Quotulatiousness

October 10, 2017

India’s bold experiment … is an economic failure

Filed under: Economics, Government, India — Tags: , , — Nicholas @ 05:00

Back in December, I linked to an article by Shikha Dalmia, discussing the rhetoric and (likely) reality of India’s currency experiment. Now, Lawrence White rounds up the damage done:

The debate over demonetization was revived this month (September 2017) after the Reserve Bank of India finally announced the count of returned currency. It announced that 99 percent of the discontinued notes, Rs 15.28 trillion out of Rs 15.44 trillion, had been returned. As Vivek Kaul has noted, “The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them.”

The trivial size of unreturned currency, of course, obliterates BDK’s [Bhagwati, Dehejia, and Krishna’s] projection of a government seigniorage windfall.

What about BDK’s other projected source of revenue, the 50% tax on acknowledged black deposits? Whereas in BDK’s scenario, black currency holders would make Rs2 trillion in voluntary-disclosure deposits, which would yield Rs 1 trillion in revenue, the actual collections under the scheme were reported in April at Rs 23 billion, or 2.3% of the BDK-imagined sum. Such paltry revenues mean that demonetization, from the fiscal perspective, was all pain and no gain.

The accumulating evidence on economic growth, meanwhile, has become damning. Between July and September 2016, India’s GDP grew 7.53 percent. Between January and March 2017 it grew 5.72 percent. Former head of the Reserve Bank of India Raghuram Rajan, now returned to the University of Chicago, links the drop to demonetization: “Let us not mince words about it — GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money — over Rs2 lakh crore [i.e. trillion] and maybe approaching Rs2.5 lakh crore.” Kaul adds that GDP does not well capture the size of the informal cash sector, where the losses from demonetization were greatest.

In response to the RBI report and GDP data, and to their credit, BDK have substantially retreated from claims of success to what can be regarded as the claim that there is still a chance to break even.

September 29, 2017

Blockchain primer – blockchain as a ledger

Filed under: Business, Economics, History, Technology — Tags: , — Nicholas @ 04:00

At Catallaxy Files, Sinclair Davidson provides some background knowledge of blockchain technology as a modern evolution of the simple ledger:

The blockchain is a digital, decentralised, distributed ledger.

Most explanations for the importance of the blockchain start with Bitcoin and the history of money. But money is just the first use case of the blockchain. And it is unlikely to be the most important.

It might seem strange that a ledger — a dull and practical document associated mainly with accounting — would be described as a revolutionary technology. But the blockchain matters because ledgers matter.

Ledgers all the way down

Ledgers are everywhere. Ledgers do more than just record accounting transactions. A ledger consists simply of data structured by rules. Any time we need a consensus about facts, we use a ledger. Ledgers record the facts underpinning the modern economy.

Ledgers confirm ownership. Property title registers map who owns what and whether their land is subject to any caveats or encumbrances. Hernando de Soto has documented how the poor suffer when they own property that has not been confirmed in a ledger. The firm is a ledger, as a network of ownership, employment and production relationships with a single purpose. A club is a ledger, structuring who benefits and who does not.

Ledgers confirm identity. Businesses have identities recorded on government ledgers to track their existence and their status under tax law. The register of Births Deaths and Marriages records the existence of individuals at key moments, and uses that information to confirm identities when those individuals are interacting with the world.

Ledgers confirm status. Citizenship is a ledger, recording who has the rights and is subject to obligations due to national membership. The electoral roll is a ledger, allowing (and, in Australia, obliging) those who are on that roll a vote. Employment is a ledger, giving those employed a contractual claim on payment in return for work.

Ledgers confirm authority. Ledgers identify who can validly sit in parliament, who can access what bank account, who can work with children, who can enter restricted areas.

At their most fundamental level, ledgers map economic and social relationships.

Agreement about the facts and when they change — that is, a consensus about what is in the ledger, and a trust that the ledger is accurate — is one of the fundamental bases of market capitalism.

[…]

The evolution of the ledger

For all its importance, ledger technology has been mostly unchanged … until now.

Ledgers appear at the dawn of written communication. Ledgers and writing developed simultaneously in the Ancient Near East to record production, trade, and debt. Clay tablets baked with cuneiform script detailed units of rations, taxes, workers and so forth. The first international ‘community’ was arranged through a structured network of alliances that functioned a lot like a distributed ledger.

A fragment of a late Babylonian cuneiform ledger, held by the British Museum, 58278

The first major change to ledgers appeared in the fourteenth century with the invention of double entry bookkeeping. By recording both debits and credits, double entry bookkeeping conserved data across multiple (distributed) ledgers, and allowed for the reconciliation of information between ledgers.

The nineteenth century saw the next advance in ledger technology with the rise of large corporate firms and large bureaucracies. These centralised ledgers enabled dramatic increases in organisational size and scope, but relied entirely on trust in the centralised institutions.

In the late twentieth century ledgers moved from analog to digital ledgers. For example, in the 1970s the Australian passport ledger was digitised and centralised. A database allows for more complex distribution, calculation, analysis and tracking. A database is computable and searchable.

But a database still relies on trust; a digitised ledger is only as reliable as the organisation that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.

July 31, 2017

QotD: Naming Mount McKinley as an amusing “up yours” gesture

Filed under: Economics, History, Humour, Quotations, USA — Tags: , — Nicholas @ 01:00

Just one thing makes me regret the change. “Mount McKinley” was originally named as a amusing “up yours” gesture with which I have enormous sympathy.

The story told by the prospector who pinned the moniker on the mountain is that he had crossed paths in the wilds of Alaska with two advocates of “free silver.” This was a political craze that, like the Dreyfus Affair or the Sacco-Vanzetti trial, took over an entire civilization for a while, but now defies easy explanation. The “silverites” were Western populists and farmers who wanted silver to be accepted as currency and minted into coin “freely” by the government, as gold then was — but at a face price far above silver’s market value. This would have expanded the money supply explosively, letting the chronically indebted off the hook.

Most economists now regard the silverites as having had a ridiculous answer to real problems with a gold standard. But the important point is that the prospector, Frank Dickey, ran into classic monetary cranks of a type that still exists. And he had done so in a unique situation which permitted no immediate escape. One shudders upon envisioning such a hell.

Dickey got so tired of his companions’ laborious tirades — one imagines them arguing with him long, long after he had stopped arguing back — that when they ran across an impressive mountain, he immediately decided to name it after the new presidential nominee McKinley, Great Satan of the silverites. As the Secretary of the Interior’s Order No. 3337 points out, William McKinley never visited or had any other connection with the mountain, or with Alaska. He was, for Dickey’s purposes, a punchline.

Colby Cosh, “Mount McKinley was a most amusing ‘up yours’ aimed at monetary cranks”, National Post, 2015-09-01.

July 30, 2017

The Greenback cases

Filed under: Government, History, Law, USA — Tags: , , , , — Nicholas @ 03:00

At Samizdata, Paul Marks discusses why it is so difficult to prevent governments from expanding their powers far beyond what the constitution may allow:

… a Constitution is only as good as the enforcement mechanisms to make sure it is obeyed – and as Luther Martin warned at the Constitutional Convention in Philadelphia, trusting government appointed judges to limit the powers of the very government that appointed them is a fatally flawed idea.

This is not a recent problem. Even in the 19th century the Supreme Court often ruled that the Federal Government has powers that the Constitution does NOT give it. For example the infamous “Second Greenback Case” where the Supreme Court, with newly appointed “justices” (appointed, in part, for this corrupt purpose) overturned the “First Greenback Case” where the court had declared, quite correctly, that the Federal Government has no power to print (or have printed) money – only to “coin money” (Article One, Section Eight of the Constitution of the United States) and that only gold or silver coin (not paper money) may be “legal tender” in any State (Article One, Section Ten of the Constitution of the United States). Nothing could be plainer than that paper money is unconstitutional – indeed the very reason the United States Constitution was written in the first place was to prevent the “not worth a Continental” paper money issued by the Continental Congress to finance its government – those who support the Articles of Confederation system forget that one of its fundamental flaws was that it allowed the government to print money, as it gave no reliable source of taxation to finance the United States Armed Forces. Without a large scale and professional armed forces there is no point in having a United States of America at all – and each State might as well go its own way till conquered by European powers in the 18th century or by the People’s Republic of China in the 21st century.

[…]

To return to the Greenback Cases… – Chief Justice Salmon P. Chase (the former “slaves lawyer” famous for his anti slavery legal work before the Civil War) de facto ruled that the Treasury Secretary during the Civil War had acted unconstitutionally in having money printed, even though the the Treasury Secretary of the time was Salmon P. Chase (himself). It is not necessary to recuse yourself if you intend, de facto, to find yourself guilty. However, more “justices” were added to the court – and the judgement (and the Constitution) was overturned. The argument being that no more paper money was being printed – it would gradually go over time, so there was no need to make a fuss… still less to declare that the “United States Dollars” in the pockets of people were just bits of paper with ink on them (not “money”).

In 1935 the Supreme Court de facto ruled (by five votes to four) that the Federal Government could steal all monetary gold and void all private and public contracts that had gold (or silver) clauses in the contracts. There was no Constitutional basis for this decision (none whatever – just “lawyer’s cant”) and the Federal Reserve notes declared valid money came from an organisation (the Federal Reserve system created in 1913) that the Congress had no Constitutional power to create. The Supreme Court, led by the Chief Justice, might as well have chanted “Death to America!” and “Hail Satan!” as they announced their judgement – as some of the dissenting judges pointed out. Thus the unconstitutional Credit Bubble financial system was pushed forward. The doubts of Luther Martin at the Constitutional Convention were vindicated – government appointed judges sitting without a jury can not be trusted.

June 8, 2017

Words & Numbers: Earning Profits is Your Social Responsibility

Filed under: Business, Economics, Government — Tags: , , , , , — Nicholas @ 04:00

Published on 7 Jun 2017

“We tend to demonize people who make money – how dare they have more than us? But that negative reaction forgets the voluntary role we play in profit-making every day. This week in Words and Numbers, Antony Davies and James R. Harrigan discuss just how good it is to earn a profit, and the vital difference between that and forcing money from people.”

January 4, 2017

QotD: The utility of money

Filed under: Economics, Quotations — Tags: — Nicholas @ 01:00

As of yesterday afternoon, a nonstop round-trip flight from New York City to Los Angeles on Independence Day weekend cost $484. That the price is so low is an incredible story in itself, one that is more important than most of what our children are taught in their history classes and one that we should not fail to appreciate, but it is a subject for another day. Consider, though, that that $484 is a messy number; it isn’t an even $500 or rounded to $480 or $485. Messy numbers are a sign of real calculation, and they are the opposite of political numbers: the first 100 days in office, the five-year plan, the $15 minimum wage.

That $484 is easily expressed in non-U.S. dollar contexts: €445.08, £ 314.56, ¥ 5,9573.87, 2.0349 Bitcoin. (Damn!) On the commodities market, that’s 745.54 pounds of cotton or 338.5 pounds of coffee. It is 0.00000268888 of a Les Femmes d’Alger, the Pablo Picasso painting that recently set a new auction record at Christie’s.

There is no reason, in theory, that one could not buy a Picasso masterpiece and pay for it in coffee, or in coffee futures, or in barrels of West Texas Intermediate crude. But most sellers, and most buyers, prefer currency — a restaurant in Austin has a sign proclaiming that it “proudly does not accept the American Express Card, Visa, MasterCard, checks, chickens, or pesos.” Dollars do not have any inherent value; as my favorite presidential candidate, the mighty Cthulhu (“Why Vote for a Lesser Evil?”) put it, dollars are merely “pieces of green paper backed solely by religious dogma.” (Cthulhu’s fiscal policy? “He permits his devotees to collect as much paper in as many colors as they happen to like.”) Dollars have value because of the things for which we can trade them: Picasso paintings (or, ideally, paintings by some superior artist), coffee, cotton, cheeseburgers, sofa beds … checks, chickens, or pesos. This is an aspect of what in economics is known as Say’s Law, which holds that goods are paid for in goods — i.e., that we manufacture widgets or grow tomatoes or write novels because we wish to consume shoes and poached salmon and Buicks. The dollar or the euro is just a way to avoid the difficulties of trading a truckload of chickens (or a convoy of them) for Les Femmes d’Alger.

Kevin D. Williamson, “Bernie Sanders’s Dark Age Economics”, National Review, 2015-05-27.

January 1, 2017

QotD: Currency Manipulation

Filed under: China, Economics, Politics, Quotations — Tags: , , , , — Nicholas @ 01:00

One of the critiques of any trade deal of late is that there should be penalties for countries guilty of “currency manipulation.” The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them. As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.

I have two brief responses to this:

  1. I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation. In practice in today’s QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
  2. As an American consumer, to such currency manipulation by other countries I say, Bring it On! If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it. Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism. Which is one reason I think Elizabeth Warren is a total hypocrite. The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get. Senator Warren’s preferences for protectionist trade policies and a weak dollar will hurt these folks the most.

Warren Meyer, “Currency Manipulation”, Coyote Blog, 2015-05-26.

December 28, 2016

QotD: The importance of fabric as a technological driver

Filed under: Greece, History, Quotations, Science, Technology — Tags: , , , , — Nicholas @ 01:00

The ancient Greeks worshiped Athena as the goddess of technē, the artifice of civilisation. She was the giver and protector of olive trees, of ships and of weaving (without which there would be no sails). When she and Odysseus scheme, they ‘weave a plan’. To weave is to devise, to invent – to contrive function and beauty from the simplest of elements. Fabric and fabricate share a common Latin root, fabrica: ‘something skillfully produced’. Text and textile are similarly related, from the verb texere, to weave. Cloth-making is a creative act, analogous to other creative acts. To spin tales (or yarns) is to exercise imagination. Even more than weaving, spinning mounds of tiny fibres into usable threads turns nothing into something, chaos into order.

‘The spindle was the first wheel,’ explains Elizabeth Barber, professor emerita of linguistics and archeology at Occidental College in Los Angeles, gesturing to demonstrate. ‘It wasn’t yet load-bearing, but the principle of rotation is there.’ In the 1970s, Barber started noticing footnotes about textiles scattered through the archaeological literature. She thought she’d spend nine months pulling together what was known. Her little project became a decades-long exploration that turned textile archaeology into a full-blown field. Textile production, Barber writes in Prehistoric Textiles (1991), ‘is older than pottery or metallurgy and perhaps even than agriculture and stock-breeding’.

Of course, pottery and metal artifacts survived the centuries much better than cloth, which is rarely found in more than tiny fragments. That’s one reason we tend to forget how important textiles were in the earliest economic production. We envision an ancient world of hard surfaces much as we imagine the First World War in black and white.

But before there was gold or silver currency, traders used cloth. In the 20th century BC, the Minoan kingdom on resource-poor Crete swapped wool and linen for the metals that its famed craftsmen, represented by the mythical Daedalus, used to create their wares. In the pre-monetary trade of the ancient Aegean and Anatolia, writes the archaeologist Brendan Burke in From Minos to Midas (2010), textile production was of ‘greater value and importance … than the production of painted clay pots, metal tools, and objects carved from precious metals: everyone depended on cloth’.

Archaeologists often track fabric production by what is left behind. Huge numbers of spindle whorls (usually of clay) survive, as do the clay loom weights that held vertically hung warp threads in tension. By counting the clay weights left from his workshops’ looms, writes Barber, ‘we can calculate that King Midas of Gordion could have kept over 100 women busy weaving for him, which makes him more than twice as rich as Homer’s fabulous King Alkinnoos [Alcinous, from the Odyssey], who had 50. No wonder the Greeks viewed Midas as synonymous with gold!’

Virginia Postrel, “Losing the Thread: Older than bronze and as new as nanowires, textiles are technology — and they have remade our world time and again”, Aeon, 2015-06-05.

December 24, 2016

The History of Paper Money – Lies – Extra History

Filed under: Economics, History — Tags: , — Nicholas @ 04:00

Published on Nov 12, 2016

James talks about our mistakes and adds additional stories and explanations for the History of Paper Money!

December 8, 2016

The History of Paper Money – VI: The Gold Standard – Extra History

Filed under: Economics, History, WW1 — Tags: , , , — Nicholas @ 04:00

Published on Nov 5, 2016

Even as the use of paper money grew, ties to the gold standard remained… and remained challenging. From the First Opium War to the Great Depression, events around the world stretched the capacity of bullion based economics. So what – and who – finally abandoned it?

December 5, 2016

The History of Paper Money – V: Working out the Kinks – Extra History

Filed under: Economics, History — Tags: , , — Nicholas @ 03:00

Published on Oct 29, 2016

The first question of paper money is not how much you can print, nor even what its value is – but who prints the money? When every bank started to print their own bank notes, it caused confusion and frustration. Enter the Central Bank.

December 3, 2016

The History of Paper Money – IV: Lay Down the Law – Extra History

Filed under: Economics, Europe, France, History — Tags: , , — Nicholas @ 03:00

Published on Oct 22, 2016

What happens when you really try to put paper money doctrine into practice? And why would you put a gambler, womanizer, and fugitive criminal like the ironically named John Law in charge of running it?

December 2, 2016

India’s bold experiment in self-inflicted economic wounds

Filed under: Economics, Government, India — Tags: , , , — Nicholas @ 02:00

Shikha Dalmia explains why Indian Prime Minister Narendra Modi suddenly decided to kneecap his country’s money supply and cause massive economic disruption:

Modi was elected in a landslide on the slogan of “Minimum Government, Maximum Governance.” He promised to end babu raj — the rule of corrupt, petty bureaucrats who torment ordinary citizens for bribes — and radically transform India’s economy. But rather than tackling government corruption, he has declared war on private citizens holding black money in the name of making all Indians pay their fair share.

Tax scofflaw behavior is indeed a problem in India. But it is almost always a result of tax rates that are way higher than what people think their government is worth. The enlightened response would be to lower these rates and improve governance. Instead, Modi is taking his country down what Nobel-winning political economist F.A. Hayek called the road to serfdom, where every failed round of coercive government intervention simply becomes an excuse for even more draconian rounds — exactly what was happening in pre-liberalized India.

[…]

About 600 million poor and uneducated Indians don’t have bank accounts. Roughly 300 million don’t have official identification. It’s not easy to swap their soon-to-be worthless cash, which is a catastrophe given that they live hand to mouth. It is heartbreaking to see these people lined up in long queues outside post offices and banks, missing days and days of work, pleading for funds from the very bureaucrats from whose clutches Modi had promised to release them.

Modi hatched his scheme in complete secrecy, without consulting his own economic advisers or the Parliament, lest rich hoarders catch wind and ditch their cash holdings for gold and other assets. Hence, he could not order enough new money printed in advance. This is a massive problem given that about 90 percent of India’s economic transactions are in cash. People need to be able to get money from their banks to meet basic needs. But the government has imposed strict limits on how much of their own money people can withdraw from their own accounts.

[…]

This is not boldness, but sheer conceit based on the misguided notion that people have to be accountable to the government, rather than vice versa. Over time, it will undermine the already low confidence of Indians in their institutions. If Modi could unilaterally and so suddenly re-engineer the currency used by 1.1 billion people, what will he do next? This is a recipe for capital flight and economic retrenchment.

The fear and uncertainty that Modi’s move will breed will turn India’s economic clock back to the dark times of pre-liberalized India — not usher in the good times (aache din) that Modi had promised.

November 23, 2016

The History of Paper Money – III: Barebones Economy – Extra History

Filed under: Britain, Economics, History — Tags: , , , , — Nicholas @ 02:00

Published on Oct 15, 2016

Poor England. First Charles I and civil war, then losing to the French, then the Great Fire of London in 1666. Luckily, Nicholas Barbon comes along to help. And make obscene amounts of money. Who says you can’t do both?

October 31, 2016

The History of Paper Money – II: Not Just Noodles – Extra History

Filed under: China, Economics, Europe, History, Italy — Tags: , , — Nicholas @ 03:00

Published on Oct 8, 2016

How does paper money get introduced? Who has to lose their head to do so? And what does Marco Polo have to do with anything???

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