Deficit Scolds

Jonathan Chait pretty much sums it up:

It’s like a bad rerun of the 1930s all over again. Same exact mistake. Note that even FDR got this wrong — which led to the double dip depression in 1937. (He was a most reluctant Keynesian, indeed, I don’t think he quite understood the theory and was always concerned about deficits up until WW2 when everybody finally started ignoring them and turned the dial up to 11.)

Growth — sustained growth — must precede thrift. You cannot starve your way into prosperity. Then and only then can you begin to reduce a deficit. We’ve simply jumped the gun here and failed to take proper advantage of incredibly cheap money to invest in the economy. Lord knows there’s plenty of infrastructure work to do. By the time we get around to doing it interest rates will have gone up. (They have bottomed out already and are starting to go up again.) It’s all totally chuckleheaded.

Leaving Keynes aside, modern conservatives ought to consider taking a page out of Hamilton, who rightly regarded a properly managed national debt as a blessing. (Hamilton in his own odd way anticipated Keynes and is allegedly an iconic conservative Founding Father. I always admired him and still do.)


I am Smarter than Matthew Yglesias

Take the quiz and see if you can beat him:

I scored 363 to his 320. 8 out of 12 questions right in 58 seconds.

So there, punk. (I like his column a lot, actually.)



Recent Reading

Charles Stross inspired me to pick up David Graeber’s Debt: The First 5,000 Years.

This was a frustrating read for me. The first half of it is genuinely interesting, even brilliant, but the second half turns into a rather muddleheaded crie de coeur. On the positive side: Graeber convincingly argues that credit preceded currency and dates back to the dawn of civilization going all the way back to Sumeria; even pre urban cultures practice various forms of credit. That surprised me as the standard story in economic 101 going back to Adam Smith is that the earliest economic form is barter. But it turns out that very few cultures at any time practice pure barter.

Currency doesn’t turn up at all until about 600 BC, thousands of years after credit was in play in Sumeria and elsewhere. It took root in the various Greek city states and spread rapidly from there. Graeber attributes this, dubiously, to organized warfare. The soldiers liked coin. Fair enough, but it seems to me that coin worked just as well for a trading maritime state like Athens as it did for Sparta, and maybe more so. The guy who really got this Axial age of currency going was Alexander the Great, who plundered the vast treasuries of the Persian Empire.

So it all comes down to war. Yet I wonder if currency took hold as much as it did due to simple economic efficiency; it obviously lowers transaction costs not just compared to barter but even credit based economic systems lacking a medium of exchange. It would be interesting to comapre economic growth rates of states in the Axial era to those preceding it. Graeber doesn’t present such data and it may not even exist.

The other big point Graeber makes is that the language of economics has all sorts of hidden cultural and moral assumptions: we must pay our debts, etc. He’s absolutely right about that and it makes it difficult even today to deal with economic questions in instrumental terms. This goes a long ways towards explaining the mania for austerity economics in Europe especially but also here in the United States where in the midst of near depression conditions somehow the main concern in the last few years has been…to reduce the national debt? We’ve learned nothing from Keynes, evidently. It’s almost enough to make you wish for a nice world war, since somehow debt spending is more acceptable during conflict than peace. But the whole weapons of mass destruction thing makes that a bit too risky a cure for economic problems nowadays.

Unfortunately, Graeber himself tend to invert this moral language. And this is where he runs into trouble in the second half going into the modern age and contemporary times. I got a little impatient at this point and started wishing for a more analytical discussion. He’s not an economist and simply lacks the chops to do this. I’d love to see an actual economist broadly sympathetic to his politics and views take this up. (Maybe a Paul Krugman; I wonder if Krugman has read this book.) What I was looking for at the end was a program, solutions, numbers, something pragmatic and useful, not just Occupy Wall Street rhetoric. Where do we go from here? How do we get out of this mess?

Back to Stross; I’ve started going through his Laundry books, and these are a real hoot. Stross plainly has a talent for mashing genres together in unexpected ways. I already noted how he practically invented the financial space opera in Neptune’s Brood. In the Laundry books, he blends together information tech, magic, and espionage. It’s not detective fiction at all, but somehow it has that noir feel, too. I’m not sure if this is quite as unique as the financial space opera, but there it is.

Finally, I got around to reading the 4 books of the Hyperion Cantos by Dan Simmons: this is straight up, good old fashioned space opera, with some literary flourishes. These came out back in the 90s were very well received and somehow I missed them entirely. Thank goodness for the Kindle. I’ve read some of his later stuff, but it’s not as good. Near as I can tell he peaked with the Hyperion Cantos, and it was a hell of a peak.

Show Me The Money

I just finished reading Neptune’s Brood by Charles Stross and though that would be a splendid topic to start my blog with since it involves two of my interests, finance and science fiction.

Near as I can tell Stross has invented a brand new literary genre, the Financial Space Opera. For whatever reason this sort of thing simply hasn’t been done before or at least at this level of detail. I don’t intend to review the book, but do want to noodle around with his ideas on how to run an interstellar economy. In the end, I remain skeptical that his setup can work in practice, but it is so novel and gonzo that this hardly matters. He takes the hardest possible case for an interstellar economy and makes a strong go at it; that hardest case being an extremely slower than light human interstellar community relying on 1% STL ships to expand.

My own view is that under these conditions interstellar trade will be extremely limited and less than dynamic. Interstellar colonization itself will be difficult to justify on economic grounds alone. Said colonization projects aren’t likely to happen as a result of private investment, either: they’ll be public given the lack of immediate economic incentives. But Stross has an answer to these objections.

His secret sauce: slow money. The hardest currency ever. This is entirely different than what we understand as money today and is known in his 90th century as fast money. There is also medium money backed by long term bonds and real estate, but is mostly a sideshow and hardly figures in the novel. (It also makes some very dubious assumptions about how well you can wall off real estate from crashes in the fast money economy. I’m frankly skeptical that medium money saves us, from, say, a subprime crackup, but let’s table that discussion.)

So what is this slow money and how does it work?

First of all, the entire purpose of slow money is to finance colonization projects (privately, even!) For most other purposes you can do just fine with old fashioned local fast money.

Only a select few banks can issue slow money currency, typically one per system, but possibly more in well developed systems. The amount they can issue is based on an algorithm; there is no central banking here as we would understand it, where an intelligence can decide how many bitcoins each bank can issue and goose or depress the money supply as needed.

Note that Stross uses “bitcoins” here as a generic term for slow money. The algorithm in question isn’t the same as the one for the real life Bitcoin. There is no hard upper limit to how much of this currency can be made. It is not inherently deflationary. But Stross makes clear the supply is very tight indeed and barely enough to stave off a liquidity crisis. You can only increase the supply of slow money gradually over time seemingly regardless of actual economic conditions. Currency generated in a bank in one system must be countersigned by parties in two different systems before it is considered authentic at the bank of origin.

Similarly, transfers of slow money across star systems occur at no better than 1/3 light speed effectively due this 3 phase protocol.

A single slow dollar will be worth an incredible amount in local fast money, depending on particulars. At one point in the novel the protagonist exchanges a single slow dollar for 1 million in local…and that’s after taking a 90% hit on the exchange rate for immediate conversion. (The local system bank pocketing the difference.)

The very richest and oldest systems like Sol have a GDP approaching 100 million slow dollars. A well set up colony clocks in around a tenth of of that.

A well appointed colony ship might run around 5 million slow dollars and take about 500 years to construct and then arrive at its destination, and then another two centuries to become a viable colony. That colony will have to go further in the hole once initially set up to import information and labor (the labor being the information content of an immigrant beamed over at light speed and reconstructed in the new system.)

The loans involved here do not appear to be amortized or have any kind of maturity dates, but they are subject to compound interest and will grow very large indeed given enough time. At some point you need to at least service the interest and then think about how to chip away at the principal. Stross claims the interest rate is .001 per cent; that is either a mistake or typo. At that rate a million slow dollar loan compounds to 1,007,024.52 slow dollars over 700 years. Not a spectacular rate of return for such a risky investment, indeed a negative return rate once you factor in risks. (Colony success rates run at around 64%.) If you jack that up to .1% then things make more sense. That loan will double in amount after 700 years. In two thousand years it will blow up to 7,381,675.65 slow dollars assuming no payments.

The best way to clear this debt? Start another colony, ASAP. This is all by design. But it’s not very good monetary policy, indeed, it isn’t any kind of monetary or economic policy at all. It gives a fledgling colony just enough time to get on its feet and immediately start fretting over how to clear the books. It doesn’t care at all about the long term economic prospects of the colony in question or of the interstellar economy as a whole. Just keep pumping out them colonies, baby!

There is a safety valve here: rarely parties can agree to forgive debts. But as time goes on these structured debt forgiveness plans (Jubilees) are becoming more and more rare and at some future point the whole thing is going to come crashing down and the barely averted liquidity crisis will arrive and spread like wildfire. It is simply not a sustainable model — but the Quantum Teleportation drive turns up before this hard crash can occur, happily. 100% light speed drive on cheap. A game changer, as they say.

Note that even Stross admits this massive failure point in the slow money model. But like the champ he is, that’s just a pivot point for his story and sets him up for the surprise ending, which I have already spoiled for you. It’s a whole new universe when cheap light speed travel is possible. With the new drive, you can even haul goods across interstellar distances in a profitable fashion. This is almost cheating…but not quite FTL magic. (This drive may actually be superior in economic terms to a highly inefficient FTL drive for bulk transport purposes. Fast isn’t necessarily better.)

So what comes after the end of this not so perpetual slow money debt machine? Stross gives few hints, but it’s going to be a fast cash economy. Slow money is going to to be discounted to oblivion. He doesn’t mention what happens to medium money (I assume it also goes away by and large.)

Human space is too big for any single fast currency to predominate. It’s an open question what an optimal currency union looks like in these conditions, but there will be room for several and possibly many. Distance will factor into this as well, presumably. All other things being equal, whatever is in use in Sol system might come out on top as the reserve currency as it should be roughly at the center of human expansion and is almost certainly the largest system economy. But it will have competitors.

I look forward to exploring where to Stross goes with this in the future. And maybe Stross by his fine example will encourage others to try their hand at Financial Space Opera. There’s a good SF equivalent waiting to be made of, say, movies like Margin Call or the Boiler Room.