Off I go

I'll be back in SF after Labor Day Weekend.

This earthquake taunting doesn't make any sense!

Californians, taunting the east coast for overreacting to a 5.8 earthquake does not make sense, because, unlike here, nothing on the east coast is built to withstand an earthquake. So a 5.8 earthquake over there ought to be regarded as a big deal.

It's like when SF people complain about 90 degree weather. At first it sounds like ridiculous whining until you realize that the city isn't built to withstand heat--e.g., no one has air conditioning here.

That is all.

Informative post on California high-speed rail

This is a must-read post to get oriented the facts for CA high speed rail. Cost estimates have been drastically revised upwards recently, but some of that has to do with accounting changes and some of it is legitimate.

Bottom line, though, per-mile costs are about lining up with the international average. Moreover, it's important to remember that the state's population will be increasing over the next few decades and so infrastructure will have to be built, whether that's a high-speed rail system, more airports, or more highways. No it's not a question of rail or no rail, but rather, rail or some other transit option.

If you're poor, you spend a lot of your income on food

To me, one of the best measures of wealth is the percentage of one's income that is spent on food. If you check out this map, you'll see that the wealthy spend down around 10% of their income on food, whereas those in poverty spend up to 50%.

This is also a good way to intuitively grasp the dramatic increase in total worldwide wealth since the industrial revolution. I tried finding looking for some historical data for this but my Google-fu wasn't strong enough. If I find something though I'll post it.

Greek yogurt sales soar

An odd factoid:

Indeed, the Greek yogurt market in the U.S. has undergone a growth spurt that a recent Wall Street Journal article called “nothing short of astronomical.” While sales five years ago amounted to a mere $60 million annually, today they represent nearly a quarter of the $6.8 billion spent on yogurt in the U.S. every year.

The theory is that Americans associate Greek cuisine with healthy, simpler, natural foods.

Is a perfect investor possible?

The previous post made me think of an idea I've had for a while that isn't really fully formed, which is: is it possible for there to be a "perfect" investor, or is there some formal/logical reason why such perfection would be self-defeating?

On the face of it, it would seem that the presence of a perfect investor would break the market. For normally when we make an investment, it's based on some empirical fact about what we're investing in--that the company is profitable, or that the currency will be devalued, or a trade agreement will be signed, whatever. But suppose God were an investor, and invested in X. In this case, I would also invest in X, not because of anything having to do with X, but simply because God invested in it and I know that God can do no wrong in the market. What's more, all other investors would think the same way, and also make the same investment. At this point, market behavior would become detached from empirical reality, and a prolonged (infinite?) period of irrational exuberance for X would follow.

Of course, one way out would be to simply point out that a truly perfect investor would strive to keep the fact of his perfection a secret by deliberately losing money on investments from time to time. Specifically, the investor could only continue to win so long as his success itself did not become the basis for other players' decision making. In such a scenario, whatever empirical data being collected by the perfect investment algorithm would cease to be relevant, because a new theory--that generates some other set of empirical data--would now be regulating investor decisions. (In this case, the "new empirical data" would be what investment choices the perfect investor is making. The new theory would be, "whatever the perfect investor invests in is a good investment". In the short term, switching to this new theory would not hurt the perfect investor--everyone would continue to invest in X. But eventually the pattern would have to collapse, for the same reason that pyramid schemes always collapse: at some point, you run out of new investors in X--and besides, there would undoubtedly be bizarre and disastrous global effects of so much wealth accumulating to one arbitrary investment.)

How humans use cognitive salience to guide mutually recursive decision making

Try the following experiment:

In a classroom, give every student a slip of paper. The challenge is that they must devise a way to all meet each other at some location in France at some time during some arbitrary day in the future, say October 14 2012--only they are not allowed to communicate with each other. Each student must write down what is essentially a guess on the slip of paper, completely incommunicado.

As you can probably guess, the students are for the most part successful: most will write down "Eiffel Tower, noon" on their slip of paper.

What happens, of course, is that each student goes through a process of mutually recursive decision making: the student must guess what the others will guess, knowing that those students' guesses are dependent on his own, and so on ad infinitum. Realizing that the guess will be hopelessly arbitrary, the student supposes that, all things being equal, he would meet the others at the most canonical place and the most canonical time of day. But, knowing that the others will also gravitate to this same canonical time and place, the student can now know with some certainty that they will choose the same time and location. And so it is the very rational arbitrariness of the decision that reveals the particular salience of one time and place (in this case, Eiffel Tower at noon). This salience is then used as an empirical datapoint to rationally arrive at a now-suddenly-non-arbitrary choice, "Eiffel tower at noon".

My thinking is that this process is precisely the same one that governs markets. Stock price, for example, though naively a reflection of the "value of a company", is strictly speaking a reflection of other investors' demand for the stock. But since all investors are using the same decision function, and the function takes as its inputs the decisions of all other investors, rational decision making stalls on an infinite regress, rendering the decision arbitrary. But the arbitrariness of the decision, now placing all choices on an equal footing, reveals that some choices are more salient than others--in particular, the ones that correspond to the "naive" understanding of stock price as a reflection of the "value of a company". Because if all theories are equally arbitrary, what other theory would everyone pick? Surely, they will pick the naive theory, since that is the most salient one--because canonically, one buys the stock of a company that is doing well.

However, if there is no most-salient theory to fall back on when the initial mutually recursive decision process fails in infinite regress, then chaotic instability ensues, and bubbles and sell-offs will non-linearly continue until a sufficiently salient theory once again takes hold, and investors bind their decisions once again to independent empirical data. (Note that it is entirely possible that the chaotic movements of the stock will themselves form the basis of a new theory about the company--for example, if the stock chaotically plummets in a sell-off, this will be interpreted as an "adjustment" in response to "new information" that reveals that the company was "overvalued". But if the stock had chaotically risen in a bubble, the community might just as easily have interpreted this as "renewed investor confidence" and selected some good news about the company to use as cognitively plausible "evidence" for the company's good prospects.)

Given all this, you have to wonder how it is that computers can model the movements in financial markets. Unless your algorithm somehow is able to take into account the salience of various explanatory theories, you cannot make headway into the problem, unless you already assume some empirical theory, and use the empirical data from the theory as inputs for the computer program. But even with this, it would be the human's task to monitor the investor zeitgeist to determine when it shifts to a different most-salient theory, or when there is a theory vacuum and the market goes into chaotic instability.

This whole post was instigated, by the way, by a blog post by Zachary Karabell, where he concludes:

That is where trust becomes even more essential: we have to know that executives are behaving responsibly, in their own self-interest, and that regulators are ensuring that leverage isn’t excessive and capital is. We have to believe that ratings agencies are diligent in affirming strength, especially if we then give them credence when they announce weakness à la downgrading the United States. And we have to imagine that the media report things that have a tangible relationship to something called the truth. But we do not live in that world, and that is a headwind pushing against currents of balance, growth, and repair.

Here, I take him to be saying, in so many words, that the most-salient theories need to be reinforced credibly by institutions if we are to avoid the dreaded state of theory-less chaotic instability in the markets. However, I wonder if what he advises next makes sense:

In that world of trust deficit, we’d do well to repeat the following mantra: just because it happened last time doesn’t mean it is happening again. Being skeptical is healthy; being cynical, not so much. And the only way to judge the present is on the present, not on false application of the lessons of the past, and not on irrational fears of what the future might hold.

My problem with what he says here is that he seems to be placing the blame--or at least, expecting the fix to come entirely from--the investors who have lost "trust" in the prevailing salient theories, rather than the institutions that are charged with instilling and maintaining trust in the theories. It's hardly "irrational" of investors to withdraw from the market when suddenly there's a chance the US Government will stop paying its bills and the German government is mulling over whether it should just let Greece, Ireland, and Spain default on huge amounts of government debt--these remarkable and historical economic events threaten to bring into being a "new normal" that wipes away the old, long-agreed upon most-salient theories
that kept the markets from spiraling off into non-linear chaos.

In light of this, I would think the right "call to action" is to get Wall Street and the rest of the financial world to put extreme political pressure on the US and German governments to guarantee government debt and double-down on the prevailing global financial world order.

The high cost of dysfunctional government

As Yglesias points out, 5 year, 7 year, and 10 year US Treasuries have such low rates that their real interest rates (that is, the interest rate after inflation is taken into account) is negative.* Which means that the US government is in a better position than someone who can borrow money for free; investors are actually paying the US government to borrow their money.

This means that, at a minimum, the US can borrow a bunch of money and just let it sit there, and that would be better than not borrowing any money. But more reasonably, it means that for any expenditure that we know must take place within the next 10 years, it makes sense to pay for it now rather than later (if possible).

The most obvious category of spending that presents itself is infrastructure. Over the next decade, we know we're going to have to build new schools and hospitals and upgrade old ones; expand airport capacity and update our air traffic control systems; repave roads and replace old pipe and sewer systems; build new highways and bridges; dig new tunnels; retrofit a lot of old buildings; expand existing rail and other mass transit; improve energy efficiency to eliminate dead-weight loss, for example by painting roofs of buildings white; etc. So there's a lot of work to be done. But there are three reasons why infrastructure spending now is a particularly good idea:

• We know with certainty that the work must be done over the next decade anyway
  
• Much of the work is done by state and city governments, and so federal dollars would be providing a timely boost to ailing state and city budgets
• These projects will efficiently stimulate overall demand because they will mobilize the huge amount of idle labor in the construction sector, which was hit hardest by the bursting of the real estate bubble; so there is no danger of inefficient "crowding out"**
  

The idea of spending infrastructure dollars now rather than later is agnostic to what ideology you subscribe to or what specific policies you prefer--it's just the common sense avoiding of dead-weight loss, like our implicit daily decision to NOT just burn a bunch of $100 bills for no reason. And yet, because Congress--specifically, House Republicans--have made obstruction their number one priority, we are forced to go right on ahead and set fire to large piles of money.

* Say I borrow money from you at 5%. I repay you in a year--but money by then has become 5% less valuable, due to inflation. So in real (as opposed to nominal) terms, I paid 0% interest. So inflation works as a discount on borrowing money.

** In a recession, by definition, there are a bunch of idle resources in the country--perfectly good employees and machines, but no demand that puts them to work. So the way to end a recession is to increase demand so that idle resources are mobilized into productive action. One way to do that is to encourage the private sector (companies and consumers) to spend money, for example by making it cheaper to borrow money (lowering interest rates), increasing the money supply (increasing inflation, which as discussed in * has the effect of lowering real interest rates), or just giving people extra cash and hoping they spend it (tax breaks). But if that doesn't work, the federal government can just employ the idle resources directly by spending a bunch of money, say on new bridges or F-18 jets or something (stimulus). However, what happens when the government spends a bunch of money in non-recessionary times, when there are not a bunch of idle resources? Well, in the case of construction say, the government would be bidding with private entities (companies and consumers) for the scarce supply of construction labor. The government would end up bidding up the price, thus pricing out of the market a bunch of private companies and consumers--in other words, "crowding them out". Crowding out might be bad if you think the government doesn't do things as efficiently as private entities do; but this concern is moot if no crowding out is happening, which is precisely the case when the government hires labor that would have been idle anyway.

Screed against Cambridge Journals Online

It's a well known fact that the business of academic journals is a racket, pure and simple. So when I found out I couldn't read an esoteric Philosophy article without paying thirty goddamn dollars, I wrote them this very satisfying missive:

Subject: you people are the scum of the earth

Hello,

I just wanted you to know that, in my opinion, you people are a bunch of rent-seeking societal leeches who contribute nothing to society. Here I am, just an ordinary non-academic person who has taken an interest in David Hume, and who wants to better my understanding of his argument about induction by taking a look at Alan Schwerin's article Hume On Our Notion of Causality. Imagine my disgust when I see that I can have access to this completely obscure academic article for the outrageous sum of $30! Congratulations, you have effectively walled off higher education from the common man and made academic knowledge completely unavailable to a wide audience in a time, ironically, when it costs virtually nothing to disseminate information.

Just what is it that justifies this price for the privilege of downloading an electronic copy of the article, which costs you almost $0.00 to send to me? What value are you adding to the product? What on earth are you doing with the money you receive? Surely, it is not as if you yourselves peer-review all the content of your publication with your own stable of well-paid professional philosophers. And yet that is the only value added from "prestigious" journals such as yourself.

If you're reading this and nodding along and thinking, "I agree buddy, but I'm just a low-level lackey earning my paycheck in a bad economy, like everyone else", then that's fine--we all have to pay the bills. But if you get any satisfaction--or think there's anything noble at all--about the industry you work for, please understand that you are badly undermining the ability of people to pursue knowledge, and what's worse, doing so in pursuit of your own grotesque and stupid greed.

If there's any justice in the universe, your dismal company will soon be replaced by an institution that does everything you do, but for free or at an extremely low cost.

Burn in hell,
David

PS: I see in your "About Us" section your ostensible "commitment...to advance learning, knowledge and research worldwide". More like a commitment to line your own underserving, rent-seeking, stupid pockets with the hard-earned cash of people who want to learn, advance knowledge, and do research. Assholes.

PPS: I mean really.

Markie Post Burnnnnnnnn

From YouTube:

To think I used to consider Markie Post to be hot.

tzkelley 1 month ago

Ouch.

At least the debt ceiling crisis is really over

Read this just now:

Prices for Treasury securities jumped Thursday, sending the yield on the two-year note to a record low, as investors rushed to US government debt in search of safety.

If the US had defaulted, we might have been living in a world where investors sought safety somewhere besides US debt.