Category Archives: economics

Bitcoin v cash to avoid Trump’s tariffs or ransom a sailor

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The number and cash value of bitcoin transactions has surged in the last two years, and it seems that a lot of the driving motivation is avoidance of Trump’s tariffs. If you want to avoid Trump’s tariffs, claim that the value of the shipment is less than it really is. Pay part via the normal banking system through the bill of lading (and pay tariffs on that) and pay the rest in bitcoin with no record and no taxes paid. The average bitcoin transaction amount has increased to $33,504, and that seems to be the amount of taxable value being dodged on each shipment. As pointed outAs noted in Cryptopolitan, “smugglers attempting to export Chinese goods to the USA illegally have been found to be among the largest purchasers of Bitcoin.” https://www.cryptopolitan.com/is-us-china-trade-war-fueling-bitcoin-price-rally-to-7500/

Average transaction amount for several crypto currencies. The amount has surged for Bitcoin, blue line.

Bitcoin isn’t the only beneficiary, of course, but it is the largest. The chart at right shows the average transaction value of the major cryptocurrencies. The average for most are in the dollar range that you’d expect for someone evading tariffs in containerized shipments. Someone who wants to import $100,000 worth of Chinese printers will arrange to have them shipped with a lower price bill of lading. The rest of the payment, 1/3 say, would be paid by a bitcoin transfer whose escrow is tied to the legally binding bill of lading.

Number of transactions per day for several cryptocurrencies, data available from Bitinfocharts.com

Bitcoin does not stand out from the other cryptocurrencies so much in the amount of its average transaction, but in the number of transactions per day. As shown at left there are 333,050 bitcoin transactions per day at an average value of $33,504 per transaction. Multiplying these numbers together, we see that Bitcoin is used for some $11.2 billion in transactions per day, or $4.1 trillion dollars worth per year. The legitimate part of the US economy is only $58 billion per day, or $21 trillion per year. The amount will certainly rise if further tariffs are put into effect. 

Most other cryptocurrencies have fewer transactions per day, and the few that have similar (or higher) numbers deal in lower amounts. Etherium is used in 2.5 time more transactions, but the average Etherium transaction is only $679. This suggests that the total Etherium business is only $586 million per day. The dollar amounts of Etherium suggests that it is mostly used for drug trafficking, 

Cash-money is the old fashioned way to avoid tariffs, buy drugs, and do other illegal money transfers. This method isn’t going away any time soon. A suitcase of $100 bills gets handed over and the deal is done. Though it gets annoying as the amounts get large, there is a certain convenience at the other end, when you try to spend your ill-gotten gains. Thus, when Obama wanted to ransom the ten sailors that Iran had captured in 2016, he sent paper bills. According to the LA Times, this was three airplane shipments s of all non-US currency: Euros and Swiss Francs mostly. The first payment was $400 million, delivered as soon as Iran agreed to the release. The rest, $1.3 billion, was sent after the prisoners were released. Assuming that the bundles shown below contained only 100 Euro notes, each bundle would have held about $170 million dollars. We’d have had to send ten bundles of this size to redeem ten US sailors. The US ships, the laptops of sensitive information, and the weapons were granted as gifts to the Iranians. Obama claimed that all this was smart as it was cheaper than a war, and it likely is. The British had 15 sailors captured by Iran in 2009 and paid as well. In the late 1700s, John Adams (an awful president) paid 1/4 of the US budget as ransom to North African pirates. He paid in gold.

These are supposedly the pallets of cash used to ransom our sailors. Obama has justified the need to transfer the cash this way, and indeed a ransom is a lot cheaper than a war.

Obama could have ransomed the sailors with Bitcoin as there was hardly enough Bitcoin in existence, and the Iranians would have had a hard time spending it. In general, it is hard to spend Bitcoin on anything legal. Legitimate sellers want proof that they’ve paid. As a result, a buyer generally has to exchange bitcoin for bank checks — and the financial watchdogs are always sniffing at this step. Things are simpler with paper money, but not totally simple when there is no apparent source.

Iranian released this picture of the US sailors captured. Obama ransomed them for $1.7 billion in Euros.

To get a sense of the amount of paper money used this way, consider that there are $1.1 trillion in hundred dollar bills in circulation. This is four times more money’s worth than the value of all Bitcoin in circulation. Based on the wear on our $100 bills, it seems each bill is used on average 30 times per year. This suggest there are $33 trillion dollars in trade that goes on with $100 bills. Not all of this trade is illegal, but I suspect a good fraction is, and this is eight times the trade in Bitcoin. The cost of transferring cash can be high, but it’s easy to make change for a bundle of $100 bills. There is fee charged to convert Bitcoin to cash; it’s often in excess of 1%, and that adds up when you do billion-dollar kidnappings and billion dollar arms buys. In case you are wondering how German uranium enrichment centrifuges got to Iran when there is an export embargo, I’m guessing it was done through an intermediary country via cash or Bitcoin transactions.

It’s worth speculating on whether Bitcoin prices will rise as its use continues to rise. I think it will but don’t expect a fast rise. Over a year ago, I’d predicted that the price of Bitcoin would be about $10,500 each. I’d based that on Fisher’s monetary equation, that relates the value of a currency to the amount spent and the speed of money. As it happens I got the right dollar value because I’d underestimated the amount of Bitcoin purchases and the speed of the money by the same factor of four. For the price of a Bitcoin to rise, it is not enough for it to be used more. There also has to be no parallel rise in the velocity of transactions (turnovers per year). My sense is that both numbers will rise together and thus that the bitcoin price will level out, long term, with lots of volatility following daily changes in use and velocity.

As a political thought, I expect is that Bitcoin traders will mostly support Trump. My expectation here is for the classic alliance of bootleggers and prohibition police during prohibition. The police salaries and bonuses depended on liquor being illegal, and bootleggers knew that their high prices and profits depended on the same thing. I thus expect Bitcoin dealers will support Trump as a way of protecting Bitcoin profits and value. Amazon’s owner, Jeff Bezos is strongly anti-Trump, I suspect, because Amazon profits from no-tariff imports.

Robert Buxbaum,  July 10, 2019. Here are my thoughts about tariffs and free trade, and here is Satochi’s original article proposing Bitcoin and explaining how it would work. As for Iran, they’ve announced a fee for any ship in the Gulf of Hormuz. If you don’t pay, you might get attacked as a Japanese tanker recently was. My guess is payments are made in cash or Bitcoin to avoid embarrassing the payer.

Making The City of New Orleans profitable

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The City of New Orleans is the name of the only passenger train between Chicago and New Orleans. It’s also the name of a wonderful song by Steve Goodman, 1971. Hear it, sung by Arlo Guthrie with scenes from a modern ride.

“Riding on the City of New Orleans
Illinois Central Monday morning rail
Fifteen cars and fifteen restless riders
Three conductors and twenty-five sacks of mail
All along the southbound odyssey
The train pulls out at Kankakee
Rolls along past houses, farms and fields
Passin’ trains that have no names
Freight yards full of old black men
And the graveyards of the rusted automobiles…”

Every weekday, this train leaves Chicago at 9:00 PM and gets into New Orleans twenty hours later, at 5:00 PM. It’s a 925 mile trip at a 45 mph average: slow and money-losing, propped up by US taxes. Like much of US passenger rail, it “has the disappearing railroad blues.” It’s a train service that would embarrass the Bulgarians: One train a day?! 45 mph average speed!? It’s little wonder is that there are few riders, and that they are rail-enthusiasts: “the sons of Pullman porters, and the sons of engineers, Ride[ing] their father’s magic carpets made of steel.” The wonder, to me was that there was ever fifteen cars for these, “15 restless riders”.

A sack of mail being picked up on the fly.

I would be happy to see more trips and a faster speed, at an average speed of at least 60 mph. This would require 85 mph or higher between stops, but it would save on salaries, and it would bring in some new customers. But even if these higher speeds cost nothing extra, in net, you’d still need something more to make the trip profitable; a lot more if the goal is to add another train. Air-traffic will always be faster, and the automobile, more convenient. I find a clue to profitability in the fifteen cars of the song and in the sacks of mail.

Unless I’m mistaken, mail traffic was at least as profitable as passenger traffic, and those “twenty-five sacks of mail” were either very large, or just the number on-loaded at Kankakee. Passenger trains like ‘the city of New Orleans’ were the main mail carriers till the late 1970s, a situation that ended when union disputes made it unprofitable. Still, I suspect that mail might be profitable again if we used passenger trains only for fast mail — priority and first class — and if we had real fast mail again. We currently use trucks and freight trans for virtually all US mail, we do not have a direct distribution system. The result is that US mail is vastly slower than it had been. First class mail used to arrive in a day or two, like UPS now. But these days the post office claims 2 to 4 business days for “priority mail,” and ebay guarantees priority delivery time “within eight business days”. That’s two weeks in normal language. Surely there is room for a faster version. It costs $7.35 for a priority envelope and $12.80 for a priority package (medium box, fixed price). That’s hardly less than UPS charges.

Last day of rail post service New York to Washington, DC. .June 30, 1977.

Passenger trains could speed our slow mail a lot, if it were used for this, even with these slow speeds. The City of New Orleans makes this trip in less than a day, with connections available to major cities across the US. If priority mail went north-south in under one day, people would use it more, and that could make the whole operation profitable. Trains are far cheaper than trucks when you are dealing with large volumes; there are fewer drivers per weight, and less energy use per weight. Still there are logistical issues to making this work, and you want to move away from having many post men handling individual sacks, I think. There are logistical advantages to on-loading and off-loading much larger packages and to the use of a system of standard sizes on a moving conveyor.

How would a revised mail service work? I’d suggest using a version of intermodal logistics. Currently this route consists of 20 stops including the first and last, Chicago and New Orleans. This suggests an average distance between stops of 49 Miles. Until the mid 70s, , mail would be dropped off and picked up at every stop, with hand sorting onboard and some additional on-off done on-the-fly using sacks and hooks, see picture above. For a modern version, I would suggest the same number of passenger stops, but fewer mail pick ups and drop offs, perhaps only 1/3 as many. These would be larger weight, a ton or more, with no hand sorting. I’d suggest mail drop offs and pick ups every 155 miles or so, and only of intermodal containers or pods: ten to 40 foot lengths. These containers plus their contents would weigh between 2,500 and 25,000 pounds each. They would travel on flatcars at the rear of the passenger cars, and contain first class and priority mail only. Otherwise, what are you getting for the extra cost?

The city of New Orleans would still leave Chicago with six passenger cars, but now these would be followed by eight to ten flatcars holding six or more containers. They’d drop off one of the containers at a stop around the 150 mile mark, likely Champaign Urbana, and pick up five or so more (they’d now have ten). Champaign Urbana is a major east-west intermodal stop, by the way. I’d suggest the use of six or more heavy forklifts to speed the process. At the next mail-stop, Centralia, two containers might come off and four or more might come on. Centralia is near St. Louis, itself a major rail hub for trains going west. See map below. The next mail stop might be Memphis. Though it’s not shown as such, Memphis is a major east-west rail hub; it’s a hub for freight. A stripped down mail-stop version of passenger train mail like this seems quite do-able — to me at least. It could be quite profitable, too.

Amtrak Passenger rail map. The city of New Orleans is the dark blue line going north-south in the middle of the map.

Intermodal, flat-bed trucks would take the mail to sorting locations, and from there to distribution points. To speed things, the containers might hold pre-sorted sacks of mail. Intermodal trucks might also carry some full containers east and west e.g. from Centralia to St. Louis, and some full flatcars could be switched on and off too. Full cars could be switched at the end, in New Orleans for travel east and west, or in the middle. There is a line about “Changing cars in Memphis Tennessee.” I imagine this relates to full carloads of mail joining or leaving the train in Memphis. Some of these full intermodal containers could take priority mail east and west. One day mail to Atlanta, and Houston would be nice. California in two days. That could be a money maker.

At this point, I would like to mention “super-fast” rail. The top speeds of these TGV’s “Transports of Grande Vitess” are in the range of 160 mph (265 km/hr) but the average speeds are lower because of curves and the need to stop. The average speeds are roughly 125 mph on the major routes in Europe, but they require special rails and rail beds. My sense is that this sort of special-use improvement is not worth the cost for US rail traffic. While 60 -90 mph can be handled on the same rails that carry freight, the need for dedicated track comes with a doubling of land and maintenance costs. And what do you have when you have it? The bullet rail is still less than half as fast as air travel. At an average speed of 125 mph, the trip between Chicago and New Orleans would take seven hours. For business travelers, this is not an attractive alternative to a two hour flight, and it is not well suited for intermodal mail. The fuel costs are unlikely to be lower than air travel, and there is no easy way to put mail on or off a TGV. Mail en-route would slow the 125 mph speed further, and the use of intermodal containers would dramatically increase the drag and fuel cost. Air travel has less drag because air density is lower at high altitude.

Meanwhile, at 60 mph average speeds, train travel can be quite profitable. Energy use is 1/4 as high at 60 mph average as at 120 mph. An increase of average speed to 60 mph would barely raise the energy use compared to TGV, but it would shorten the trip by five hours. The new, 15 hour version of “The City of New Orleans” would not be competitive for business travel, but it would be attractive for tourists, and certainly for mail. Having fewer hours of conductor/ engineer time would save personnel costs, and the extra ridership should allow the price to stay as it is, $135 one-way. A tourist might easily spend $135 for this overnight trip: leaving Chicago after dinner and arriving at noon the next day. This is far nicer than arriving at 5:00 PM, “when the day is done.”

Robert Buxbaum, June 21, 2019. One summer during graduate school, I worked in the mail room of a bank, stamping envelopes and sorting them by zip code into rubber-band tied bundles. The system I propose here is a larger-scale version of that, with pre-sorted mail bags replacing the rubber bands, and intermodal containers replacing the sacks we put them in.

Speed traps penalize the poor

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On a street corner about 1/4 mile from my house, at the intersection of the two busiest of the local streets, in the center-median of the street, is parked a police car. He’s there, about 18 hours a day, looking to give out tickets. The cross-street that this officer watches is where drivers get off the highway. In theory, they should instantly go from 65 mph on the highway to 35 mph now. Very few people do. The officer does not ticket every car, by the way, but seems to target those of poor people from outside the city limits. The only time ai was ticketed, I was driving a broken-down car while mine was in the shop. As best I can tell, he choose cars for revenue, not for safety. It’s a speed trap. It’s appalling. And our city isn’t alone in having one.

Speed traps are an annoyance to rich, local folk who sometimes get ticketed, but they’re a disaster for the poor. Poor people are targeted, and these people don’t have any savings. They don’t have the means to pay a suddenly imposed bill of $150 or more. Meanwhile, the speed-trap officer is incentivized to increase revenue and look for other violations: expired registrations or insurance, seat-belt violations, open alcohol, unpaid tickets. Double and triple fines are handed out, and sometimes the car is impounded. A poor driver is often left without any legal way to get to work, to earn money to pay the fines. Police officers behave this way because they are evaluated based on the revenue they generate, based on the number of tickets they write. It’s a horrible situation, especially for the poor

Speed traps to little and cost much.

An article on the effect of speed traps. It appears they do little good and cause much pain, especially to the poor. Here is a link to the whole article.

The article above looks at the impact of speed traps on poor people. The damage is extreme. The folks targeted are often black, barely holding it together financially. They are generally not in a position to pay $150 for “impeding traffic,” and even less in a position to deal with having their car impounded. How are they supposed to pay the bill? And yet they are told they are lucky to have been given this ticket — impeding traffic, a ticket with no “points.” But they are not lucky. They are victims. Tickets with no points is are money generators, and many poor people realize it. If they were to get a speeding ticket, they would have the opportunity to void the penalty by going to traffic school. With a ticket for impeding traffic, there is no school option. Revenue stays local, mostly in that police precinct. Poor people know it, and they don’t like it. I don’t either. After a while, poor people cease to trust the police, or to even speak to them.

In what world should you pay $150 for impeding traffic, by the way? In what world should the police be taken from their main job protecting the people and turned into a revenue arm for the city? I’d like to see this crazy cycle ended. The first steps, I think, are to end speed traps, and to limit the incentive for giving minor tickets, like impeding traffic. As it is we have too many people in jail and too many harsh penalties. 

Robert Buxbaum, April 10, 2019. I ran for water commissioner in 2016, and may run again in 2020.

A probability paradox

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Here is a classic math paradox for your amusement, and perhaps your edification: (edification is a fancy word for: beware, I’m trying to learn you something).

You are on a TV game show where you will be asked to choose between two, identical-looking envelopes. All you know about the envelopes is that one of them has twice as much money as the other. The envelopes are shuffled, and you pick one. You peak in and see that your envelope contains $400, and you feel pretty good. But then you are given a choice: you can switch your envelope with the other one; the one you didn’t take. You reason that the other envelope either has $800 or $200 with equal probability. That is, a switch will either net you a $400 gain, or loose you $200. Since $400 is bigger than $200, you switch. Did that decision make sense. It seems that, at this game, every contestant should switch envelopes. Hmm.

The solution follows: The problem with this analysis is an error common in children and politicians — the confusion between your lack of knowledge of a thing, and actual variability in the system. In this case, the contestant is confusing his (or her) lack of knowledge of whether he/she has the big envelope or the smaller, with the fixed fact that the total between the two envelopes has already been set. It is some known total, in this case it is either $600 or $1200. Lets call this unknown sum y. There is a 50% chance that you now are holding 2/3 y and a 50% chance you are holding only 1/3y. therefore, the value of your current envelope is 1/3 y + 1/6y = 1/2 y. Similarly, the other envelope has a value 1/2y; there is no advantage is switching once it is accepted that the total, y had already been set before you got to choose an envelope.

And here, unfortunately is the lesson:The same issue applies in reverse when it comes to government taxation. If you assume that the total amount of goods produced by the economy is always fixed to some amount, then there is no fundamental problem with high taxes. You can print money, or redistribute it to anyone you think is worthy — more worthy than the person who has it now – and you won’t affect the usable wealth of the society. Some will gain others will lose, and likely you’ll find you have more friends than before. On the other hand, if you assume that government redistribution will affect the total: that there is some relationship between reward and the amount produced, then to the extent that you diminish the relation between work and income, or savings and wealth, you diminish the total output and wealth of your society. While some balance is needed, a redistribution that aims at identical outcomes will result in total poverty.

This is a variant of the “two-envelopes problem,” originally posed in 1912 by German, Jewish mathematician, Edmund Landau. It is described, with related problems, by Prakash Gorroochurn, Classic Problems of Probability. Wiley, 314pp. ISBN: 978-1-118-06325-5. Wikipedia article: Two Envelopes Problem.

Robert Buxbaum, February 27, 2019

China worse than the US in CO2 per output

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CO2 per year, 1965-2017, China and developed world

CO2 output per year, 1965-2017, China and developed world

For the last decade at least, China has been the industrial  manufacturer to the world. If not for Chinese shoes, the US would go barefoot. if not for Chinese electronics, Americans would be without iPhones, laptops, and TVs. China still trails the US and Europe in banking, software, movies and the like, but relying on China for manufactured goods is a dangerous position for the free world economically, and it’s not much better in terms of pollution.

China is among the world’s worst polluters. It burns coal for power to an extent that the air quality of China’s major cities would be unacceptable most everywhere else. On most days, it is thick with a yellow and grey haze. By 1969 China had passed the US and the European union in terms of CO2 production. And, as 2017, they produce nearly three times as much CO2 as the USA, four times more than the entire European Union. While China claims an interest in changing, the amount of pollution China’s CO2 output is still growing while ours and the EU’s is decreasing.

Manufacturing in the US, China, EU, Japan, Korea. Source: World Bank.

Manufacturing in the US, China, Germany, Japan, Korea. Source: World Bank.

China’s pollution would not be so bad if it were an efficient manufacturer, but there is a lot to suggest that it is not. China produces 50% more industrial goods than the US, but employs far more man hours, and generates more than three times the  CO2. Even in a fairly developed industry like steel, the US uses fewer man hours per ton and generates less CO2. I’m thus drawn to conclude that US companies off-load work to China mainly to get around US labor and pollution laws. Alternately, they off-load manufacture to gain entry to the Chinese market, a market that is otherwise closed to them. When US companies do this, they benefit the corporate managers and owners, but not the US worker. 

The hope (expectation) is that president Trump’s tariffs on Chinese goods will decrease the wage advantage of manufacturing in China, and will decrease the amount of US goods manufactured there. Some of that production, I expect, will move to the US, some will remain in China, and will be imported at a higher price-point. I expect a net decrease in CO2 as the US appears to be the more efficient producer, and because fewer ships will be crossing the Pacific bringing Chinese goods to the US. I expect some increase in tax revenue to the US, and some price inflation as well, as importers pass along the increased cost of Chinese goods. Overall, I think this is an acceptable trade-off, but what do I know.

Robert Buxbaum, November 29, 2018

Less than 1 year to the crash

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Stock market crashes happen for a reason, and generally the reason is that owning stock is seen as less profitable than owning bonds, gold, guns, or hundred-dollar bills stuffed into one’s mattress. For this essay, I thought I might explain the reasoning behind the alarm bells that virtually every economist has been sounding. For the last year and a half they’ve been sure a severe correction is imminent. The reason has to do with price and predictions of profitability.

Let’s begin with Nobel Laureate economist, Paul Krugman of the New York Times. He has been predicting severe job losses, and a permanent stock collapse since Trump’s election in November 2016. Virtually every week he announces that the end is near, and every month the economy looked better. A lesser man would give up, but he has not. Why? Mostly it’s his hatred of all things Trumpian: Krugman can not accept that Trump could avoid destroying the economy, and con not imagine that any investor would see things otherwise.

Apparently some folks felt otherwise, and caused unemployment to drop and the market to rise. but then, in September 2017, Krugman’s dire predictions were echoed by Robert Schiller, 2013 Nobel winner, and author of a textbook the majority of schools use to teach market analysis. Robert Schiller, has argued that valuations are extremely expensive. “This stock market bears striking similarities to that of 1929. “The market is about as highly priced as it was in 1929,” “In 1929 from the peak to the bottom, it was 80 percent down. And the market really wasn’t much higher than it is now in terms of my CAPE [cyclically adjusted price-to-earnings] ratio. So, you give pause when you notice that.”

What Schiller is referring to is his particular version of the price to earnings ratio, the price of the average stock share divided by the amount of the average earnings per share. Schiller’s CAPE version uses the ten-year, inflation-averaged earnings, rather than today’s earnings, and finds the ratio is high, as the graph below shows. When he made these comments, this ratio was 25, nearly as high as the 1929 peak. The ratio is now higher, 32.74, higher than it stood on “Black Tuesday.” Why this number is important is that the profitability of a stock-share is merely the inverse of the Price/ Earnings ratio. The current ratio, 32.74 suggests that the average dollar’s worth of shares will return about 3.05% (1/32.74 = 3.05%). By comparison, one could buy a five-year treasury bond and get 2.96%. That’s hardly less, and federal bonds are totally safe. More alarming yet, the Federal Reserve has indicated that it will continue to raise interest rates at planned rate of 1%/year for at least the next year. At some point, people will decide bonds are the far better bargain, and will exit stocks en-mass. And then it’s crash-city, or so the theory goes.

The Schiller Price to Earnings ratio as of July 27, 2018. It suggests a crash is past due.

The Schiller Price to Earnings ratio as of July 27, 2018. It suggests a crash is past due.

Shown above is a historical plot of Schiller’s particular version of the price to earnings ratio based on the S+P 500 index, with data going back to 1880. It’s argued that his version using a ten-year, trailing average of corporate profits, is better than the non-adjusted, one year P/E ratio: the version you find in the newspapers. In the newspaper version, the peaks don’t show up until just after the crash because company profits tend to spike along with prices. In this version, profits can’t exactly spike, and  stock crashes show up as valuation peaks. The crash is seen as a consequence to high values of the Schiller P/E.  In terms of CAPE, we are at a more dangerous spot than in 1929. We are more exuberant than in 2008, or when Alan Greenspan warned of irrational exuberance. Schiller: “you give pause when you notice that.”

Schiller Price to earnings ratios are a good predictor of future stock prices. We are past the end of this chart, suggesting a significant loss of stock value ahead.

Schiller Price to earnings ratio plotted versus 20 year stock return. The higher the Schiller P/E, the lower the return. We are past the end of this chart suggesting we should expect a significant loss of capital value.

Stock pull-backs are sometimes gradual, as in 1968 through 1982, but more often the pullback is sudden, a crash. People typically expect a stock return in excess of bonds of 2% or so. They sometimes accept less, and sometimes demand more. Schiller calls the cause “animal spirits.” The fear is that investors will suddenly go back to the historical norm and demand of stocks 2% more return than the 3.05% they get from bonds. If they’d suddenly demand a 5.05% return on stocks to balance, the stock prices would fall by 40%. If the crash happened now, it would take a 40% drop in stock prices to raise the earnings ratio to 5.05%. But if they wait a year, until after the Fed raised the interest rate to 3.5%, we’d expect a greater pull-back 50% or so, a major crash. As early as last year, Schiller has advised moving out of US stock into foreign stocks, particularly European, noting that the US market was  the most expensive in the world. I don’t agree that Europe is a safe haven, but agree that a crash is likely given current return rates, snd the treasury plan to raise interests by 1% over the next year.

Schiller claims that the reason the recession has not hit so far is that people trust Trump. I would not have expected a comment like that from a Yale economist, especially given the constant carping from the TV news. Still Schiller may be on to something. The stock market went up dramatically after the Trump election. There are some advantages to a narcissist president. It also seems Trump’s tariffs are helping to provide jobs, as I predicted. In this quarter, the GDP rose at an impressive 4.1% rate. Gains came even where you’d expect otherwise. US soybean exports rose by 9600% despite a boycott from China. If the economy keeps going like this it might be as much as a year before the correction. A likely scenario is that the Fed raises interest rates, growth slows to 2.5% or less, and with bond interest rates at 3.5% people will get out of stocks in a big way. My expectation is that China will suffer too, and with it Europe. With luck, the Fed will then lower interest rates to 2%, or so. In my opinion interest rates should matches the inflation rate, more or less. I don’t know why the Federal Reserve does not do this, but instead swings its interest rates from very high to low, now aiming for a far excess of inflation rate. I suspect it’s mistake, one that we will pay for soon.

Robert Buxbaum, July 29, 2018. My only other stock analysis post was on bitcoin, In December 2017 I thought it had gone about as far as it would go. Shortly there-after bitcoin value crashed. I hope I don’t cause a crash

The wealth of nations in beer

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We generally compare the wealth of nations in dollars per capita, but this is a false comparison. You can not eat dollars, and even if dollars can be exchanged for products or other countries’ currencies with minimum cost, the same is not true for their products. A sack of rice in America costs more than in India; you can not easily buy it at the Indian price. Nonetheless we generally measure the wealth of a county as if all products cost the same everywhere. Based on this, we declare that the citizens of Lichtenstein are the richest on the planet, followed by Norway and Denmark. US citizens not far behind, vastly richer than the people of Africa who we picture living on pennies per day. But pennies in Africa buy more than pennies in America; wealth is spent locally, and things are expensive where people have money.

GDP for various countries in pints of beer per person per year in main city bar or restaurant

GDP for various countries in pints of beer per person per year in main city bar or restaurant

To correct for this local value of money effect, some economists modify consider the ratio of per-capita GDP by relation to the cost of a basket of goods. This is called purchasing power parity, or ppp. By this measure, American’s are not as much richer than Africans, but the problem remains that people don’t all buy the same basket of goods. The Economist magazine has thus suggested correcting ppp by choosing a single consumable, the MacDonald’s Big Mac, a standard product available world-wide. The Economist’s “Big Mac Index” is quite good in my opinion, but it could be better, and I decided to make it better by using beer instead of Big Macs.

It strikes me that typical Africans don’t eat Big Macs — the price is out of range. Meanwhile, in rich countries mostly it’s the poor who eat MacDonald’s (and Donald Trump). The advantage of using beer to measure the wealth of nations is it’s something most-everyone consumes across all social strata. A country is wealthy in terms of many pints of beer a person can buy based on his or her, per-capita GDP.

Shown at left is the top countries from a table I made by dividing the GDP per capita by the price of a pint (or half-liter) of local beer as served in a tavern or restaurant of the major city. Measured this way I find Lichtenstein is still the richest country on earth, now followed by Saudi Arabia and the Czech Republic. Norway is no longer among the richest countries — beer is expensive there, as is labor. The Czech Republic, normally considered a middle-to-poor country, is number 3 because of the low cost of its excellent beer. The US is several stages down, just below Denmark, and barely above Hungary and Kazakhstan. The socialist countries: Russia, Cuba, and Venezuela are as poor in beer as they are in dollars. Socialism distributes wealth without creating it.

Number of beers one can buy on a month's minimum wage in Europe

Number of beers one can buy on a month’s minimum wage in Europe, by Reddit:adilu.

By now you’re wondering about my use of per-capita GDP. Perhaps a better comparison — one where socialism looks better would involve the minimum wage. At right I show a map of Europe in terms of the number of beers one can buy per month based on 40 hour weeks at the minimum wage. Several countries are greyed out: Italy, Austria, Sweden, Finland, Lichtenstein, etc. These are mostly rich countries bu have no minimum wage. Based on the data, Belgium’s working classes are the best off, with Ireland and England not far behind. Germany’s workers look like they are doing well, but they don’t really have a minimum wage (the chart, by Reddit editor adieu assumes one based on a proposal). The United States’s minimum worker is poorer in beer (327/month) based on a minimum wage of $7.85 and an average cost of beer about $4/pint (bar + supermarket). He is richer than the French, Poles, Italians, Norwegians, Danes, Austrians and Swedes in beer, and better off than the Turks and Russians too. It’s clear that high minimum wages harm community wealth and job prospects. Though some at the bottom of the work scale are left dry at the bar.

Robert Buxbaum, July 18, 2018. I write these blogs to help me think. If you’d like to see more of the wealth of nations in beer, I’ll be happy to provide.

Trump, tariffs, and the national debt

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My previous post was about US foreign policy, Obama’s and Trumps. This one is about Trump’s domestic policy as I see it. The main thing I see, the pattern is that I think he’s trying to do is pay down the national debt while increasing employment. So far unemployment is down, but borrowing is not. I suspect that a major reason for the low unemployment is that Americans (particularly black Americans) are taking jobs that used to be held by Mexicans. As for US borrowing, it’s still bad. For his first budget, Trump, like all other recent politicians caved to the forces that favor borrow and spend than to pay back. In this century, only Wm. McKinley, Theodore Roosevelt, Taft, Harding, and Coolidge managed to pay down the national debt. But only one man, Andrew Jackson, managed to pay it off completely. Jackson’s picture hangs in the pride of place in the Trump white house, something that I find significant. I suspect that Trump’s tariffs and spats are intended to pay down the debt without raising unemployment, or weakening the military. Andrew Jackson is his idea of “Make America Great Again.”

All recent presidents have raised the national debt. Trump claims he will shrink it.

All recent presidents have raised the national debt. Trump data to April 20, 2018.

As the graph above shows, if Trump plan is to pay down the debt, he is not succeeding. Trump is overspending — at a somewhat slower rate than other recent presidents, but in 1 1/4 year he’s increased the debt by 6.3%, about $1220 B. He’s saved a few billion by reduced payments to the UN, and to the EU for climate studies, and he’s asking NATO to pay more for Europe’s defense, but he’ll have to do a lot more, and the rest of the world is already unhappy with him.

Many US economists — Keynesians – are not happy with him for another reason. They claim that debt is good, and that borrowing increases employment. As proof they note that FDR borrowed and spent heavily though the 1930s,and we got out of the depression. Other economists point out that it took longer in the US to get out of the depression than in many other countries. More recently, under Jimmy Carter, deficit spending created a combination of high inflation and high unemployment, “stagflation,” suggesting that Keynes should be modified to “Neo Keynesians” who claim you can overspend if you don’t outspend the GDP growth rate. Sorry to say, even in these terms, Obama and GW Bush overspent badly, as did Reagan before them (see graph below). Obama raised the debt from 65% of the GDP to its current 105%, and GW Bush raised it from 50% of GDP to 65%. This borrowing did not increase employment, or raise the standard of living for most Americans, though several at the top became fabulously wealthy. As Alan Greenspan noted, “If national borrowing was a path to wealth, Zimbabwe would be the richest country on earth.” I’m more of a hard money man, as Greenspan was, inclined to think that a balanced budget is good, and that tariffs are good too.

Ratio of US government debt to GDP

Ratio of US government debt to GDP

As of June 1, 2018, Trump has imposed ~20% tariffs on five items: wood, steel, aluminum, washing machines, and solar panels. Combined, these items constitute 4.1% of our imports, $130 B/ year. Taxed at 20%, the US will collect $25 B/year. it’s a step, but I suspect that Trump knows that, if tariffs are to wipe out all of our deficit, he’ll have to impose a lot more, about 40% on all of our imports ($3,100 B/year). Trump may yet do this, and may yet cut spending, and put a lot more America to work. My sense is that this is his aim.

The next step in the Trump MAGA plan involves adding another $35B to the list of items being taxed; that’s about 1.1% of US imports (5.2% total). In response, our trade-partners have complained to the press and to the world court, and have imposed their own tariffs — so far on about $100 B of US products, mostly food items, like bourbon and cheese, chosen to hit Republicans in politically – sensitive states: Tennessee and Wisconsin. Canada now taxes US cheese at over 100%. It’s an effort to embarrass Trump and get Democrats elected in 2018. If these tactics don’t work, Trump will impose another round, e.g. on foreign-made cars and motorcycles. I’d also expect him to cut NATO funding unilaterally, too, as a counter-slap to the EU.

US unemployment by race

US unemployment by race, data to May 2018.

Speaking of Keynesian economists, Nobel Laureate economist, Paul Krugman of the New York Times has been predicting severe job losses, and a permanent stock collapse since 2016, and especially following Trump’s election. Virtually every week he announces that the end is near, and every month the economy looks better. But he’s not deterred, and neither are most economists. In a survey of nearly 100 economists by Reuters, 80% said that Trump’s policies will hurt the U.S. economy, and the rest said there would be little or no effect.[1] . So far it looks like they are all wrong. Unemployment is at record lows, particularly for African-Americans (see chart above); we’re adding new jobs at the rate of 200,000 new jobs per month, nearly 0.8% of the population per year. Inflation is a modest 2.3%, GDP growth is excellent, at 3.2% (or an incredible 4.5%). All we need now is a sensible immigration policy plus some healthcare reform, a modified social security tax, and for the economy to stay this way for another 5-10 years. It’s unlikely, but that’s the plan.

Robert Buxbaum, July 5, 2018. I’d hoped to see the employment and deficit numbers for June by now, but it’s not out. I’ve also argued that free trade is half right, as there is a benefit to workers, And there is a certain greatness that comes from paying your bills. Today, the EU offered to lower some auto tariffs if Trump does not move forward.

Beyond oil lies … more oil + price volatility

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One of many best selling books by Kenneth Deffeyes

One of many best-selling books by Kenneth Deffeyes

While I was at Princeton, one of the most popular courses was geology 101 taught by Dr. Kenneth S. Deffeyes. It was a sort of “Rocks for Jocks,” but had an unusual bite since Dr. Deffeyes focussed particularly on the geology of oil. Deffeyes had an impressive understanding of oil and oil production, and one outcome of this impressive understanding was his certainty that US oil production had peaked in 1970, and that world oil was about to run out too. The prediction that US oil production had peaked was not original to him. It was called Hubbert’s peak after King Hubbert who correctly predicted (rationalized?) the date, but published it only in 1971. What Deffeyes added to Hubbard’s analysis was a simplified mathematical justification and a new prediction: that world oil production would peak in the 1980s, or 2000, and then run out fast. By 2005, the peak date was fixed to November 24, of the same year: Thanksgiving day 2005 ± 3 weeks.

As with any prediction of global doom, I was skeptical, but generally trusted the experts, and virtually every experts was on board to predict gloom in the near future. A British group, The Institute for Peak Oil picked 2007 for the oil to run out, and the several movies expanded the theme, e.g. Mad Max. I was convinced enough to direct my PhD research to nuclear fusion engineering. Fusion being presented as the essential salvation for our civilization to survive beyond 2050 years or so. I’m happy to report that the dire prediction of his mathematics did not come to pass, at least not yet. To quote Yogi Berra, “In theory, theory is just like reality.” Still I think it’s worthwhile to review the mathematical thinking for what went wrong, and see if some value might be retained from the rubble.

proof of peak oilDeffeyes’s Maltheisan proof went like this: take a year-by year history of the rate of production, P and divide this by the amount of oil known to be recoverable in that year, Q. Plot this P/Q data against Q, and you find the data follows a reasonably straight line: P/Q = b-mQ. This occurs between 1962 and 1983, or between 1983 and 2005. Fro whichever straight line you pick, m and b are positive. Once you find values for m and b that you trust, you can rearrange the equation to read,

P = -mQ2+ bQ

You the calculate the peak of production from this as the point where dP/dQ = 0. With a little calculus you’ll see this occurs at Q = b/2m, or at P/Q = b/2. This is the half-way point on the P/Q vs Q line. If you extrapolate the line to zero production, P=0, you predict a total possible oil production, QT = b/m. According to this model this is always double the total Q discovered by the peak. In 1983, QT was calculated to be 1 trillion barrels. By May of 2005, again predicted to be a peak year, QT had grown to two trillion barrels.

I suppose Deffayes might have suspected there was a mistake somewhere in the calculation from the way that QT had doubled, but he did not. See him lecture here in May 2005; he predicts war, famine, and pestilence, with no real chance of salvation. It’s a depressing conclusion, confidently presented by someone enamored of his own theories. In retrospect, I’d say he did not realize that he was over-enamored of his own theory, and blind to the possibility that the P/Q vs Q line might curve upward, have a positive second derivative.

Aside from his theory of peak oil, Deffayes also had a theory of oil price, one that was not all that popular. It’s not presented in the YouTube video, nor in his popular books, but it’s one that I still find valuable, and plausibly true. Deffeyes claimed the wildly varying prices of the time were the result of an inherent quay imbalance between a varying supply and an inelastic demand. If this was the cause, we’d expect the price jumps of oil up and down will match the way the wait-line at a barber shop gets longer and shorter. Assume supply varies because discoveries came in random packets, while demand rises steadily, and it all makes sense. After each new discovery, price is seen to fall. It then rises slowly till the next discovery. Price is seen as a symptom of supply unpredictability rather than a useful corrective to supply needs. This view is the opposite of Adam Smith, but I think he’s not wrong, at least in the short term with a necessary commodity like oil.

Academics accepted the peak oil prediction, I suspect, in part because it supported a Marxian remedy. If oil was running out and the market was broken, then our only recourse was government management of energy production and use. By the late 70s, Jimmy Carter told us to turn our thermostats to 65. This went with price controls, gas rationing, and a 55 mph speed limit, and a strong message of population management – birth control. We were running out of energy, we were told because we had too many people and they (we) were using too much. America’s grown days were behind us, and only the best and the brightest could be trusted to manage our decline into the abyss. I half believed these scary predictions, in part because everyone did, and in part because they made my research at Princeton particularly important. The Science fiction of the day told tales of bold energy leaders, and I was ready to step up and lead, or so I thought.

By 2009 Dr. Deffayes was being regarded as chicken little as world oil production continued to expand.

By 2009 Dr. Deffayes was being regarded as chicken little as world oil production continued to expand.

I’m happy to report that none of the dire predictions of the 70’s to 90s came to pass. Some of my colleagues became world leaders, the rest because stock brokers with their own private planes and SUVs. As of my writing in 2018, world oil production has been rising, and even King Hubbert’s original prediction of US production has been overturned. Deffayes’s reputation suffered for a few years, then politicians moved on to other dire dangers that require world-class management. Among the major dangers of today, school shootings, Ebola, and Al Gore’s claim that the ice caps will melt by 2014, flooding New York. Sooner or later, one of these predictions will come true, but the lesson I take is that it’s hard to predict change accurately.

Just when you thought US oil had beed depleted for good, production began rising. It's now higher than the 1970 peak.

Just when you thought US oil was depleted, production began rising. We now produce more than in 1970.

Much of the new oil production you’ll see on the chart above comes from tar-sands, oil the Deffeyes  considered unrecoverable, even while it was being recovered. We also  discovered new ways to extract leftover oil, and got better at using nuclear electricity and natural gas. In the long run, I expect nuclear electricity and hydrogen will replace oil. Trees have a value, as does solar. As for nuclear fusion, it has not turned out practical. See my analysis of why.

Robert Buxbaum, March 15, 2018. Happy Ides of March, a most republican holiday.

Bitcoin risks, uses, and bubble

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Bitcoin prices over the last 3 years

Bitcoin prices over the last 3 years

As I write this, the price of a single bitcoin is approximately $11,100 yesterday, up some 2000% in the last 6 months. The rise rate suggests it is a financial bubble. Or maybe it’s not: just a very risky investment suited for inclusion in a regularly balanced portfolio. These are two competing views of bitcoin, and there are two ways to distinguish between them. One is on the basis of technical analysis — does this fast rise look like a bubble (Yes!), and the other is to accept that bitcoin has a fundamental value, one I’ll calculate that below. In either case, the price rise is so fast that it is very difficult to conclude that the rise is not majorly driven by speculation: the belief that someone else will pay more later. The history of many bubbles suggests that all bubbles burst sooner or later, and that everyone holding the item loses when it does. The only winners are the brokers and the last investors who get out just before the burst. The speculator thinks that’s going to be him, while the investor uses rebalancing to get some of benefit and fun, without having to know exactly when to get out.

That bitcoin is a bubble may be seen by comparing the price three years ago. At that point it was $380 and dropping. A year later, it was $360 and rising. One can compare the price rise of the past 2-3 years with that for some famous bubbles and see that bitcoin has risen 30 times approximately, an increase that is on a path to beat them all except, perhaps, the tulip bubble of 1622.

A comparison between Bitcoin prices, and those of tulips, 1929 stocks, and other speculative bubbles; multiple of original price vs year from peak.

A comparison between Bitcoin prices, and those of tulips, 1929 stocks, and other speculative bubbles; multiple of original price vs year from peak.

That its price looks like a bubble is not to deny that bitcoin has a fundamental value. Bitcoin is nearly un-counterfeit-able, and its ownership is nearly untraceable. These are interesting properties that make bitcoin valuable mostly for illegal activity. To calculate the fundamental value of a bitcoin, it is only necessary to know the total value of bitcoin business transactions and the “speed of money.” As a first guess, lets say that all the transactions are illegal and add up to the equivalent of the GDP of Michigan, $400 billion/year. The value of a single bitcoin would be this number divided by the number of bitcoin in circulation, 15,000,000 currently, and by the “speed of money,” the number of business transactions per year per coin. I’ll take this to be 3 per year. It turns out there are 5 bitcoin transactions total per year per coin, but 2/5 of that, I’ll assume, are investment transactions. Based on this, a single bitcoin should be worth about $8890, slightly below its current valuation. The gross speed number, 5/year, includes bitcoin transactions that are investments and never traded for goods, and those actively being used in smuggling, drug-deals, etc.

If the bitcoin trade will grow to $600 billion year in a year with no other change, the price rise of a single coin would surpass that of Dutch tulip bulbs except that more coins are bing minted, and that the speed is increasing. If you assume that coin use will reach $1,600 billion/year, the GDP of Texas in the semi-near future, before the Feds jump in, the fundamental value of a coin should grow no higher than $44,000 or so. There are several problems for bitcoin investors who are betting on this. One is that the Feds are unlikely to tolerate so large an unregulated, illegal economy. Another is that bitcoin transactions are not likely to go totally legal. It is very hard (near impossible) to connect a bitcoin to its owner. This is a plus for someone trying to deal in drugs or trying hide profits from the IRS (or his spouse), but a legal merchant will want the protection of courts of law. For this, he or she needs to demonstrate ownership of the item being traded, and that is not available with bitcoin. The lack of a solid, legitimate business need suggests to me that the FBI will likely sweep in sooner or later, and that the value of a coin will never reach $44,000.

Yet another problem for those wishing to invest in bitcoin is the existence of more bitcoins (undiscovered, or un-mined so far) and the existence of other cryptocurrencies with the same general qualities: Litecoin (LTC), Ethereum (ETH), and Zcash (ZEC) as examples. The existence of these coins increases the divisor one should use when calculating the value of a bitcoin. The total number of bitcoins is capped at 21,000,000, that is 6,000,000 coins more than known today. Assuming more use and more acceptance, the speed (turnovers per year) is likely to increase to four or five, similar to that of other currencies. Let’s assume that the bitcoin will control 1 trillion dollars per year of a $1.6 trillion/year illegal market. One can now calculate the maximum long term target price of a bitcoin by dividing $1 trillion/year by the number of bitcoins, 21,000,000, and by the speed of commercial use, 4.5/year. This suggests a maximum fundamental value of $10,582 per coin. This is just about the current price. Let the investment buyer beware.

For an amusing, though not helpful read into the price: here are Bill Gates, Warren Buffet, Charlie Munger, and Noam Chomsky discussing Bitcoin.

Robert Buxbaum, December 3, 2017.