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Archive for May, 2011

Bitcoin

May 30, 2011 2 comments

Today’s lesson: Money is only worth something because someone with a gun says it is worth something.

If you don’t know what Bitcoin is, this is as good a place to start as any other.

The only reason Bitcoin is worth anything is because some nice/crazy/kooky/internet people decided it would be fun to buy some. It simultaneously riding the crescendo of two large memes:

1) Bankers/The Man is evil.

2) The Internet will save the world.

Now that people have bought in, the bubble has begun. The meme of Bitcoin is spreading, more misinformed people are feeding the flames by buying Bitcoins, and the price for them is doubling every couple of weeks/months depending upon whom you ask.

Classic asset bubble: people are buying something they think is valuable. It is not. The people who devised the plan in the first place, who own the valueless asset which they bought at a fair (basically zero) price, will ride the bubble up and cash out (if they are smart). The losers will end up holding the worthless asset, which in this case hardly even meets the definition of an economic asset: something that is valuable.

The stimulus for this post:  This guy is supposedly putting all his savings into Bitcoin.  These are the people whose musings and “advice” one should ignore at all costs. Not only is putting your entire life savings into a single asset incredibly risky, the volatility of Bitcoin’s price should be reason enough to make it an unfit “investment” (as a speculative gamble, I don’t anything wrong with buying bitcoin, although I also don’t see anything wrong with playing blackjack, or roulette for that matter. All three are only marginally worse than the equity market). This guy is either doing a classic pump and dump or he just has his head up his ass. Reminds me a lot of the guy who wrote this book.

People like Jerry Brito, who are in the business of predicting and profiting from tech fads, have been some of the currency’s biggest cheerleaders. As a technologist, he understands and is right about all the “on paper” advantages of Bitcoin, but he doesn’t understand the political economy of it. First, Bitcoin is not really a currency, it is a private asset, more analogous to buying property on the moon than to dollars or even gold.

There are many different currencies in the world. Currency needs to have utility. I generally hold my own savings as dollars (and dollar-denominated assets) because the places I go accept dollars, and the governments that compel me to pay taxes only accept payment in dollars. Some people prefer to hold on gold because it is really easy to convert gold into dollars anyway, and gold has intrinsic value, aesthetically and industrially.  Other prefer to hold euros because they live in the EU and pay taxes in euros and the local goods and services are denominated in euros. But in the case of Bitcoin, I have no utility from holding them. The pool of goods and services I can buy with them is small, and even if it grows 100 fold over the next year, it will still be small compared to the pool of goods and services I can buy with dollars. I also can’t pay taxes in Bitcoin. If this doesn’t seem like a big deal, take into consideration that the only reason the dollar has achieved primacy is because it is the only way to pay your debts owed for living within and benefiting from the social capital brought to you by the world’s greatest imperial superpower. The only reason dollars are worth anything is because the US military can fuck you up. It is literally illegal to not accept dollars as a form of payment within the US. People cannot be coerced into taking Bitcoin as payment, unless someone wants to step up and use Bitcoin as the national currency (which won’t ever happen, as I’ll explain).

Bitcoin won’t take off for the same reason Esperanto never took off: top-down systems “designed” by intellectuals to be “better” usually cannot gain enough critical mass to catch on without being co-opted by a violent, authoritarian institution. There is are tremendous political incentives for governments that adopt fiat currencies within a fractional reserve central banking model. Being able to debase your own national currency allows a government to decrease its real debt, stimulate short run aggregate demand (a convenient way to keep the peasants distracted and employed during a time of financial crisis), or pay for large expenditures such as wars. There are no political incentives for using Bitcoin. It is an inherently decentralized system that has no role for institutional authority, and so the institutional authorities will not use it.

Getting back to the compulsive gambler that inspired me to write all of this in the first place, the price for Bitcoins will continue to rise as it gains name recognition, but ultimately it is a classic asset bubble and it will pop (I will be generous and give it 3-8 years) as people realize that Bitcoins have no value except for what other people think they are worth. So maybe putting all your money into Bitcoin is a moneymaker for now, but many have been sent to the poorhouse trying to predict the top of an asset bubble. At least when you are buying real estate and the market crashes, you still own actual real estate. When the Bitcoin bubble crashes, all the losers will have is some 0’s and 1’s in a computer file.

Categories: Economics, Hackers, Money

DSK

May 22, 2011 1 comment

Rape is really bad. But so is convicting someone in the court of public opinion before they have a fair trial. I haven’t seen anything in the media that doesn’t assume his guilt is a foregone conclusion. Are we as a public so horny for revenge against the Masters of The Universe that we are willing to abandon due process?

Dream Platform

Wars: End them, redirect 50% of military budget to a Manhattan project for sustainable energy infrastructure (solar, wind, tidal). End most foreign aid.

Abortions, Drugs, Prostitutes, Gay Marriage: All cool, Legalize It Peter Tosh. There is just no good reason not to. Every technocrat in the world agrees with me.

Medicare: replace with a single payer system modeled after Canada or the UK. Better end of life care: instead of paying $30,000 to prolong a 79 year old’s life by 6-12 months, give them a grant to go travel the world or start an NPO or whatever and let them die happier instead of live on more miserably.

Social Security: end it. Refund all SS contributions back to the people who paid them. It is nice to take care of old and sick people, but a government run SS system is the wrong way to do it. SS is modeled after a Ponzi scheme, and is inherently unsustainable. A better name for it would be “Social Stability”. It is a handout from the ruling class to keep the proletariat complacent. It is also, as currently structured, socially regressive.

Immigration: cutting down the size of the welfare state will let us bring in more immigrants. Immigrants are good especially entrepreneurial ones. Accordingly…

Business: too much of the tax burden falls on small businesses. The facts are that small businesses pay much higher marginal rates than large cap multinationals. Change the tax code to exempt the first $X of profits from taxation. Tax foreign earnings the same as domestic ones for multinationals.

Farm Subsidies: End them immediately.

Prison: use more remote monitoring for nonviolent offenders. Stop warehousing nonviolent criminals. Abolish the death penalty.

Law: allow people to take the bar exam without going to law school. Most of the founding fathers became lawyers by being an apprentice to another lawyer. Sadly, this process has disappeared and the legal industry is controlled in an oligarchic fashion by less than 200 law schools. This lack of competition drives up the costs of law school, and subsequently legal services and litigation. More lawyers = cheaper litigation and a more robust tort law system, which in turn allows for less Federal regulation and oversight, as many property right issues could be resolved by tort law.

Environmental Stewardship and Sustainability should be at the center of my dream platform. The biggest crisis we face as a species is the carrying capacity of the Earth.

Open Ed: The Answer to the Supposed Education Bubble

From The Chronicle of Higher Education:

“The concept is simple: Community colleges that compete for federal money to serve students online will be obliged to make those materials—videos, text, assessments, curricula, diagnostic tools, and more—available to everyone in the world, free, under a Creative Commons license. The materials will become, to use the common term, open educational resources, or OER’s.”

Brilliant idea.

As the current system is designed, Higher Ed has two components: the knowledge and learning component, and a signalling component. Having more OER’s will increase the dissemination of knowledge and learning. People without the financial means to attend college will be able to get essentially free access (from the internet) to course materials that usually cost hundreds or even thousands of dollars. As for signalling, if their is a large enough demand for some type of alternative certification, and the government doesn’t interfere, markets will provide testing and certification companies that essentially act as test proctors for comprehensive final examinations. This should provide a much cheaper alternative to getting a traditional college degree at a brick and mortar institution, and the certification would still provide a signal to employers and institutions that the student has achieved a certain level of proficiency within a given subject.

Categories: Economics, Education

Milton Friedman: 2005 Interview with Charlie Rose

Watch it HERE

Milton Friedman is arguably the most important thinkers of the 20th century. In spite of this, or perhaps because of, he is hated and misunderstood by a great many people. I think a lot of the hatred is misplaced. Any of the (questionable) connections he has to some of the more ill-conceived policies of the Pinochet regime or the IMF/World Bank are greatly overshadowed by the paradigm shifting contributions he made to monetary policy and political economy. The world is undeniably a better place because of him, and if you don’t believe me, ask your parents or grandparents what the 1970’s were like.

A lot of the vitriol directed at Friedman is his “support” of Augustus Pinochet. I don’t know the extent of his actual advising duties while he was in Chile. What I do know, is that after Pinochet left, and as the country continued to follow the free market policies advocated by Friedman, Chile’s economy went from janky to swanky in just about ten years.

A lot more negative attention was given to Friedman after Naomi Klein’s Shock Doctrine became a best seller. In Klein’s book, she paints a picture of Friedman that makes him sound like a mad scientist, bent on using his sinister and cruel economic experiments to achieve his aims of… winning a Nobel Prize? Or maybe helping Ronald Reagan justify tax cuts for the rich… I am not sure. In any case, you are doing yourself a disservice if everything you know about Friedman is from The Shock Doctrine and/or Zeitgeist and/or the Principles of Macroeconomics course you took at the community college (take it from someone who has once identified as such).

Monetarism, the movement that Friedman is associated with and considered to have founded, understands money as just another good for which there is a demand and supply. Before this, no one really thought of money this way. A lot of economic problems could be understood as being caused by a disequilibrium between the supply of money and demand for it. It might seem strange to think of there being a “demand” for money, but imagine a situation where there is an economic recession. Investors are unsure of the future cash flows that will be generated by their assets. Accordingly, many investor’s decide that they would rather hold onto cash instead of the assets they have, because they know that the cash (or treasuries) have less risk than whatever else they could put their money into. The effect of everyone wanting to get liquid creates a demand for cash, a demand that outstrips the supply, and ultimately causes asset prices to plummet as investors sell at fire-sale prices (if they do finally decide to sell at all, or if they can).

In the past (Keynesian era), the government could step in and start writing checks, using its own cash to jump start the economy (hopefully) and also increasing the amount of money being supplied (except Keynes didn’t really think about this; he thought that the demand for money naturally reached an equilibrium with supply within the asset and forex markets).  Keynes didn’t believe you should just fire up the printing press: it debases the currency (duh!) and ultimately doesn’t have a “real” effect on the economy. He basically said: “It doesn’t make a difference if you have $1 or $10, if the $10 has been debased and each one of those dollars is only worth a dime.”

Friedman came around and said: “Keynes, you are mostly right, but the money supply doesn’t instantly reach equilibrium with demand. There are all kinds of signalling effects and inefficiencies that can create situations where demand doesn’t equal supply, and such a disequilibrium can be maintained for quite some time, especially so with help from the economic illiterates that are usually in charge.” The whole “economic illiterate” thing is why Friedman is so often associated with “free market ideology”: like hundreds of prominent economists before him, Friedman noticed (correctly) that most of the government’s economic policy (interference) actually hindered the absolute growth of the economy.

In my mind, Friedman is mostly responsible for most of the economic prosperity that the entire world has enjoyed since 1980. Neoliberalism has been a winning strategy, not just for America, but for everybody (except North Korea, which plays by its own rules, to tragic effect). It is true that the gains from global trade haven’t been distributed “evenly” between the rich and poor nations of the world, but they have been gains none the less.

The success or failure of the economic policies advocated by the World Bank or IMF have little reflection on Friedman himself.

Education: Public vs. Private Models

From The Economist:

On the other hand, American universities really are the best in the world, and the European model of taxpayer financing of higher education really is going through a massive and inevitable restructuring. This makes figuring out what to do about higher-education cost inflation harder, to my mind, than figuring out what to do about health insurance. There don’t seem to be alternative models that sustainably deliver equivalent value at lower cost. ”

I am not sure if there is a bubble in higher ed. There certainly seems to be a lot of evidence to support a bubble: skyrocketing tuition, inelastic demand, relatively high unemployment for recent college graduates. Part of the problem is definitely related to the structure of education model.

Berkeley Economist Brad DeLong agrees that something strange is afoot:

“I do observe that education and medical care are the two large sectors in which the private market did not have a strong presence a century ago and are also the two large sectors where market competition does not seem to produce lower prices. And I feel that there must be some connection.”

The reason that education and heath care behave this way is because of consumers’ disconnect with the real costs and benefits. It is a consumer knowledge problem, not a regulation problem or enterprise model problem. When someone is dying of cancer, it is seldom the case that this patient and their family make a financial calculation to see if it worth while to receive treatment: “Sorry, Pops, but your best earning years are behind you, and even though I played around with the discount rate a little bit, we still don’t see a justification for treatment because of a negative NPV.” That’s not how it works. Patients and families often spend WAY too much money because it is presently impossible to accurately measure the marginal benefit of any given treatment ex ante.

Similarly, higher education has a mystical role in the American Zeitgeist. My parents, and many of my friend’s parents, told us to do the best we could in high school and apply to the best colleges possible: they would figure out a way for us to pay for Harvard (worth it?) or USC (probably not worth it?) if we got accepted. My grandfather applauded by choice to go to Santa Barbara City College first before transferring to UCSB. Essentially, the savings I enjoyed is the premium students pay for the “college experience”, i.e. living in a dorm, attending freshmen success seminars for 3 easy units. The instruction I received at the CC was leagues better than what I received at the UC. Unfortunately, Higher Ed isn’t entirely about education. Going to Harvard is as much about being around smart people and making connections with the future leaders of the world as it is about learning and scientific inquiry. Ivy Leagues might be worth the 200K it costs to attend them (this would be an easy regression to do, looking at differences in lifetime earnings. While someone is at it, also look at the net worth of the student’s families, to see if the elite gain more of an advantage going to Harvard than “regulars”, due to the elite families having connections in business and politics). The elites will always support Ivy League caliber schools because it is where elite attitudes and cultural memes are incubated and distributed.

Ultimately, I think the correct model is a mixture of private and public. The public model in the USA is surprisingly strong: considering all the other government sponsored endeavors that become politicized, American public universities are among the best in the world. This is partially due to state governments acting as intermediaries between Federal money and the schools themselves. The private sector’s role is to step up and fill the gaps created by the public model. All the negative talk about for-profit universities ignores an important fact: these universities are popular because people want educations. Some of the more predatory tactics that these companies use to “seduce” potential students are reprehensible, but ultimately they are just marketing and advertising. College also gets a bit of a subsidy from High School guidance counselors who pressure students into going to college regardless of the students financial means or aptitude. If students and their parents understood more about the value of a college degree, rather than just believing the narrative meme that “college is important and always worth it”, consumers would make better choices and maybe they would rethink the $60,000 MBA from the University of Phoenix if they knew the job prospectives facing them after graduation. Ultimately, I believe that it is always better to put the onus on consumers to consume responsibly (caveat emptor) than to regulate an industry and destroy consumer choice.

Categories: Uncategorized

Links That Should Be Read

Categories: Uncategorized