That is the theme of my latest Bloomberg column, here is one excerpt:
One reason for the rise in Bitcoin’s price may have to do with the U.S. and China and the trade war. It no longer seems that China will join the international economic order as that term might have been understood 15 years ago. Instead, there will be an ongoing cold war; China will not liberalize, and capital controls may persist. In that world, Bitcoin will continue to prove a useful way of getting funds out of China. The Chinese Communist government may or may not crack down on that practice, but outright liberalization would have ended this use of Bitcoin altogether.
For related reasons, a China that does not liberalize may influence the broader tenor of the global economy away from freedom, again giving Bitcoin additional uses around the world for evading central authorities.
A second development is that the Democratic Party in the U.S. continues to shift to the left, including on the possibility of a wealth tax. As America’s fiscal deficits grow (due often to the Republicans, I might add), there will be a long-term need to restore fiscal sanity. Presidential candidate Elizabeth Warren, for one, advocates a 2% wealth tax (over $50 million) toward this end.
No matter what you think of this idea, it likely would boost the demand for Bitcoin and other crypto assets, as cryptocurrencies are potentially a way to store assets out of reach of many tax authorities. And the U.S. is hardly the only nation that may be looking to a wealth tax in the future to balance the books. In essence, the new and higher price of Bitcoin is telling us that fiscal solvency will be hard to come by, and the wealthy will not give up their assets without a fight.
Do read the whole thing.
Press TV: A report by Iran’s Mehr news agency last week showed that bitcoin miners were using power in buildings and properties that enjoy a lower price for electricity, including factories, greenhouses, government offices and mosques.
…A spokesman of Iran’s Ministry of Energy said on Monday that the country’s power grid had become unstable as a result of increased mining of cryptocurrencies.
Bitcoin mining in a mosque may seem outré but at least it’s not money lenders in the mosque. In fact, Bitcoin is halal, at least according to one source (quoted here):
As a payment network, Bitcoin is halal. In fact, Bitcoin goes beyond what more conventional closed banking networks offer. Unlike conventional bank networks which use private ledgers where there’s no guarantee that the originator actually owns the underlying assets, Bitcoin guarantees with mathematical certainty that the originator of the transfer owns the underlying assets. Conventional banks operate using the principle of fractional reserve, which is prohibited in Islam.
Muhammad was a merchant and much more open to business than some traditional Christian interpretations. For example, compare Jesus, “it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God” with one of Muhammad’s sayings:
Abu Said related that the Prophet said: The truthful and trustworthy businessman will be in the company of Prophets, saints and martyrs on the Day of Judgment. (Darimi, Tirmidhi)
I’ve already outlined the case for how Libra might be able to significantly lower the 7-8% costs and commissions currently charged for making remittances. That would make Libra a widely used means of payment. I am less optimistic, however, about Libra being widely used as a medium of exchange.
Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar. It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving). I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average. That is in essence a two percent tax on currency holdings, not an eight percent tax. I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.
If an unbanked farmer is in debt, I would think the velocity of currency would be well over 4x a year (consider monthly microcredit borrowings and repayments), although certainly some MR readers can enlighten us here.
A few decades ago, when inflation was much more common, it was generally believed that people were not very interested in switching monies until inflation rates hit about forty percent. I am not sure if that same number would hold today, but of course that is pretty high. Furthermore, the countries with the highest inflation rates, such as Venezuela, can be impossible to do business in.
Don’t forget that Libras are specified as paying zero nominal interest throughout.
You might think that Libras have some advantages over current e-monies and smart phone banking systems. It is hard to make that judgment for a product which does not exist yet, but it is unlikely those advantages will run close to the range of seven to eight percent.
For those reasons I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange.
That is the theme of my latest Bloomberg column, here is one excerpt:
How could L.A.’s tech scene develop even further? Imagine that virtual reality is the “next big thing” and the gamification of just about everything, including education, proceeds apace. For the next generation of startups, that might throw the balance of power in the direction of expertise in entertainment and design — a sense of the theatrical, in other words, intermediated through tech. That could favor the culture of Los Angeles and Hollywood. Southern California also has a strong background in aerospace and military contracting, two areas that could produce a spillover effect for the next tech booms, especially if they involve transportation. The region also remains the leading U.S. manufacturing center, and that too could be a source of future synergies.
Northern California had an original advantage over Southern California as a center of free thinking and thus as a tech hub. Think back to Haight-Ashbury, the 1960s, Beatniks, LSD and the Whole Earth Catalog, the psychedelic movement, the bohemian and gay cultures of San Francisco. All of that bred an atmosphere of rebellion, and it helped birth the personal computer and a large movement of non-conformist hippie programmers, often working out of their proverbial garages.
But those cultural roots have largely faded, and if anything today San Francisco and the Bay Area are better known for political correctness and a conformist culture of scolding and groupthink. That can’t be good for the region’s long-term creativity.
There is much more at the link.
Dante Disparte, as interviewed by Ben Thompson ($$, but you should subscribe to Ben):
One example is the use case of international money transfers or remittances. Globally, the remittance cash flow is projected to be about $715 billion in 2019, and on average…you are seeing between seven and ten percent of transfer costs, and in some instances much higher than that in the teens. For a product and an outcome from the sender and receiver point of view, that is not only very slow, it often takes a few days to clear on the receiving end, it is [extremely expensive]. There are direct payment rails that are just technology powered that do a lot in terms of advancing efficiency, but pre-blockchain it would have been very, very hard to conceive of a network of international payments that could do that at near zero cost instantaneously while at the same time not sacrificing the type of ledgering and transaction information that would enable the world to begin to do that securely. So that would be one amazing use case that could put billions and billions of dollars back into the market by eliminating as many of these fees as possible, while at the same time putting billions of dollars into the hands of people around the world in real time.
Here is my current understanding of Libra/Calibra, at least within this particular context, noting again that my understanding may be wrong or incomplete. These transfers would not go through the current banking system as we know it, but rather through a blockchain with say 100 or so (quite legitimate) participants enforcing some kind of “proof of stake” standard. Some form of “proof of stake-equivalent of mining fees” would have to be paid, either explicitly or implicitly, and those arguably could be much lower than current remittance costs, noting that the actual operation of proof of stake in this setting remains to me murky. Still, it would largely avoid the current mining fees associated with Bitcoin. On net, one is trading in the current regulatory and clearing and Western Union branch costs for these future proof of stake costs. Do you think the Libra Association can run a proof of stake system for less say than $100 billion?
“But don’t you have to convert your Libras back into mainstream fiat currencies?” Well, maybe you might, but that is simply the cost of showing up at the relevant financial institutions and claiming redemption. Those costs also could be much lower than the current fees associated with remittances. What is sent through the blockchain network simply can be Libras, as I understand it, with varying assumptions on how much people will hold Libras rather than converting them.
To use a historical analogy, think of this as substituting “the transfer of paper claims to gold” for “claims to gold,” but in a one hundred percent reserves setting. It can be (and indeed was) much cheaper to send around the paper than the gold, and yet the paper still was a claim to the gold. The Libra is a kind of parallel, redeemable currency, legally not within standard banking systems, but still redeemable in terms of mainstream fiat currencies which are within standard banking systems. “Create a synthetic claim which can be traded more cheaply” would be my version of the ten-word slogan.
Another slightly wordier slogan might be: “let’s actually separate the means of payment from the medium of exchange by creating a new synthetic asset, because those two things actually should not be the exact same asset.”
Of course it still remains to be seen in which countries regulators will allow this to happen. How persuasive is the promise of one hundred percent reserves? I don’t mean to speak for Libra/Calibra here, but I believe they are suggesting (or implying?) that the proof of stake system for making and validating transfers could in essence enforce relevant regulations against money laundering, illegal transfers, and the like.
It is a quite separate (but possible) claim to believe that libras could serve as an effective medium of exchange at a retail level, and perhaps I will cover that in a separate post. That would mean that both the medium of exchange and means of payment should be new and different assets, a much stronger claim.
Skype and Zoom aren’t quite as good as meeting in the physical world. But why? Pioneer and Emergent Ventures are looking to fund research on exactly how and why video conferencing interactions are different. Apply at https://pioneer.app and mention this tweet…Given the rise of remote work, the economic impact of this research could be Nobel-worthy.
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.
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.
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.
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.
That is my essay in the new NBER volume The Economics of Artificial Intelligence: An Agenda, edited by Ajay Agrawal, Joshua Gans, and Avi Goldfarb. Here is one excerpt from my piece:
These distribution effects [from more powerful AI] may be less egalitarian if hardware rather than software is the constraint for the next generation of AI. Hardware is more likely to exhibit constant or rising costs, and that makes it more difficult for suppliers to charge lower prices to poorer buyers [price discrimination]. You might think it is obvious that future productivity gains will come in the software area — and maybe so — but the very best smart phones, such as IPhones, also embody significant innovations in the areas of materials. A truly potent AI device might require portable hardware at significant cost. At this point we don’t know, but it would be unwise to assume that future innovations will be software-intensive to the same extent that recent innovations have been.
You can buy the book here, it has many notable contributors and other essays of interest.
To provide storage space for the huge coils of wire, three great tanks were carved into the heart of the ship. The drums, sheaves, and dynamometers of the laying mechanism, occupied a large part of the stem decking, and one funnel with its associated boilers had been removed to give additional storage space. When the ship sailed from the Medway on June 24, 1865, she carried seven thousand tons of cable, eight thousand tons of coal, and provisions for five hundred men. Since this was before the days of refrigeration, she also became a seagoing farm. Her passenger list included one cow, a dozen oxen, twenty pigs, one hundred twenty sheep. and a whole poultry-yard of fowl.
That is 1865 we are talking about here, remarkably early (in my view) for laying a cable across the bottom of the entire Atlantic.
The passage is from Arthur C. Clarke’s excellent How the World Was One: Beyond the Global Village.
Slate has published an adaptation from my recent book *Big Business: A Love Letter to an American Anti-Hero*, here is one excerpt:
Advocates of splitting up the big tech companies have a utopian vision of what will replace them. Whether you like it or not, we now live in a world where every possible idea (and video) will be put out there in some fashion or another. Don’t confuse your discomfort with reality with your assessment of big tech companies as individual agents. We’re probably better off having major, well-capitalized companies as guardians and gatekeepers of online channels, however imperfect their records, as the relevant alternatives would probably be less able to fend off abuse of their platforms and thus we would all fare worse.
Imagine, for instance, that instead of the current Facebook we had seven smaller companies all performing comparable social networking services, perhaps with some form of interconnectability or data portability. The negative sides of social media, which are indeed real, probably would be worse and harder to control.
It is unlikely that such a setting would result in greater consumer privacy and protection. Instead, we would have more weakly capitalized entities, with less talent on staff and weaker A.I. technologies to take down objectionable material. Probably some of those companies would be more tolerant of irresponsible user behavior as a competitive lure. Fake accounts would proliferate, and social networking sites such as 4chan—often a cesspool of racism and rhetoric that goes beyond the merely offensive—would comprise a larger and more central part of the market.
As for privacy, these smaller Facebook replacements would be more susceptible to hacks, foreign surveillance and infiltration, and external manipulation—the real dangers to our privacy and well-being.
There is much more at the link.
…we suggest that this division of innovative labor has not, perhaps, lived up to its promise. The translation of scientific knowledge generated in universities to productivity enhancing technical progress has proved to be more difficult to accomplish in practice than expected. Spinoffs, startups, and university licensing offices have not fully filled the gap left by the decline of the corporate lab. Corporate research has a number of characteristics that make it very valuable for science-based innovation and growth. Large corporations have access to significant resources, can more easily integrate multiple knowledge streams, and direct their research toward solving specific practical problems, which makes it more likely for them to produce commercial applications. University research has tended to be curiosity-driven rather than mission-focused. It has favored insight rather than solutions to specific problems, and partly as a consequence, university research has required additional integration and transformation to become economically useful. This is not to deny the important contributions that universities and small firms make to American innovation. Rather, our point is that large corporate labs may have distinct capabilities which have proved to be difficult to replace.
That is from Ashish Arora, Sharon Belenzon, Andrea Patacconi, and Jungkyu Suh, “The Changing Structure of American Innovation: Some Cautionary Remarks for Economic Growth,” recommended, an excellent paper spanning several disciplines. I would myself note this is further reason not to split up the major tech companies.
Lots of fire! Here is the podcast link.
The proportion of students studying fully online who are enrolled within 50 miles of their homes has risen from under half to fully two-thirds, a new study finds.
Here is the longer piece.