High Stakes Gambling in a Town Called Zugzwang
Did you ever read "Jabberwocky""? It must really be read aloud for best effect.
'Twas brillig, and the slithy toves
Did gyre and gimble in the wabe;
All mimsy were the borogoves,
And the mome raths outgrabe.
"Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!
Beware the Jubjub bird, and shun
The frumious Bandersnatch!"
He took his vorpal sword in hand:
Long time the manxome foe he sought—
So rested he by the Tumtum tree,
And stood awhile in thought.
And as in uffish thought he stood,
The Jabberwock, with eyes of flame,
Came whiffling through the tulgey wood,
And burbled as it came!
One, two! One, two! and through and through
The vorpal blade went snicker-snack!
He left it dead, and with its head
He went galumphing back.
"And hast thou slain the Jabberwock?
Come to my arms, my beamish boy!
O frabjous day! Callooh! Callay!"
He chortled in his joy.
'Twas brillig, and the slithy toves
Did gyre and gimble in the wabe;
All mimsy were the borogoves,
And the mome raths outgrabe.
So goes the poem "Jabberwocky", the classic and famed nonsense poem written by Lewis Carroll and included within his book "Alice through The Looking glass". It's a marvellous poem which I have always loved since I enthusiastically memorized it in my youth.
He wrote it in 1871, as a sequel to his 1865 novel "Alice in Wonderland". It's a long time ago for such a popular childrens' story. The first novel, also a classic, was about Alice in a land found after she slipped down a rabbit hole in which the characters she met were based upon the playing cards in a deck of cards.
"Alice Through The Looking Glass" (which I'll refer to as ATTLG from here on) is set also in a fantasy world, but this time it is a world encountered by Alice after she steps through a mirror. It begins when she is playing with her two kittens, Kitty a black one, and Snowdrop a white one. After going through the mirror she finds a book containing strange unintelligible characters, and finds that it is mirror writing, and when held up to the mirror the reflection of the writing in the book can be read. And what she read was the poem "Jabberwocky". As an aside, Carroll wrote the first verse of jabberwocky several years earlier, during 1855, and the rest of the poem was apparently added onto the first stanza 16 years later while writing ATTLG.
The main characters of ATTLG are, unlike Carroll's prior novel, representative of pieces from the game of chess. Thus the King and Queen, in both chess and playing cards provide continuity as do Mad Hatter and March Hare, but the game is now chess. In Looking Glass, each field is a chess square, a Red Queen and a White Queen, and the brooks which Alice crosses to the next field are each a move in the game. Alice is a pawn in the game, and when she crosses the last brook she is promoted to a Queen just as in chess. She grabs the Red Queen thus checking the King and the game comes to an end. Alice wakes up and finds her kitten again.
The game of chess itself appears to have originated in India about the 6th century where it was called Chaturanga, which in Sanskrit refers to 4 divisions of the military - Infantry, Cavalry, Elephants, and Chariotry. It made it's way to Persia about 600, and upon the Muslim conquest of Persia in 633 became known as Shatranj. Then it passed to Greece, Portugal, Spain and Europe, where the "Shah" (in "Sha-trang") became a "King".
Here are a couple of Templar Knights (the international bankers of that time) playing it in the 13th century:
Between 1200 and 1500 the rules evolved and some more pieces were added and it became the modern chess as we now know and play.
To my way of thinking, chess was an interesting choice of subject for Lewis Carroll to have made for his book ATTLG. His story was fantasy and illogical and full of paradox both in events and also in dialogue. Chess on the other hand could not be more different. It is logical, and strategic and sequential in nature.
The next person I would like to introduce in my little tale is Allesandro Salvio (1870-c. 1640) . Salvio was a great Italian chess player in the early 17th century. He wrote several books about chess. In one of them he described a strategy which was used in chess to gain advantage particularly during the latter part of a chess game, called the endgame which had been used in Shatrang since the 9th century.
This strategy was given a name in the German language during the 1800s, and in 1905 a well known German chess champion wrote about it in his chess magazines and books, and introduced the German word for this strategy into the English language. His name was Emanuel Lasker ( 1868 - 1941)
This chess strategy I am talking about is called "Zugzwang".
At this point I should mention that when I decided to write today about Zugzwang, I began my research for my article, and quickly discovered an article in Dailyreckoning which can be seen here about the very same term and discussing Bernanke's congressional testimony during May 2013. I was put off for a while upon finding that, but on reflection I decided that what I planned to say would not be diminished by the presence of that piece. I wouldbe relevant for readers so long as I firmly connect the idea of Zugzwang to my topic, and so long as I stick to my guns and plough on in the right direction there would be no plagiarism. So with that said let's get back to the main story.
Zugzwang, in chess, is the name used to describe a situation whereby one player finds it his turn to make a move, but there is no good move to make. The player must move. Every available move worsens his position. Therefore when our player eventually, and reluctantly, makes his move, it is a step towards disaster which his opponent will capitalize on and exploit as much as possible, and it leads some way towards loss of the game.
For beginner chessplayers here is a beautifully clear example of Zugzwang:
Credit: I found the above neat little picture here.
For non chessplayers, the above shows the white pawn about to be taken by black king, but white king is protecting the white pawn leading to the situation shown. However white must now make a move, his pawn's progress is blocked, he has no other pieces left, the white square beside his pawn is attacked so his king can't go there, therefore he must move his king .... away from his pawn. Zugzwang! Next move black gets the white pawn.
So now we get to the big issue.
The powers that be have run the Keynesian designed economy into a wall. Not for the first time. Every 30 years or so this happpens. The recipe for solving the situation is long worked out and tested. The government must quickly note and admit the arrival of a recession, then borrow as much as it can and print the rest of the required capital. It then deficit spends thereby pumping money and activity into the economy until the private sector revives and takes up the slack. At that stage the money priming can be eased (tapered off) and soon after ended. It worked in the 1930s, eventually, it worked in the 1970-80s eventually. Here we are once again.
Now I have already characterized this economic strategy as a trading strategy called the Martingale gambling strategy in a previous article called: Rogue Traders, Martingales and Central Banks in January 2014. The fact that some managers of economies call this an economic strategy is irrevelant to the fact that it is a gambling strategy being used for running economies. It is also a long discredited trading strategy, which led for example to the trades of "rogue trader" Nick Leeson and the bankruptcy of Barings Bank. The idea underlying the martingale is to play double or quits when in a losing trade and underwater (in negative capital) trading with borrowed money. Hopefully, eventually, a single win will materialize which clears the problems away. Until the win comes, keep on doubling up with each bet. If you can borrow more you can win and get out. And a central bank can print as much as it requires enabling inevitable victory with a Martingale plan. So they say. But even though that is assumed, I wonder if nowadays a CB really can print as much as it requires.
The real world has an obvious problem with this. If you are sitting at a poker table, and winning big, and your opponent says "Double or Quits". You have the ability to make a decision whether to play or not. If you win, he owes you double the debt, if you lose, the slate is cleaned, but your winnings accumulated so far are gone. So I think it is fair to say that while the debtor likes the martingale strategy, the other party, the counterparty has some thinking to do when offered the bet. Can he pay off a bigger debt? Can he pay what he already owes? Accept or refuse? More credit, or not?
Now in the rarified world of central banks and politics, there can be an ability to not notice reality creeping up until a moment of crisis pulls back the curtain of spin and words which conceal a real problem. This is such a situation.
In our example a central bank can always print more dollars or euros or pounds, to prime the pump and fund increased deficit spending by the government as it tries repeatedly to kickstart a stagnant economy which has stopped generating sufficient taxe receipts to pay for said government's employees, projects, and careers.
So during the 1970s the stagnation took over, the money printing began. Oil producers didn't want declining dollars for real oil and so they hiked their prices in a reaction to money printing. It moved into stagflation.
Physical wealth like Oil and gold rose in price as a result. To compete with these the return on debt had to rise. Interest rates rose to enable bonds to be sold to finance the government and fund the next money printing. It nearly came apart. But after increased private business failures in 1980-1981 the stock market made a higher low in 1982 and things took off. Before moving on, let's consider for a moment if that higher low in 1982 was higher in real inflation adjusted terms? A lot of money had been printed during the late 70s.
Maybe in inflation adjusted terms the late 70s low might have been closer to the 82 low (in real purchasing power adjusted price) than a simple look at a chart would suggest. (ergo historic stocks charts fail to show the latter half of recessions/depressions except as higher lows) But I'm not arguing which was the lower low, that's not the point. My point is that the stock market rises during times when businesses are failing if money is being printed. So the 1936 stocks high was during the depression, significant lows followed. The 1980 high was something similar, in 82 there was a selloff.
And as I just said, here we are again. Stocks making highs, businesses going out of business. But the inflation indicators have been changed, and the money printing seems to not have produced inflationary effects - so say the official economists and governments (their new CPI formula does not include energy as it did during the 70s). They can point out that interest rates have not risen like they did during the 1970s. They point out the stock market highs and say "Look at the signs of green shoots".
Well the money priming of the freshly printed money has propped up the financial sector, it is true. The stock market has risen. But here is a little problem. Despite the claims that we are in a financial dominated economy, what remains when finance stalls? Are there any voices saying "What about the consumer economy?"
So here is how I see it.
The "Central Banks" printed as per Keynes, and deficit spent and saved their closest friend, "Finance". But they did the opposite to the "Middle Class", cannibalizing it via low interest rates to pay the banks.
The Central Banks' partner, "Government", taxed "Middle Class" to raise money which also cannibalized "Main St" since these are comprised of the same individuals. "Government" also in a regulatory fashion pandered to, and are still pandering to their closest friend "Multinational Corporations", which require a Main St (somewhere) to make a living off of.
But by now the Main St depression ripple has now gone round the globe and is returning to home as a wave. This means the big caps will face decreasing advantage, leaving tricks to produce expected results. Corporations borrow fresh money and buy their own stocks in mini replica of the Central banks buying their own bonds. That will only last a certain time, so pretending is going to get more difficult. It's important to note that big cap corps are now in the same boat as central banks, made of high debt and stocks ownership. Their fates have intertwined.
So until "Finance" lets some money into Main St, tax receipts will stay down. Until Main St gets fresh money, who will buy the stocks and property back off the central banks and wealth funds who currently hold these assets? The powers that be see now that Main St needs money, and their circle will not complete itself until Main St gets enough money to restart itself. And money in Main St will put pressure on interest rates to rise, and bonds to fall. But they still need to sell bonds to finance their affairs.
So they print and buy their own bonds themselves. "It's not so bad and it works" they say. Except for one thing. There are a lot of other bonds already out there which fall due for renewal some day soon. Those bonds are owned by heavy hitters at this particular table of poker players. During the 70s the sellers of oil saw money printing and put they their prices up to compensate for it. Sovereigns are unreasonable like that! That was bad for the powers that be. After some wars in the middle east it went away. And today we see wars in many places where energy comes from, or through. This is not a coincidence.
Come back to the game being played at that table. Let's assume it is more like chess than poker, but with high stakes gambling on the outcome. Double or quits reduces ability to pay debts already racked up, but nobody wants to leave.
Let's assume that big bondholders (eg China/Middle East) are playing against energy producers (Russia, Middle East) and energy consumers US/EU/China). Let's assume that consumer nations are concerned to a high degree that their future energy costs do not rise, but they still want to print new money because although they have "done" finance, they want to "do" their consumers next with fresh money. However if energy costs rises, that hits the consumer, and that will undo the plan to revive (the taxpaying) Main St within their nations.
How can the western central banks/military deal with competition to buy energy from the east (who are willing to pay more for it than the west) and at the same time print more money, and at the same time avoid bondholders selling their bonds and causing interest rates to rise? The reaction to printing will undo what they have planned to restart the taxpaying Main St within their nations too. So it's a "teams of nations" game not single nations.
Main St lies on the casualty table gasping and it is the hard worker that pays for the big extended family. The cleverest of the lazy relatives who live off Main St's tax payments stand nearby and look on in horror. They get the implications. Many less well informed parasite relatives are at home watching TV totally unaware of this real life drama which will decide their future lives.
Back in the playing hall, the air is getting so smoky the big players can only see some of what their opponents might be doing while their hands are out of sight. It once seemed real, but sometime a while ago reality shimmered and vanished. Now everything looks fantastical like maybe the Jabberwock's world. All solutions carry a big problem embedded inside them due to the reaction of the opponent to that action.
The players look across the table into each other's eyes. The piano player has come to the end of his tune and stopped. Nobody blinks. But somebody must make a move. Soon.
This is ZUGZWANG!!!