Month: June 2019

Claims about Iran (model this)

“Iran has probably arrived at the conclusion that it has less to lose from acting this way than from doing nothing,” Aniseh Tabrizi, a research fellow and Iran expert at London’s Royal United Services Institute, told CNBC via phone Tuesday.

“There is a gamble behind it that wasn’t there before, which is: ‘If other countries retaliate, we are willing to take the risk because we have really nothing to lose at this point’,” Tabrizi described. “And that is a dangerous way to feel.”

Iran’s economy is expected to shrink by 6% this year, after having contracted 3.9% last year, the International Monetary Fund says. By contrast, it clocked 3.8% growth in 2017, before the Trump administration re-imposed economic sanctions after withdrawing from the 2015 nuclear deal that offered the Islamic Republic relief from prior sanctions.


“It’s all about careful calibration and plausible deniability,” Hussein Ibish, a senior resident scholar at the Arab Gulf States Institute in Washington, told CNBC.

Iran’s tactics, experts say, are designed to disrupt but not provoke a military response. So far, attacks have specifically avoided civilian deaths and environmental damage like an oil spill.

Instead, the Revolutionary Guard or its naval equivalent may be sending the message that it’s capable of undermining U.S. and Arab Gulf states’ interests in the region. And if they feel they can get away with it, it’s because they’re banking on President Donald Trump not wanting to actually start a war.

“Ultimately, Iran’s intention is to call President Trump’s bluff,” says Ibish.

I don’t have a clear view on this matter, but find it an interesting and of course important question.  Here is more from Natasha Turak.

Currency manipulation doesn’t actually work so well

That is the topic of my latest Bloomberg column, here is one excerpt on the empirical side:

It is also worth keeping in mind a number of empirical points. First, the ECB has not historically been all that expansionary. Rather, it is renowned for a fairly tight monetary policy. Eurozone rates of price inflation are usually below 2%, and that does not seem about to change.

Second, up through the late 1990s, Chinese currency manipulation consisted of keeping the value of the currency “too high” rather than “too low.”  Yet in those earlier times, Chinese exporters still were gaining ground. And since 2005, the Chinese currency has risen considerably — arguably, it has attained the levels one would expect in a normally adjusting market. More recently, the Chinese central bank may be propping up the currency, to limit capital flight from China. That is currency manipulation, but in a manner that will damage Chinese exports, not help them, and indeed China probably is headed toward having permanent trade deficits with the rest of the world.

Finally, countries with low household savings rates tend to run trade deficits, and of course that is the U.S., with savings rates usually below 10% and often as low as 4%. Obviously, if you spend most of your money, some of those expenditures will go abroad, and that will hurt your trade balance. Whether or not you think that is a problem, America’s savings shortfall has little to do with Chinese currency manipulation.

Of course President Trump and yes also Elizabeth Warren are the main offenders here.  Read Warren’s Medium essay on these topics, it is shocking in its crude nationalism: “A Plan for Economic Patriotism.

How to Become a Federal Criminal

Mike Chase, author of the excellent twitter feed @CrimeADay, has now written the illustrated handbook, How to Become a Federal Criminal. In truth, a handbook wasn’t necessary because it is very easy to become a federal criminal.

You may know that you are required to report if you are traveling to or from the United States with $10,000 or more in cash. Don’t hop over the Canadian border to buy a used car, for example, or the Feds may confiscate your cash (millions of dollars are confiscated every year). DiImage result for how to become a federal criminal chased you also know that you can’t leave the United States with more than $5 in nickels??? That’s a federal crime punishable by up to five years in prison. How about carrying a metal detector in a national park–up to six months in prison. And God forbid you should use your metal detector and find something more than 100 years old, that can put you away for up to a year. Also illegal in a national park? Making unreasonable gestures to a passing horse.

The expansion of Federal criminal law into every nook and cranny of life can be amusing but there is a darker side.

The feds also have unbelievably powerful tools at their disposal. They can subpoena your bank records, listen to your phone calls, indict you in a secret proceeding called a grand jury, an, if they think you lied to them, they can charge you for that alone. Then, if you can get a jury to find you guilty on just one charge, the judges is allowed to sentence you up to the statutory maximum based on things you were never charged with, or even things a jury acquitted you of, so long as the judge decides you probably did them. (italics added).

Moreover, when anyone can be charged with a crime, the application of criminal law becomes discretionary and that discretion may be used to suppress the free exercise of other rights. Indeed, the recent Supreme Court case, Nieves v. Bartlett, makes it easier for the police to arrest people even if the reason for the arrest is retaliation for lawful behavior.

Slate: The First Amendment makes it unconstitutional for government officials to retaliate against you because they dislike your speech. At the same time, federal law gives you the right to sue state officials for compensation if they violate constitutional rights such as your right to free speech. But on Tuesday, the Supreme Court invented a rule that will often allow police officers to arrest people in retaliation for disfavored speech without liability.

….Because local laws are full of minor infractions, like “loitering,” that are frequently violated without incident, police will often have a pretext to arrest people engaged in speech the officers don’t like. By immunizing such abuse, Nieves may have devastating effects on demonstrators, press photographers, and anyone who wants to exercise their speech rights in public, like the right to film the police or verbally challenge officer misconduct. The power to arrest is a potent tool for suppressing speech because even if charges are later dropped, arrestees must undergo the ordeal—and dangers—of being booked and jailed, and they may have to disclose the arrest on future job and housing applications, among other ramifications.

Those new service sectors jobs — lots of ’em!

…we find that total employment rises substantially in industries with rising concentration.  this is true even when we look at total employment of the smaller firms in these industries.  This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP.  It is not consistent with the view that concentration is due to declining competition or entry barriers…as those forces will result in a decline in industry employment.

That is from a new paper by Chang-Tai Hsieh and Esteban Rossi-Hansberg.  The paper presents a larger picture too:

…the secular changes the U.S. economy has experienced for the last four decades…amount to a new industrialization process.  One that allows firms to expand geographically and deliver its goods and services to customers locally.  We have argued that this evolution was the result of an underlying technological change that led to reductions in variable costs (and establishment-level fixed costs) in exchange for larger firm-level fixed costs.


My Conversation with Hal Varian

Hal of course was in top form, here is the audio and transcript.  Excerpt:

COWEN: Why doesn’t business use more prediction markets? They would seem to make sense, right? Bet on ideas. Aggregate information. We’ve all read Hayek.

VARIAN: Right. And we had a prediction market. I’ll tell you the problem with it. The problem is, the things that we really wanted to get a probability assessment on were things that were so sensitive that we thought we would violate the SEC rules on insider knowledge because, if a small group of people knows about some acquisition or something like that, there is a secret among this small group.

You might like to have a probability assessment of whether that would go through. But then, anybody who looks at the auction is now an insider. So there’s a problem in you have to find things that (a) are of interest to the company but (b) do not reveal financially critical information. That’s not so easy to do.

COWEN: But there are plenty of times when insider trading is either illegal or not enforced. Plenty of countries where it’s been legal, and there we don’t see many prediction markets in companies, if any. So it seems like it ought to have to be some more general explanation, or no?

VARIAN: Well, I’m just referring to our particular case. There was another example at the same time: Ford was running a market, and Ford would have futures markets on the price of gasoline, which was very relevant to them. It was an external price and so on. And it extended beyond the usual futures market.

That’s the other thing. You’re not going to get anywhere if you’re just duplicating a market that already exists. You have to add something to it to make it attractive to insiders.

So we ran a number of cases internally. We found some interesting behavior. There’s an article by Bo Cowgill on our experience with this auction. But ultimately, we ran into this problem that I described. The most valuable predictions would be the most sensitive predictions, and you didn’t want to do that in public.


COWEN: But then you must think we’re not doing enough theory today. Or do you think it’s simply exhausted for a while?

VARIAN: Well, one area of theory that I’ve found very exciting is algorithmic mechanism design. With algorithmic mechanism design, it’s a combination of computer science and economics.

The idea is, you take the economic model, and you bring in computational costs, or show me an algorithm that actually solves that maximization problem. Then on the other side, the computer side, you build incentives into the algorithms. So if multiple people are using, let’s say, some communications protocol, you want them all to have the right incentives to have the efficient use of that protocol.

So that’s a case where it really has very strong real-world applications to doing this — everything from telecommunications to AdWords auctions.


VARIAN: Yeah. I would like to separate the blockchain from just cryptographic protocols in general. There’s a huge demand for various kinds of cryptography.

Blockchain seems to be, by its nature, relatively inefficient. As an economist, I don’t like this proof of work that this is. I don’t like the fact that there’s one version of the blockchain that has to keep being updated. I don’t like the fact that it’s so slow. There are lots of things that you could fix, and I expect to see them fixed in the future, but I would say, crypto in general — big deal. Blockchain — not so much.

And finally:

COWEN: Now, users seem to like them both, but if I just look at the critics, why does it seem to me that Facebook is more hated than Google?

VARIAN: Well, you know, I actually don’t use Facebook. I don’t have any moral objection to it. I just don’t have the time to do it. [laughs] There are other things of this sort that can end up soaking up a substantial amount of time.

I think that one of the reasons — and this is, of course, quite speculative — I think that one of the reasons people are most worried about Facebook is they don’t really understand the limits of what can be done at Facebook. Whereas at Google, I think we’re pretty clear that we’re showing you ads. We’re showing you ads that are targeted to one thing or another, but that’s how the information’s used.

So, you’ve got this specific application in our case. In Facebook’s case, it’s more amorphous, I think.

There is much, much more at the link.

*One Giant Leap*

The author is Charles Fishman, and the subtitle is The Impossible Mission That Flew us to the Moon.  Here is one excerpt:

It [NASA’s Mission Control] was the first real-time computing facility IBM had ever installed.


…the Apollo flight computer was the first anywhere to have responsibility for human lives.

That computer had 73 kilobytes of memory and had 0.000002 percent of the computing capacity of an iPhone.  And don’t forget this:

At least while you were headed outbound, you’d have plenty of fuel to correct things.  Coming home from the Moon is a lot less forgiving.  The heat of reentry, the splashdown targeting into the ocean, and the g-forces piling up on the spaceship and the astronauts inside combine to create a very thin slice of air you need to slide your spaceship into.  The command module had just 1 degree of latitude on reentry.  Too shallow an angle, and your space capsule skips off the top of the atmosphere like a flat stone — out into space and a wide orbit around the Earth, from which there was no rescue.  Too steep a cut into the atmosphere, and the speed, heat, and g-forces would combine to incinerate your space capsule.  And unlike on the way out, on the way back there are no go-arounds.

Definitely recommended, gripping from start to finish.  Overall the best history of how the space revolution and the computer revolution were interconnected.

What I’ve been reading

1. Graeme D. Ruxton, Nature’s Giants: The Biology and Evolution of the World’s Largest Lifeforms.  Picture books are underrated!  They are like a better version of Wikipedia, and with glossy paper at that.

2. Neil Irwin, How to Win in a Winner-Take-All World: The Definitive Guide to Adapting and Succeeding in High-Performance Careers, is another excellent book by Neil Irwin, and it is both subtler and broader than the title alone would indicate.

3. Matthew Sadler and Natasha Regan, Game Changer: AlphaZero’s Groundbreaking Chess Strategies and the Promise of AI.  Everything you wanted to know about AlphaZero and already have been asking, lots of games and illustrations but also lots of plain text.  Definitely recommended, if you care that is.  AlphaZero, by the way, never plays 1. e4, mostly because it sees 1…e5 in response as giving Black nearly equal chances.

4. John Brockman, editor, The Last Unknowns: Deep, Elegant, Profound UNANSWERED QUESTIONS About the Universe, the Mind, the Future of Civilization, and the Meaning of Life.  My nominated question was: “How far are we from wishing to return to the technologies of the year 1900?”  NB: you get only the questions, not the answers.

Leah A. Plunkett, Sharenthood: Why We Should Think Before We Talk About Our Kids Online, high time there has been a book with this message, and this is it.

Fiona MacCarthy, Gropius: The Man Who Built the Bauhaus also has plenty of interesting information about Alma Mahler, beyond what is in the Tom Lehrer song.

Chris Sagers, United States v. Apple: Competition in America, is a useful look at the antitrust case over eBook pricing, though the actual book does not start until p.79 or so.

The Libra reserve, discussion of background documents

Here is a 4-pp. appendix of sorts to the core Libra white paper, and it has some of the details that will be of most interest to monetary economists.  I have learned:

1. The Libra will be backed by a bundle of pretty safe, pretty mainstream assets (I don’t know which ones).  It is presented as one hundred percent reserve, though no system with fluctuating prices and also float really will be pure one hundred percent.  And the reserve is in “low-risk” assets, attention all critics of the Basel capital standards.

1b. The paper has a chance to say that the custodians will be separately capitalized, with no cross-collateralization, for purposes of Libra protection, but it does not do so.  I would recommend that change.

2. The assets in the reserve fund will come from users of Libra (how will they be charged?) and from “investors in the separate Investment Token.”  Furthermore “The funds for the coins that will be distributed as incentives will come from a private placement to investors.”

3. What about the public choice issues?  Won’t banks insist — correctly or not — that this represents competition and part of the payments system, and thus it should be brought under deposit insurance control and taxation, Fed regulation, various bank holding company acts, Monetary Control Act of 1980, and so on?  Have banks ever lost a political battle of this kind?

4. We are told “The association does not set monetary policy.  It mints and burns coins only in response to demand from authorized resellers.”  Maybe, of course there are hundreds of years of debate on that one, google “real bills doctrine,” noting that here we have a semi-dominant private issuer rather than a perfectly competitive banking system.  The association policy on interest rate spreads, floats, and credit, of course, can end up being a monetary policy de facto.  I don’t want to prejudge this one against Libra, since to me the validity of the real bills doctrine is a genuinely open question, but it is worth noting that most economists would not agree with the doctrine in most settings.

4b. Won’t some margins arise where there are fractional reserves, even if Facebook/association/Libra are not the ones doing it?  Imagine that a new class of intermediaries arises, offering some intermediate services between the core system and retail use, but not adhering to the 100% reserve provisions.  The logic behind this tendency seems pretty strong, for better or worse, and it can reintroduce risk into the system.  Someone wants to be holding higher yielding assets and then be making claims on them be liquid through the Libra system.  But Facebook/Libra would not seem to have the power to regulate the surrounding system of intermediaries, or is that somehow to be done through covenant (“you can’t use Libra unless you promise not to pile your intermediaries on top of it”)?

5. The crypto angle does seem like a sideshow, for me that is not a problem.

6. Imagine a private payment company issuing SDRs, or some other similar basket, based on 100% backing.  They would offer you new transactions technologies for greater convenience (WhatsApp?), in return receiving access to your transactions data and sharing some of the float and spread all around, to merchants and customers too.  Perhaps that is one way of thinking about how the plan works and where the gains from trade come from?

7. Is there a provision in the system for zero or low-interest loans?  Can I send small amounts of “libras,” say to pay my water bill, without first having them in my account?  Might sellers sign up to participate in such a system, sharing part of the credit risk with Libra?  And is there a way to do it, with crypto and layered assets and float and implicit positions, so that all this is not subject to the usual consumer credit regulations?  Is that part of how the system will make money and attract interest?  This is just speculation, my question marks here are literally question marks, not tricks to make you think that is how it will be.

8. “Who holds intraday credit risk?” is always a question worth asking.

9. Does any of this try to arbitrage away the fees earned by credit card companies for their intermediation?

10. What if the market for the underlying currencies and assets is (for a while?) more liquid than the market for Libras?  Say the basket values adjust before Libra values do.  What kind of arbitrage opportunities does that create?  If we know Libras are due to depreciate, is there a higher nominal rate of interest on them, as with traditional currencies in an international multi-currency setting?  What are the equivalents of covered and uncovered interest parity in this setting?  Does a kind of “program trading” arise to perform the arbitrage?  Can perfect redemption be offered credibly while the prices are still out of whack?

I still don’t feel I have a great handle on the plan, but those are my immediate reactions.  You should take them with a grain of salt, as they may be based on misunderstandings or perhaps even plan incompleteness.  I look forward to learning more.

Addendum: If anyone connected to Libra would wish to send more information or address these questions, I would gladly run that material on MR.

The new Facebook cryptocurrency

Here is a thread on the new project from those running it, here is the White Paper (which I have yet to read).  Here is an FTAlphaville analysis of how it may not use a blockchain after all.  Note this:

Another important aspect of the Libra Blockchain is Move, its new programming language. This programming language will, says Facebook, allow users to define their own smart contracts in the future. Smart contracts are agreements written in code whose clauses are automatically enforced when a set of pre-determined criteria is met.

Any comments from the experts in the MR reading audience?  By the way, if you haven’t been paying attention the Facebook share price is up 44.2% this year.  Alphabet is up 4.7%.

Here is a further FTAlphaville analysis: “Managing a pegged monetary reserve system isn’t all that easy.”

Here is a Hacker News thread.