Streetwise Professor

About 6AM this morning I emailed a friend saying that Trump tweeted at AOC, Ilhan Omar, et al to “go back” whence they came (hell?) in order to “force all the Dems to embrace these clowns after they had been trying to get them into line. ”

But very few figured this out. They were too intent on being outraged and outrageously demonstrating their outrageous outrage to consider whether there was method behind what they perceived as yet more Trump madness.

Gradually, a few got clued in. Notably David Axelrod:

Is it just me, or is there some grudging admiration there? Axelrod, after all is a master at cold, hard strategy, e.g., getting Obama’s Senate election opponents’ divorce records unsealed.

But some, notably those on the right, remained stubbornly clueless:

Yo! Moron! That was exactly the point! He forced the Democrats to unify behind four lunatic leftists who are as popular among the general populace as root canals or the clap, at the very moment–the precise moment–that Pelosi and others who pass for adults in the Democratic Party were trying to yank them from center stage in order to present a more moderate face to the public, precisely because they realized that “the Squad” is electoral poison outside of Wokistan.

To the astonishment of many, Trump doubled down this afternoon, and rather than kowtow to the outrage, stoked it by saying that Omar et al hate America, and if so, they should leave.

But then Trump had to spoil it all, and announce to the world (via Twitter) that getting the Democrats and the media to rush to the defense of AOC and Omar and Tlaib and Ayanna Pressley was precisely what he intended all along:

Suckas. You done got played. Again. When are you ever going to learn? That’s right–nevah.

Trump is like Dr. Pavlov, ringing the bell for his dogs, except that Trump uses Twitter rather than a bell. His foes are so conditioned to respond with sputtering, drooling, foaming outrage to his tweets that they don’t stop to think. To think about how he has played them in the past. About how they reacted viscerally, only to find that their reaction was exactly what he had intended. To consider whether he might be baiting them into doing exactly what he intends.

Another metaphor: Trump is the matador who gets the enraged bulls to rush the red cape, only to see him step aside and plunge another blade into their backs.

Trump is undoubtedly an narcissist, and perhaps that is why he is able to read and manipulate his adversaries so well. For they are narcissists too, convinced of their own superiority and his utter inferiority and depravity. This makes them an easy mark for his provocations.

No doubt Trump is behaviorally conditioned as well. He gets positive reinforcement from the extreme negative reaction his tweets elicit from his enemies. Which means that he will continue this until said enemies wise up and stop rising up to take the bait. Which means he will continue it for the foreseeable future, for they will never wise up. They revel in their outrage, even though it is counterproductive.

Totalitarian and authoritarian regimes are noted for their vicious internecine battles between the lords of various economic fiefdoms: Nazi Germany presents a classic example (and perhaps a good thing too, because these battles crippled German war industry). Not-quite-totalitarian Russia is seeing such a battle today, over the fallout from the Druzhba pipeline fiasco. Pipeline operator Transneft and oil producer and refiner Rosneft are at it hammer and tong over the issue:

Russian state-owned pipeline monopoly Transneft launched a broadside at Rosneft on Monday, publicly criticising the oil producer for dragging its feet over oil quality controls and making unsubstantiated damages claims.
Transneft said that Rosneft had been unwilling to help resolve a contaminated oil crisis in the Russian Druzhba export pipeline which began in late April and that the oil producer was seeking compensation from it without any grounds.
Rosneft did not immediately responded to a request for comment.

For his part, Putin is steering clear:

The dispute between Rosneft and Transneft (TRNF_p.MM) is not a matter for Russian President Vladimir Putin to intervene in because it is a corporate matter, Kremlin spokesman Dmitry Peskov said on Wednesday.

As if Putin never got involved in corporate matters before. Hell, this is supposed to be his job. As I have pointed out for well over a decade, Putin’s primary function in the Russian “natural state” has been to be the balancer, the adjudicator of conflicts within the Russian economic elite, and the distributor of rents among them.

So why is he standing aloof? His power has eroded to the point that he can’t dictate or even negotiate a settlement? Or does he actually quite like economic titans bashing out each other’s brains, thereby distracting them from scheming against him?

I’m guessing the latter. After some more weeks or even months of Tokarev and Sechin bashing one another, he’ll swoop in and graciously broker a solution.

An aside on Transneft’s criticism of Rosneft dragging its feet on “oil quality controls.” To me that is an implicit accusation that the massive contamination wasn’t caused by a handful of mopes currently enjoying the hospitality of a Russian prison, but was the result of something Rosneft did (or didn’t do). Given the volumes involved, that’s quite plausible.

And if true, it would make Sechin’s demand for compensation, and his praise for the operators of Rosneft’s German refinery, truly awesome examples of chutzpah. But we all know that chutzpah is one thing Sechin is expert at. Or should I say the one thing?

Back in March, I opined that the Green New Deal was a Trojan Horse for a grandiose plan to remake the economy on socialist/communist lines:

But whenever Bordoff asked a question about energy, or climate policy, Gunn-Wright couldn’t even feign interest. Her responses were in the vein of “whatever”, and then she launched into impassioned monologues about what really interested her–a laundry list of progressive dreams from health care to child care to labor policy.

What’s clear from Gunn-Wright’s performance is that “climate change” is merely a Trojan Horse for a hard-core leftist agenda. The plan is to use climate alarmism to stampede voters into electing hard-left politicians who, once ensconced in power, will implement what good (I use that term ironically) socialists have been drooling to implement for decades–since before the original New Deal.

But don’t take my word for it! Heed the hand up the AOC sockpuppet, Saikat Chakrabarti:

“The interesting thing about the Green New Deal is it wasn’t originally a climate thing at all,” Chakrabarti said, according to the Post. “Do you guys think of it as a climate thing? Because we really think of it as a how-do-you-change-the-entire-economy thing.”

Pretty much what I said.

Chakrabarti, by the way, is known for wearing t-shirts bearing the image of one Subhas Chandra Bose. A charmer, he was. Escaping from India, he traveled to Germany, where he raised a force of Indian POWs to fight for the Nazis, only to be disappointed when his new buddy Hitler invaded his old buddy Stalin’s USSR.

He then took a U-boat (U-180) (you can’t make up this stuff!) to Japan, and then spearheaded the recruiting of the Indian National Army that fought alongside the Japanese in Burma.

As the war ground down, 12 days after Hiroshima, Bose was tragically (well, not really) killed in the crash of a Japanese plane on Formosa.

Such is the role model of AOC’s ventriloquist. In his mind, British colonialism was so bad that it made acceptable and defensible canoodling with three of the four greatest mass murdering regimes of the 20th century (Bose died, alas, before he could have collected the set and conspired with Mao). Just think what he would be willing to do to rid the world of evil capitalist regimes, like the US.

In my recent post on position limits, I suggested that at most spot month limits are justified as a means of constraining market power manipulation. It is important to note, however, that setting spot month limits at levels that approximate stocks in deliverable position may not be sufficient to prevent the exercise of market power during the delivery period, with the resultant deleterious effects on prices.

The basic motivation for position limits equal to stocks is predicated on a model of manipulation that makes particular assumptions about market participants’ beliefs. I pointed out the importance of this assumption in my 1993 Journal of Business article on market power manipulation. In one model of that paper, I assume that market participants believe that a large long who takes delivery will resell what is delivered, and will not consume it. In the other model, market participants believe that the large long will consume (or otherwise withhold from the market) some fraction of what shorts deliver to him.

Under the first set of beliefs, it is indeed a necessary condition for profitable manipulation that a long’s position exceed inventories in deliverable position. It is this kind of manipulation that spot month limits pegged to inventories can prevent.

However, under the second set of beliefs, a large long with a position smaller than inventories in deliverable position can exercise market power and inflate prices. Spot month limits based on inventories cannot prevent this type of manipulation.

I recently completed a paper that incorporates this insight into a standard signalling model. In the model, there are two kinds of longs: (a) “strong stoppers,” who have a real demand for the deliverable commodity, place a higher value on it than others, and who will consume at least some of what is delivered to them, and (b) manipulators, who have no real demand for the deliverable and who will resell what is delivered. Shorts do not know which type is standing for delivery.

In the model, a long submits an offer to sell his futures position at a specified price prior to expiration. The strong stopper submits an offer above the price that would prevail in the absence of a strong stopper (reflecting his high valuation of the commodity). I show that under different out-of-equilibrium beliefs there is a pooling equilibrium in with the manipulator mimics a strong stopper, and submits a high offer price at which he is willing to liquidate.

In the pooling equilibrium, the shorts deliver a quantity that exceeds the quantity that they would deliver if they knew the long was a strong stopper: this reflects the fact that they realize that the manipulator will resell what is delivered, and the shorts can repurchase it at a depressed price. However, in this equilibrium the manipulator sells some of his futures position at a supercompetitive price, and earns a supercompetitive profit even though he has to “bury the corpse” of a manipulation.

Crucially, the manipulation can succeed even if the long’s position is smaller than inventories, as long as the flow supply curve is upward sloping at such quantities. The flow supply curve can be upward sloping merely due to the theory of storage: an anticipated depletion of stocks increases the value of the remaining inventory. Therefore, if shorts anticipate a positive probability that a long will consume what is delivered, the theory of storage implies that the supply of deliveries is an increasing function of the futures price at expiration.

Thus, a futures position in excess of inventories in deliverable position may be a sufficient condition to exercise market power, but it is not a necessary one. If shorts are uncertain about a long’s motive for taking delivery, and some longs are strong stoppers who will consume what is delivered and thereby deplete inventories, manipulators can mimic strong stoppers and extract a supercompetitive price even with a position smaller than inventories.

One implication of this analysis is that reliance on spot month position limits is not sufficient to prevent market power manipulations. Additional measures, what I have called “ex post deterrence” since my 1996 Washington and Lee Law Review article, are also necessary. In my earlier work I argued that they are necessary because it was unlikely that position limits could adjust to reflect inevitable changes in inventories. This new paper shows that even if they could so adjust limits, they would be inadequate. Market power manipulation facilitated by fraud (i.e., falsely pretending to have a real demand for the commodity) can occur even if position limits prevent a long from obtaining a position during the delivery period that exceeds stocks in deliverable position.

This analysis also implies that equating “deliverable supply” with “inventory in deliverable position” is wrong. The supply available at the competitive price may be smaller than inventories–and indeed, far smaller than inventories–when shorts do not know the “type” of long standing for delivery.

The traditional model of deliverable supply is predicated on a view of manipulation shaped by the big corners of history, in which there was little doubt about the motivations of a large long. But as the court in the Cargill case noted, “[t]he methods and techniques of manipulation are limited only by the ingenuity of man.” Exploiting shorts’ ignorance about his motive for taking delivery, a long can ingeniously exercise market power even with a position smaller than deliverable supply.

This is a possibility that is only dimly recognized in the existing regulatory structure in the US. Most importantly, it implies that a reliance on preventative measures like position limits alone is inadequate to reduce efficiently the frequency and severity of market power manipulation. Ex post measures are required as well.

When my grandfather was barely 17, his mother signed a paper saying he was 18 (he was a hillbilly with no birth certificate, which gives rise to another story I may tell sometime), and he left Burr Oak, Ohio to join the Navy. He went to electrician’s school, and was assigned as an electrician’s mate on a submarine, the USS K-2 (submarine #33 in the US Navy), on which he served in 1921-22. (The K-2 was laid-up the next year.)

As you can see, she was a tiny thing, displacing 400 tons on the surface, and a little over 500 tons submerged.* My grandfather’s stories of his service on her were pretty harrowing. 1920s submarines were not for the faint of heart.

Even so, if given the choice, I would serve on the K-2 circa 1920 than on a modern Russian sub. Since Soviet days, the Soviet/Russian sub force has experienced a litany of accidents, many of them fatal: here is a list of those since 2000. The most notable of these incidents, and the one with the highest death toll, was of course the Kursk, about which Putin famously and laconically said: “It sank.”

Well, this week Putin didn’t have to say exactly those words about another sub, but there was a fatal incident aboard a Russian boat, reported to be the Losharik, reputedly a super-deep diving research and intelligence vessel.

Given the very secretive nature of the sub’s purposes and missions, and the inherent secretiveness of the Russian state, we know very little beyond a few details. These include that there was a fire that killed 17 aboard. (The standard crew of this class is estimated at 25, so arguably the fire killed 2/3s of those on board.) That the surviving crew was able to seal off the affected compartments, and eventually extinguish the blaze. And that’s about it.

It’s one thing for a dry dock carrying a decrepit hulk like the Kuznetsov to sink. It’s another for one of the most elite units in the Russian Navy to suffer such a catastrophic event. It does not speak well of the condition and readiness of the Russian Navy generally.

There are also some curious details. Reportedly 7 of the 17 killed were captains “of the first rank” (the equivalent of an O-6 in the US Navy). I know the Russian Navy (especially the nuclear sub force) is officer-heavy (and indeed, the entire complement of the boat is apparently officers), but that’s an insanely high number. Most US major combatants (including SSNs, SSBNs, and DDGs) are commanded by commanders (O-5), and others have a single captain, who is CO. What were 7 (or more) captains, plus two Heroes of Russia, doing on board? Was it holding some sort of ceremony? Or was it engaged in activities that were of intense interest to the higher ups?

Another possibility is enlisted ratings, and even junior and mid-grade officers, are not deemed sufficiently qualified and trustworthy to crew such an important vessel. But if they are not given substantial responsibility as lieutenants, how can one be confident in the captains? Is the Russian Navy so paranoid about security that they don’t trust anyone but the very senior, to serve on top-secret ships?

Also, are senior officers the best suited to handle the vital, but more narrow tasks that western navies entrust to well-trained, specialized ratings? If not, depending on the very senior to perform these tasks may increase the risk of things like fatal fires.

I doubt we’ll learn much more about the Losharik. But what we do know, especially in light of the record of Russia’s silent service, reinforces the very real perception that anyone in that service plays a submerged version of Russian Roulette every time his boat casts off.

*My grandfather took dozens of photos in his time on the K-2. I am going to digitize them and will post them when I do.

George Orwell described “doublethink” thus: “to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic” and “the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.”   With the campaign for the Democratic presidential nomination getting underway, we are seeing numerous examples of doublethink in action. So much so, that it is more than fair to call the Democratic Party the Doublethink Party.

This is most evident when it comes to immigration. On the one hand, leftist (i.e., mainstream) Democrats lament that Central American countries like El Salvador, Honduras, and Guatemala are so wretched, poor, violent, and oppressive that it is our moral duty to admit any migrant from those countries (and others equally benighted). Indeed, during last night’s Democratic candidate debate, Kamala Harris gave an impassioned plea, saying that conditions in these countries were so brutally awful that it was perfectly understandable that a mother would subject her child to a high probability of rape, and a non-trivial probability probability of death, by paying a human trafficker (a “coyote”) to get her to the United States.

Boy, those countries must be real shitholes if it is worthwhile to pay such a price to escape them, right?

But you know, metaphysically, that the same people will call you a racist, or worse, if you make the simple declaration: “those countries are shitholes.” You know that, because that’s exactly what happened when Trump referred to immigration from “shithole countries.”

That’s 99.9 percent pure doublethink.

Another immigration-related example. No doubt you’ve heard the shrieking over the terrible conditions in which asylum seekers, children in particular, are held. Sleeping on the floor. No toothbrushes.

But the same people–yeah, I’m looking at you, oh bucktoothed bug-eyed one–fought tooth and nail against a bill funding the detention centers, and said it was totally righteous for employees of a company contracted to supply beds for the centers to walk out in protest.

Again, doublethink in its almost purest form.

Doublethink is so pervasive on the immigration issue that it is beyond certain that the Democratic Party position on the issue, and the position of every Democratic Party presidential candidate, is open borders. If a country’s corruption, violence, poverty, and oppressiveness imposes a moral duty on the US to allow anyone from those countries to claim asylum in the US, since every country south of the Rio Grande is corrupt, violent, poor, and oppressive, per the Democrat’s logic everyone from those countries has a right to enter the US. Indeed, immigrants from African and Middle Eastern nations (again uniformly corrupt, violent, poor, and oppressive) have been transiting to the US via Mexico. Meaning that they have a right to come here too.

And of course, even if the US adopted that policy, the “logic” in the Democrat’s position would be that’s not enough: we should actually provide the means for them to come here. If you doubt that, note that every Democratic presidential candidate supports free medical care for immigrants.

I am of a mixed mind on this. On the one hand, the position seems so stark raving insane that it will be political suicide for the Democrats to run on it. On the other hand, if they win . . . . Meaning that although encouraging this insanity has a positive expected value, the downside risk is severe. Especially as immigration is only one issue on which the Democratic Party is now starkers.

Although I’ve focused on immigration doublethink, this Orwellian mindset is not limited to that issue. Not at all!

One more example–I could spend all day and many days to follow adding other ones. Donald Trump is routinely lambasted for his unilateralism. But when he says things like the US should not be unilaterally responsible for securing oil flows out of the Persian/Arab Gulf, the lamabasters freak out on him for turning his back on American policy that dates back to the halcyon days of the Carter administration. I guess the “logic” is that the United States is obligated to provide security services that everyone (including rivals like China) free rides on, and is also obligated to be nice to the free riders and say only nice things about them.

One closing thought. I’ve used the word “logic” several times (in scare quotes!), but this is one way in which Orwell’s definition of Doublethink doesn’t do justice to its modern practitioners. Recall that Orwell said that doublethink “use[s] logic against logic.” But postmodernists and deconstructivists and leftists generally strenuously oppose privileging logic. To them, logic is an instrument of oppression, a weapon of the white patriarchy wielded against women, LGTBQ, “people of color,” and most of all, the intersectional (i.e., those who can check more than one of the above boxes). Orwell anticipated that logic would be twisted. He did not anticipate what has actually transpired: logic has been denied.

The objective is the same, however. Orwell portrayed Doublethink as an instrument of power and control. Since logic is a constraint on the will to power, it must be destroyed. Nothing good can come of that: indeed, many evils will follow in its train.

Vladimir Putin held his annual marathon phone-in session last week. Although Vova was taking the calls, he was the one who was clearly phoning it in. By all accounts his performance was bored and listless, and largely unresponsive to the economic and environmental (as in garbage disposal) concerns expressed by many callers.

Putin’s answers to questions regarding declining living standards bordered on the pathetic, and definitely revealed he has no answers and can offer no serious succor. The best he could do is to tell Russians that things aren’t as bad today as they were in the 90s.

If the key to success is setting low expectations, Putin certainly succeeded! Perhaps the only current world leader who is doing worse than Russia’s in the 90s is Maduro.

As for explanations, the best Putin could offer was sanctions, and low oil prices. The sanctions excuse is somewhat amusing, given that Putin had previously claimed that sanctions not only wouldn’t hurt/weren’t hurting Russia, they would actually rejuvenate the Russian economy by encouraging the development of import-substituting industries. Insofar as oil prices are concerned, Putin’s answer only underlines the failure of Russia under his watch to develop outside the resource extraction sectors.

None of this should be surprising, and I have predicted such a trajectory. Maximum Leaders get old. They get tired. They get bored. They run out of new ideas and don’t have the energy or inclination to generate them. They begin to prefer a quiet life and to abhor change and innovation. Even they get captured by vested interests who strongly favor maintaining the status quo. Moreover, authoritarian leaders like Putin inevitably become progressively more isolated and out-of-touch because they are surrounded by sycophants, and deprived of feedback from elections, a free press, and open debate.

We are witnessing the senescence of Putin, and Putinism. The most grave concern–for Russians mainly, but for the rest of the world too–is that another inherent feature of authoritarian systems like the one in Russia is that the current leader has no interest in creating a system of succession: indeed, he has an interest in NOT creating one. As he continues to age, or if he dies suddenly, the battle to succeed him will intensify, and inevitably destabilize Russia (with spillover effects around the world).

This brings to mind two closing thoughts.

First, if you think Putin is bad, you should shudder at the type who will prevail in the struggle to succeed him. (Such person will almost certainly emerge from the shadows of the security services or their allies, and you will likely not have heard of him.)

Second, for years Putin’s political hole card has been “I have given you stability.” But ironically, his creation of an increasingly ossified system creates the conditions for a resurgence of instability–perhaps as bad as the 90s–upon his demise, or even his enfeeblement.

So it is more accurate to say that Putin has perhaps delayed instability, and guaranteed that the instability will be all the more intense when it inevitably reappears.

I ask for very few things in life, because I am a firm believer in unintended consequences, as summarized by the adage: “Be careful what you ask for–you might get it.”

Recep Tayyip Erdoğan should have heeded this adage when he asked for–and got–a rerun of the Istanbul mayoral election. I guarantee he hadn’t bargained for the way his wish was granted–a humiliating loss to CHP (pronounced “jay hey pay”) candidate Ekrem İmamoğlu.

İmamoğlu had won by a mere 14,000 votes in the 31 March election that Erdoğan claimed was tainted by fraud (in a first where the opposition allegedly won by fraud, rather than the party in control): he won by over 700,000 votes today. Meaning that by insisting on a mulligan, Erdoğan succeeded in increasing his opponent’s margin of victory by a factor of a mere 50. That takes talent!

There is rejoicing in the streets of İstanbul, and elsewhere in Turkey, especially in places like İzmir. But there is no joy in Mudville, er, the massive (as in 3.2 million square feet) presidential palace in Ankara, which is symbolic of Erdoğan’s sultanic pretensions. So far, over 8 hours after the polls closed, he has been silent. Only his hapless and comically uncharismatic candidate in İstanbul, former prime minister Binali Yildirim, has made a monotone concession speech.

Erdoğan has straddled Turkish politics like a colossus for almost 20 years. This is his first major defeat, which raises questions about his future.

In the near term, İmamoğlu’s control of government in İstanbul will allow him to uncover and publicize the massive corruption of AKP/Erdoğan rule there. Further, money the the lifeblood of politics, and the CHP victory will allow it to sharply reduce the flow of this lifeblood to AKP’s pockets.

Over the longer run, there is now a credible personality to oppose Erdoğan. The national CHP leader Kemal Kılıçdaroğlu (who was almost lynched by an AKP mob near Ankara recently) is not a threat, for many reasons. He is deemed an elitist, and worse, he is Alevi, a religious group that is scorned by most Turks.

İmamoğlu’s biography has eerie parallels to Erdoğan’s. Both are from the Black Sea region who moved into national politics in İstanbul. Erdoğan gained considerable sympathy as a result of his jailing 20 years ago: denying İmamoğlu victory in March gained him considerable sympathy too. Both figures have a common touch. Unlike many in the CHP, İmamoğlu is not viewed as a hard-core secularist, or anti-Islam. Indeed, his name denotes a Muslim heritage. (An ardent secular Turk I know says he is glad that is not HIS name.)

Meaning that Erdoğan like faces the biggest political threat in his life, and it comes at a time when Turkey’s economy is teetering, and its international position is fraught.

Top at the very long list of Erdoğan’s foreign policy headaches is his testy (to say the least) relationship with the US. Matters are coming to a head here, with Erdoğan swearing that Turkey will cross a US red line, and buy S-400 SAMs from Russia.

I have been wondering for some weeks whether Erdoğan’s chest thumping on this issue has been driven by his need to look tough before a largely anti-US Turkish electorate in the runup to the rerun of the İstanbul election, and that he would back down once the results are in. He has backed down before after claiming he would never concede to Trump (on the issues of the American missionary and the NSA employee imprisoned in Turkey). It’s hard to know how the crushing defeat will affect his calculations. Will he realize that in his weakened domestic situation he can’t afford to confront the US? Or will he figure that he can’t afford to look weak now?

I don’t know, but I do know that as consummate a domestic politician as Erdoğan has been, internationally he has been a disaster for Turkey. Turkey has alienated the US and Europe, has bungled in Syria, and is at odds with Saudi Arabia and Egypt. Turkey literally has no friends or allies now, except for Qatar, which is itself isolated in the Arab world. Given this record, I think it is highly likely that Erdoğan will make the wrong choice.

We should see within days. He is to meet Trump at the G-20 this week. Perhaps Trump will offer him a face-saving way out of the dilemma he has put himself in. Whether Erdoğan is wise enough to take it is another matter.

To huge fanfare, Facebook announced the impending release of a new cryptocurrency, “Libra.” Except it isn’t–a crypto, that is. Whereas real cryptocurrencies are decentralized, anonymous, unpermissioned, and lack trusted intermediaries, Libra is centralized, permissioned, non-anomymous and chock-full o’ intermediaries in addition to Facebook. It doesn’t really utilize a blockchain either.

Other than that . . .

For the best (IMO) take on the “Zuck Buck”, I heartily recommend FT Alphaville’s extended take–and takedown. I’ll just add a few comments.

First, when it comes to finance, there is little (if anything) new under the sun, and that is clearly true of Libra. The Alphaville stories provide several historical precedents, to which I’ll just add another. It is basically like pre-National Bank Act banking system in which banks issued bank notes that circulated as hand-to-hand media of exchange, and which were theoretically convertible into currency (gold prior to the Civil War) on demand. Libra is functionally equivalent to such bank notes, with the main distinction that it is represented by bytes rather than pieces of paper.

Facebook attempts to allay concerns about such a system by requiring 100 percent backing by bank deposits or low-default-risk government bonds, but as historical experience (some as recent as 2008) demonstrates, although such systems are less subject to runs than liabilities issued by entities that invest the proceeds in illiquid assets, they are not necessarily run-proof.

Furthermore, the economic model here isn’t that different from the 19th century bank model because the issuer can profit by investing the proceeds from the issue of the currency in interest bearing assets, and pocketing the interest. Those buying the currency forego interest income, and presumably are willing to do so because of it reduces the costs of engaging in various kinds of transactions.

This type of system faces different kinds of difficulties in low and high interest rate environments. In high rate environments, the opportunity cost of holding the currency is high, which leads to lower quantity demanded. In low rate environments, the revenue stream may be insufficient to cover the costs incurred by the intermediaries. This creates an incentive for asset substitution, i.e., to allow backing the currency with higher risk assets (with higher yields) thereby increasing insolvency and run risks.

I note in passing that low interest rates destroyed the traditional FCM model which relied on interest income from customer margins as a major revenue stream (as Facebook is proposing here). Ask John Corzine about that, and look to the experience of MF Global.

Why introduce this in a low interest rate environment? Maybe this is a kind of loss-leader strategy. The opportunity cost of holding Libra is low now (given low rates), so maybe a lot of people will buy in now. Even though the benefits to the issuers/intermediaries may be low now (because the interest income is low), they may be counting on customer stickiness once there is widespread adoption. That is, those who hold Libra when the cost of doing so is low may stick around even when the cost goes up substantially. That is, Facebook and its partners in this endeavor may be counting on some sort of switching cost or some behavioral irrationality to reduce the interest-rate sensitivity of demand for Libra.

Good luck with that. (For another example of nothing new under the sun, read up on disintermediation of traditional banks when interest bearing money market mutual funds came on the scene.)

I would also suggest that Libra has some disadvantages as a medium of exchange. For one thing, since assets will be held in multiple currencies, it creates currency risk for virtually everyone who uses it. For another, it involves additional cost to move from fiat into Libra and from Libra into fiat. This reduces the value of the Libra as a medium of exchange because of the resulting difference in cost in using it for within-network and off-network uses.

This last point relates to something else in the Libra white paper, namely, the claims that the currency will be a boon to the “unbanked.” This makes zero sense.

The reason that some people don’t have bank accounts is that the cost of servicing them (reflected in fees that banks charge) is above the willingness/ability of those people to pay for those services. There is no reason to believe that Libra reduces the cost of servicing the currently unbanked. Furthermore, the value of the services provided is likely to be lower, and substantially so because inter alia (a) the lack of brick an mortar facilities that low income people need for check cashing/depositing and cash depositing, (b) the restricted network of people with whom they can transact, and (c) currency risk.  Relatedly, it’s hard to see how one can move funds into our out of Libra without having access to banking services. I see the unbanked rhetoric as mere SJW eyewash attempting to make this look like some progressive social project.

The arrogance of Facebook is also rather astounding. Again, this is not crypto–it is banking. Yet Facebook presumes that it can do this without the panoply of licenses that banks must have, and without being subject to the same kinds of regulation as banks.

Because why? Trust me? Suuuurrreee, Mark.

Along these lines, note that the most benign interpretation behind Libra is that it is a narrow bank (100 percent reserve banking). But remember the Fed recently denied approval to TNB (“The Narrow Bank”) USA NA even though it was only going to offer deposits to “the most financially secure institutions” and explicitly eschewed providing retail banking services. Yet Marky et al expect the Fed (not to mention banking regulators in every other jurisdiction on the planet) to stand aside and let Facebook offer maybe (but maybe not) narrow banking services (with added currency risk!) to the great unwashed?

On what planet?

Note the furious government reactions to this, not just in the US but in Europe. Zuckerberg et al were totally delusional if they expected anything different, especially in light of Facebooks serial privacy, free-speech, and antitrust controversies.

In sum, in my opinion Libra faces serious economic and political/regulatory obstacles. Having politicians and regulators hate you isn’t bad per se in my book–it can actually represent an endorsement! But the economics of this are incredibly dodgy. My skepticism is only increased by the misleading packaging (crypto! a boon to the unbanked!) and the congenitally misleading packager.

Just when I think politics could not get any more retarded, I’m proven wrong. The latest example being the meltdown freakout over Trump’s statement that he would listen to “dirt” on an opposing candidate passed on by a foreign source.

The mind boggles. Those melting down and freaking out are Democrats to the last he, she, and xe of them. (Mitt Romney et al are basically eunuchs who follow the lead of the Democrats who unmanned them, and whose approval they crave.) They are all die hard Hillary supporters.

This would be the Democratic Party that actively solicited compromising information on Trump and Trump campaign figures from the Ukrainian government. Last time I checked, Ukraine was not the 51st state. Or even the 58th.

This would be the Hillary Clinton whose campaign hired a foreigner to solicit foreigners–Russians, no less, rather than the benign Norwegians whom Trump referred to in his answer–to collect dirt on Trump.

And alleged information passed on by Alexander Downer (who speaks with a funny accent and so I’m pretty sure he’s a furriner) was apparently totally copacetic.

A consistent application of the standards implicit in the meltdown freakout would require those melting down and freaking out to demand the banning of the Democratic Party and Hillary’s incarceration.

Consistent application. Sometimes I crack myself up. If these people didn’t have double standards, they’d have no standards at all.

A few other observations. Does truth matter? That is, should the information provided be ignored and even criminalized merely because it is from a foreign source, even if it is true?

Hypothetical. A source within the FSB provides documentation showing that while honeymooning in the USSR a certain candidate for president agreed to become a source for the KGB, and had in fact regularly provided information to the KGB and then the FSB in the past 30+ years. Is that information to be suppressed, merely because of the source? Isn’t it meddling in an election to keep this information secret? (Any reasonable definition of the word “meddling” would involve an action that affects the outcome of an election, and keeping information secret can impact the outcome just as much as its revelation. Which is precisely why candidates want to suppress compromising information.)

Indeed, some information can only come from foreign sources. So it’s better to accept an increased risk of electing someone who canoodled with foreigners, than to accept information that would disclose such canoodling, because the information came from the foreigners that s/he canoodled with?

The controversy over the DNC emails suggests that truth is not a relevant consideration. The veracity of those emails, and the damaging information in them, were never disputed. Yet their release was supposedly scandalous, and sufficient in the minds of many to rule them out of bounds for discussion.

Moving on. Isn’t the obsession with the foreign-ness of the source of the dirt, oh, I dunno, kinda nationalist? Isn’t it passing strange that people who are willing to accept the illegal immigration of every last Guatemalan to the US (transportation courtesy of a Mexican drug cartel) believe that it is utterly unacceptable for a campaign to accept information provided by a Norwegian or whoever who may never set foot on the fruited plain nor see the amber waves of grain? So citizenship should be totally irrelevant for residency and employment and receiving government benefits, but it is determinative when it comes to who can provide information on political candidates to rival political candidates?

That makes sense how, exactly?

Isn’t it also implicit in the obsessive focus on the citizenship of the provider of information that it’s totally OK for Americans to meddle in elections by passing on damaging information to opposing campaigns?

I could go on, but contemplating the outpouring of sanctimonious hypocrisy for too long makes my head hurt. Suffice it to say, the louder the scream, the more execrable the screamer.