Further regarding my previous post about the Swiss move to de-peg the Swiss franc from the Euro — In John Mauldin’s Thoughts From The Frontline letter this week, he notes:

Early Thursday morning the Swiss abandoned that policy. Much of the press coverage in the (largish) wake of their surprise move has focused on the costs to banks and hedge funds around the world, but you have to realize that serious pain is being felt in Switzerland itself. Every bank and business that held non-Swiss-franc debt or investments took an immediate 15–20%+ haircut on its holdings. Swiss investors lost at least 10% on investments in their own stock market and more on shares they held in other stock markets. Forty percent of Swiss exports go to the Eurozone, and the Swiss franc is now over 30% higher than it was five years ago – with almost half that movement coming in one day. Those exporters just got hammered.

And this was not a painless policy decision for the SNB. Citibank estimates the SNB’s losses to be close to 60 billion Swiss francs.

Those are a lot of gored oxen. But keeping in mind that currency trading is at root a zero-sum game, what I want to know is — who were the big winners? For sure, there’s a chess game going on behind the scenes here. Some players knew this was coming and profited mightily from this scam. More »

In a conversation with an economics PhD friend of mine last Thursday, I was indulging in my usual bloviation about the insanity of the notion that a weak currency is good for the economy. As I have ranted here previously, it may be good for debtors, who can pay back their obligations in inflated currencty, and it may be a short term benefit for some exporters, but it certainly isn’t good for the economy. As my friend pointed out, it may also be good for politicians, since the resulting inflation may cause a nominal increase in the income subject to taxation, with the net effect of pushing it into higher tax brackets.

In the course of our conversation (and in my previous post), I cited Switzerland as a country that clearly should be able to get the benefits of both a strong currency and strong exports, simply by adjusting prices instead of trashing the currency.

The very next day, the SNB announced that they were dropping the CHF1.20 ceiling vs. the Euro, causing a great deal of wailing and gnashing of teeth in the financial world, and no doubt laughing all the way to the bank. What a sucker play! More »

(My friend Tom, certainly among the most analytical and intellectually capable people of my acquaintance, posted two long and thoughtful comments to my post of a few weeks ago about computational models in general and climate models in particular. I thought that Tom’s comments deserved better billing so with his permission I have converted them to a guest post, which follows, with some slight editing for flow. Tom raises some valid and interesting points, which I will probably revisit in a future post. Also, I highly recommend the Guardian podcast linked in Tom’s post below, in which I can find very little to take issue with other than the implicit assumption that anthropogenic climate change is a proven fact, forever settled, and about which no reasonable disagreement is possible.)

Here’s Tom:

Jack, I won’t pretend to any ability to state properly the scientific case in favor of the many nonpolitical and serious climate scientists who are presently convinced that dangerous anthropological global warming exists and is increasing. I do, however, think that your posting gives too much weight, like the litigation lawyers we both know who want to win for their clients by fair means or foul, to the possible or, as you put it, inevitable computer modeling hocus pocus and political jabberwockiness that exist in the science dispute. I personally believe, and feel it’s OK to use this, since your posting also contains a fair amount of opinion, that existential evidence of global warming caused by increasing CO2, apart from intricate computer models and hypocritical politicians, is gathering apace. Can anyone rational turn a blind eye to that? More »

Some time ago, I wrote about what I regard as the lunacy of deliberately cheapening one’s own currency, and how I cannot fathom how increasing the (in real terms) price one pays for everything one buys (imports) and simultaneously reducing the amount one gets paid for everything one sells (exports) could conceivably be regarded as beneficial to one’s economy.

As further proof that I just don’t “get” economic policy, here is another bit of accepted wisdom that seems nuts to me. The following quote is from the most recent (and last) issue of the always entertaining and incisive newsletter “Things that make you go hmmm”, by Grant Williams, but you can find similar opinions expressed by many other economic commentators:

“[T]he fact that Japan’s population is now declining by roughly 20,000 people every month has seemingly crept up on the world and taken everybody by surprise. . . .

“The only answer to Japan’s demographic problem is mass immigration. Simple.”

More »

There has been a rash of commentary lately about the potential for strong AI — AGI, or artificial general intelligence as it’s often referred to — to turn around and bite the human species that created it. Paypal/Tesla/SpaceX founder Elon Musk and physicist Stephen Hawking have recently opined publicly and apocalyptically on what Musk described as “our greatest existential threat.” Hawking, in a BBC interview, said that “full AI” could “spell the end of the human race.” Naturally, there are equivalently authoritative opposing views; Ray Kurzweil, for example, sees the future of AI in much more optimistic terms, as expounded at length in several books.

Econtalk, a consistently excellent weekly podcast by the always insightful Prof. Russ Roberts, has aired two hour-long audio interviews on the subject in recent weeks, the first with philosophy professor Nick Bostrum of Oxford University (who is perhaps better known for his paper exploring the possibility that what we perceive as reality is actually a simulation), and the second with  Gary Marcus, a cognitive psychologist at NYU. Both are authors of recent books: Superintelligence: Paths, Dangers, Strategies by Bostrum, and The Future of the Brain: Essays by the World’s Leading Neuroscientists, by Marcus.

More »

I don’t know much about global climate science. I’ve read a few papers and listened to a few lectures, but it’s not something I’ve ever studied in enough depth to have any business commenting on.

I do know a bit about computational modeling, though, and I also have some experience with argumentative overreaching (having spent 20 years as a litigator).

It’s fairly easy to fool oneself with computational models. Models have parameters that have to be “tuned” to fit the data, and given enough parameters (it doesn’t take very many) you can make a model fit just about anything.

In fact, I would go so far as to offer the following conjecture:

Conjecture: For any model of a complex system where a set of parameters determines the fit of the model to training data and the model generates a binary prediction A, there exists an alternative set of equivalently plausible parameter values that produces no worse fit to the training data and generates the opposite prediction (i.e. ‘not A’).

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It is commonly held that countries can gain an economic advantage by devaluing their currencies against those of their trading partners. This is often referred to as the “beggar thy neighbor” tactic. I don’t see how it can possibly benefit the country doing it. I have tried to discuss this with several folks who are much better versed in these matters than I  — some with PhD’s in economics — and they seem very sure that the devaluing country does gain an advantage, but I still don’t see it.

To explain where my understanding seems to go off the rails, I’ll take an oversimplified example. A year or so ago, Switzerland found its currency appreciating against the Euro (and just about everything else), so it arbitrarily instituted a “peg” at 1.20 SF to the Euro. In other words, the Swiss franc would not be allowed to rise above that level. If it started to, the Swiss central bank would print more Swiss francs and use them to buy Euros, in whatever quantities might be necessary to keep the Swiss franc from rising in value. When this policy was announced, the value of the Swiss franc immediately dropped like a stone. How much depends on which currency you’re comparing with and over what time frame, but for purposes of today’s exercise let’s call it 15%. More »

As the “fiscal cliff” lurches back into the public consciousness, the political class engages in its usual disingenuous portrayal of what is actually an easily solved problem.

Democrats will say that the problem is Republicans’ refusal to go along with a reasonable tax increase on the “wealthy”, which the Democrats define as “anyone not living in a car”.

The Republicans will say that the problem is Democrats refusal to cut “entitlements”, which Republicans define as “any program whose primary beneficiaries are not defense contractors, agribusiness conglomerates, or Goldman Sachs executives”. More »