging.

The precious nature of fuel is also not generally appreciated. 10 tons of pre-historic buried plant and organic matter converted by pressure and heat over millennia was needed to create a single gallon (4.5 litres) of gasoline. The human race is on track to exhaust the energy content of hundreds of millions years’ worth of sunlight stored in the form of coal, oil and natural gas in a few hundred years.

I think this data is very important in trying to understand how energy drives our wealth and growth. It is also important to understand how renewables can never be the complete answer which is important for understanding our prospects. A debate based on people’s feeling about these issues without data is unhelpful.

There is always an issue about the quality of data. It is never perfect. I try to check and calibrate data as well as possible. Importantly, the use of data forces people to examine the factual material. It places emphasis on them finding new and better data which can help challenge hypotheses allowing us to reach a better level of understanding. You can’t do that without data.

On your 85% or 86% point, you are right it is the order of magnitude that is important. But if the number is 85% it just is isn’t it?

I am out of tune with our times. Today, our debates are conducted on the basis of ‘truthiness’, a term coined by Stephen Colbert – “Truthiness is 'What I say is right, and [nothing] anyone else says could possibly be true.' It's not only that I feel it to be true, but that I feel it to be true. There's not only an emotional quality, but there's a selfish quality.”

But as Aldous Huxley observed: facts do not disappear just because they are ignored.

Throughout the 19th and 20th Century and into, so far, the 21st century the cognoscenti have all dabbled with a bow tie at some point. Abe Lincoln, Albert Einstein, Walter Gropius, Groucho Marx, Winston Churchill - what's your take on bow ties and why do you think these characters chose to wear them?

My knowledge and interest in sartorial matters is limited. I dress the same every day, with minimal variation. I also haven’t worn a neck tie for year. So I am not a good person to ask this question.

Logically, I can say that a bow tie offer theoretical advantages. It is harder to drop food on or dip into a drink.

Correlations, such as that between an item of clothing and intelligence, may be sometimes misleading. For example, people pay too much attention to money. Galbraith was right when he wrote: “Nothing so gives the illusion of intelligence as personal association with large sums of money. It is also alas an illusion”.

Perhaps the people you mention were interesting and intelligent and just wore bow ties?

Can you give us a list of five influential thinkers you think our blog readers might benefit from following?

I don’t have ‘heroes’ or people who influence me. Friedrich Nietzsche’s observation is correct: “every philosophy hides a philosophy; every opinion is also a hiding place, every word is a mask”.

I have never been comfortable with over-arching theories or big ideas. Take economics/ finance theory for example. Many economists modestly consider economics the most important social science, applicable to all human behaviour as well as to financial and social problems. In reality, economics is religion, with different sects. Everyone professes faith in whichever prophet is fashionable as long as it is consistent with their ideological framework and delivers growth and rising living standards.

Also as Nietzsche understood the people who create gods are implicitly more powerful than the figures they conjure up. Nietzsche’s statement about the death of god is misunderstood. He was interested in what would take god’s place. All manner of scientists, philosophers, artists, business leaders and quacks, of variable quality, have filled the vacuum.

Everyone should try to know something about everything and everything about something. So I read different people and different things.

I find Schopenhauer and Nietzsche interesting. I also find Fyodor Dostoevsky, Jorge Luis Borges, Vladimir Nabokov and Werner Heisenberg’s work (on Uncertainty) insightful. I read a lot of history and science but little economics or finance. I can’t stand self-help and ‘the [x] steps to a goal’ books.

The most important thing is to read widely and critically. As Nietzsche wrote: “great intellects are sceptical”.

About Satyajit Das

Satyajit Das is a former financier with over 35 years' experience. He is regarded as a global authority on derivatives and risk. He anticipated the 2008 financial crisis and has been prescient in outlining subsequent developments. In September 2014, Bloomberg included him as one of the 50 most influential people in international finance.

He was featured in Charles Ferguson’s 2010 Oscar-winning documentary Inside Job, the 2012 PBS Frontline series Money, Power & Wall Street, the 2009 BBC TV documentary Tricks with Risk, and the 2015 German film Who’s Saving Whom.

Das is the author of two international bestsellers, Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006) and Extreme Money: The Masters of the Universe and the Cult of Risk (2011). His latest book is A Banquet of Consequences: Have We Consumed Our Own Future? (2015) (published as The Age of Stagnation in North America).

A Banquet of Consequences (2015) also published as Age of Stagnation


Extreme Money (2011)

“Like Hunter S. Thompson’s Fear and Loathing in Las Vegas, Extreme Money launches you into a fascinating and disturbing alternative view of reality. But now greed predominates, the distorted world of finance is completely global, and the people making crazy decisions can ruin us all. This is an informative, entertaining, and deeply scary account of Hades’s new realm. Read it while you can. ”
–Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan School of Management and Author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown


Traders, Guns & Money (2006)
"Funny, readable and peppered with one-liners from Groucho Marx, "Traders, Guns & Money" offers an ideal primer for anyone tempted to take a walk on the derivative side." James Pressley,

1 comment:

  1. Many thanks for this interview with Das; good questions and great answers!