Archive for March, 2008

Stagflation

Tuesday, March 18th, 2008

The US economy faces recession: To stimulate the economy, the fed is lowering interest to near zero and the government handing out six hundred dollars to everyone.

But what the US faces is not recession, but stagflation, and handing out free money is not the cure for stagflation.

Stagflation was first observed in the first great fiat money inflation of modern times, the French assignat.

The more assignats they printed, the worse the shortage of assignats became. They would double the number of assignats in circulation, and prices would quadruple!

You could not buy, because the seller did not trust your money, and you could not sell, because the buyer did not have money that you could trust. You could not borrow, nor could you lend, for the lender knew his money would be worthless when returned.

To cure stagflation, the Fed must give people confidence in money, and confidence in financial intermediaries. You create confidence in money by firmly refusing to issue more of it, and confidence in financial intermediaries by ensuring that those financial intermediaries that have misbehaved become bankrupt or go to jail, as appropriate.

Moral hazard:

Tuesday, March 18th, 2008

Financiers know that if they misbehave, the Federal Reserve will print money and give it to them in return for worthless collateral. Public knows that when the central bank prints money, its value diminishes, and thus the public become reluctant to sell, and unable to buy. Hence stagflation.

Cargo Cult Science.

Tuesday, March 18th, 2008

xkcd.com is the ultimate geek cartoon. Getting the joke usually requires esoteric knowledge of some combination of science, maths, popular culture, and internet trivia.

In today’s cartoon, Zombie Feynman shows up, seeking to eat brains, but then again explains the essence of the scientific method. He then implies that string theorists have no brains. This is very funny to those of us familiar with today’s critique of string theory, and Feynman’s critique of Cargo Cult Science. If you read it and laugh, you get a smug glow from being part of a tiny elite who understand that string theorists have given up on any effort to relate string theory to empirical consequences, and that this means that they constitute cargo cult science.

I think the educational and psychological studies I mentioned are examples of what I would like to call cargo cult science. In the South Seas there is a cargo cult of people. During the war they saw airplanes with lots of good materials, and they want the same thing to happen now. So they’ve arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head to headphones and bars of bamboo sticking out like antennas – he’s the controller – and they wait for the airplanes to land. They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.

Now it behooves me, of course, to tell you what they’re missing. But it would be just about as difficult to explain to the South Sea islanders how they have to arrange things so that they get some wealth in their system.

The science of anthropogenic global warming looks like science, sounds like science, but it lacks key elements of science. The typical procedure is to gather a pile of data that would likely be affected by the the answer to the question at issue, but also affected by lots of other things, and then announce that due to wonderfully scientific statistics, they extracted the signal of the one thing that they were interested in, and eliminated the influence of all the other effects. Thus, for example Mann deduced that the Medieval climatic optimum did not exist from the fact that a few bristlecone pines were not doing too well during the Medieval climatic optimum.

Similarly the IPCC announced that the Urban heat island effect is very small, much smaller than decadal warming. They deduced this by analyzing a bunch of weather stations, some of which they arbitrarily designated as urban, and others of which they designated as rural. But even if these designations had been accurate, you could not possible deduce the size of the urban heat island effect from this data.

To measure the size of the urban heat island effect, buy a thermometer in your local hardware store. Attach a toilet roll around the bulb to shield the bulb from radiant heat, and attach the thermometer to your car. Then drive your car from the countryside through a small town and out to the countryside again. You will observe an urban heat island effect of several degrees, about five or ten times larger than the decadal warming. That is real science. What the IPCC does is cargo cult science.

The global warming swindle

Monday, March 17th, 2008

Anthropogenic global warming is a swindle in that the scientific method has been abandoned, the evidence is in substantial part lies, and so on and so forth.

But it is not a swindle in that it is provably false. It could be true. The evidence vastly overstated, and the effects vastly overstated, but it could be true that humans are causing the world to warm at about one fifth of a degree per decade, about two degrees per century

Of course two degrees per century is not very fast: Walk, walk, the hills! But it could be true.

But in few years, by 2012 or so, we will know whether it is true or not.

Measurements of the 18O/16O provide an accurate measure of ancient water temperature. We observe that the climate has always been changing, and from time to time has changed quite a lot. Measurement of 10Be from these same ice cores indicate that the high temperatures occurred at times of high solar activity, and the low temperatures at times of low solar activity.

So in the past, the climate varied as the sun varied. So are present day changes in climate a reflection of increasing solar activity, or increasing anthropogenic CO2?

Throughout most of the twentieth century, solar activity increased, and CO2 increased. So it was impossible to say which was causing the change in climate.

Around 2000 or so, solar activity peaked, and in the recent year, fell like a stone. So if climate change is caused by the sun, global warming should have ended around 2000, the world should have cooled a little towards 2007, and should have cooled quite a bit this year. Arguably that is just what happened. And arguably that is not what happened. The data is noisy.

In a little while, a few months, or a few years, it will become apparent that the world is continuing to warm, which case climate change is primarily anthropogenic, or that the world is cooling, in which case climate change is primarily cosmogenic.

The global warming swindle

Monday, March 17th, 2008

Anthropogenic global warming is a swindle in that the scientific method has been abandoned, the evidence is in substantial part lies, and so on and so forth.

But it is not a swindle in that it is provably false. It could be true. The evidence vastly overstated, and the effects vastly overstated, but it could be true that humans are causing the world to warm at about one fifth of a degree per decade, about two degrees per century

Of course two degrees per century is not very fast: Walk, walk, the hills! But it could be true.

But in few years, by 2012, possibly as soon as 2009, we will know whether it is true or not.

Measurements of the 18O/16O provide an accurate measure of ancient water temperature. We observe that the climate has always been changing, and from time to time has changed quite a lot. Measurement of 10Be from these same ice cores indicate that the high temperatures occurred at times of high solar activity, and the low temperatures at times of low solar activity.

So in the past, the climate varied as the sun varied. So are present day changes in climate a reflection of increasing solar activity, or increasing anthropogenic CO2?

Throughout most of the twentieth century, solar activity increased, and CO2 increased. So it was impossible to say which was causing the change in climate.

Around 2000 or so, solar activity peaked, and in the recent year, fell like a stone. So if climate change is caused by the sun, global warming should have ended around 2000, the world should have cooled a little towards 2007, and should have cooled quite a bit this year. Arguably that is just what happened. And arguably that is not what happened. The data is noisy.

In a little while, a few months, or a few years, it will become apparent that the world is continuing to warm, which case climate change is primarily anthropogenic, or that the world is cooling, in which case climate change is primarily cosmogenic.

Monthly global average temperature anomaly

Blue dots represent observed month to month global average temperatures. Observe the cooling trend in the last few months. If this goes on for a while, it will disprove the claim that human activity has substantially influenced the climate. Of course, if, on the other hand, it reverses …

Yes, the Fed can just keep on printing money.

Saturday, March 15th, 2008

The business times quotes an anonymous “senior London Banker”

Someone will go under in this crisis, that’s for sure. The question is whether they stay under or get rescued. Let’s see whether this latest round of stabilisation helps, but if it doesn’t, it’s difficult to see what Plan B is. The Fed can’t just keep on printing money.

Yes, the Fed can just keep on printing money.

The banks have real assets and nominal liabilities. If the Fed debases money enough, the banks will be fine – it is just that everyone else will be broke.

Fed blows three hundred billion in one day.

Thursday, March 13th, 2008

Yesterday, the fed, in an effort to restore liquidity, “loaned” the banks three hundred billion dollars with mortgage backed securities as “security”. Because these securities are not worth @#$% it in fact purchased these securities. And because the mortgages backing these securities are not worth @#$% it in fact purchased the mortgages. And because the mortgages are for more than the value of the properties, it in fact purchased the properties – mainly residential properties.

But government is notoriously incapable of managing residential properties. The properties will in the end be at best occupied by people who pay very little rent, at worst will be overrun by gangs and squatters, and turned into ruinous slums.

Further, this three hundred billion is off budget. On paper, the fed has merely exchanged one security for another. In reality, the fed has made a massive investment in real estate at inflated prices.

Which is irrational, the Fed or the market?

Wednesday, March 12th, 2008

The economist is puzzled that the very rational Fed is having such difficulty bringing rationality to those terribly irrational markets:

the more frightening tremors in the system are those generated by the seemingly irrational unwillingness to hold safe investments, thereby making the safe unsafe.

And to cure this terrible irrationality, the Fed is injecting liquidity buying dud mortgages.

Hang on. Dud mortgates are not safe investments. They are extremely speculative investments. The Fed is going into the the real estate business, suddenly becoming the nations largest owner and seller of houses, something far outside its expertise and administrative abilities. Being a rentier is hard, and the Fed has no experience or organization to do it. Vast numbers of houses are bound to sit empty, or be occupied by squatters paying no rent.

Government is not permitting land to be subdivided to build houses, and to sustain the price of houses, government is now buying up troubled mortgages, thus buying up houses in foreclosure, thus pouring gigantic amounts of money into the property market. But there is quite a bit of horded land in out of the way areas that received subdivision permission back in the days when subdivision was easier, in effect, horded permissions, and of course, in response to these huge prices, people are moving to that land. Thus though housing prices overall will rise, as the price of horded permissions rise, bubble areas must fall. The Fed is doing a King Canute, and will wind up owning extravagantly priced property in Silicon valley which will, as government owned housing tends to do, turn into slums.

The economist is puzzled that the very rational Fed is having such difficulty bringing rationality to those terribly irrational markets:

Global warmers lie again 1

Tuesday, March 11th, 2008

According to a statement issued by the World Wide Fund for nature a few hours ago:

“Hundreds of newborn seal cubs risk dying of hunger and cold because global warming is making ice in the Arctic Circle melt too fast“When the ice melts too fast, the cubs end up in the ice water before they have their insulating fat layer, and they die painfully of hunger and cold.

“The WWF said there was less ice in the Arctic this winter than at any point in the past 300 years.”

Needless to say, according to satellite observations, the ice the arctic this winter is at the exact average that it has been during the period that it has been subject to satellite observation, and no one has any clear idea what it was like three hundred years ago.

Cause of International Inequality

Tuesday, March 11th, 2008

Arnold Kling is much puzzled by the inequality of nations. I don’t know why. The answer is pretty obvious.

Firstly, you require capitalism, which requires not mere formal laws recognizing private property, but a culture of respect for entrepreneurship, for property rights in productive capital and freedom to do business. With that respect, the laws are unnecessary, as in today’s China. Without that respect, the laws are useless, as in Argentina and Russia.

Secondly, given capitalism, you require people able to operate modern capitalism, able function in a business encompassing numerous people – you require people whose verbal IQ is higher than 105. By and large, the capitalist portion of the economy, the portion that produces wealth, will be proportional to number of people with an IQ higher than 105.

If we look at countries that are reasonable capitalist, and these days a large part of the countries of the world are reasonably capitalist, the GDP per head is fairly closely proportional to fraction of the population with a verbal IQ higher than 105, the smart fraction.