Equifax and Our Broken Computer Industry

George Friedman


The Equifax hack ought to have been the last straw in the saga of our inept computer industry. Critical information on the vast majority of American families was compromised. To say that this was not a rare phenomenon understates it. There has been an endless array of stolen information, from the recent theft of still proprietary stock information from the Commerce Department to the theft of emails from the Democratic National Committee.

The probability that information committed to computers will remain confidential has become slim at best. It must be assumed that if people wish to steal information, they will.
 
The “Stupid User” Defense

The computer industry has developed a defense that most industries have tried at one point or another: the “stupid user” defense. When a hack occurs, the spotlight turns to the victim, who is said to be responsible for preventing such attacks.
 
Consider my favorite attack: phishing. A phishing attack happens when someone receives an email and clicks on a malicious link contained in the email. This triggers a process where the program linked to the email searches for, finds, and transmits information from the computer to the sender of the email.

The view of the computer industry is that the responsibility for this attack rests with the stupid user who clicked on the link. The computer industry has made it clear that you should never click on a link from an unknown sender. Announcing this has discharged the industry’s responsibility. But assume that a company had 5,000 employees. The probability that one person out of 5,000 would not click on the link is near zero. An effectiveness rate of 99.98% in preventing clicks would not be enough to prevent potential disaster. A business or individual would have to prevent all mistakes perfectly and permanently.

At a higher level, the industry blames the stupid administrator. The security sold with servers, laptops, and the rest is primitive. In selling the equipment, the rule is caveat emptor, let the buyer beware. It is the job of the IT administrator not only to keep things running but also to acquire and maintain a host of security hardware and software to keep the system secure. The problem is not that these tools are fiendishly expensive but that they constantly become obsolete and have to be reconfigured or replaced.
 
Attackers’ Advantages

There is a cadre of criminals and vandals that is constantly trying to circumvent security systems. The advantage is with the attacker. The defender must reconfigure his system to meet a new attack, which the attacker will make certain is novel and therefore not anticipated. This new attack must be detected by users and communicated among them, then a defense must be developed and implemented. This process takes days or weeks.

For midsized and small businesses, maintaining constant awareness of new attacks and having the expertise to block them is absurd. And for the very largest businesses, the resources are never enough to prevent all errors in protection. If the attacker fails, no one knows about it and he will live to fight another day. If the defender fails—and the computing system is so shabbily built that it generates failures by its own lack of sophistication—he is all over the front pages.

We all know that computing systems are liable to attack. We also know that the system is designed for failure. At some point, someone will commit an error and click on a malicious link. Given the increasing tempo of attacks, expecting that administrators will never fall behind the curve is ridiculous. We also know that computer companies have pushed the responsibility for security on users, telling them to acquire third-party software and hardware. Security not only costs significant amounts of money, but it also requires expertise in acquiring, integrating, and configuring the equipment. Finally, the third parties are themselves liable to error.

The problem, as I have written before, has to do with the primitive nature of computers. The basic structure of hardware and software was created to allow upgrades and third-party software to run on the systems. Since much of this came from outside vendors, authenticating the legitimacy of the code was difficult. It still is difficult. Computers can play vastly complex games, but they cannot identify malicious code. Computer companies solve the lack of evolution in computer security by pointing at the users. Try this in any other industry and I am reasonably certain that the lawsuits would be flying, regardless of what the fine print on contracts said.

But it is not just the legal issue—although I am fascinated that no one that I know of has brought suits against the computer industry for knowingly selling defective products. Rather, my concern is geopolitical. The world has become utterly dependent on computing. I am typing this on a computer, and my personal information was compromised on a computer. The attacks are mounting, and the vulnerability of our financial and military systems—and those of the rest of the world—are not only vulnerable but under constant attack. We cannot abandon computing, nor can we risk the consequences of using these systems. Nor will the “stupid user” explanation work when most users are as ignorant of computing as they are of the internal combustion engine.

The computer and the car have become utilities where the manufacturers are given great value by society. Cars have roads, and computers have access to the Internet. Both have utilitarian necessity. But cars are expected to maintain certain safety features. It would seem reasonable that an industry whose failures can wreak havoc globally should be expected to build security into its own systems.


The end of German exceptionalism

Far-right electoral gains show the country is not immune to the populist virus

by Gideon Rachman
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AfD's co-leaders Alexander Gauland and Alice Weidel (front) and the party's chairwoman Frauke Petry (back) © Reuters


For the past year, as the hurricane of political populism shook the west, Germany remained an island of calm. The US elected Donald Trump; Britain plunged towards Brexit; François Hollande was too unpopular even to stand for re-election as France’s president. By contrast, Angela Merkel, moved serenely towards a fourth term as German chancellor. Among the large western nations, only Germany seemed to have strong and stable leadership.

This weekend’s elections ensure that Ms Merkel has indeed secured another term in office. But the other, less comforting, development is that Germany has lost its immunity to angry, anti-establishment populism. That has serious implications for the German chancellor’s ability to play the role of “leader of the western world”, a title that many bestowed on her after the election of Mr Trump.

The big story of the German election is clearly the rise of the nationalist right, in the form of Alternative for Germany, which scored over 13 per cent of the vote and will be the third-largest bloc in parliament with more than 90 MPs. Sigmar Gabriel, Germany’s foreign minister, has argued that with the AfD in parliament “we will have real Nazis in the German Reichstag for the first time since the end of the second world war”. Most analysts do not go that far. But other far-right politicians in Europe certainly regard the AfD as a sister party. Marine Le Pen, leader of France’s National Front, was quick to congratulate the German party on its electoral success.

The rise of the AfD is part of a bigger shrinkage of the political centre. The main centrist parties — the chancellor’s Christian Democrats and the centre-left Social Democrats — scored their worst results since 1949. With the far-left party, Die Linke, getting just over 9 per cent of the vote, more than one in five Germans voted for populist, anti-establishment parties.

That level of populist support is still well below the substantial proportion of voters (nudging 50 per cent in each case) who elected Mr Trump, delivered Brexit and opted for far-right or far-left candidates in the first round of the French presidential election. But the strong showing of the populists, and particularly the AfD, puts an end to the fond hope that the “burden of history” means that Germany is immune to extremism. On the contrary, many German observers were shaken by the undercurrent of anti-establishment rage revealed by the election campaign. At many of her rallies, Ms Merkel was drowned out by jeering and whistling, a new development in German politics.

The AfD has become increasingly radical with the passage of time. The group originally emerged as a “professors’ party” of conservative intellectuals angered by Germany’s participation in eurozone bailouts. But the refugee crisis of 2015, which saw more than 1m asylum seekers, mostly Muslims, enter Germany gave the AfD the opportunity to remake itself as an anti-immigration party.

More recently, the AfD has begun to play with the most incendiary material in German politics — the country’s Nazi history. Alexander Gauland, the party’s co-leader, has said that Germans have a right to be proud of its soldiers in both world wars. In leaked emails, Alice Weidel, the AfD’s other lead candidate, called the German government the “puppets of the victorious powers of the second world war”.

The presence of a rightwing nationalist party in the Bundestag will change the tone of German politics. It could also complicate the way Germany interacts with the rest of Europe, putting pressure on the government to take more nationalist positions.

Germany already has very difficult relations with both Turkey and Poland. Recep Tayyip Erdogan, the Turkish president, has accused the German government of “Nazi practices” for blocking Turkish political rallies on German soil. The Polish foreign minister has suggested Germany should pay his country up to $1tn in reparations for the second world war. Rising above insults from abroad will become harder, with a nationalist bloc in parliament demanding that the government stand up for Germany. That also raises the danger of relations between European nations taking on an increasingly harsh tone.

Hopes for deeper European integration to counter the nationalist tide and improve the workings of the EU may also now be put on hold. The French government had hoped that a re-elected Ms Merkel would take bolder steps towards eurozone integration. Emmanuel Macron, the French president, intends to set out his ideas in a speech in a few days’ time. But the new political landscape in Germany will make it harder for Ms Merkel to respond positively to French overtures.

The rise of populism highlights the fact that many German workers feel that their living standards are being squeezed, which makes it harder to make the case for generosity towards southern Europe. The need to incorporate the Free Democrats into a new governing coalition will also make concessions to France difficult. The FDP, once champions of European integration, are now a strongly Eurosceptic party.

A fourth term in office is a personal triumph for Ms Merkel. But she has paid a price for her policies on refugees and the euro. Germany now looks more like a “normal” western country. And that, ironically, is not something to be welcomed.


DowDuPont’s Andrew Liveris: How America Can Bring Back Manufacturing
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Smokestacks belching hazardous gases, rivers so polluted they catch fire, workers in identical overalls turning bolts with wrenches: For many Americans, the word “manufacturing” conjures up negative, old-fashioned images. Or, we think of it as something that takes place in less-developed nations, as has increasingly been the case. Many have said that factories will continue to locate wherever the work can be done most cheaply, despite political messaging about bringing back manufacturing jobs.

Manufacturing accounts for about 13% of the U.S. economy. Should we even focus on trying to “bring it back,” now that information and services — the “knowledge economy” — seems a more promising path? Andrew Liveris firmly believes we should. In fact, he said in a recent talk at the University of Pennsylvania that manufacturing is essential to our knowledge economy, and to America’s competitiveness on the global stage.

Liveris is the executive chairman of DowDuPont, a $73 billion holding company (the two giant chemical companies merged in September), and Chairman and CEO of The Dow Chemical Company. He has advised both the Obama and Trump administrations on manufacturing issues. (Liveris was head of Trump’s now-defunct American Manufacturing Council.)

The author of Make It in America: The Case for Reinventing the Economy, in which he writes that America’s economic growth and prosperity depends upon a strong manufacturing sector, Liveris was interviewed at Penn’s Perry World House during Penn Global Week by Wharton School Dean Geoffrey Garrett. Garrett referred to Liveris “the cheerleader of advanced manufacturing.”

A Key Difference

Garrett stated that President Trump has been talking about bringing U.S. economic growth back up to the level it was before the 2008 Great Recession. Since World War II the economy has typically increased about 4% a year, but in 2016, the economy grew just 1.6%. What would it take to see those higher numbers again, he asked?

Liveris commented that the very nature of growth has changed dramatically because human civilization is going through “one of its every-few-hundred-years massive tipping point,” due to digitization. He said this phenomenon was as disruptive as Ford’s introduction of mass-produced cars in the horse-and-carriage era. This tipping point is causing enormous dislocation, including the elimination of jobs and the loss of meaningful work. Moreover, he said, “the job of 20 or 30 years ago is paying less — wage rates are down and all of that — so there are a lot of unhappy and angry people out there.”

And America is under-prepared, including from a policy point of view, he said. Liveris talked about the profound implications for business leaders as the forces of globalization collide with the forces of digitization. He said most corporations are not yet nimble enough to re-design themselves to accommodate these trends.

Yet, he said, substantial economic expansion is possible. “In the immediate term, can we get 3.5% growth in this country? You bet we can,” said Liveris. He noted that instituting policies to spur foreign direct investment would help as they did in the Clinton and Reagan eras. He also cited tax reform, infrastructure spending and business deregulation as important factors. He added, though, that the U.S. currently has “a massive, massive issue in how our government is functioning,” so change is not likely to happen overnight.

According to Liveris, there is a widespread lack of understanding among the public of what today’s manufacturing — which he referred to as advanced manufacturing — actually consists of. (Definitions vary, but the OECD defines advanced manufacturing technology as computer-controlled or micro-electronics-based equipment used to make products.) Liveris stated, “We are generating a new wave of technology to generate a knowledge economy. And a knowledge economy will need things made. They’ll just be made differently.”

Advanced manufacturing might include making smartphones, solar cells for roofs, batteries for hybrid cars, or innovative wind turbines. Liveris said he had visited a DowDuPont factory the previous week that is working on advanced compasses to enable wind turbines with blades the size of football fields. The goal is to produce blades light and efficient enough to make wind power a viable reality. “That’s technology. That’s advanced manufacturing,” he said.

He asked the audience to envision “a knowledge economy based on the collision and intersection of the sciences.” Those who think the tech revolution is only about “the Facebooks and the Googles, connectivity and all that,” are dead wrong, he said.

Not Enough Work, or Not Enough Workers?

Doesn’t the use of more robotics and automation lead to job loss? Garrett asked. Or, is the problem that workers aren’t appropriately skilled to fill new kinds of jobs? Liveris said he was firmly in the second camp. “I have job openings now at Dow and at DuPont that I can’t get the skills for. And engineering jobs open.”

He elaborated that the way machines provide insights is changing, and noted, “We humans will have to read those insights. I can’t [find] enough of those humans. That’s the issue we’re dealing with in this country.”

Liveris said that 7.5 million technology jobs left America between 2008 and 2016 because the country wasn’t supplying appropriate candidates. The reaction of many businesses was to re-locate to “the Chinas, the Indias, the places that were supplying that sort of skill.” In the United States right now, he said, there are half a million technology jobs open, but American educational institutions are only graduating roughly between 50,000 and 70,000 candidates per year, so there’s a “massive under-supply.” In the next three years, there will be 3.5 million jobs created, and Liveris said the U.S. might only be able to fill about 1.5 million of them through a combination of graduation and immigration. “Unless immigration is fooled with, which is a whole other issue.”

According to Liveris, a critical reason for America to revive its manufacturing sector is to promote innovation. “Something that we at Dow and many of us in manufacturing know: If you have the shop floor, if you make things, you have the prototype for the next thing, so you can innovate.” Conversely, if you stop making those things, your R&D diminishes dramatically, he said.

The U.S. should be incentivizing the technologies that America is good at, said Liveris. Everybody knows about Silicon Valley, Liveris noted, but fewer know that the U.S. is prominent in advanced sensors, which are critical to the progress of the Internet of Things (IoT) sector. Other areas in which America stands out are lightweight compasses and 3D printing. He noted that technologies like these have been developed at various institutions “in a somewhat haphazard way, which is very American. That’s great. That’s creativity.” But, he said, shouldn’t we as a country double down on the things we do best and become the world leader?

Liveris called advanced manufacturing “the best path for the United States” and said, “We’re so naturally suited for it if we’d just get the policies to help us.” He believes that the U.S. should already be at the most advanced layer of economic development based on technology. “We have cheap money, we’ve got skills, we’ve got low-cost energy. We should be having an investment boom in this country,” he said.

He noted, though, that we have created barriers to investment that are preventing this from happening. Borrowing an expression from Indian Prime Minister Narendra Modi, Liveris said that there were two kinds of countries in the world: red tape countries (hampered by bureaucracy and over-regulation) and red carpet countries (welcoming to investors). The U.S. has unfortunately become a red tape country, he said.

He called investment “the biggest job creator out there,” and stated that Germany for example has figured out how to do this. “It’s the poster child of investment in Europe.” China, too, has mastered it, and “other countries who want to trade with the United States are mastering it because they incentivize it.”

“If you have the shop floor, if you make things, you have the prototype for the next thing, so you can innovate.”

Closing America’s Education Gap

A big proponent of STEM education, Liveris said that American schools are not graduating the workers we need. “We have convinced ourselves that a four-year college degree of the skills we used to have in the last century is what we should still keep producing.” He said that re-tooling American education needs to happen immediately, with STEM education incorporated at every level including elementary school.

Liveris said DowDuPont is funding a STEM-dedicated school, in conjunction with Michigan State University, in Dow Chemical’s home base of Midland, Michigan. The school will offer curricula for kindergarten through 12th grade, with MSU course offerings for college students, according to the Michigan news site MLive.

The pilot school will also provide teacher enrichment programs. Liveris said that American teachers need to be better trained and rewarded. “We do something very bad in this country, which is we don’t celebrate teachers at the elementary, middle and high school level. We should be putting them on pedestals. And giving them the skills to teach STEM.”


In China, Economic Pressures Beyond the Government’s Control

By Xander Snyder


As external pressures continue to bear down on the Chinese economy, the government appears to be losing some ability to manage the situation. Two developments last week restricted the government’s flexibility in its monetary policy.

First, ratings agency S&P downgraded China’s sovereign debt from AA- to A+. This followed Moody’s downgrade of China’s sovereign debt in May from Aa3 to A1. This indicates that there is convergence among credit ratings agencies on the belief that China’s credit growth is posing greater risk to its economy. Second, the U.S. Federal Reserve announced a timeline for its plan to sell off assets it accumulated through its quantitative easing program, which was meant to spur economic growth following the financial crisis. Both of these developments will put upward pressure on Chinese interest rates and, therefore, the cost of capital for the central government and Chinese businesses.

Higher Risks

The link between China’s monetary policy and the credit downgrade is fairly direct – a lower rating implies greater risk, which leads investors to require a higher rate of return. Since lending to corporations is considered riskier than lending to the sovereign state, downgrades on sovereign debt ratings will also make borrowing more expensive for corporations.


High-rise buildings under construction are seen near Beijing’s central business district on May 26, 2017. FRED DUFOUR/AFP/Getty Images

The link between China’s monetary policy and the Fed’s move to sell off assets is less direct, but it nevertheless constrains China’s ability to conduct monetary policy at its own pace. China wants to increase interest rates – both to prevent a rapid decline in the value of the yuan and to control the surging real estate market. But it must do so gradually. When the Fed raises rates, however, it forces China’s central bank to raise rates more quickly than it would like to in order to prevent foreign capital from leaving China to take advantage of the higher rate offered in the U.S.

The Fed kept long-term rates relatively static since it began purchasing long-term Treasury securities several years ago, but it will begin selling them in October. This will raise long-term rates on U.S. Treasuries, which will lead to an increase in the value of the dollar and, as investors flock to the U.S. market, could result in a decrease in the value of the yuan. To maintain the strength of its currency, the Chinese government will have to raise rates at a faster clip than U.S. rates.
 
Main Objectives

China has been very gradually raising certain interest rates in an attempt to deflate the surge in real estate prices; a collapse in the real estate market could spill over into related industries and China’s broader financial system. The first objective of raising rates, therefore, is to deflate the real estate market without destroying it.

The second objective is to prevent an uncontrolled depreciation in the yuan. While a cheaper currency boosts exports, a collapsing currency creates fear and, potentially, capital flight. China must limit capital outflows to ensure that sufficient funds remain in the country to carry out its infrastructure initiatives and any capital redistribution plans that the communist government hopes will increase the living standards of people in China’s interior provinces.

The dilemma for the Chinese government is that raising rates too quickly threatens its real estate industry. The Fed’s decision, therefore, creates a new dynamic that forces the People’s Bank of China to chase U.S. interest rate rises if it wants to keep the yuan from depreciating too far. No longer does the Chinese government have the latitude to raise rates gradually at its leisure – it will be forced to prioritize either keeping the yuan strong with larger rate increases or preventing a collapse in real estate prices with smaller rate increases.

Though the Chinese government has been effective in the past at managing real estate prices, its maneuverability will be diminished as the Fed sells more assets and increases the rate on long-term Treasury securities. Granted, the Chinese government has many more ways to control its monetary policy than the U.S. government does, and its ownership of land gives it the ability to grow or restrict the land available to developers as necessary. But as the country’s total debt grows – reaching 260 percent of gross domestic product at the end of 2016 – higher interest rates will have a larger effect on the economy. The higher the debt, the higher the interest payments.


The combination of the credit downgrade and the Fed’s decision to begin shrinking its balance sheet adds to the challenges facing the Communist Party as it prepares for its National Congress. As interest rates rise, the government will likely be forced to increase capital outflow restrictions so that it can prevent further capital flight without again increasing rates.

China needs to decrease the level of debt in its economy. But the broader economic risks of rapid deleveraging are still present, and the government’s options are appearing increasingly limited. The fact that policies enacted by the Fed – policies that are entirely domestically oriented – can have such an impact on China’s own economic strategy is a testament to how closely intertwined the two countries’ economies are. Even in a country like China, where the president and the central government have a high degree of power over the economy, political leaders face constraints that are beyond their control.


Gold as the Monetary Sun

by Jeff Thomas



For millennia, people believed that the sun revolved around the earth, appearing, as it did, on the eastern horizon in the morning and setting on the western horizon in the evening.

Greek astronomer Aristarchus of Samos is generally credited with the concept that the universe is heliocentric, with all the planets revolving around the sun. Yet it took a further eighteen centuries before Nicolaus Copernicus came along and convinced people that this was the case.

So, we can be forgiven if we educated modern-day people sometimes have difficulty in understanding that gold is the monetary sun.

Even those of us who have been tracking gold’s progress for decades frequently give in to the ease of quoting gold’s value in terms of fiat currency—most commonly in US dollars.

And yet, we have it the wrong way round. Gold is in fact the centre of the economic universe, and all the fiat currencies (including cryptocurrencies) revolve around gold.


But, isn’t this an exercise in hair-splitting? After all, does it really matter whether we acknowledge “orocentricity”? Doesn’t it amount to the same thing?

Well, no, it doesn’t. For those of us who deal frequently (or entirely) in US dollars, there would be an inclination to say that, for more than four years, gold has been essentially stagnant, varying no more than $200 an ounce. But, during that time, the US dollar has risen against major currencies. Although the price of gold has risen in this period, the US dollar has risen more.

More to the point, this has been no accident. A major effort has existed to repeatedly knock down the value of gold in relation to the dollar. This is only possible in an environment in which public faith in the banking system and the stock market remain high. As soon as those two confidence bubbles burst, the dollar will decline rapidly in relation to gold, and gold will once more return to its intrinsic value, just as it has done time and time again for over 5,000 years.

It’s interesting to note that, throughout history, banks and governments have fiddled with the value of currencies, from the devaluation of the denarius in ancient Rome, through the increased mixture of copper in the coins, to the successful introduction of paper currency in China in the seventh century. (The practice later took off in Europe in the seventeenth century and continues today.)

Over the millennia, mankind has used cattle, tobacco, seashells, even tulips as currency, yet each of these has failed at some point. More importantly, all paper currencies that have ever existed, except the current ones, have not only failed, but have gone to zero in worth.

Which brings us around to gold once more. The “barbarous relic,” as John Maynard Keynes called it, has easily outlived his opinion of it. But then, according to his contemporary, Friedrich Hayek, Mister Keynes was an exceptionally intelligent man who was so convinced of his superiority that he based all his economic theory on what he learned at Cambridge and never even bothered to attain a full education of Austrian economics, or even classical economics. Yet all world banks and governments today operate on the principles set down by the misinformed Mister Keynes.

Readers of this publication will be aware that the world is nearing an economic collapse of historic proportions. In attempting to understand the price of gold in the future, such notables as Eric Sprott, Peter Schiff, Jim Rickards, James Turk, Jim Sinclair, and many others have all predicted that gold would have risen to at least $5,000 by now. Conversely, deflationist Harry Dent predicted that gold would drop below $750 by 2015.

Are all of these men fools? Far from it. They’ve merely been premature. As Eric Sprott has repeatedly stated, “I tend to confuse inevitable with imminent.” Even Harry Dent could conceivably still prove to be correct. A crash in the markets is almost certain to create an immediate downward spike in the price of gold, prior to the creation of currency by the central banks that would immediately follow, sending gold, eventually, to an unprecedented high price. Such a crash would predictably cause a gold mania. $5,000 is in no way an unrealistic number.

Will it stop there? Well, in spite of the fact that virtually no one is even considering the possibility now, gold could conceivably go to $50,000, $500,000, $5,000,000, or beyond. Whilst this would appear to be an absolute absurdity to us at present, if hyperinflation kicks in, in the US, as it has in so many previous cases of currency collapses, there is literally no limit to how high the price can go. (I keep on my desk a $100,000,000,000,000 Zimbabwean bank note from 2008 as a reminder.)

If that’s the case, would it also be true that gold can’t be overpriced? In a word, no. Manias have a way of overshooting—creating prices that go far beyond common sense. In a mania, those who are knowledgeable keep their heads, whilst those who don’t understand the dramatic price rise tend to assume that there’s no limit as to how high it can go. They’re the creators of bubbles, and a bubble can exist in gold, as in any other investment.
 
But a gold bubble, like any other bubble, would be temporary. Eventually, gold would return to its intrinsic value. It’s been said that 2,000 years ago an ounce of gold could buy a good toga and a pair of sandals. Today, an ounce of gold will still buy a good suit and a pair of shoes. If gold were to go to, say, $10,000 soon, it would be in a bubble. But, if, with inflation, the price of a good suit with shoes were to rise to $10,000, then gold would be quite comfortable at that level.

If gold rises well beyond the price of a suit and shoes as a result of a mania, those who know precious metals well will be seen to sell, and move the proceeds into something that’s underpriced at the moment. Gold will once again settle at a natural level.

Long after fiat currencies like the dollar, the euro, the SDR, bitcoin, etc. have gone the way of the dodo, gold will still be around and will remain the centre of the economic universe.

Although gold will outlive us all, we can, by understanding “orocentricity,” provide ourselves with an insurance policy against the ravages of currency failure.