Category: Current Affairs

Why isn’t crypto an effective hedge?

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

The last few months of chaos show what Bitcoin and other crypto assets are good for: They are advanced tools of globalization, luxury goods for complex, well-functioning markets — not protections against the depredations of hostile governments.

One common story, especially popular in libertarian circles, has been that when inflation runs rampant and governments confiscate private wealth, crypto will be a vital refuge. It increasingly appears that this story is wrong.

The world has been in turmoil, with a major war, wealth confiscations, and much higher inflation rates.  Yet mostly crypto prices have fallen.  More theoretically:

Think of some of the possible legitimate use cases for crypto. Perhaps entrepreneurs will build a significant online metaverse, spanning national boundaries and allowing for fruitful interactions, including commercial ones. For many transactions, especially micropayments, crypto transfers might make more sense than trying to process all the trades through current dollar networks. There is at least the promise that crypto will be faster, more reliable and more secure.

In this scenario, crypto is worth the most when global trading networks, and internet connections, are stable. Right now they are moving in the opposite direction, and as a result the price of crypto is falling. The reality is that the crypto world has been a globalized product from the very beginning.

Recommended.

US Pandemic Policy: Failures, Successes, and Lessons

My talk at Bowling Green State University on US Pandemic Policy: Failures, Successes, and Lessons

This was not a black swan event. This was an entirely predicted and predictable event. We knew it was going to happen….And yet, we weren’t ready.

I am told that my talk made many people angry (not at me, natch).

Kotkin on Russia and the West

A great interview with historian Stephen Kotkin. Kotkin has some some thoughts on the Kennan, Mearsheimer, Kissinger, Hill, Service et al. view that expanding NATO was a precipitating event in the Ukraine-Russia war which are well taken, albeit he fails to think on the margin. Much more important is his full throated defense of the West. Just a few months ago a defense like this would have been branded as right-wing agitprop and the author attacked for not being woke to the evils of capitalism. But Putin has reminded the West of its virtues.

How do you define “the West”?

The West is a series of institutions and values. The West is not a geographical place. Russia is European, but not Western. Japan is Western, but not European. “Western” means rule of law, democracy, private property, open markets, respect for the individual, diversity, pluralism of opinion, and all the other freedoms that we enjoy, which we sometimes take for granted. We sometimes forget where they came from. But that’s what the West is.

And yet, as corrupt as China is, they’ve lifted tens of millions of people out of extreme poverty. Education levels are rising. The Chinese leaders credit themselves with enormous achievements.

Who did that? Did the Chinese regime do that? Or Chinese society? Let’s be careful not to allow the Chinese Communists to expropriate, as it were, the hard labor, the entrepreneurialism, the dynamism of millions and millions of people in that society.

On a kind of natural resource curse:

…in Russia, wealth comes right up out of the ground! The problem for authoritarian regimes is not economic growth. The problem is how to pay the patronage for their élites, how to keep the élites loyal, especially the security services and the upper levels of the officer corps. If money just gushes out of the ground in the form of hydrocarbons or diamonds or other minerals, the oppressors can emancipate themselves from the oppressed. The oppressors can say, we don’t need you. We don’t need your taxes. We don’t need you to vote. We don’t rely on you for anything, because we have oil and gas, palladium and titanium.

On why the stupid get on top:

You have to remember that these regimes practice something called “negative selection.” [In a democracy, AT] You’re going to promote people to be editors, and you’re going to hire writers, because they’re talented; you’re not afraid if they’re geniuses. But, in an authoritarian regime, that’s not what they do. They hire people who are a little bit, as they say in Russian, tupoi, not very bright. They hire them precisely because they won’t be too competent, too clever, to organize a coup against them. Putin surrounds himself with people who are maybe not the sharpest tools in the drawer on purpose.

That does two things. It enables him to feel more secure, through all his paranoia, that they’re not clever enough to take him down. But it also diminishes the power of the Russian state because you have a construction foreman who’s the defense minister [Sergei Shoigu], and he was feeding Putin all sorts of nonsense about what they were going to do in Ukraine. Negative selection does protect the leader, but it also undermines his regime.

On the importance of error correction:

…Finally, you’ve given credit to the Biden Administration for reading out its intelligence about the coming invasion, for sanctions, and for a kind of mature response to what’s happening. What have they gotten wrong?

They’ve done much better than we anticipated based upon what we saw in Afghanistan and the botched run-up on the deal to sell nuclear submarines to the Australians. They’ve learned from their mistakes. That’s the thing about the United States. We have corrective mechanisms. We can learn from our mistakes. We have a political system that punishes mistakes. We have strong institutions. We have a powerful society, a powerful and free media. Administrations that perform badly can learn and get better, which is not the case in Russia or in China. It’s an advantage that we can’t forget.

And most importantly, we need to blaze a path to de-escalation.

The problem now is not that the Biden Administration made mistakes; it’s that it’s hard to figure out how to de-escalate, how to get out of the spiral of mutual maximalism. We keep raising the stakes with more and more sanctions and cancellations. There is pressure on our side to “do something” because the Ukrainians are dying every day while we are sitting on the sidelines, militarily, in some ways. (Although, as I said, we’re supplying them with arms, and we’re doing a lot in cyber.) The pressure is on to be maximalist on our side, but, the more you corner them, the more there’s nothing to lose for Putin, the more he can raise the stakes, unfortunately. He has many tools that he hasn’t used that can hurt us. We need a de-escalation from the maximalist spiral, and we need a little bit of luck and good fortune, perhaps in Moscow, perhaps in Helsinki or Jerusalem, perhaps in Beijing, but certainly in Kyiv.

A great interview. Read the whole thing.

Yes those new service sector jobs are getting weirder

On Thursday afternoon, 30 top TikTok stars gathered on a Zoom call to receive key information about the war unfolding in Ukraine. National Security Council staffers and White House press secretary Jen Psaki briefed the influencers about the United States’ strategic goals in the region and answered questions on distributing aid to Ukrainians, working with NATO and how the United States would react to a Russian use of nuclear weapons.

Here is the full story, via Bryant Seaman, and several other MR readers.

Japan fact of the day

More than a quarter of major Japanese start-ups, those worth more than a billion dollars, involve care for the elderly. The tech is impressive: at care homes, ‘workers now receive a signal when incontinent residents require attention, forewarning them of the need for urgent intervention. There are also devices that track vital signs and indicate irregular heartbeats or breathing, while robotic beds that turn into wheelchairs are also being manufactured.’

Here is more from Ed West, mostly about aging societies more generally.

My Conversation with the excellent Sam Bankman-Fried

Here is the audio, video, and transcript.  Here is part of the summary:

He joined Tyler to discuss the Sam Bankman-Fried production function, the secret to his trading success, how games like Magic: The Gathering have shaped his approach to business, why a legal mind is crucial when thinking about cryptocurrencies, the most important thing he’s learned about managing, what Bill Belichick can teach us about being a good leader, the real constraints in the effective altruism space, why he’s not very compelled by life extension research, challenges to his Benthamite utilitarianism, whether it’s possible to coherently regulate stablecoins, the implicit leverage in DeFi, Elon Musk’s greatest product, why he thinks Ethereum is overrated, where in the world has the best French fries, why he’s bullish on the Bahamas, and more.

And an excerpt:

COWEN: Now, for mathematical finance, as you know, we at least pretend we can rationally price equities and bonds. People started with CAPM. It’s much more complicated than that now. But based on similar kinds of ideas — ultimately arbitrage, right? — if you think of crypto assets, do we even have a pretense that we have a rational theory of how they’re priced?

BANKMAN-FRIED: With a few of them, not with most. In particular, let’s talk about Dogecoin for a second, which I think is the purest of a type of coin, of the meme coin. I think the whole thing with Dogecoin is that it does away with that pretense. There is no sense in which any reasonable person could look at Dogecoin and be like, “Yes, discounted cash flow.” I think that there’s something bizarre and wacky and dangerous, but also powerful about that, about getting rid of the pretense.

I think that’s one example of a place where there is no pretense anymore that there is any real sense of how do you price this thing other than supply and demand, like memes versus — I don’t know — anti-memes? I think that more generally, though, that’s happened to a lot of assets. It’s just less explicit in a lot of them.

What is Elon Musk’s greatest product ever, or what’s his most successful product ever? I don’t think it’s an electric car. I don’t think it’s a rocket ship. I think one product of his has outperformed all of his other products in demand, and that’s TSLA, the ticker. That is his masterpiece. How is that priced? I don’t know, it’s worth Tesla. It’s a product people want, Tesla stock.

COWEN: But the prevalence of memes, Dogecoin, your point about Musk — which I would all accept — does that then make you go back and revisit how everything else is priced? The stuff that was supposed to be more rational in the first place — is that actually now quite general, and you’ve seen it through crypto? Or not?

BANKMAN-FRIED: Absolutely. It absolutely forces you to go back and say, “Well, okay, that’s how cryptocurrencies are priced. Is it really just crypto that’s priced that way?” Or maybe, are there other asset classes that may claim to have some pricing, or purport to, or people may often assume it does, but which in practice is not exactly that? I think the answer to that is a pretty straightforward yes.

It’s a pretty straightforward answer that you look at Tesla, you look at a lot of stocks right now, you think about what determines their market cap — the discounted cash flow? Yeah, sort of, that plays a role in it. That’s 30 percent of the answer. It’s when we look at the meme stocks and the meme coins that we feel like we can see the answer for ourselves for the first time, but it was always there in the other stocks as well, and social media has been amplifying this all over the place.

COWEN: Is this a new account of how your background as a gamer with memes has made you the appropriate person for pricing and arbitrage in crypto?

BANKMAN-FRIED: Yeah, there’s probably some truth to that. [laughs]

Interesting throughout, and not just for crypto fans.

Bank runs and CBDC

Our analysis holds important lessons for the introduction of central bank digital currencies (CBDCs). With a CBDC as the main means of payment, people can convert their bank deposits into CBDC quickly. There is no longer a need to stand in line at an ATM as currently in Russia. With CBDC, ordering goods and dumping this electronic cash is easier, too: a simple on-line transaction suffices. While the Russian central bank may suspend electronic means of payments, this is a bad option in a CBDC system, as such transactions lie at its heart. Suspending CBDC payment possibilities risks breaking trust in the currency altogether. With a CBDC, a central bank run may no longer proceed in slow motion, as currently in Russia; it can be fast and dramatic.

The situation in Russia is unusual. The central bank run as described may not come to pass, and lines at ATMs may recede. But trust in government money should not be taken for granted. We have seen plenty of panic in the U.S. in the last two years already. Options on how to deal with the evaporation of trust need thinking through ahead of time, particularly once a CBDC is introduced.

That is part of a short piece by Linda Schilling, Jesús Fernández-Villaverde, and Harald Uhlig.

The Sheriff of Transnistria

You will probably start to hear a lot more about Transnistria in the near future. Transnistria sits in between Moldova and Ukraine and was formed in the 1990s as a pro-Soviet breakway state from Moldova. After a brief civil war it is now governed independently and its security is overseen by “a three-party (Russia, Moldova, Transnistria) Joint Control Commission that supervises the security arrangements in the demilitarised zone, comprising 20 localities on both sides of the river.”

Wikipedia: Although the ceasefire has held, the territory’s political status remains unresolved: Transnistria is an unrecognised but de facto independent semi-presidential republic with its own government, parliament, military, police, postal system, currency, and vehicle registration.[16][17][18][19] Its authorities have adopted a constitution, flag, national anthem, and coat of arms. After a 2005 agreement between Moldova and Ukraine, all Transnistrian companies that seek to export goods through the Ukrainian border must be registered with the Moldovan authorities.[20] This agreement was implemented after the European Union Border Assistance Mission to Moldova and Ukraine (EUBAM) took force in 2005.[21] Most Transnistrians have Moldovan citizenship,[22] but many also have Russian, Romanian, or Ukrainian citizenship.[23][24] The main ethnic groups are Russians, Moldovans, and Ukrainians.

Now here is where it gets weird.

Wikipedia: Sheriff (Russian: Шериф) is the second-largest[citation needed] company in the unrecognised breakaway state Transnistria. It is based in the city of Tiraspol. Formed in the early 1990s by Viktor Gușan and Ilya Kazmaly, former members of the special services, Sheriff has grown to include nearly all forms of profitable private business in the unrecognised country, and has even become significantly involved in local politics and sport,[2] with some commentators saying that company loyalists hold most main government positions in the territory.

…Sheriff owns a chain of petrol stations, a chain of supermarkets, a TV channel, a publishing house, a construction company, a Mercedes-Benz dealer, an advertising agency, a spirits factory, two bread factories, a mobile phone network, the football club FC Sheriff Tiraspol and its home ground Sheriff Stadium, a project which also included a five-star hotel.

And consider the following from 2021:

New Moldovan President Maia Sandu has said she wants her country to join the European Union and demanded Russian troops leave Transnistria.

But the breakaway statelet still affirms its allegiance to Moscow.

In Tiraspol, a billboard reads “Russia in our hearts,” while a portrait of Russian President Vladimir Putin hangs on a wall in Krasnoselsky’s offices.

Hat tip: The deputy, Kevin Lewis.

The U.S. is really good at destroying things

If a country is really good at X, and along comes social change Y, you ought to figure there is a pretty good chance Y will feed into X.

So for instance the United States is really good at retail.  So along comes Wokeism, and, lo and behold, Wokeism slots wonderfully into retail, whether you like that fact or not.  The Woke is marketed all the time, and so you can find “green” versions of so many products, even if organic food costs more energy, etc.  Or if you invent a new app, with anti-corporate purposes in mind, don’t be surprised if you wake up one day and the app has been co-opted by retail corporations.  And so on.

What we are now observing is that the recent innovation of “The Woke’ has been co-opted for the purposes of destroying things, in this case the economy and possibly the society and polity of Russia.  The lining up of European allies, the mobilization of sentiment on Twitter, the inducement of Visa and Mastercard to pull out, and you could go on and on and on.  The Woke campaign against Russia has turned out to be extremely powerful, well beyond what I had been expecting to happen.  Energy purchases might be next to go.

To be clear, sometimes we are good at producing or threatening destruction in very beneficial ways (WWII, 1973 airlift to Israel, ending the post-Yugoslavia wars, stopping Saddam from taking Saudi oil, etc.), and sometimes we are good at destruction in very harmful ways (you can supply your own list, but it is extensive).  In this post I am not going to try to assess the net expected value from the ongoing destruction of Russia, only to say that the final outcome is uncertain.

Nuclear power, airplanes, computers, GPS and much more all have been co-opted into destroying things, again noting these effects may be net positives on the whole.  They have been co-opted into retail purposes as well, nuclear power excepted.

Make no mistake about it, many of the most important “contributions” of Wokeism are to feed into, and enhance, those capabilities that America already is good at.

Which include retail and yes, destruction as well.

The Coase theorem, combined with the force of increasing returns to what a country is really good at, will see to this.

The same feeder tendencies may well be true for other innovations you might have in mind, be they practical or intellectual in nature.  Whether you like it or not, they will contribute to both American retail and to the American capacity to destroy.

Some people observe these trends and think the Woke is transcendent and all-powerful.  But under another reading, it is actually the Woke that is somewhat being pwned.

Who is working on creative solutions to limit nuclear war risk?

I don’t mean on the macro foreign policy side, but more the micro elements.  For instance, how do we make sure all countries with nuclear weapons have accurate early warning systems, so they do not confuse flocks of birds with incoming missiles?

Your suggestions do not have to be credentialed in the traditional sense, but they should be smart, curious, and hard-working, at the very least.

I thank you in advance for the nominations.

Addendum: I am looking for actual suggestions and will delete all “soapbox” comments.

Which Russians are getting cancelled?

The Russian filmmaker Kirill Sokolov has spent the past week distraught at the horror unfolding in Ukraine. Half his family is Ukrainian, he said in a telephone interview, and as a child he spent summers there, staying with his grandparents.

His maternal grandmother was still living in Kyiv, he said, “hiding from bombs in a bunker.”

Since Russia’s invasion began, Mr. Sokolov said he had signed two online petitions calling for an end to the war, an act that carries a risk in Russia, where thousands have been arrested for protesting the conflict, and some have reportedly lost their jobs.

Yet despite his antiwar stance, Mr. Sokolov on Monday learned that the Glasgow Film Festival in Scotland had dropped his latest movie, “No Looking Back.”

Here is more from Alex Marshall at the NYT.  Remind me again — why is this better than “simple racism”?  The Festival noted that the Russian government earlier had funded his film work.  Surely that could be grounds for cancelling anyone who went to public school in Russia?

The game theory of attacking nuclear power plants

From my latest Bloomberg column (do I really need to indent my own text?):

“Putin would like to find a way of making nuclear threats without quite incurring the liability from … making nuclear threats.

Enter nuclear power plants. When Russian forces attack the plant, there is some chance that something goes wrong, such as a radiation spill. But more likely than not, the plant will hold up, and most dangerous processes can be shut down and the very worst outcomes avoided. You can think of Putin as choosing a “nuclear radiation deployment” with only some small probability.

Why might he do this? Well, he is showing that the use of broader nuclear deployments is not out of the question. He is also showing that he is willing to take a huge risk.

Most of all, he doesn’t much have to fear retaliation. The Western powers cannot know if these nuclear attacks are deliberate strategy or simply an accident of tactics in the field, and so — if only for that reason — they will not respond with a major escalation. If Russian forces moved on Estonia, they might be courting a very serious NATO response. But not in this situation.

You don’t have to believe that Putin sat in his lair rubbing his hands as he dreamed up this diabolical strategy. It’s also possible that the attack on the nuclear power plant started by mistake, or was ordered by lower-level commanders. Putin then simply allowed it to continue, perhaps out of a general love of chaos. At the very least, he did not consider it a priority to stop the attack.

Game theory doesn’t always have to be about explicit plans and intentions. It also can help explain why “invisible hand” mechanisms lead people to a particular point in the strategy tree, as if they had those strategies as conscious intentions.

Attacking the nuclear power plant also illuminates some other parts of game theory. Ukraine and its people are taking very heavy losses and are hoping for NATO to intervene on their behalf. If the conflict seems riskier to all of Europe, and not just Ukraine, the odds of such intervention improve.

In this sense, the attack on the nuclear power plant does not have to be entirely bad for Ukrainian prospects in the war. The Ukrainian leadership is rightly horrified by this attack, due to the risks for Ukrainian citizens. But the attack could also mobilize European public opinion on behalf of military intervention for Ukraine. If the war greatly increases chances for the spread of dangerous nuclear radiation, then the likelihood that Germany, France, Turkey and other nations will intervene also greatly increases.

Notice, however, that the Russian position here may be sounder than it at first appears. European citizens care more about radiation in Ukraine than do American citizens, for reasons of simple proximity. Putin may realize he can put Europeans at greater risk so long as he doesn’t provoke an intervention from the U.S. military, which would probably be decisive. It is a risky strategy that he might just get away with.

If you are the Ukrainian government, your incentive is to make the nuclear power plant attack sound as risky and precarious as possible. Indeed, Ukrainian President Volodymyr Zelenskiy has done exactly that.”

I am sorry to say that the column does not have an especially optimistic ending.

I Booked an Airbnb in Kyiv

I booked 5 nights at an Airbnb in Irpin, a heavily bombed city near Kyiv.

I’m not going. (And I told the host I wasn’t going).

The host replied:

Любі друзі дякуємо за допомогу. На ці гроші ми зможело допомогти сімьям які залишились без будинків. Дякуємо

Dear friends, thank you for your help. With this money we were able to help families left homeless. Thank you

It’s a very strange world in which you can book an apartment in a bombed city thousands of miles away.

Would this form of charity pass the Givewell test? Probably not. Still I am glad to have done it. Not to make light of the situation, but the look on my wife’s face when I told her I had booked an Airbnb in Kyiv was priceless.

NFT markets in everything

Ukraine plans to become the first developed country to issue its own collection of non-fungible tokens, as it looks to capitalise on a flood of crypto donations to back its war against Russia.

Mykhailo Fedorov, Ukraine’s vice-prime minister, announced the plan in a tweet on Thursday and said Kyiv would reveal details of its NFTs soon.

The move is the latest sign of the Ukrainian government embracing digital assets as a way to fund its armed forces in their battle, and comes after it raised more than $270mn in “war bonds”.

One for each Russian tank destroyed?  Here is the full FT story, via Natasha.