Thursday, November 27, 2008

So let me see if I understand the crisis.

Alfred lends money that he doesn't have to Bill, and Charlie lends money that he doesn't have to Drake. The IOUs are written on napkins.

Bill and Drake bet against one another on a coin flip.

As it turns out, Drake wins the bet, but when it is time for him to collect, he is shocked to learn that neither Alfred nor Bill have real money to pay him. So he doesn't try to collect, but books his napkin-asset on his balance-sheet as a "cash or equivalent".

And now that the financial wonderland of fictitious loans and fictitious bets is being unwound, Obama and his team are asking Americans to pay real money -- which is to say, higher taxes -- to compensate Drake, who, as you recall, was never betting real money in the first place. Throughout the last decade, people were making a million dollars a day, but nobody cared, because they were only spending a fraction of it competing for goods and services in the real economy. However, the bailout is turning all those profits into real money, which will compete with wage-earners for the real products in the world.

So if you are a wage earner, and your children will be wage-earners, then
they will not eat as good food, buy as good seats to the orchestra, live in as nice a neighborhood, because, as a direct consequence what is happening right now, they will be competing against the descendants of people who earned tremendous amounts of money.

But will that really happen? The bailout, projected deflation, the low thirty-year note, and all that is probably a stop on the road of the system unwinding itself. They are using more imaginary money to prop up their other imaginary money.

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Tuesday, November 25, 2008

With our President Elect's metaphor -- that we need to "jolt" the economy back to life -- it is clear that economy is an ailing, sick, old autocrat with a heart condition caused by terrible dietary habits and a lack of exercise. If we bring him back from the brink of death, we will be dealing with a sick, ineducable and ungrateful Paterfamilias. So why not let the old bastard die, so a new generation can take over? Why mortgage the future on medical treatments for the old man when we could use that money on the kids?


Friday, November 21, 2008

the fixed income markets hurt more than the S&P

Bonds are for wise old men, while stocks are young man's game. Stocks speak in ambiguous poetry, but bonds communicate in clear prose.

When the stock market crashes, nobody knows what the new prices mean. Are half the stocks worthless, while the other half are worth twice their value, but nobody can sort them out? Is it a wave of panic selling from hedge fund liquidation?

The twenty percent change in the return on the thirty year bond is telling us that monetary policy will neither default nor inflate, and that we are looking at a full generation of pain before things even begin to brighten a little.

Wednesday, November 19, 2008

Why Warren Buffett bought USG at 35

It is becoming clear that capitalism is not a system that rewards intelligence, but rather a system that rewards the kind of intelligence required by the system at a particular juncture of the system's evolution, and that, after the system's requirements have shifted, what once passed for intelligence, looks a lot like stupidity.
Citibank and Goldman Sachs are trading below their 52-week lows. In the cold light of reason, they are being assessed at lower values than those dictated by the eye-bulging panic of earlier sessions.

Tuesday, November 18, 2008

It would certainly be cheaper than letting the Auto industry collapse, so maybe if everybody in America pitched in, and we all bought Goldman Sachs 500M Jun 5 calls in Ford, maybe Paulson would change his mind...

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Must we all end as Tolstoy?

Rumination on the role of art in society inevitably returns to Janusz Korczak. Would the orphans have been served by an unflinchingly honest caretaker? Who is really helped when artists "tell it like is"?

After watching the new bond movie last night, I see that violent movies as the anti-Korszack -- rather than soothing the souls of the innocent as they head to the chambers, modern entertainments symbolically enact the punishment instinctively craved by the profoundly guilty.

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If you're going to do the crime, you should get the dime

Throughout the upswing, mewling leftists complained about the unwillingness of corporations to share the benefits of increased productivity. However, if the profits generated during the last period were almost entirely specious, and the role of the "employees" was to be a distraction while the con men in charge of those organizations looted banks and shareholder value, then it is quite possible that the "workers" were quite fairly paid for their "work", since the engine of profitability was dissembling and fraud.
Traditionally, "business" and "art" were considered separate and mutually exclusive domains. However, the last few decades have seen a blending of the categories, where former businessmen like Jeff Koons pursued lucrative art careers and many businessmen, like Rupert Murdoch or Sir Richard Branson, represented themselves to the public as "artists".

Using classical definitions, an Artist is someone who is skilled in Art, namely representation -- a person who is rich in leisure and subject to imaginative visions, while business is defined by the absence of leisure (negotium) -- a complete focus on the hear and now. There has always been one kind of artist who bridged the two diametrically opposed psychological states, and this person was called the "confidence artist", whose Art was entirely dedicated to the representation of himself as a person engaged in business. Come to think of it, if we accept the con man as a bridge between the worlds of Ars and Negotium, there is no need to create a new category to describe the contemporary world's "artist business man" and "businessman artist".

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The traditional argument against a Marxist vision of capital as a relentless force is that Marxism ignores the essential humanity and diversity of capitalists. However, it was only with the invention of the computer, and the elevation of the Chief Financial Officer that corporations because the truly profit-obsessed entities that Marx thought they were in the 1880s.

Paradise regained?

One of the mechanisms by which capitalism as a system has perpetuated itself is that, during relatively good times, the wealthy were more generous to their minions, and then, during relatively bad times, those minions had savings that helped them endure a tougher economic climate. A Marxist matrix insists that capitalism has its own internal logic, and the capitalists will always be driven to a relentless maximization of their profits, but the historical fact is that many capitalists felt a deep human need to share their prosperity (for example, Henry Ford the First), and in many ways capitalism served more to amplify the humanity of the powerful rather than squelch the humanity of the poor.

The permeation of the computer and computerized accounting systems moved the position of Chief Financial Officer from a record-keeping role to a proscriptive role, and once the finances of the corporation were firmly dictated by the "numbers", it was logically impossible for the executives presiding over success to spread the wealth around among their employees, as was their natural human tendency. As a result of the "numbers" we had enormously dispirited workers who were short the enterprise risk of a company, without receiving any time decay in the form of bonuses.

Now, we are heading into a recession after the bulk of economic growth was shifted into a smaller class of people, and many are starting the downturn with more ravaged finances than they ended the last downturn. This has introduced a systemic instability into the political consensus around raw capitalism, untempered by human traits during the last period of growth. But how do you get the genie back in the bottle? How do you create a social system that rewards innovation without rewarding relentless and unimaginative obsession with the reward itself?

Monday, November 17, 2008

Why obama might fail

Obama has the temperament to be one of the greatest mayors in America. He enjoys running things efficiently, listening to various points of view, finding the common ground. In fact, Daley shunted him into the Senate in order to prevent him from emerging as a viable challenge to Daley's hegemony.

However, will an essentially mayoral temperament help the President? The country is too diverse to bring together via compromise -- it needs to be united by leadership. Will Obama continue to grow into exactly what we need, and find the leadership to genuinely help Americans make the sacrifices that will take them to a better future?

Why Obama might succeed

Time and again, people who fancy themselves to be smarter than him have second-guessed him on the campaign strategy, and he slowly and meticulously did the right thing and proved his detractors wrong.

You don't need ayawasca to see this future

So what does the future hold?

Government bailouts increase the deficit;
Chinese stimulus packages and domestic infrastructure investment reduce their appetite for Treasury notes;
business is crowded from the credit markets, so government steps in with direct loans to businesses;
the deficit increases, further crowding private businesses from the credit markets;
a system that is neither socialist nor capitalist, where the government, in order to preserve the fiction of solvency, it makes easy credit available for the nearly bankrupt citizenry, who use the credit to maintain their debts, to perpetuate the shells of companies;
moves to nativism -- American taxpayers are subsidizing the formerly-international corporations, so the economic multiplier effects of those jobs should benefit the taxpayer base;
homeland security expands its grip, and public discussions of economic reality become a "threat to the homeland" -- censorship is put in place, because an attack on the United States credit rating is seen as more significant and more terroristic than leveling a couple of buildings;

At that point it gets somewhat cloudy... President Palin was the simulacra -- but who will be the real thing?


Sunday, November 16, 2008

Hmmm, maybe capitalism can be saved after all?

Imagine a meritocratic world, where people who wanted to run for office were given a standardized test, and then voters could assess their actual understanding of the undisputed facts.

Now, let's take it a step further, and imagine a world where the boards of corporations were selected from people who passed a similar standardized test, which would staff boards with people who could not easily be deceived by the CEOs. Further, let's imagine a world where, if a person wanted to be on a board, they would become legally liable for fraud that occurs in the company (i.e., expand Sarbanes-Oxley to include boards).


Repeal the 17th amendment

Let's pause for a moment and ponder the original genius of the United States Constitution, and the provision of having United States Senators selected by the various State Senates. Madison's vision increases the credibility and competence of the state legislatures, and also effectively blocks high net worth individuals from purchasing their seats as an attractive trinket. It also selects individuals with deep political skills rather than public relations skills, which are far more useful in the Senate.


The beauty of asking Clinton to be Secretary of State is that all of Bill's skeletons will be discussed during the Senate confirmation hearings, and that will either open Hillary up for perjury prosecution or neutralize her as a political force. If she accepts, then she cannot run in 2012, no matter how tempting a target the Obama Presidency is; if she declines, then Obama's conciliatory maturity contracts with her childish petulance.

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The bizarre idea that the financial system needs to be protected from capitalism is reminiscent of some South American Countries where legislators are all granted constitutional immunity to the laws that they pass.

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Saturday, November 15, 2008

I'd rather stiff the Chinese than sell the National Parks

According to Barron's, the price of CDSes on T-Bills has doubled -- though T-Bills remain AAA. At first glance, it seems ontologically impossible for our government to default on its debt, since the federal reserve can participate in treasury auctions and create the money that could be used to repay the debt. However, if we must choose between hyper-inflation and stagnation -- and if interest payments consume a greater portion of federal revenue than the rest of the budget, if the presence of the United States Government in credit markets is squeezing out business-building competitors, and if we reach the point where the rest of the budget is less than the tax revenue, it might make economic, logical and political sense for the Federal Government to start fresh.

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Economic recession is usually accompanied by cultural prudery. But will the technosexual revolution liberate people from the business cycle?

Friday, November 14, 2008


So it turns out that the collapse of the Minneapolis bridge was not caused by Republican underinvestment in the infrastructure, but rather by Democratic overinvestment -- haste to build massive infrastructure projects without sufficient engineering.

Wednesday, November 12, 2008

Would a purely corrupt system be more efficient than the system that we have? If the AIG bailout was about preserving 20B in Goldman P&L, it cost eight dollars for every dollar Paulson gave to his friends. If we could've just given him three hundred billion dollars as payment for locking himself in a room until the change of administration, it would have been worth it.

Why are you scared? It's only a flash of light!

With the financial crisis, we have seen the explosion, but we haven't heard the sound, and we certainly haven't yet felt the shockwaves.

plus ca change ...

The same people who were kicking themselves for not buying a nice New York brownstone for a hundred thousand dollars in the early eighties will probably have the chance to not do it again.

Deflation today, inflation tomorrow

The bond markets are assuming that Obama will be responsible and clean up Bush's mess. But if Obama flinches, the bond markets will explode with pent-up anxiety about Bush's policies, and we'll face a deflationary economy, inflationary monetary policy, and long-term interest rates at ten percent. So watch what _that_ would do to housing prices.


As the Treasury and Fed send another trillion dollars up the chimneys, to spitefully sabotage the future Obama administration, I feel like somebody who is locked outside of his house while a serial killer inside is meticulously killing his family. "Easy now, he has promised that he'll leave peacefully in a few hours", the police say. "We don't want any trouble: just sit tight."

How can I think such uncharitable things about them? Well, by their system of values, it is more charitable than thinking that they are complete idiots.

Wie man es macht, ist es falsch

For a few brief seconds, I liked Paulson's bailout, because supporting "Troubled Assets" would wipe out the profits on the huge derivative portfolios tied to those assets, profits from which would benefit the wrong people in the financial system (i.e. people who ruthlessly took advantage of the broken valuation model for those contracts at places like AIG).

I should have guessed that when he realized that driving up the prices of CDSes would directly affect the PandL of Goldman, he would pull back from his original plan.


I still don't understand why the House Democrats supported the Bailout.

So a giant dinosaur terrorized us for twenty years. Now the dinosaur is hobbled, exhausted and nearly dead. The dinosaur's minions come to us, hat in hand, and ask for food to keep the sick dinosaur alive. "You've gotta save the dinosaur, they say -- it's the only dinosaur you know -- and if you thought life was bad when the dinosaur was hunting you and eating your children, imagine how terrible life will be without the dinosaur!"

Tuesday, November 11, 2008

Is this how Newton felt?

After admiring the comic timing of the PC guy, and hearing that the PC guy was played by "comedian, John Hodgman", and admiring the comic timing of "comedian, John Hodgman" on the Daily Show, I am slowly coming to the dawning realization that the "comedian, John Hodgman" who plays the PC guy is actual the same person as the "comedian, John Hodgman" who appears on the Daily Show!

Monday, November 10, 2008

Inscrutable bond markets

But the big question is why the Chinese stimulus package didn't crush bond prices? If it is going to rescue the world economy, then interest rates should go up; if it suggests a fundamental reorientation of China towards itself, then it is the first of many Chinese stimulus packages, leaving less money to buy treasury notes, which should, of course, increase interest rates, too.

So the more depressing possibility, is that the bond markets expect a long and difficult near-deflationary period, so a four percent return is a real five or six percent return, and the assumption is that the economy will be so weak that even our local wealth will be tripping over itself to experience positive capital growth.

And thus we have more proof that the bond markets are just smarter and more emotionally mature than the equity markets.


Another fulfilled campaign promise

By emphasizing programs to preserve the middle class, the new administration is opting for "change that basically keeps things the same", which, come to think of it, is exactly the kind of change that most Americans can believe in.
The latest infusion for AIG is yet another transfer of wealth from the Federal Government to the financial system. It is increasingly clear that AIG did a terrible job modeling the risk on their credit default swaps, and if they had been Chicago Floor Traders rather than Harvard genius math Ph. Ds, they would have experienced the enormous demand for their product as evidence of an incorrect model, with a consequent adjustment to their model until demand slackened. However, moving our theoretical apparatus seven miles South in Chicago, to Hyde Park, we can still make sense of their ridiculously low prices for Credit Default Swaps: AIG default risk was built into the price, so at a CDS at two cents on the dollar for a fifty percent default risk had the embedded default risk of AIG itself.

We know that GS had 20B of AIG CDSes --but who were the other speculative counterparties? Now that the US stake in AIG has crossed 80%, this should be the requested in a FOIA filing. In the meantime, AIG should be put into a type of recievership where a federal judge can adjudicate which obligations will be made whole and which obligations will go out worthless. There is something outrageous about Federal money providing a 50x1 return on bets that were made at theoretical value and are going out at 5000 per cent.

Saturday, November 08, 2008

Character types

Bill Clinton was, of course, a band guy. The off-center outsider at High School with a special talent that freely moved among the cliques.

G. W. was a frat boy. Nuf said.

Obama's formative experience was being a "new kid". That means that his special gift lies in figuring out what people want, and then reinventing himself to become that thing. If you watch childhood dynamics, the first people to reach out to the "new kid" in a grade school are always the misfits and the losers, so it should not surprise the people on the left as they find themselves left behind as Obama moves into more elevated circles.

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For the last two decades, it was a Schumpeterian world, as workers were told to have patience when their trusted social structures collapsed, and it was promised that new and better forms of civil society would emerge.

Now, of course, we have seen the collapse of big business, in as spectacular a fashion as big government collapsed in the seventies. And, of course, big business has sought to revive big government to protect it from the market's judgment of its failure.

But the real failure of our financial system came from extreme centralization and inadequate diversification. On a superficial level the financial system failed because the quality of free research available from Wall Street -- the foundational underpinning of the Efficient Market Hypothesis -- underwent a fundamental change when analyst compensation was reduced in the wake of Eliot Spitzer's indictments, while analyst compensation was increased at hedge funds. Once the top tier of analysts moved to hedge funds, the mid-level analysts at the ratings agencies were -- definitionally -- the people who could not get top-tier hedge fund jobs, and they were strangely in the dark while plying their trade.

But the real problem is an absence of diversity of opinion -- the collective group-think that descended on financial institutions where models estimated risk two three decimal places, but nobody bothered estimating the risk that the models were wrong (which is not to say that there weren't plenty of voces clamantes in desertas, but just that such people were effectively isolated from power). Those who felt in their gut that the models were wrong, were told that they didn't have the intelligence to deserve the high compensation that was a natural consequence of feeling in their gut that the models were right.

But this ultimately refutes the classroom model for stratifying intelligence and shows a sharp critique of Goldman/Harvard synthesis. By drawing our social elite from people who have the unique ability not to upset their social superiors -- people who receive Rotary Scholarships, get positive recommendation from High School teachers, learn to flatter the egos of the establishment figures at our institutions of higher learning -- we create an environment inside the higher echelons of corporate culture that is uniquely prone to groupthink, since these are the very people who were best able to articulate the hidden views of their teachers when they were in school. The result is, of course, that when an educational pedigree is the prerequisite for filling a social role, the people who fill that social role usually have a special gift for intellectual mimicry, and the absence of core values that is highly correlated with the ability to simultaneously please a variety of divergent professors gets caught in the amplification chamber of the modern american corporation, causing a lack of doubt in the generalized consensus.

Which is not to say that the highest reaches of American society should be staffed by pot-smoking drop-outs, though it is hard to imagine a bunch of stoners doing a much worse job, but rather to say that the failure of the financial system is, in fact, an indictment of the entire social structure that has emerged in the previous half-century. People who are thoroughly invested in that social structure can only imagine preserving it, and the means by which a highly centralized, systematically unintelligent social organization is to be preserved will only increase the imbalanced weight of the social structure when it is time for it to collapse, while forestalling the inevitable emergence of a more dynamic social structure.

Which brings us back to Schumpeter. Capitalism is a dynamic system, but humans are terrified little mice, who scurry to the safety of their holes at the first hint of change. For the longest time, so-called capitalists derided the working classes resistance to change, but when the capitalists are asked to do the very thing that their professed allegiance to their form of social organization would ask of them, they balk, and become the biggest and loudest whiners of them all. Schumpeter is usually seen as a reactionary, chiding the workers for their unionized resistance to progress, but the simple fact is that the real resistance to progress comes from those with the greatest stake in preserving the collapsing system -- namely the members of the Harvard/Goldman elite, and it will be interesting to see to what degree Obama is committed to preserving a system that has benefited most of his friends.

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Friday, November 07, 2008

One of the compelling Clintonian arguments was that, if Obama was have such trouble in a genteel campaign against a member of his own party, it was hard to imagine him withstanding a hostile campaign against another party. As it turned out, however, the Clintons were much tougher competitors than McCain was, which sticks to a Chicago trope, since the Chicago primary is usually the real election.

Thursday, November 06, 2008

By this sign shall ye recognize him

The key questions to watch for in the Obama presidency

1. How quickly he backs away from a Pelosi style generalized stimulus package which gives all taxpayers a couple hundred bucks to spend on ice cream cones and taxi fares.

2. Whether he bails out the automotive industry, or allows it to reconstitute itself in several dozen environmentally friendly, more economically efficient units

3. Whether he bails out the financial industry, or allows it to reconstitute itself into several hundred more economically efficient units.

4. How he finesses the inevitable need for a more intelligent tax policy.

5. Whether he encourages a moderately inflationary monetary policy at the fed.

No silver lining

Q: If the world is heading for a catastrophe, why are gold prices plummeting?

A: With 20B ounces of gold in the world, each dollar decrease in the value of an ounce of gold reduces the wealth of the world by 20B, and a three hundred dollar drop in gold has reduced the wealth of the world by 6T.

Q: Oh, I get it. Gold is going down because, by some measures, it could be conceived as good news for gold to be going up.

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Es Viva Andrew Mellon

Over the last twenty years, Japan freely lent 10 Trillion dollars to the west -- this money went for bad real estate loans in the US, four store hotels in second world backwaters, coffee shops in iceland, and other terrible places where it is now worth dimes on the original dollars.

Nobody knows the extent of "rot" in the international financial system, but I would gently suggest that, as a matter of world history, the 10T number is probably a good start -- and that means that, if the goal of bailouts is to preserve the current system by having national governments make the banks whole, we are only about twenty per cent done. And then what do we have? We have a moribund financial system, and Americans get to spend the next twenty years paying for the crap that was bought in the previous twenty -- it is like socialism, except that people are subsidizing the Japanese rather than themselves.

When European and American governments are "saving" individual banks, the deeper fact is that we are only about ten per cent of the way done with repaying the trade imbalance.

So what is the right economic plan?

1. Moderate inflation
2. Expand the safety net
3. Let the current financial/corporate system collapse and allow the shards get caught in the safety net, and watch new and wonderful systems emerge. For example, if a team from a bankrupted automotive company has a smart idea, use the money that could have been spent keeping the automotive company alive to fund their lightweight enterprise.

Megacorporations are the evolutionary equivalent of dinosaurs -- large collections of dna that need size in order to compete with one another: in the future a swarming collection of smaller organisms will lead to greater efficiencies than hulking monstrosities. Government intervention to preserve these joyless monoliths is like enslaving the egg-stealing mammals in the service of their cold-blooded predecessors.

How is that Democrats have a reputation as biological evolutionists but economic theocrats?

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The idea behind "trickle down" economics is that the very wealthy will be delighted to spend perhaps one or two percent of their net worth on labor intensive luxuries that create comfortable middle class lives for echelons of service workers, however, in a year where the very wealthy have lost twenty to forty percent of their net worth, it is hard for them to cultivate the celebratory mood required for free spending, and we watch the entire economy slide into the abyss.

Deflation leads to a cycle of economic stagnation -- people hoard cash because simply sitting on money is the equivalent to investing it. By the same logic, if the Fed wants to revive consumption, inflation creates a giddy incentive to keep money circulating, as a "use it or lose it" philosophy prevails.

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Tuesday, November 04, 2008

"If you make less than a quarter million dollars a year, you're safe"

In a potentially deflationary environment with a 4% twenty year t-bill rate, it is preposterous to think that raising the income taxes on the top 1% of American earners will yield enough money to address the eleven trillion dollar debt that was established during the period when the American upper classes effectively quadrupled their assets. The truly wealthy are buying tax free federal bonds, and preparing to hunker down for several generations of untaxed leisure. Needless to say, the economy will not heal unless consumption is goosed, but increasing consumption through middle-class credit card debt is a non-starter, and the current conjuncture that couples a shrinking economy with a large class of people living on the interest paid by the federal debt will beget coupon-cutting trust fund families who will not contribute to the tax base.

Replacing the income tax with an asset tax would release money into the economy if the people who accumulated money during the consumption boom were forced to spend their money before it was taxed away. Inflation is, of course, an extra-legislative asset tax -- and if it is managed along with inflationary social programs that provide a safety net -- it is difficult to argue with a policy that would encourages reckless consumption among the very people who pocketed the federal deficit during the Bush years.

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Sunday, November 02, 2008

And, lest we forget, allow me to remind you that the world is something like sixty trillion dollars poorer than it was a year ago (if we add together the collapsed world equity, commodity and property markets).

As they say on television, "that's gotta hurt!"
There is a general hope in America that Obama and Axelrod's ability to create a ruthless political machine bodes well for their administrative competence at running the government. Chicago's experience with Mayor Daley suggests that those two factors are not inevitably coupled.

Marcel, the guy with a baguette in his armpit

One of the mysteries of organizational psychology is the near inevitability of different social roles emerging inside the human ecosystem. If you put a hundred identical people together in a community, with a few months, twenty will be the responsible hard-workers, ten will be the class clowns, and the other seventy will be middling coalition -- willing to do what they are asked, but also eager to avoid work when they can. The extra discipline of the hard workers comes from a psychological oppositionality in seeing their structural superiority to the mediocre middle and the lazy laggards.

In rare cases, an entire organization -- conceptualizing itself in opposition to other organizations -- can defeat this basic dynamic. By structurally situating themselves in relation to other collectives, they are able to be almost 100% productive -- because they have effectively externalized their tribal need to psychologically represent the roles of class clown. This, of course, is the dark fact of racism's social utility -- and the tragedy of racism is not that one community takes its own superiority for granted, but rather that the other community accepts the role assigned to it -- or that the first community uses its power to suppress the second.

In this campaign, Obama and Axelrod have created a campaign of hard workers, and in broader political ecosystem, McCain's organization is unable to claw their way into the top tier, because the ground is so well occupied, with the bizarre result that their own campaign is so slapdash that it can be infiltrated by a pair of Canadian comedians posing as the Prime Minister of France.

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Whoever America chooses as President will age about twelve years in the first nine months, as they have to deal with tragic decisions and choosing the least terrible among dozens of nightmarish scenarios. Needless to say, McCain -- though his younger self might have been up to the challenge -- simply does not have the dozen years of vitality that the job will inevitably deplete.

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