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Some thoughts on Greece

February 25, 2015

Economic instability can lead to political extremism which can in turn lead to totalitarian governments which are a million times worse than a few bank shareholders taking a haircut. The level of seriousness is simply not there in Troika. This isn’t kindergarten. It’s 1933 and it’s time to stop fucking around and pretending like the worst possible outcome is the Deutsche Bank going out of business. Krugman likes to talk about Very Serious People (“VSPs”) in a pejorative way, and I think this is a good use of the term. There are a lot of serious looking people in suits who are treating this like some sort of game.

The IMF is not to be trusted. They have happily destroyed countries in their pursuit of maximizing lending banks’ profits. When you have Joe Stiglitz calling you out, maybe that’s a red flag for your trustworthiness. Even a cursory examination of the IMF’s history will reveal a litany of failure, at least if you define failure as bad outcomes for the countries being intervened in.

I don’t think bank losses are a big deal, especially when they have had 6 years to insulate themselves from Greek debt. No one thinks the Greeks are going to pay back what they owe. The only question is how much. Any bank wiped out at this point from a Greek default only has themselves to blame. Banks are firms. They can go out of business and new ones will arise to take their place. Bankruptcy is the sign of a healthy economy, because it demonstrates creative destruction is working. No one firm is as important as overall economic performance.

Speed bankruptcy can save the world. Banks deliberately structure themselves so that they are fragile in order to credibly blackmail governments into giving them bailouts when things go downhill. There’s no other reason to finance yourself with so much debt vs. equity. However, there is a counter. If you make bank debt convertible to equity in the cause of a bank run, you take away the bank’s trump card – defaulting on their own loans, and triggering a chain reaction. If another bank is tipped into bankruptcy by the speed bankruptcy, run them through speed bankruptcy as well.

Banking cronyism is THE #1 economic problem in the first world. Lenin taught us that political cronies are interchangeable. Take a page from his book and convince yourself that economic cronies are also interchangeable. Sure, Goldman Sachs looks pretty indispensable right now, but if they’re gone, another investment bank will take their place and throw money into your reelection campaign just like the last bank did.

Prudent lending is just as important as prudent borrowing. If you know someone is going to default and you lend them money anyway, that is your fault as much as it is theirs. Sure, the “predatory lending” story doesn’t fit as well with Greece as they are with sub-prime borrowers, but it rhymes. If you lent Greece a ton of money, you’re going to get what you deserve good and hard and you have no one to blame but yourself.

Default does not change the net wealth of a society. The lender loses by exactly as much as the borrower gains. In fact, default is even better with government debt because government debt is paid back by taxation which has deadweight loss. From a strict economic efficiency perspective, governments should default all the time.

Germany’s mercantilism is stupid in the long run. Sure, in the short run, you can lash yourself to importers and get an artificially weak currency to boost your exports, but in the long run you get exactly the sorts of imbalances you are seeing now. Sure, you help exporters, but only at the cost of hurting consumers who are buying imports. Free trade and floating currency is, and always has been, the first best option.

Conflation of default and leaving the Euro. If a country can’t default without leaving a currency, it should never have entered the currency union in the first place. A U.S. city or state can default without having to leave the dollar. Why isn’t this the case in Europe? Just default and start to issue new debt. You don’t need permission from anyone. Germany can’ kick Greece out involuntarily any more than Greece can tell Germany not to use the Euro.

Greece is going to have to run a primary surplus one way or another, either to stabilize its debt or as a way of avoiding capital markets. And in fact, defaulting may lower Greece’s interest rates. If your debt to GDP is 200% and rising fast, no one thinks you are ever doing to repay it. So your interest rates are going to be sky high, leading to more debt. It’s a vicious cycle. But if you default, suddenly your debt to GDP ratio is 0, and suddenly your debt burden is bearable for a few years. Even if you continue to run small deficits, lenders have more reason to think you’ll pay them back, not less. If you look at historical examples of default, this is exactly what happens.

Reform would be good for Greece no matter what you think about debt forgiveness. Need primary account surplus/balance. Greece has a terrible economic climate, and not just because of the Euro.
http://www.doingbusiness.org/data/exploreeconomies/greece
http://www.heritage.org/index/country/greece

If the ECB is going to keep being stupid, it’s not worth staying in. Greece may be able to set up their own CB to act reasonably. No one is cursed by their culture to permanently have high inflation. Problem of idiosyncratic shocks.

The stupidity of the ECB is a major factor pushing Greece not to unilaterally default. A competent central bank can maintain an inflation target in spite of defaults on government debt. The ECB can’t maintain an inflation target in a stiff wind. If the Greeks were to default, there would probably be massive deflation in the Eurozone, maybe even Great Depression levels of it. Given the large number of fixed amount government welfare programs, such deflation would trigger even more debt and more economic chaos. If deflation greater than 10% were to occur, the best outcome I could forsee would be everyone leaving the Euro. The worst outcome would be WW3 and/or a takeover of totalitarian regimes.

Further reading
Greece should not give in
The morality of debt

Hey diddle diddle, that cow’s gonna have a bad day

February 11, 2015

Hey diddle diddle,
The Cat and the fiddle,
The Cow jumped over the moon.

The short answer is that a cow jumping fast enough to escape Earth’s orbit, let alone getting to the moon, would explode in a huge plume of fire and ash.

The escape velocity of Earth from sea level is really fast (11.2 km/s). Rockets are able to go to space without burning up because they continue to apply force all the way up, rather than releasing it all at once and coasting the rest of the way. But a jump doesn’t work like that. Once you jump, that’s it for vertical force. If you are going to go to space with a jump, you have to have sufficient kinetic energy the second you leave the ground to get you all the way there.

KE = (1/2) * mass * velocity^2

According to a Google search, a cow weighs about 600 kg.

(1/2) * (600) * (11,200)^2 = 37,632,000,000 Joules, or 37.6 GJ.

Given that insane speed in a normal Earth atmosphere, I’m just going to assume all of the kinetic energy is converted to thermal energy by friction. A cow is not going to be able to hold together under the force from the air resistance it would encounter at that speed. It would quickly break apart and the surface area would increase to the point where all that speed would quickly convert to heat.

The specific heat of beef is 3.5 kJ/kg C, and I’m going to assume that that’s pretty close to the specific heat of the full cow.

3.5/600 = .005833 kJ per degree C that the cow increases in temperature.
37,632,000 kJ * 0.005833 = 219,507 C change in temperature.

So, it’s hard to get a mental handle on just how overcooked that beef would be. The surface of the Sun is a measly 6,000 K, which isn’t even close to our poor bovine friend. Lightning is a bit closer at 30,000 K, but still you’re off by a factor of 7. Fortunately, it would be cool enough that our hapless cow wouldn’t set off a fusion reaction of the nitrogen in the atmosphere.

Basically, the cow’s better off staying on Earth.

Assorted Links

February 5, 2015

1. An obituary for Andrew Sullivan

2. Millennials in Adulthood

3. After the latest round of saber rattling, the Greeks have back down and apologized to the ECB

4. Does black culture need to be reformed?

5. The science of why people don’t change their beliefs

The Airplane on a Treadmill

February 3, 2015

Can an airplane take off on a treadmill going as fast as the top speed of the aircraft?

The answer to the question is yes, but that’s not the interesting part. The interesting part is the explanation, which is notoriously difficult.

Airplanes take off by moving forward first, then up. They don’t take off right away; this is why runways are so long. So to simplify the original question, let’s ask “Will a treadmill stop an airplane without wings from moving forward?”. To stop the plane from moving, the frictional force from the treadmill acting on the wheels pushing the plane backwards must equal or exceed the thrust of the engines pushing the plane forward.

plane without wings

Moving Forward
Aircraft engines don’t push on the ground to generate movement, like cars do. They push on the air. Obviously, when you’re flying, there’s no ground to push on, so this has to be the case. So with or without wheels, an aircraft’s engines will push the plane forward.

Airplane engines generate a tremendous amount of thrust. Keep in mind, they are designed to take a vehicle weighing several tons and throw it through the air at 500 mph.

Watch this video to get an idea of just how powerful jet engines are:

How much force does a treadmill exert?
Aircraft wheels are free spinning. When an airplane lands, the wheels go from stationary to 200 mph in a fraction of a second. If they were not extremely low friction, they would be ripped off. An airplane’s engine doesn’t connect to the wheels in any way. They are more like a skateboard or a furniture dolly than a car.

An airplane, basically:
furniture dolly

Suppose someone took a small airplane and put it on a treadmill and then tied a rope to its nosecone and handed the other end of the rope to a normal human being.

treadmill plane with rope

If the treadmill were slowly brought up to speed, could the human hold on to the rope? They’d have to pull a bit, but they could hold it. Now try the same stunt with a car and their arm would be ripped off.

The Verdict
So, we have a huge force pushing the plane forward and a tiny force holding it in place. According to the laws of physics, if you have a net force applied in one direction, acceleration will occur. The plane will move forward.

Theoretically, if the treadmill were moving at an insane speed, like 2,000 mph, the friction from the wheels might generate enough friction to substantially slow the aircraft’s acceleration. However, at the speeds where friction would generate substantial amounts of friction, the wheels would melt and the landing gear would rip off and the plane would be torn apart by the insanely fast treadmill beneath it. Landing gear is not strong enough to hold together against the forces the engines can generate.

Moving up
Now that we’ve established that the plane moves forward, it will eventually reach the critical speed, and the lift from the wings as well as the thrust from the engines will push the plane upwards. The faster the plane moves, the less its weight pushes down on the runway, and the less friction the wheels will generate.

Reducing the problem down to whether the plane moves forward makes it much easier to solve and sidetracks any nonsense about lift or airflow or anything like that.

The Mythbusters actually tested this, so if you just want to watch a video as proof, here you go:

Another article about this problem

Assorted Links

January 27, 2015

1. Why economists are more influential than other social scientists.

2. The myth of the math person

3. Excellent article on Greece.

4. On Yanis Varoufakis, Valve’s former chief economist.

Credibility, Commitment, and Capital

January 27, 2015

Note: The capital in the title refers to institutional capital at central banks, but I wanted alliteration more than clarity.

Imaginary conversation between two economists:
Naive Economist: Wow, what the central bank was tremendously stupid. It caused price instability, high unemployment, and financial instability.
Worldly Economist: Ahh, but the central bankers are building institutional capital.
Naive Economist: But can’t they do that by providing stability and doing what they say they are going to do?
Worldly Economist: No, they have to do stupid things that destroy the economy.
Naive Economist: Oh, that makes sense.

In any other profession, incompetence would be called incompetence. Maybe it’s because macro is so cloaked in obfuscation that everyone just assumes that what the people in charge do is right, regardless of their consequences. There is no wizard behind the curtain. People with power aren’t super smart or know things no one else does, they are just people who make mistakes like the rest of us. But if the mistakes aren’t pointed out and corrected, they will just continue.

The Swiss Franc appreciated about 20% a couple weeks ago when they went of the Euro peg. That’s an insane fluctuation for a currency in a single day. Ideally, currencies should change less than 5% in an entire year. To change in value 20% in a day is prima facie evidience that someone at the central bank screwed up. Big time. Swiss equities dropped about 10% on the news that the Swiss National Bank was going to abandon their currency peg with the Euro.

That doesn’t bother me. Central banks do stupid things all the time. The ECB has been riding the moron train for the better part of a decade now, so no big deal right? What bothers me is Tyler Cowen’s reaction to it. He posits three possible explanations, which I have excerpted below:

1. “Bureaucrats are not so much budget maximizers as hoarders of institutional capital.”

2. “They either cannot do “the right thing,” or doing that would be too costly in terms of the country’s longer-term institutional prospects.”

3. (which Tyler does not find credible) “The Swiss central bankers suddenly became stupid and forgot their macroeconomics.”

1 and 2 both rest on the assumption that bad policy is good politics. I guess that makes some sense to me. Deflation is highly popular with some Republicans these days. If they had their druthers, I can imagine them putting tremendous pressure on the central bank. I know very little about Swiss politics, so perhaps it was political pressure that forced the Swiss National Bank to abandon the peg.

But I think in those cases, it’s the central bank’s duty to at least pitch a fit. Tell people that’s why you’re doing the stupid thing. “Guys, this is a bad idea, but if that’s what you want…” No one should be wondering why things went wrong afterwards. As an added bonus, this discourages politicians from pressuring central banks.

Hindsight
It can be hard to judge central bank actions as they are happening, but are there any examples from history where a central bank deviated from price stability and was later vindicated? Maybe, but no examples spring to mind. The Great Depression looks like #3 to me, as does the period of 1970s inflation. Is the argument that #3 may be common in the past, but not anymore?

Institutional reasons
Everyone is rational, but that does not mean their actions are not stupid in the broader sense. A criminal may rob a bank which is rational, but as a society we do and should wring our hands to figure out ways to prevent that from happening. Pete Leeson has written some fascinating papers showing how a wide variety of seemingly crazy behavior is actually rational in the microeconomic sense. I suppose I could be convinced that the bureaucrat’s actions are narrowly rational, but that does not mean economists should not call them out. When a thief robs a bank, normal people understand that it is harmful to society as a whole, but if a central banker screws things up, people won’t actually know that it was bad unless other economists call them out.

Credibility and Time Consistency
Time consistency sometimes rears its head as a reason why central banks must do stupid things from time to time. Just to get it out of the way: I don’t think past central banks can bind future central banks. But I don’t think there is any sane target which requires them to do so. If you want to target inflation, just target inflation in every time period. As long as the target itself is politically popular and the economists deems it reasonable, Bob’s your uncle.

Central banks mostly spend institutional capital defending themselves in the wake of their own screw-ups. Imagine a central bank that held inflation at 2% and has done so as long as anyone can remember. What, precisely, would such a central bank need institutional capital for? It’s not until they have a year with 10% inflation that they need institutional capital to convince people they’ll get it right in the future. Is it radical to suggest that a central bank should gain institutional capital when it does good things?

Where do we go from here?
This is where the economics profession has a role to play. We must not let central bankers get away with bad decisions and say “maybe they had a secret good reason for it.” I agree with Scott Sumner (I can’t find a link) that central banks generally go with the mainstream opinion for macroeconomic policy. If 90% of macroeconomists agree with a policy, that’s what they’ll do. But if we let them get away with it, they’ll never learn.

Further reading
Cowen on why the Swiss broke the peg
Sumner calls it how he sees it
Francis Cappola on how bad breaking the peg was
Maybe it was for balance sheet reasons. Sounds like a good argument for nationalization to me. A central bank shouldn’t care what its balance sheet is.

Assorted Links

January 16, 2015

1. Kafkatrapping.

2. Japan Photo essay. Very much makes me want to go back. I visited several of the places pictured, and their spirit is captured very well.

3. Running for your life from Shia Lebeouf. Your daily dose of WTF and then some.

4. 5 things about the first year of parenthood.

UPDATE: Big news
5. Federal Asset forfeiture program dealt a huge blow!

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