You Want Me to Pay You … Why?

Fed Funds Rate goes negative
Negative rates burn wealth! ramcreations/Shutterstock

14 August 2019 – There’s been some hand wringing in the mass media recently about negative interest rates and what they mean. Before you can think about that, however, you have to know what negative rates are and how they actually work. Journalists Sam Goldfarb and Daniel Kruger pointed out in a Wall Street Journal article on Monday (8/12) that not so long ago negative interest rates were thought impossible.

Of course, negative interest rates were never really “impossible.” They used to be considered highly unlikely, however, because nobody in their right mind would be willing to pay someone else for taking money off their hands. I mean, would you do it?

But, the world has changed drastically over the past, say, quarter century. Today, so-called “investors” think nothing of buying stock in giant technology companies, such as Tesla, Inc. that have never made a dime of profit and have no prospects of doing so in the near future. Such “investors” are effectively giving away their money at negative interest rates.

Buying stock in an unprofitable enterprise makes sense if you believe that the enterprise will eventually become profitable. Or, and this is a commonly applied strategy, you believe the market value of the stock will rise in the future, when you can sell it to somebody else at a profit. This latter strategy is known as the “bigger fool theory.” This theory holds that doing something that stupid is a good idea as long as you believe you’ll be able to find a “bigger fool” to take your stock in the deadbeat enterprise off your hands before it collapses into bankruptcy.

That all works quite nicely for stocks, but makes less sense for bonds, which is what folks are talking about when they wring their hands over negative-interest-rate policy by central banks. The difference is that in the bond market, there really is no underlying enterprise ownership that might turn a profit in the future. A bond is just an agreement between a lender and a debtor.

This is where the two-fluid model of money I trotted out in this column on 19 June helps paint an understandable picture. Recall from that column that money appears from nowhere when two parties, a lender and a debtor, execute a loan contract. The cash (known as “credit” in the model) goes to the debtor while an equal amount of debt goes to the lender. Those are the two paired “fluids” that make up what we call “money,” as I explain in that column.

Fed Funds Rate

The Federal Reserve Bank is a system of banks run by the U.S. Treasury Department. One of the system’s functions is to ensure the U.S. money supply by holding excess money for other banks who have more than they need at the moment, and loaning it out to banks in need of cash. By setting the interest rate (the so-called Fed Funds Rate) at which these transactions occur, the Fed controls how much money flows through the economy. Lowering the rate allows money to flow faster. Raising it slows things down.

Actual paper money represents only a tiny fraction of U.S. currency. In actual fact, money is created whenever anybody borrows anything from anybody, even your average loan shark. The Federal Reserve System is how the U.S. Federal Government attempts to keep the whole mess under control.

By the way, the problem with cryptocurrencies is that they attempt to usurp that control, but that’s a rant for another day.

Think of money as blood coursing through the country’s economic body, carrying oxygen to the cells (you and me and General Motors) that they use to create wealth. That’s when the problem with negative interest rates shows up. When interest rates are positive, it means wealth is being created. When they’re negative, well you can imagine what that means!

Negative interest rates mean folks are burning up wealth to keep the economic ship sailing along. If you keep burning up wealth instead of creating it, eventually you go broke. Think Venezuela, or, on a smaller scale, Puerto Rico.

Negative Interest

Okay, so how do negative interest rates actually work?

A loan contract, or bond, is an agreement between a lender and a debtor to create some money (the two fluids, again). The idea behind any contract is that everybody gets something out of it that they want. In a conventional positive-interest-rate bond, the debtor gets credit that they can use to create wealth, like, maybe building a house. The lender gets a share in that wealth in the form of interest payments over and above the cash needed to retire the loan (as in pay back the principal).

Bonds are sold in an auction process. That is, the issuer offers to sell the bond for a face value (the principal) and pay it back plus interest at a certain rate in the future. In the real world, however, folks buy such bonds at a market price, which may or may not be equal to the principal.

If the market price is lower than the principal, then the effective rate of interest will be higher than the offered rate because what the actual market value is doesn’t affect the pay-back terms written on the loan agreement. If the market price is higher than the principal, the effective rate will be lower than the offered rate. If the market price is too much higher than the principal, the repayment won’t be enough to cover it, and the effective rate will be negative.

Everyone who’s ever participated in an auction knows that there are always amateurs around (or supposed professionals whose glands get the better of their brains so they act like amateurs) who get caught up in the auction dynamics and agree to pay more than they should for what’s offered. When it’s a bond auction, that’s how you get a negative interest rate by accident. Folks agree to pay up front more than they get back as principal plus interest for the loan.

Negative Interest Rate Policy (NIRP) is when a central bank (such as the U.S. Federal Reserve) runs out of options to control economic activity, and publicly says it’s going to borrow money from its customers at negative rates. The Fed’s customers (the large banks that deposit their excess cash with the Fed) have to put their excess cash somewhere, so they get stuck making the negative-interest-rate loans. That means they’re burning up the wealth their customers share with them when they pay their loans back.

If you’re the richest country in the world, you can get away with burning up wealth faster than you create it for a very long time. If, on the other hand, you’re, say, Puerto Rico, you can’t.

Fed Reports on U.S. Economic Well-Being

Federal Reserve Building
The Federal Reserve released the results of its annual Survey of Household Economics and Decisionmaking for calendar year 2018 last week. Image by Thomas Barrat / Shutterstock

29 May 2019 – Last week (specifically 23 May 2019) the Federal Reserve Board released the results of its annual Survey of Household Economics and Decisionmaking for CY2018. I’ve done two things for readers of this blog. First, I downloaded a PDF copy of the report to make available free of charge on my website at cgmasi.com alongside last year’s report for comparison. Second, I’m publishing an edited extract of the report’s executive summary below.

The report describes the results of the sixth annual Survey of Household Economics and Decisionmaking (SHED). In October and November 2018, the latest SHED polled a self-selected sample of over 11,000 individuals via an online survey.

Along with the survey-results report, the Board published the complete anonymized data in CSV, SAS, STATA formats; as well as a supplement containing the complete SHED questionnaire and responses to all questions in the order asked. The survey continues to use subjective measures and self-assessments to supplement and enhance objective measures.

Overall Results

Survey respondents reported that most measures of economic well-being and financial resilience in 2018 are similar to or slightly better than in 2017. Many families have experienced substantial gains since the survey began in 2013, in line with the nation’s ongoing economic expansion during that period.

Even so, another year of economic expansion and the low national unemployment rates did little to narrow the persistent economic disparities by race, education, and geography. Many adults are financially vulnerable and would have difficulty handling an emergency expense as small as $400.

In addition to asking adults whether they are working, the survey asks if they want to work more and what impediments they see to them working.

Overall Economic Well-Being

A large majority of individuals report that, financially, they are doing okay or living comfortably, and overall economic well-being has improved substantially since the survey began in 2013

  • When asked about their finances, 75% of adults say they are either doing okay or living comfortably. This result in 2018 is similar to 2017 and is 12%age points higher than 2013.

  • Adults with a bachelor’s degree or higher are significantly more likely to be doing at least okay financially (87%) than those with a high school degree or less (64%).

  • Nearly 8 in 10 whites are at least doing okay financially in 2018 versus two-thirds of blacks and Hispanics. The gaps in economic well-being by race and ethnicity have persisted even as overall wellbeing has improved since 2013.

  • Fifty-six percent of adults say they are better off than their parents were at the same age and one fifth say they are worse off.

  • Nearly two-thirds of respondents rate their local economic conditions as “good” or “excellent,” with the rest rating conditions as “poor” or “only fair.” More than half of adults living in rural areas describe their local economy as good or excellent, compared to two-thirds of those living in urban areas.

Income

Changes in family income from month to month remain a source of financial strain for some individuals.

  • Three in 10 adults have family income that varies from month to month. One in 10 adults have struggled to pay their bills because of monthly changes in income. Those with less access to credit are much more likely to report financial hardship due to income volatility.

  • One in 10 adults, and over one-quarter of young adults under age 30, receive some form of financial support from someone living outside their home. This financial support is mainly between parents and adult children and is often to help with general expenses.

Employment

Most adults are working as much as they want to, an indicator of full employment; however, some remain unemployed or underemployed. Economic well-being is lower for those wanting to work more, those with unpredictable work schedules, and those who rely on gig activities as a main source of income.

  • One in 10 adults are not working and want to work, though many are not actively looking for work. Four percent of adults in the SHED are not working, want to work, and applied for a job in the prior 12 months. This is similar to the official unemployment rate of 3.8% in the fourth quarter of 2018.

  • Two in 10 adults are working but say they want to work more. Blacks, Hispanics, and those with less education are less likely to be satisfied with how much they are working.

  • Half of all employees received a raise or promotion in the prior year.

  • Unpredictable work schedules are associated with financial stress for some. One-quarter of employees have a varying work schedule, including 17% whose schedule varies based on their employer’s needs. One-third of workers who do not control their schedule are not doing okay financially, versus one-fifth of workers who set their schedule or have stable hours.

  • Three in 10 adults engaged in at least one gig activity in the prior month, with a median time spent on gig work of five hours. Perhaps surprisingly, little of this activity relies on technology: 3% of all adults say that they use a website or an app to arrange gig work.

  • Signs of financial fragility – such as difficulty handling an emergency expense – are slightly more common for those engaged in gig work, but markedly higher for those who do so as a main source of income.

Dealing with Unexpected Expenses

While self-reported ability to handle unexpected expenses has improved substantially since the survey began in 2013, a sizeable share of adults nonetheless say that they would have some difficulty with a modest unexpected expense.

  • If faced with an unexpected expense of $400, 61% of adults say they would cover it with cash, savings, or a credit card paid off at the next statement – a modest improvement from the prior year. Similar to the prior year, 27% would borrow or sell something to pay for the expense, and 12% would not be able to cover the expense at all.

  • Seventeen percent of adults are not able to pay all of their current month’s bills in full. Another 12% of adults would be unable to pay their current month’s bills if they also had an unexpected $400 expense that they had to pay.

  • One-fifth of adults had major, unexpected medical bills to pay in the prior year. One-fourth of adults skipped necessary medical care in 2018 because they were unable to afford the cost.

Banking and Credit

Most adults have a bank account and are able to obtain credit from mainstream sources. However, sub- stantial gaps in banking and credit services exist among minorities and those with low incomes.

  • Six percent of adults do not have a bank account. Fourteen percent of blacks and 11% of Hispanics are unbanked versus 4% of whites. Thirty-five percent of blacks and 23% of Hispanics have an account but also use alternative financial services, such as money orders and check cashing services, compared to 11% of whites.

  • More than one-fourth of blacks are not confident that a new credit card application would be approved if they applied—over twice the rate among whites.

  • Those who never carry a credit card balance are much more likely to say that they would pay an unexpected $400 expense with cash or its equivalent (88%) than those who carry a balance most or all of the time (40%) or who do not have a credit card (27%).

  • Thirteen percent of adults with a bank account had at least one problem accessing funds in their account in the prior year. Problems with a bank website or mobile app (7%) and delays in when funds were available to use (6%) are the most common problems. Those with volatile income and low savings are more likely to experience such problems.

Housing and Neighborhoods

Satisfaction with one’s housing and neighborhood is generally high, although notably less so in low-income communities. While 8 in 10 adults living in middle- and upper-income neighborhoods are satisfied with the overall quality of their community, 6 in 10 living in low- and moderate-income neighborhoods are satisfied.

  • People’s satisfaction with their housing does not vary much between more expensive and less expensive cities or between urban and rural areas.

  • Over half of renters needed a repair at some point in the prior year, and 15% of renters had moderate or substantial difficulty getting their landlord to complete the repair. Black and Hispanic renters are more likely than whites to have difficulties getting repairs done.

  • Three percent of non-homeowners were evicted, or moved because of the threat of eviction, in the prior two years. Evictions are slightly more common in urban areas than in rural areas.

Higher Education

Economic well-being rises with education, and most of those holding a post-secondary degree think that attending college paid off.

  • Two-thirds of graduates with a bachelor’s degree or more feel that their educational investment paid off financially, but 3 in 10 of those who started but did not complete a degree share this view.

  • Among young adults who attended college, more than twice as many Hispanics went to a for-profit institution as did whites. For young black attendees, this rate was five times the rate of whites.

  • Given what they know now, half of those who attended a private for-profit institution say that they would attend a different school if they had a chance to go back and make their college choices again. By comparison, about one-quarter of those who attended public or private not-for-profit institutions would want to attend a different school.

Student Loans and Other Education Debt

Over half of young adults who attended college took on some debt to pay for their education. Most borrowers are current on their payments or have successfully paid off their loans.

  • Among those making payments on their student loans, the typical monthly payment is between $200 and $299 per month.

  • Over one-fifth of borrowers who attended private for-profit institutions are behind on student loan payments, versus 8% who attended public institutions and 5% who attended private not-for-profit institutions.

Retirement

Many adults are struggling to save for retirement. Even among those who have some savings, people commonly lack financial knowledge and are uncomfortable making investment decisions.

  • Thirty-six percent of non-retired adults think that their retirement saving is on track, but one-quarter have no retirement savings or pension whatsoever. Among non-retired adults over the age of sixty, 45% believe that their retirement saving is on track.

  • Six in 10 non-retirees who hold self-directed retirement savings accounts, such as a 401(k) or IRA, have little or no comfort in managing their investments.

  • On average, people answer fewer than three out of five financial literacy questions correctly, with lower scores among those who are less comfortable managing their retirement savings.

The forgoing is an edited extract from the Report’s Executive Summary. A PDF version of the entire report is available on my website at cgmasi.com [ http://cgmasi.com ] along with a PDF version of the 2017 report, which was published in May of 2018 and based on a similar survey conducted in late 2017. Reports dating back to the first survey done in late 2013 are available from the Federal Reserve Board’s website linked to above.

Why Target Average Inflation?

Federal Reserve Seal
The FOMC attempts to control economic expansion by managing interest rates. Shutterstock.com

8 May 2019 – There’s been a bit of noise in financial-media circles this week (as of this writing, but it’ll be last week when you get to read it) about Federal Reserve Chairman Jerome Powell’s talking up shifting the Fed’s focus to targeting something called “average inflation” and using words like “transient” and “symmetric” to describe this thinking. James Macintosh provided a nice layman-centric description of the pros and cons of this concept in his “Streetwise” column in Friday’s (5/3) The Wall Street Journal. (Sorry, folks, but this article is only available to WSJ subscribers, so the link above leads to a teaser that asks you to either sign in as a current subscriber or to become a new subscriber. And, you thought information was supposed to be distributed for free? Think again!)

I’m not going to rehash what Macintosh wrote, but attempt to show why this change makes sense. In fact, it’s not really a change at all, but an acknowledgement of what’s really been going on all the time.

We start with pointing out that what the Federal Reserve System is mandated to do is to control the U.S. economy. The operant word here is “control.” That means that to understand what the Fed does (and what it should do) requires a basic understanding of control theory.

Basic Control Theory

We’ll start with a thermostat.

A lot of people (I hesitate to say “most” because I’ve encountered so many counter examples – otherwise intelligent people who somehow don’t seem to get the point) understand how a thermostat works.

A thermostat is the poster child for basic automated control systems. It’s the “stone knives and bearskins” version of automated controls, and is the easiest for the layman to understand, so that’s where we’ll start. It’s also a good analog for what has passed for economic controls since the Fed was created in 1913.

Okay, the first thing to understand is the concept of a “set point.” That’s a “desired value” of some measurement that represents the thing you want to control. In the case of the thermostat, the measurement is room temperature (as read out from a thermometer) and the thing you’re trying to control is how comfortable the room air feels to you. In the case of the Fed, the thing you want to control is overall economic performance and the measurement folks decided was most useful is the inflation rate.

Currently, the set point for inflation is 2% per annum.

In the case of the thermostat in our condo, my wife and I have settled on 75º F. That’s a choice we’ve made based on the climate where we live (Southwestern Florida), our ages, and what we, through experience, have found to be most comfortable for us right now. When we lived in New England, we chose a different set point. Similarly, when we lived in Northern Arizona it was different as well.

The bottom line is: the set point is a matter of choice based on a whole raft of factors that we think are important to us and it varies from time to time.

The same goes for the Fed’s inflation set point. It’s a choice Fed governors make based on a whole raft of considerations that they think are important to the country right now. One of the reasons they meet every month is to review that target ‘cause they know that things change. What seems like a good idea in July, might not look so good in August.

Now, it’s important to recognize that the set point is a target. Like any target, you’re trying to hit it, but you don’t really expect to hit it exactly. You really expect that the value you get for your performance measurement will differ from your set point by some amount – by some error or what metrologists prefer to call “deviation.” We prefer deviation to the word error because it has less pejorative connotations. It’s a fact of life, not a bad thing.

When we add in the concept of time, we also introduce the concept of feedback. That is what control theorists call it when you take the results of your measurement and feed it back to your decision of what to do next.

What you do next to control whatever you’re trying to control depends, first, on the sign (positive or negative) of the deviation, and, in more sophisticated controls, it’s value or magnitude. In the case of the thermostat, if the deviation is positive (meaning the room is hotter than you want) you want to do something to cool it down. In the case of the economy, if inflation is too high you want to do something to reduce economic activity so you don’t get an economic bubble that’ll soon burst.

What confuses some presidents is the idea that rising economic activity isn’t always good. Presidents like boom times ‘cause they make people feel good – like a sugar high. Populist presidents typically fail to recognize (or care about the fact) that booms are invariably bubbles that burst disastrously. Just ask the people of Venezuela who watched their economy’s inflation rate suddenly shoot up to about a million(!) percent per annum.

Booms turn to busts in a heartbeat!

This is where we want to abandon the analogy with a thermostat and get a little more sophisticated.

A thermostat is a blunt instrument. What the thermostat automatically does next is like using a club. At best, a thermostat has two clubs to choose from: it can either fire up the furnace (to raise the room temperature in the event of a negative deviation) or kick in the air conditioner (in the event that the deviation is positive – too hot). That’s known as a binary digital control. It’s gives you a digital choice: up or down.

We leave the thermostat analogy because the Fed’s main tool for controlling the economy (the Fed-funds interest rate) is a lot more sophisticated. It’s what mathematicians call analog. That is, instead of providing a binary choice (to use the club or not), it lets you choose how much pressure you want to apply up or down.

Quantitative easing similarly provides analog control, so what I’m going to say below also applies to it.

Okay, the Fed’s control lever (Fed funds interest rate) is more like a brake pedal than a club. In a car, the harder you press the brake pedal, the more pressure you apply to make the car slow down. A little pressure makes the car slow down a little. A lot of pressure makes the car slow down a lot.

So, you can see why authoritarians like low interest rates. Autthoritarians generally have high-D personalities. As Personality Insights says: “They tend to know 2 speeds in life – zero and full throttle… mostly full throttle.”

They generally don’t have much use for brakes!

By the way, the thing governments have that corresponds to a gas pedal is deficit spending, but the correspondence isn’t exact and the Fed can’t control it, anyway. Since this article is about the Fed, we aren’t going to talk about it now.

When inflation’s moving too fast (above the set point) by a little, the Fed governors – being the feedback controller – decide to raise the Fed funds rate, which is analogous to pushing the brake pedal, by a little. If that doesn’t work, they push it a little harder. If inflation seems to be out of control, as it did in the 1970s, they push it as hard as they can, boosting interest rates way up and pulling way back on the economy.

Populist dictators, who generally don’t know what they’re doing, try to prevent their central banks (you can’t have an economy without having a central bank, even if you don’t know you have it) from raising interest rates soon enough or high enough to get inflation under control, which is why populist dictatorships generally end up with hyperinflation leading to economic collapse.

Populist Dictators Need Not Apply

This is why we don’t want the U.S. Federal Reserve Bank under political control. Politicians are not elected for their economic savvy, so we want Fed governors, who are supposed to have economic savvy, to make smart decisions based on their understanding of economic causes and effects, rather than dumb decisions based on political expediency.

Economists are mathematically sophisticated people. They may (or may not) be steeped in the theory of automated control systems, but they’re quite capable of understanding these basics and how they apply to controlling an economy.

Economics, of course, has been around as long as civilization. Hesiod (ca. 750 BCE) is sometimes considered “the first economist.” Contemporary economics traces back to the eighteenth century with Adam Smith. Control theory, on the other hand, has only been elucidated since the early 1950s. So, you don’t really need control theory to understand economics. It just makes it easier to see how the controls work.

To a veteran test and measurement maven like myself, the idea of thinking in terms of average inflation, instead of the observed inflation at some point in time – like right now – makes perfect sense. We know that every time you make a measurement of anything, you’re almost guaranteed to get a different value than you got the last time you measured it. That’s why we (scientists and engineers) always measure whatever we care about multiple times and pay attention to the average of the measurements instead of each measurement individually.

So, Fed governors starting to pay attention to average inflation strikes us as a duh! What else would you look at?

Similarly, using words like “transient” and “symmetric” make perfect sense because “transient” expresses the idea that things change faster than you can measure them and “symmetric” expresses the idea that measurement variations can be positive or negative – symmetric each side of the average.

These ideas all come from the mathematics of statistics. You’ve heard of “statistical significance” associated with polling data, or two polling results being within “statistical error.” The variations I’m talking about are the same thing. Variations between two values (like the average inflation and the target inflation) are statistically significant if they’re sufficiently outside the statistical error.

I’m not going to go into how you calculate a value for statistical error because it takes hours of yammering to teach it in statistics classes, and I just don’t have the space here. You wouldn’t want to read it right now, anyway. Suffice it to say that it’s a well-defined concept relating to how much variation you can expect in a given data set.

While the control theory I’ve been talking about applies especially to automated control systems, it applies equally to Federal Reserve System control of economic performance – if you put the Federal Open Market Committee (FOMC) in place of the control computer that makes decisions for the automated control system.

So,” you ask, “why not put the Fed-funds rate under computer control?”.

The reason it would be unreasonable to fully automate the Fed’s actions is that we can’t duplicate the thinking process of the Fed governors in a computer program. The state of the art of economic models is just not good enough, yet. We still need the gut feelings of seasoned economists to make enough sense out of what goes on in the economy to figure out what to do next.

That, by the way, is why we don’t leave the decisions up to some hyperintelligent pandimensional being (named Trump). We need a panel of economists with diverse backgrounds and experiences – the FOMC – to have some hope of getting it right!

What is This “Robot” Thing, Anyway?

Robot thinking
So, what is it that makes a robot a robot? Phonlamai Photo/Shutterstock

6 March 2019 – While surfing the Internet this morning, in a valiant effort to put off actually getting down to business grading that pile of lab reports that I should have graded a couple of days ago, I ran across this posting I wrote in 2013 for Packaging Digest.

Surprisingly, it still seems relevant today, and on a subject that I haven’t treated in this blog, yet. It being that I’m planning to devote most of next week to preparing my 2018 tax return, I decided to save some writing time by dusting it off and presenting it as this week’s posting to Tech Trends. I hope the folks at Packaging Digest won’t get their noses too far out of joint about my encroaching on their five-year-old copyright without asking permission.

By the way, this piece is way shorter than the usual Tech Trends essay because of the specifications for that Packaging Digest blog, which was entitled “New Metropolis” in homage to Fritz Lang’s 1927 feature film entitled Metropolis, which told the story of a futuristic mechanized culture and an anthropomorphic robot that a mad scientist creates to bring it down. The “New Metropolis” postings were specified to be approximately 500 words long, whereas Tech Trends postings are planned to be 1,000-1,500 words long.

Anyway, I hope you enjoy this little slice of recent history.


11 November 2013 – I thought it might be fun—and maybe even useful—to catalog the classifications of these things we call robots.

Lets start with the word robot. The idea behind the word robot grows from the ancient concept of the golem. A golem was an artificial person created by people.

Frankly, the idea of a golem scared the bejeezus out of the ancients because the golem stands at the interface between living and non-living things. In our enlightened age, it still scares the bejeezus out of people!

If we restricted the field to golems—strictly humanoid robots, or androids—we wouldnt have a lot to talk about, and practically nothing to do. The things havent proved particularly useful. So, I submit that we should expand the robot definition to include all kinds of human-made artificial critters.

This has, of course, already been done by everyone working in the field. The SCARA (selective compliance assembly robot arm) machines from companies like Kuka, and the delta robots from Adept Technologies clearly insist on this expanded definition. Mobile robots, such as the Roomba from iRobot push the boundary in another direction. Weird little things like the robotic insects and worms so popular with academics these days push in a third direction.

Considering the foregoing, the first observation is that the line between robot and non-robot is fuzzy. The old 50s-era dumb thermostats probably shouldnt be considered robots, but a smart, computer-controlled house moving in the direction of the Jarvis character in the Ironman series probably should. Things in between are – in between. Lets bite the bullet and admit were dealing with fuzzy-logic categories, and then move on.

Okay, so what are the main characteristics symptomatic of this fuzzy category robot?

First, its gotta be artificial. A cloned sheep is not a robot. Even designer germs are non-robots.
Second, its gotta be automated. A fly-by-wire fighter jet is not a robot. A drone linked at the hip to a human pilot is not a robot. A driverless car, on the other hand, is a robot. (Either that, or its a traffic accident waiting to happen.)

Third, its gotta interact with the environment. A general-purpose computer sitting there thinking computer-like thoughts is not a robot. A SCARA unit assembling a car is. I submit that an automated bill-paying system arguing through the telephone with my wife over how much to take out of her checkbook this month is a robot.

More problematic is a fourth direction—embedded systems, like automated houses—that beg to be admitted into the robotic fold. I vote for letting them in, along with artificial intelligence (AI) systems, like the robot bill paying systems my wife is so fond of arguing with.

Finally (maybe), its gotta be independent. To be a robot, the thing has to take basic instruction from a human, then go off on its onesies to do the deed. Ideally, you should be able to do something like say, Go wash the car, and itll run off as fast as its little robotic legs can carry it to wash the car. More chronistically, you should be able to program it to vacuum the living room at 4:00 a.m., then be able to wake up at 6:00 a.m. to a freshly vacuumed living room.

Doing Business with Bad Guys

Threatened with a gun
Authoritarians make dangerous business partners. rubikphoto/Shutterstock

3 October 2018 – Parents generally try to drum into their childrens’ heads a simple maxim: “People judge you by the company you keep.

Children (and we’re all children, no matter how mature and sophisticated we pretend to be) just as generally find it hard to follow that maxim. We all screw it up once in a while by succumbing to the temptation of some perceived advantage to be had by dealing with some unsavory character.

Large corporations and national governments are at least as likely to succumb to the prospect of making a fast buck or signing some treaty with peers who don’t entertain the same values we have (or at least pretend to have). Governments, especially, have a tough time in dealing with what I’ll call “Bad Guys.”

Let’s face it, better than half the nations of the world are run by people we wouldn’t want in our living rooms!

I’m specifically thinking about totalitarian regimes like the People’s Republic of China (PRC).

‘Way back in the last century, Mao Tse-tung (or Mao Zedong, depending on how you choose to mis-spell the anglicization of his name) clearly placed China on the “Anti-American” team, espousing a virulent form of Marxism and descending into the totalitarian authoritarianism Marxist regimes are so prone to. This situation continued from the PRC’s founding in 1949 through 1972, when notoriously authoritarian-friendly U.S. President Richard Nixon toured China in an effort to start a trade relationship between the two countries.

Greedy U.S. corporations quickly started falling all over themselves in an effort to gain access to China’s enormous potential market. Mesmerized by the statistics of more than a billion people spread out over China’s enormous land mass, they ignored the fact that those people were struggling in a subsistence-agriculture economy that had collapsed under decades of mis-managment by Mao’s authoritarian regime.

What they hoped those generally dirt-poor peasants were going to buy from them I never could figure out.

Unfortunately, years later I found myself embedded in the management of one of those starry-eyed multinational corporations that was hoping to take advantage of the developing Chinese electronics industry. Fresh off our success launching Test & Measurement Europe, they wanted to launch a new publication called Test & Measurement China. Recalling the then-recent calamity ending the Tiananmen Square protests of 1989, I pulled a Nancy Reagan and just said “No.”

I pointed out that the PRC was still run by a totalitarian, authoritarian regime, and that you just couldn’t trust those guys. You never knew when they were going to decide to sacrifice you on the altar of internal politics.

Today, American corporations are seeing the mistakes they made in pursuit of Chinese business, which like Robert Southey’s chickens, are coming home to roost. In 2015, Chinese Premier Li Keqiang announced the “Made in China 2025” plan to make China the World’s technology leader. It quickly became apparent that Mao’s current successor, Xi Jinping intends to achieve his goals by building on technology pilfered from western companies who’d naively partnered with Chinese firms.

Now, their only protector is another authoritarian-friendly president, Donald Trump. Remember it was Trump who, following his ill-advised summit with North Korean strongman Kim Jong Un, got caught on video enviously saying: “He speaks, and his people sit up at attention. I want my people to do the same.

So, now these corporations have to look to an American would-be dictator for protection from an entrenched Chinese dictator. No wonder they find themselves screwed, blued, and tattooed!

Governments are not immune to the PRC’s siren song, either. Pundits are pointing out that the PRC’s vaunted “One Belt, One Road” initiative is likely an example of “debt-trap diplomacy.”

Debt-trap diplomacy is a strategy similar to organized crime’s loan-shark operations. An unscrupulous cash-rich organization, the loan shark, offers funds to a cash-strapped individual, such as an ambitious entrepreneur, in a deal that seems too good to be true. It’s NOT true because the deal comes in the form of a loan at terms that nearly guarantee that the debtor will default. The shark then offers to write off the debt in exchange for the debtor’s participation in some unsavory scheme, such as money laundering.

In the debt-trap diplomacy version, the PRC stands in the place of the loan shark while some emerging-economy nation, such as, say, Malaysia, accepts the unsupportable debt. In the PRC/ Malaysia case, the unsavory scheme is helping support China’s imperial ambitions in the western Pacific.

Earlier this month, Malaysia wisely backed out of the deal.

It’s not just the post-Maoist PRC that makes a dangerous place for western corporations to do business, authoritarians all over the world treat people like Heart’s Barracuda. They suck you in with mesmerizing bright and shiny promises, then leave you twisting in the wind.

Yes, I’ve piled up a whole mess of mixed metaphors here, but I’m trying to drive home a point!

Another example of the traps business people can get into by trying to deal with authoritarians is afforded by Danske Bank’s Estonia branch and their dealings with Vladimir Putin‘s Russian kleptocracy. Danske Bank is a Danish financial institution with a pan-European footprint and global ambitions. Recent release of a Danske Bank internal report produced by the Danish law firm Bruun & Hjejle says that the Estonia branch engaged in “dodgy dealings” with numerous corrupt Russian officials. Basically, the bank set up a scheme to launder money stolen from Russian tax receipts by organized criminals.

The scandal broke in Russia in June of 2007 when dozens of police officers raided the Moscow offices of Hermitage Global, an activist fund focused on global emerging markets. A coverup by Kremlin authorities resulted in the death (while in a Russian prison) of Sergei Leonidovich Magnitsky, a Russian tax accountant who specialized in anti-corruption activities.

Magnitsky’s case became an international cause célèbre. The U.S. Congress and President Barack Obama enacted the Magnitsky Act at the end of 2012, barring, among others, those Russian officials believed to be involved in Magnitsky’s death from entering the United States or using its banking system.

Apparently, the purpose of the infamous Trump Tower meeting of June 9, 2016 was, on the Russian side, an effort to secure repeal of the Magnitsky Act should then-candidate Trump win the election. The Russians dangled release of stolen emails incriminating Trump-rival Hillary Clinton as bait. This activity started the whole Mueller Investigation, which has so far resulted in dozens of indictments for federal crimes, and at least eight guilty pleas or convictions.

The latest business strung up in this mega-scandal was the whole corrupt banking system of Cyprus, whose laundering of Russian oligarchs’ money amounted to over $20B.

The moral of this story is: Don’t do business with bad guys, no matter how good they make the deal look.

What’s So Bad About Cryptocurrencies?

15 March 2018 – Cryptocurrency fans point to the vast “paper” fortunes that have been amassed by some bitcoin speculators, and sometimes predict that cryptocurrencies will eventually displace currencies issued and regulated by national governments. Conversely, banking-system regulators in several nations, most notably China and Russia, have outright bans on using cryptocurrency (specifically bitcoin) as a medium of exchange.

At the same time, it appears that fintech (financial technology) pundits pretty universally agree that blockchain technology, which is the enabling technology behind all cryptocurrency efforts, is the greatest thing since sliced bread, or, more to the point, the invention of ink on papyrus (IoP). Before IoP, financial records relied on clanky technologies like bundles of knotted cords, ceramic Easter eggs with little tokens baked inside, and that poster child for early written records, the clay tablet.

IoP immediately made possible tally sheets, journal and record books, double-entry ledgers, and spreadsheets. Without thin sheets of flat stock you could bind together into virtually unlimited bundles and then make indelible marks on, the concept of “bookkeeping” would be unthinkable. How could you keep books without having books to keep?

Blockchain is basically taking the concept of double-entry ledger accounting to the next (digital) level. I don’t pretend to fully understand how blockchain works. It ain’t my bailiwick. I’m a physicist, not a computer scientist.

To me, computers are tools. I think of them the same way I think of hacksaws, screw drivers, and CNC machines. I’m happy to have ’em and anxious to know how to use ’em. How they actually work and, especially, how to design them are details I generally find of marginal interest.

If it sounds like I’m backing away from any attempt to explain blockchains, that’s because I am. There are lots of people out there who are willing and able to explain blockchains far better than I could ever hope to.

Money, on the other hand, is infinitely easier to make sense of, and it’s something I studied extensively in MBA school. And, that’s really what cryptocurrencies are all about. It’s also the part cryptocurrency that its fans seem to have missed.

Once upon a time, folks tried to imbue their money (currency) with some intrinsic value. That’s why they used to make coins out of gold and silver. When Marco Polo introduced the Chinese concept of promissory notes to Renaissance Europe, it became clear that paper currency was possible provided there were two characteristics that went with it:

  • Artifact is some kind of thing (and I can’t identify it any more precisely than with the word “thing” because just about anything and everything has been tried and found to work) that people can pass between them to form a transaction; and
  • Underlying Value is some form of wealth that stands behind the artifact and gives an agreed-on value to the transaction.

For cryptocurrencies, the artifact consists of entries in a computer memory. The transactions are simply changes in the entries in computer memories. More specifically, blockchains amount to electronic ledger entries in a common database that forever leave an indelible record of transactions. (Sound familiar?)

Originally, the underlying value of traditional currencies was imagined to be the wealth represented by the metal in a coin, or the intrinsic value of a jewel, and so forth. More recently folks have begun imagining that the underlying value of government issued currency (dollars, pounds sterling, yuan) was fictitious. They began to believe the value of a dollar was whatever people believed it was.

According to this idea, anybody could issue currency as long as they got a bunch of people together to agree that it had some value. Put that concept together with the blockchain method of common recordkeeping, and you get cryptocurrency.

I’m oversymplifying all this in an effort to keep this posting within rational limits and to make a point, so bear with me. The point I’m trying to make is that the difference between any cryptocurrency and U.S. dollars is that these cryptocurrencies have no underlying value.

I’ve heard the argument that there’s no underlying value behind U.S. dollars, either. That just ain’t so! Having dollars issued by the U.S. government and tied to the U.S. tax base connects dollars to the U.S. economy. In other words, the underlying value backing up the artifacts of U.S. dollars is the entire U.S. economy. The total U.S. economic output in 2016, as measured by gross domestic product (GDP) was just under 20 trillion dollars. That ain’t nothing!