Negative Interest Rates May Spark Existential Crisis for Cash

http://www.bloomberg.com/news/articles/2015-04-23/negative-interest-rates-may-spark-existential-crisis-for-cash

by prostoalex • 11 years ago

135 142 11 years ago

bloomberg.com

jchrisa• 11 years ago

Here's an unconventional but powerful take on the subject of negative interest rates.

http://sacred-economics.com/sacred-economics-chapter-12-nega...

fche5• 11 years ago

"Money does not decay over time..."

... except in the form of inflation. Adding yet another centrally-planned mechanism for that (negative interest rates & elimination of cash) will amplify rather than reduce chaos, and (as intended) lead to a less-free market.

cesarb2• 11 years ago

"Money does not decay over time..." ... except in the form of inflation.

We've experienced another form of decay. We had a few old leftover dollar bills from a trip to the USA we made last century. When we wanted to exchange them back into local currency a couple of years ago, all exchange houses would only give back around 70% of their face value, merely because they were old bills (they were in good condition).

walterbell2• 11 years ago

Coverage of ten recent statements about cash, http://wolfstreet.com/2015/04/25/don-quijones-war-on-cash-qu...

"As a result of technological advances and generational priorities, cash’s days may well be numbered. But there is a whole world of difference between a natural death and euthanasia. It is now clear that an extremely powerful, albeit loose, alliance of governments, banks, central banks, start-ups, large corporations, and NGOs are determined to pull the plug on cash.."

In 2011, System D (global underground economy) was claimed to be $10 trillion in size and growing, http://www.forbes.com/sites/benzingainsights/2011/11/07/rise...

"..the OECD concluded that half the world’s workers (almost 1.8 billion people) were employed in the shadow economy. By 2020, the OECD predicts the shadow economy will employ two-thirds of the world’s workers.."

crdoconnor2• 11 years ago

The PR push seems mainly to be coming from Citi primarily (although other banks may be involved).

It's pretty clear why they'd want to push to abolish cash and institute negative interest rates. It would put them at the center of the economy instead of the near center. Another back-door bailout like this might help deal with their, um, insolvency.

What isn't clear is why anybody else would want it.

Spooky232• 11 years ago

The existential crisis is the brain dead policies leading to this situation. We must not have inflation to protect the wealth of people and institutions with billions of dollars. But it's ok to destroy the ability of normal people to save or conduct business.

If we live in a world where it's too dangerous to have any unauditable transaction, perhaps we're doing something wrong at another level.

Most of these arguments are bunk anyway. The government captures every phone call in entire countries. We collect images of every piece of mail. Are you telling me that the government forgot to collect the serial numbers of every dollar bill as it enters the banking system?

The other sad thing is this really reinforces and legitimizes the fear that fuels the right wing. Perhaps the goldbugs on talk radio are right!

jevgeni• 11 years ago

The first sentence makes sense. The rest - doesn't.

zhte415• 11 years ago

Are you telling me that the government forgot to collect the serial numbers of every dollar bill as it enters the banking system?

They do. Mainly to track banknote usage and average life from when / where they enter circulation, to when / where they end up. Basically demand for and lifecycle of cash. It is valuable information for knowing how much to print, and for improving the durability of notes themselves (which is surprisingly low, an average of months, with a non-fat long-tail to weeks, for low denomination notes).

[BTW, the date on the note has little to no relationship to the date it enters circulation, the serial number is used for this.]

sonofsam• 11 years ago

The rich prodomiently hold their wealth in assets. These assets are more akin to rise in an inflationary environment (ie. Stock market.)

It usually the middle class that is desvated as most do not have any assets other than their homes and rely on a salary for the majority of their income.

It is possible for inflation and deflation to co-exist.

Wages could down while the cost of food, housing and energy raises.

lazylizard• 11 years ago

Wages could down while the cost of food, housing and energy raises. -> is inflation?

matwood• 11 years ago

Actually the flip side is true. We must not have deflation to protect the wealth of people. No one with any amount of money has it sitting in cash. Heck, anyone who owns a house with a fixed rate mortgage is going to prefer moderate inflation to deflation.

All the actions taken by the fed since 2007 (and the rest of the world really) was to stop deflation not inflation.

hnnewguy2• 11 years ago

"But it's ok to destroy the ability of normal people to save or conduct business."

I will never understand this argument. What right do people have to a return on their savings? None. It's an economic transaction.

You realize that when you "save" money, there's someone on the other side of that transaction that is taking that money, along with some risk and ingenuity, and putting it to work economically?

If you want return now, take more risk. The world is awash in capital, safe assets earn nothing.

As far as "conducting business", the largest corporations are selling massive amounts of debt at historically low rates; it's not a bad environment to conduct business.

NoMoreNicksLeft4• 11 years ago

I will never understand this argument. What right do people have to a return on their savings?

None. But people are coerced into depositing their savings. To such a degree that the typical person simply cannot comfortably think about not depositing their money. That's for pimps and drug dealers (and they expect that even pimps and drugs should start doing that as soon as they're successful enough to figure out how to launder it).

And what do you get for depositing it? For the last 20 years, bankers have been deputized as spies, first for the drug war and only for deposits of $10,000 or more. But now for tax cheats, and for deposits less than $10,000. How much less? No defined amount. If they think there's a chance that you're doing $100 to try to skirt the $10,000 rule, then they have to report that too.

God help you if you run a small business that brings in a few thousand per day/week... I suppose then you're expected to save it up to $10,000 before depositing, just to avoid suspicion (though the DEA will then be putting you under a microscope).

We put up with alot of shit to deposit money. It's not absurd to think that if we somehow play by the rules, maybe that money will earn enough interest to keep up with inflation. Hell, we all grew up being taught in public schools that banks use deposits to earn money, and give us a cut. That's the way it used to work, at least... now I guess that they earn all their money by gambling with the viability of the world economy and playing games of "Spot the Pyramid Scheme!", so they have to penalize us for it.

Spooky232• 11 years ago

I don't know why understanding my viewpoint is difficult. Earning interest isn't some sort of exotic memory of the ancient past. You could get 4.75% 5-year CDs as recently as 2008.

Why 2008? "Safe" assets earn nothing because the US has printed trillions of dollars to shore up bank balance sheets at low/no cost to the banks. Large, "too big to fail" banks and large corporate entities are awash in cash. Smaller business entities have a hard time getting access to capital.

Meanwhile, we've tightened controls on physical money to the point where people with straightforward business models like salons, laundromats and retail are one jump bank compliance offer away from some sort of interaction with law enforcement.

feraloink2• 11 years ago

"But it's ok to destroy the ability of normal people to save or conduct business.

"Conduct business" doesn't mean large corporations selling debt on capital markets. There are day-to-day financial transactions, by those of us who aren't, you know, large corporations. Forcing everyone to go to electronic money is a kind of radical step. If you read the article, you'll notice that one of the implementations recommended by the economists quoted is to require all transactions to be conducted in a reserve currency. The entire thing is about giving central banks more power, according to Citigroup. Citigroup is also quoted as saying that they like that idea, very much.

These sorts of actions are not the way to instill trust in government. The article says as much, in acknowledging that anyone who already has a lot of trust in government won't mind giving it more, by removing any further anonymity in financial transactions.

The post by so-called economist Frances Coppola in Forbes claims that consumers have an irrational fear of a cash-less society. I think she is too glib, and so is Citigroup. Requiring all transactions to be electronic, or in a reserve currency, or using tax stamped bills will result in a black market or underground barter economy. That's just how people are.

mxfh2• 11 years ago

In short term scenarios with negative/penalty interest rates, cash is considered an option favorable to accounted money by some.

It seems that a Swiss pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash.

http://www.forbes.com/sites/francescoppola/2015/04/25/the-sw...

ADDENDUM: The OP article is more about banks imposing negative interest rates, actually triggering a renaissance in cash storage. While storing huge amounts of cash as an individual during a deflation is, from an egoistic perspective, the better option in terms of personal purchasing power (minus the obvious physical risks). That the banks and financial regulators don't like this is clear, since it's money not under their control.

anon4• 11 years ago

I'm pretty sure that if you abolish paper money, you'll just give rise to a strong barter economy culminating in private paper money.

VLM2• 11 years ago

Or you get a commodity bubble. Also a bubble in art, collectibles in general, metals... Also the old "alpha strategy" or whatever it was called from the 70s. If you know the price of TP is going to go up 20% per year (or even just 1%) if thats the best rate of return you can get, you buy a years supply of TP. Its not like you're going to stop using it anytime soon and you know prices only go up. This is the middle class version of the strategy, the poor don't have the money to buy a years supply of TP at once and the rich are talking about larger sums of money.

In the short term this "activity" is exactly what they're trying to spark. The problem is in the medium and long term all you've done is pull demand forward.

pjc504• 11 years ago

Absolutely. Faced with a choice between "deflate property prices" and "rewire the entire economy to force property to be the only long term store of value", people holding a lot of property are trying to organise the latter.

crdoconnor2• 11 years ago

Or you get a commodity bubble.

Which, coincidentally, would help a LOT to prop up Citigroup's ailing balance sheet and let them take on even more risk, until they end up needing a 3rd bailout.

Their economist didn't mention that when they went on about how great this idea was, though.

bunderbunder• 11 years ago

Or you get a commodity bubble.

Which is a scary thought. The Fed holding rates at a very low level for a long time was a large factor in the housing crisis. It prompted many depositors to start casting about for somewhere else to put their money. Many of them settled on mortgage-backed securities. We all know what happened next.

VLM2• 11 years ago

Two interesting concepts to think about:

This is a strange "basic income" strategy. Mash that meme up against that meme and you get some weird observations. It seems to be failing, but its at least interesting. The idea of a debt jubilee, of course only for rich people, implemented as a low negative rate rollback instead of simply eliminating debt accounts, is related and interesting. Consider a novel solution to the housing bubble crisis or the death of the oil frack industry or the upcoming death of the social media bubble, don't just write off mortgages and loans but make them all neg 2 percent or whatever to not suddenly shock the economy. Its an interesting implementation idea.

This is a symptom of a dying/collapsing economy. Not the rate itself, but look at how fast people are getting kicked off the island and no longer allowed to participate as they had participated for decades/centuries. Much like has been happening in the labor markets. The way economies die is almost never a light switch (that comes from reading greatly summarized histories deep in the past) but its more like the number of people permanently kicked out of the game increases YoY until no one cares about the legacy economy so it gets unstable and the few remaining die hards watch the final irrelevant tipover. You can see a technology analogy in software versions. Windows XP never died on a certain date, just fewer people used it over time with variations in rate due to external forces (support contracts, new windows version releases, pirated releases, etc) and finally it'll no longer be relevant in the marketplace, eventually. Likewise, economies die the same way. Its not only the quantity of transactions or size of transactions, but literally the number of players.

dmichulke• 11 years ago

Negative interest rates may as well spark questions as to how f*ed up a system can be until it implodes and what happens then.

Seriously, if they truly were negative, we could all stop working now, borrow some money and live of the proceeds.

IMO, the story that CBs know what they do and are there for our own good is not believed by anyone anymore and the future will teach us a lesson of sorts that will prevent us from repeating such lunacy for hopefully at least a few decades.

mdemare• 11 years ago

Negative interest currently only applies to a few banks and governments.

The goal of the central banks here is to get people to spend/invest their money instead of saving it.

fche5• 11 years ago

jrs2352• 11 years ago

"The goal of the central banks here is to get people to spend/invest their money instead of saving it."

Because otherwise who will pamper and serve the central bankers and politicians if we're allowed to live free off our savings?

pjc504• 11 years ago

Central banks generally have a very narrow remit: they're not political agencies. Most central banks have inflation targets. Inflation is low due to lack of economic growth. The only tool they're allowed to use is interest rates, and to some extent QE. Hence ridiculous schemes.

Negative rates for bulk low-risk lending are a result of the collapse in borrowing. If retail rates are 1-2% and there's a 3% overall risk of default, that turns into a negative rate.

dataker• 11 years ago

If interests rates are lower, borrowing increases, including reckless borrowers.

So, technically, wouldn't it be more likely to have an even stronger economic crisis?

pjc504• 11 years ago

There's nowhere for the borrowing left to come from. Due to a combination of income inequality and tightening creditworthiness standards, everyone (business and individual) is either too risky to lend to or doesn't need the money but is instead looking for somewhere to park it.

lucozade• 11 years ago

It encourages borrowers to borrow possibly recklessly.

It doesn't encourage lenders to lend recklessly (they won't make any money for the credit risk).

Of course, that won't stop anyone from lending recklessly any more than rationality did last time around.

jrs2352• 11 years ago

"It doesn't encourage lenders to lend recklessly (they won't make any money for the credit risk)."

As long as lenders are Too Big To Fail and therefore don't take on the full risk of their lending decisions why wouldn't they continue on the private profits/rewards and public losses/risks trail?

meric• 11 years ago

It will. Banks absorbed creditors' risks and lend them money for mortgages anyways until 2007. The financial crisis caused the government to bail out the banks, whose risk increased because they ate up all the mortgagee's risks. Now the governments are beginning to see problems, and the central banks are absorbing the risks. I think what happens next is the crisis with government bonds spreading from Greece to bigger nations and affecting the U.S., but the crisis will be aborted by central banks, somehow, eating up all the risk. The central banks' risks will in turn eventually be absorbed by currencies, which, when stressed too much, will fall apart and hyperinflate. I think signs of stress include overpriced assets, and volatility of value.

A lot of this is my own observations, so take it with a grain of salt.

fixxer7• 11 years ago

"If there’s one thing that militias and Tea Partiers hate more than “fiat money” that’s not backed by gold, it’s fiat money that exists only in electronic form, where it can be easily tracked and controlled by the government."

Ugh. Good article until the author felt the need for this asinine political gem. I am neither a militia member nor a tea party republican, but I recognize the flaws of a system in which a bureaucracy controls money supply based on arbitrary theory rather than some index immune to manipulation. Therefore, I must be a militiaman. Cheap thrills kill copy, journo.

thaumasiotes• 11 years ago

In what sense is tracking an index, or some function of an index, not basing the money supply on "arbitrary theory"? There's no law of nature that says the money supply must have X relation to any index -- if there was, the whole concept of "control of the money supply" would be ill-formed.

fixxer7• 11 years ago

Sure, let's go with that. It is all subjective. What political color am I now?

My real argument is that the article had merit until the subtle mud slinging and big reveal of the author's bias.

cgearhart• 11 years ago

...some index immune to manipulation.

Commodity money and representative money aren't any more immune to manipulation than fiat money. It doesn't matter whether you use gold, silver, or marshmallow peeps -- the value of your holdings are pegged to the value of the assets, which sway with the market. And the central bank can still manipulate that value, they just have to buy and sell the asset to do it.

Fiat money gives nations a central mechanism to manipulate their own currency without hoarding gold and silver. Commodity & representative currency allow other countries to manipulate the currency. In _any_ monetary system, losing control of your money supply causes bad things to happen (see also: Greece).

fixxer7• 11 years ago

I recognize those flaws as well, so I presume by the author's definition I am a progressive militiaman.

Or maybe I'm just an intelligent individual.

Big "maybe" there, admittedly.

msandford7• 11 years ago

And the central bank can still manipulate that value, they just have to buy and sell the asset to do it.

Yes, true. But the fact that there is SOME LIMIT is pretty nice. In other words, the Fed could create as many dollars as there are bits to represent them without much effort at all. Only once you start overflowing a 64 bit integer does there start to be any kind of restraint on the amount of dollars created and only for a year or two until all the software gets migrated to use 128 bit long long long longs!

Commodities -- especially gold and silver which have widespread historical precedent as money -- can't really just be made up. Yes they're vulnerable to the vagaries of the market, but that market is at least based on some reality! And before you say "but the central bank can just make the prices go to infinity" thus achieving their price goals anyhow, I would respectfully disagree. The point of commodity backing of paper notes is that if you lose faith in the value of the notes you can always demand the commodity and hold that instead.

fche5• 11 years ago

No, the logic error is yours, not theirs. They said "tea-partier ERGO fiat-money-hater". You're asserting the straw-man opposite.

fixxer7• 11 years ago

But apparently we share a common platform, so at what point am I de facto tea party? Serious question.

adamlett• 11 years ago

Therefore, I must be a militiaman

(A ⇒ B) ⇏ (B ⇒ A)

aidenn0• 11 years ago

TFA uses a cheap rhetorical trick to imply that since those opposed to central currency share something in common with a low-status group, then opposing central currency lowers your status.

You know who else liked central currency? Hitler!

hnnewguy2• 11 years ago

In what way does that sentence imply that you are a militia man or Tea Partier, given your beliefs?

The sentence reads: "Militia men and Tea Partiers hate fiat money". Not "people who hate fiat money are Tea Partiers or militiamen".

Some people love to be offended, I guess.

JackFr• 11 years ago

I'm not a offended, but it's a throwaway line. It's both irrelevant and unsupported by any facts in the article. (And in general only supported by anecdotal evidence at best.) The author uses its merely to identify his personal bona-fides to his intended demographic.

fixxer7• 11 years ago

No, not really. I just find the constant injection of political labels tiresome.

koonsolo2• 11 years ago

I always saw money as some sort of unit for value. Everything valuable is expressed in some currency. Inflation is expressed as "things becoming more expensive", not "money loosing its value". Money seems to be the most basic part of how our economy works.

I think the next decade will change everyone's perception of central bank money and cash, going from the most basic law on value, to just another thing that can be traded with another thing, losing or gaining value. The real question is if merchants will still accept these "I owe you" notes in the far future, instead of requesting something of real value.

Timing means everything for something to become successful, and bitcoins couldn't have hoped for a better time than now.

seanp2k2• 11 years ago

You're describing fiat money: http://en.m.wikipedia.org/wiki/Fiat_money

koonsolo2• 11 years ago

Yes, exactly! But the point I was trying to make (very badly that is), is that most people call "fiat money" just "money". And they know no other money than money (including my past self). You can earn money, you can buy stuff with money, and you can save money. All fiat money of course, but that doesn't matter, because that's the only money people know. In the next decade, that perception will change. "Money" won't have a monopoly anymore.

norea-armozel2• 11 years ago

Okay, I'm not quite understanding the idea of the negative interest rate other than it's levied against people who hold on large stores of cash in their accounts. My question is under what situations would a bank implement such a policy? It is because there's no way for a bank to invest the funds? Or is it something deeper?

xnull2guest• 11 years ago

The policy maker mentioned in the article claims that credit is now more liquid than cash.

This could be taken quite a number of ways.

One way is to think that the conveniences of credit has made cash less relatively liquid (there are fewer goods, such as those online, that can be traded for credit whereas most things in the physical world can be traded for credit).

Another way is to see this as a hedge against a currency backed by a US facing fundamental challenges to its place as the global leader (not just in finance), whose growth even with stimulation boasts a mere 0.2%; 7% under major competitors.

Another way to see this (e.g. in these comments) is a strategic means for banks to try to institute consumer credit as a currency of their own.

One could also think of it as a fed inspired policy trying to get cash into circulation. The point of inflation is so that those holding large amounts of currency can't sit on the currency and make money from doing nothing. Banks and finance basically allow people to do this despite inflation (tending to benefit the rich more than the poor in this case). Putting a negative growth rate on storage of cash simulates the same thing.

norea-armozel2• 11 years ago

Thanks for the break down.

I think all the points are true within the context that it's clear the negative interest rate is a way to get around problems of stimulating the economy, but also that there's certain banks who would love to get more people hooked on consumer credit. Frankly, I just hope this situation is resolved without having to chain everyone to such a terrible situation of perpetually needing consumer credit to pay for goods/services. I don't feel it's the right way to ensure a healthy economy. Or at least that's my view of it.

chiph• 11 years ago

"Hmm. You're going to charge me $250 a month, based on my cash balance, to keep my money in your institution. How much would it be to rent a large safety deposit box and just put my cash in there?"

fexl2• 11 years ago

Some have already closed that exit, banning the storage of cash in their boxes. They want to keep your funds available for negative interest rates and possible bail-ins.

jliptzin• 11 years ago

Could you just put the cash in a cardboard box and then say it's important papers or stock certificates? Do they have the right to open it?

linuxlizard• 11 years ago

I think the difficulty would be finding enough safe deposit boxes. If I had $100M (let me dream, will you!) where could I store that physically? That much cash takes up a lot of space.

The Oatmeal had a post where he talked about how heavy his $200,000 withdrawal was (that was in 20's).

A little Google searching found: http://www.cockeyed.com/inside/million/million_dollars.html

I think Adam Curry talked about buying actual gold bullion and storing that. Still takes a lot of space and a lot of cost in storage. $100M in gold is over 80,000 oz. Two tons of gold?

https://en.wikipedia.org/wiki/Gold_bar#Standard_bar_weights http://demonocracy.info/infographics/world/gold/gold.html

Me, personally, if I had $100M, I'd buy an island somewhere close to an internet backbone. Real estate is always a good investment!

ryan-c• 11 years ago

Chase recently updated the terms on my safe deposit box to state that I'm not allowed to keep cash in there, and I doubt this was specific to me. How they intend to enforce that, I don't know.

websitescenes• 11 years ago

This is an excellent example of the extreme polarization of wealth that exists in America. Banks have so much money they don't need more!? All while more and more Americans slip into poverty. Remember, we bailed these institutions out with tax payer money. Does anyone else find this incredibly ironic?

coldcode• 11 years ago

Economists rarely if ever care about people who have little or no money. Neither do most politicians. This has been the norm since people invented money and politics. If you eliminate money and deny credit to poor people, how does that work? Eventually it results in an uptick in guillotine manufacturing.

Eye_of_Mordor• 11 years ago

Huge drop in oil prices has driven inflation lower (oil had been high for a long time). Nothing to see here.

nabla93• 11 years ago

Anyone who has critical opinion of current system should first study enough to pass "Turing test for mainstream monetary economics and monetary policy" (test where you try to fake others that you are economist who understands prevailing monetary theory and defends the policy). For example, to know how economists think about general equilibrium theory of credit.

There is huge knowledge cap between economists and policy makers and journalists and population.

Who here in HN thinks they could pass the test If I were to administer one? For example questions related to macro- and microeconomic determinants of the demand for money, Baumol–Tobin transactions demand for money, portfolio selection, demand function stability, quantity theory, general equilibrium framework for money, yield curve, interest parity, AA–DD paradigm, etc.

I feel that at least I know enough economics to know that I don't have simple technical solution (bitcoin, gold, what have you).

pjc504• 11 years ago

Isn't some of this in "economists differ" territory (Krugman and IS/LM, MMT, etc)?

nabla93• 11 years ago

Yes, but you should expect that economists who differ understand the rationale behind different approaches. At least everyone should have understanding of classical form of monetarism before they start to depart from it.

irixusr8• 11 years ago

That's like saying 'anyone who's opposed to eugenics should pass the "Turing test for mainstream eugenics and racial hygiene" otherwise they're ill-informed'. Which is largely the argument used against opponents at the time (the opponents were ignorant "medieval obscurantists", if religious speaking from "superstition")

My objections to modern economics are as follows:

- utility is an ordinal quantity, not a cardinal one. I can tell you I prefer my soon-to-be-born daughter's first kiss to my sister's cheerful hello, but not by how much (how much "what"? What are the units?).

- the utility function, so widely used, is an unknown function. However mathematics are performed after choosing an arbitrary functional form that has the features desired

But most importantly:

- It assumes utility exists and humans behave accordingly.

These are fundamental objections to the field. I can talk to an economist about yield curves flipping, but that jumps over the foundational objections: they are projecting complex human behavior onto fairly outdated mathematics. And then making a mess of it.

nabla93• 11 years ago

utility is an ordinal quantity, not a cardinal one.

Rational choice theory assumes only complete partial ordering, transitivity and that irrelevant alternatives are independent. If preferences have continuous representation, utility function can be continuous, otherwise they are not (but can sometimes be modeled as continuous),

It assumes utility exists and humans behave accordingly.

I think you are implicitly adding too much meaning into economic definitions of preference and utility. Economic definition of utility and preference assume very little. As long as people are forced to make decisions where they select one option over other you can infer underlying utilities.

copsarebastards10• 11 years ago

Yeah, it's sure terrible to want people to be informed on a subject before forming an opinion on it. /sarcasm

Your post boils down to: "The models are outdated, so let's throw out the entire field." The thing is, the outdated models are predictive enough to be more useful than your complete lack of a proposed alternative.

And even if you did propose a better model, you'd still have to understand the outdated models in order to prove that they are worse than the model you're proposing.

zmk_• 11 years ago

Your preferences are ordinal. A utility function needs to just reflect your preferences. It is ECON101 that if your preferences do not satisfy certain properties, there is no utility function that can represent them.

NoMoreNicksLeft4• 11 years ago

I feel like comparing eugenics to economics is an unfair and disgusting comparison.

Sure, eugenics is bad, but not that bad.

collyw• 11 years ago

You forgot to add the fact that it relies on infinite growth.

Symmetry2• 11 years ago

Wait really? I'd say that I could very clearly say that the gaps in utility between some experiences are much larger than the gaps in utility between others. I'd rather bang my shin than stub my toe, but the gap between those is much smaller than the gap between a toe stub and being tortured to death. I can't give you precise numbers for all of that. But I couldn't give you the numbers involved in throwing a baseball either, yet my brain can still somehow compute the air resistance and everything else to give me the correct angle I should throw at. Just because you don't know a number doesn't mean you aren't subconsciously using it.

Sniffnoy• 11 years ago

utility is an ordinal quantity, not a cardinal one. I can tell you I prefer my soon-to-be-born daughter's first kiss to my sister's cheerful hello, but not by how much (how much "what"? What are the units?).

This has an answer, though, assuming you're using an appropriately strict notion of utility function. I do gather that "utility function" is used sometimes just to mean a function that reflects (deterministic) preferences, and making that cardinal has no obvious meaning. But a utility function in the more strict sense reflects preferences over gambles -- and there are theorems[0] to the effect that, given ordinal preferences over gambles satisfying appropriate conditions, these can always be represented by a cardinal (real-valued) utility function, which is unique up to positive affine transformations. In fact, the utility functions you get as a result of Savage's theorem -- which I think makes for a better foundation, personally, as it doesn't assume the notion of probability beforehand -- are always bounded.

(I'm going to ignore the notion of "utility function" as used by utilitarians. That's largely unrelated -- a fact which has caused no end of confusion -- and is truly ill-defined.)

Now, of course, it is true that actual humans do not have utility functions -- that is to say, they do not respect the conditions required to have one. Any agent that somehow did, however -- not that such a thing can actually be built -- would be acting exactly as if it did have one, and it would be meaningful to speak of its utility function (up to a positive affine transformation), regardless of whether such a function were explicitly programmed into it. Regardless, as I see it, if economists are getting decent results by approximating humans as having utility functions, well, good for them. That's not my area though, so I couldn't say whether they are or not. (Meanwhile, there have been attempts to modify utility theory to describe how people actually behave; prospect theory[1] is an example of this.)

But as to your question -- what do the numbers mean? As I said, they reflect your (ordinal) preferences over gambles. That is to say, if you have utility function u, and u(A)=10, u(B)=1, and U(C)=0, this means that you would be indifferent between a 100% chance of B, and a gamble where you have a 10% chance of A and a 90% chance of C. Or, in other words, utility is that thing you're maximizing the expected value of (if it existed, anyway). Note that it doesn't mean that you would be indifferent between some amount of A and ten times as much of B or anything like that; the numbers are purely about probabilities. It's not clear what that would even mean in general anyway (and real things have diminishing marginal utility, you know).

Note of course that no utility value is meaningful by itself -- again, utility functions are unique only up to positive affine transformations. But if you have three utility values[2] a, b, and c, then the ratio (a-c)/|b-c| is meaningful. Although, if you're dealing with bounded utility functions, then you could always normalize so that the infimum is 0 and the maximum is 1, and then the resulting numbers would be meaningful by themselves (because you'd be implicitly setting c=inf and b=sup in the above).

This then (once we expand it a little) is the answer to your question "What are the units?". You ask this as if it were a strike against the notion, but in fact utility is more similar to conventional dimensioned quantities than you might realize. The biggest difference isn't, as you might suspect, that (as opposed to, say, length) it is nebulous and hard to measure -- it's that it's affine rather than linear!

Let's examine the notion of "length" more closely. Here's the thing -- you can't really directly measure lengths, either! What you can do is measure ratios of lengths. That's why length is a dimensioned quantity -- when we say "this has a length of 5 meters", we mean, "the ratio of its length to the standard length 'meter' is 5". You can't just measure length and get a number; you have to pick a unit.

Utilities, then, are similar, except that they're affine rather than linear -- like, say, temperature, before the discovery of absolute zero. These days of course we know that there's such a thing as absolute zero and it makes sense to measure temperature on a linear scale, hence Kelvins; but let's say we don't know that yet and we just have Celsius. This is an affine scale. Unlike meters (or Kelvins), it doesn't make sense to add two Celsius temperatures, or to multiply one of them by a (dimensionless) scalar, or to take the ratio of two of them. It does however make sense to take the difference of two Celsius temperatures, and get not a temperature but a temperature difference. (Which, again, today would be measured in Kelvins, but we're ignoring that.) It does make sense to add temperature differences, or to multiply them by scalars; and you can add a temperature difference to another temperature to get a new temperature, or you can take the ratio of two temperature differences to get a dimensionless scalar.

This is exactly how utility works. Rather than picking one reference point (like a meter), you need two reference points (like the freezing and boiling points of water) -- these are the b and c in (a-c)/|b-c|. If we are measuring temperature and we set c=freezing point of water, b=boiling point of water, then when we plug in the temperature a we want to measure, we're now measuring it in... OK, not the Celsius scale, but a rescaled version that goes 0-1 instead of 0-100. (Just as with lengths, we can only measure a/|b|; and if b is the distance traveled by light in 1/299,792,458 of a second in a vacuum, we've reinvented the meter scale.) Whatever -- your reference points don't have to be 0 and 1, that's just convenient.

So what units are utility measured in? Whatever you want, once you pick your two reference points. As mentioned above, if it's a bounded utility function, you have a natural two reference points in the infimum and supremum, but otherwise, use whatever two reference points you want. Of course frequently this is just implicit -- you have some function, and somewhere it's 0, and somewhere it's 1, and those are your two reference points. It's just not that important a lot of the time! A warning -- utility is often expressed in the undefined unit "utils", but personally I think this gives bad intuition, because again, utility is affine, not linear; I think "degrees utility" might be a better term. Of course, differences in utility are linear, and I don't see anything wrong with referring to those in "utils".

So -- while this is far from justifying the general use of the notion of utility, which, as you say, does not actually apply to humans -- I hope this answers some of your questions and shows that it's actually on a much firmer footing than you imply (at least, as a description of abstract agents, rather than humans).

By the way -- notice how when I was looking for a physical example of an affine scale, I used temperature before the discovery of absolute zero? (I mean, OK, I could have used position -- as opposed to displacement, which is a difference in positions, and thus linear -- but I wanted to keep things scalar.) The thing is that units, dimensions, are implicitly a statement of symmetry. Before the discovery of absolute zero, temperature appeared to have a symmetry (translation symmetry) that it in fact does not. When I say "You can't measure lengths, you can only measure ratios of lengths", I'm implicitly saying that if we scaled all the lengths in the universe by a constant factor, the result would be exactly the same. And that was a statement that appeared to be true when we knew less about physics. But these days, we know that's not true for speed (because of the physically significant speed c); we know that's not true for action (because of the physically significant action Planck's constant, or its reduced version); and we know that's not true for... uh, whatever the hell Newton's gravitational constant G is. And so by combining these we can see that it's not true for length, either; the Planck length forms a "natural unit", making actual lengths -- expressed in Planck units -- potentially meaningful, and not just their ratio. So when it comes to physical things, what things are affine, what are linear, and what are dimensionless, well, it depends on the physics -- in a Newtonian universe things might be different -- and our knowledge of physics has changed over time. Of course Planck lengths are not exactly convenient (and not as directly physically relevant as, for instance, c) so we continue to typically use meters despite the lack of actual symmetry; and in many ordinary cases the symmetry is still approximately there. But utility really is only unique up to positive affine transformations -- you are going to have to pick two reference values. (Though, once again, any utility you get from Savage's theorem will be bounded, making for a fairly natural choice.)

Edit: Just to clarify the above point about "in a different universe things might be different" -- if we lived in a universe where the only physically relevant constants were, say, the speed of light c, the gravitational constant G, the Coulomb constant k_C, and the Boltzmann constant k, then you could double all lengths, times, masses, electrical charges, and temperatures, and get an isomorphic universe; from inside, it would appear absolutely the same -- any actual measurement you could make would have the same result. In fact, however, the Planck constant is also physically relevant, and since this change would quadruple all actions, it would not be a symmetry of our actual universe. (And of course there are other physically relevant constants with yet other dimensions as well.)

[0]The VNM theorem: https://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenster... -- for people who already believe in probability

Savage's theorem: http://lesswrong.com/lw/5te/a_summary_of_savages_foundations... -- does not assume probability, constructs it together with utility

[1]https://en.wikipedia.org/wiki/Prospect_theory

[2]By which I mean values that "have type 'utility'", not necessarily outputs of the utility function; for instance, a supremum of outputs of the utility function would certainly count.

DamnYuppie• 11 years ago

Pass an economics test? How many economist could pass a simple common sense test on finances? From what I have seen they simply construct models with lose to no ties to reality. It seems to me they act much like the clergy in days gone by; privileged, empowered, completely based on faith, and questioning them is heresy!

TheCowboy• 11 years ago

As finance relates to economics, many academic economists would pass it just fine.

The anti-intellectualism of attacking models has become really disconcerting. Should we start dismissing coders for using abstractions, that solve real problems, with no ties to the reality of the machines running the code?

If you make a statement about how X will result in Y, you have some model upon which your idea is based. That can be critiqued and studied to see if X does in fact result in Y. Everyone uses models in their thinking without realizing it.

omilu• 11 years ago

"You may abuse a tragedy, though you cannot write one. You may scold a carpenter who has made you a bad table, though you cannot make a table. It is not your trade to make tables." -Samuel Johnson

innguest2• 11 years ago

Hi Mr. Economist. Lots of fancy terms there. Would you care to provide proof that mainstream economics is a Science? What predictions does it make that are falsifiable? How can we test and reproduce what it says about the world? For instance, before we started QE it was thought to be a good idea. Now they're changing their mind. Were they wrong before? If so, what was it that we learned now about it so we won't make that mistake again? Are we really accumulating knowledge in this "Science" or are we winging it as we go along?

Also answer me this. Physics students can make all sorts of computer simulations that simulate some aspect of reality, like the center of a tornado, or fluid dynamics, or galaxy collisions, etc. And physics students barely have any money! Now my question: Bankers, with all their money, have never been able to get a single simulation of a country going. Where is the computer simulation where we mess with interest rates, minimum wage, QE, etc, and see what happens? Where is it? Where's proof of this great "Science"?

drjesusphd2• 11 years ago

It's starting to be done [1], but by physicists. Among their basic conclusions from their simplified models:

- A free market naturally tends toward an exponential distribution of wealth.

- When debt is allowed in the model, the rich get richer, even without considering that interest is paid from the poor to the rich.

- The U.S. clearly has a two-class structure.

[1] http://physics.umd.edu/~yakovenk/econophysics/

3pt141592• 11 years ago

I think most of us here studied econ as a minor in University. The thing is, it doesn't take much knowledge to correct poor policy decisions. Credit default swaps, for example: basic mismatch in incentives. I was screaming at anyone that would listen about the coming crash. It was on the cover of the economist a full two years before the crash. Didn't matter; got fucked anyway.

Economics isn't like physics. There are wide disagreements over a host of issues and models and the disagreements impact public policy, which impacts us; the electorate.

dmd2• 11 years ago

I think most of us here studied econ as a minor in University.

Wait, what? I've never met a single person who did. Am I the outlier, or are you?

return0• 11 years ago

Economics is not one of the fields that has gained the "trust the experts" badge. Common sense says that you trust the experts when they have proved themselves, and, in economics, they haven't.

lurkinggrue• 11 years ago

It looks like from the outside it's a case of experts in screwing over everybody while making it looks like they are not.

Or just trying to siphon off value out of the system using applied phlebotinum and handwavium.

Perhaps I'm just a cynic.

zeteo• 11 years ago

Anyone who has critical opinion of current system should first study [... the] general equilibrium theory of credit [...] macro- and microeconomic determinants of the demand for money, Baumol–Tobin transactions demand for money, portfolio selection, demand function stability, quantity theory, general equilibrium framework for money, yield curve, interest parity, AA–DD paradigm, etc. [... A]t least I know enough economics to know that I don't have simple technical solution

That's like saying you can't complain of a headache unless you're a neurosurgeon. Not even when the neurosurgeons have declared they have no solution for your headache. And heaven forbid you try to do something about it before studying graduate-level neurology.

(BTW, neurosurgeons have a much better diagnosis and treatment rate than economists.)

ilaksh• 11 years ago

Money is a foundational technology for society. The core hasn't changed in thousands of years. It predates high technology and information systems.

Traditional money alone is obviously outdated.

The situation we have is as if World of Warcraft had only one stat for each character (money) and no way to track what was going on wih the environment aside from user reports. And the server somehow could not regulate anything in the simulation without it being done by a user.

Economists have done an amazing job with one number, at least in terms of finding ways to game the system and multiply one's point total while ignoring billions of people. But we need automated and mainstream systems with more than one dimension.

irixusr8• 11 years ago

When cash is abolished the bankers will own everything.

We're asked to trust bankers to keep track of bits when they'd foreclose on homes that were current with their loan payments!

Bankers who consistently make risky bets because they know their losses will inevitably be nationalized.

Bankers who have manipulated the libor index, engaged in insider trading, broke the fiduciary trust between them and their clients advising them to buy assets they were selling.

Ya, we should abolish cash and make these folks in charge of our money

feraloink2• 11 years ago

This is exactly the problem! What you wrote does not sound like extremist talk or paranoia. Certainly not after reading this:

Bank notes, as an alternate storehouse of value, are a constraint on central banks’ power. “We view this constraint as undesirable,” Citigroup Global Chief Economist Willem Buiter wrote.

He goes on to describe some ways that central banks could stop people from trying to hold on to their cash, thus undercutting the supposedly desirable goal of expanding bank power. They included:

One, abolish paper money. Two, tax paper money.

One lone guy at NYU's business school made the only (to me) rational observation. It was how the article ended:

if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution”.

tim333• 11 years ago

The main issue is a bubble market for bonds. People are buying them because they have gone up in spite of the fact they lose money in the same way they used to buy loss making dot coms in the 90s dot com boom. For example a 10 year zero coupon bond paying $100 in 10 years time would traditionally have sold for say $80 giving you some return but if people choose to pay $101 I have a feeling it will go all webvan and pets.com on them. In fact the market appears to have started crashing three weeks ago. Cash will survive of course as it always has done.

Random_BSD_Geek• 11 years ago

It's curious to read contemporaneous reports about negative interest rates on record hoards of cash, the pending insolvency of social security and medicare (in the US), and high unemployment globally. You'd think we could find better uses for those massive piles of cash.

I for one welcome our pending transition to federation credits. ;)

fche5• 11 years ago

"You'd think we could find better uses for those massive piles of cash"

But those piles of cash don't belong to "us" to spend as "we" like.

malteof• 11 years ago

Econtalk on interest rates are quite on topic, check out here: http://www.econtalk.org/archives/2015/04/scott_sumner_on.htm...

snake_plissken• 11 years ago

This article is mixing up a few things, that although related to each other, are distinct.

The theory behind negative nominal interest rates is that depositors will move their money out into the economy where it can earn a the least a positive rate of return, or used for consumption. For some reason this isn't explained very well in the article. Personally I've never bought it, both in theory and practice. Real interest rates (the rate of return you get after accounting for inflation, i.e. real = nominal - inflation) have been negative for some time and there has not been this huge outflow of deposits into other or potentially better investments. It is mostly institutional investors and banks with money parked on the sidelines who are affected by these negative rates, but being (supposedly) risk averse entities, it does sometimes make more financial sense to know you are going to lose 1% a year rather than something more. Ironically, if anything, having a nominal negative rate of interest in a situation where the money remains parked in a bank says more about how low economic expectations are.

But the ECB and the Swiss National Bank are setting a negative nominal interest rate because there is political opposition to expanding their balance sheets in the same way the Federal Reserve has done, so negative rates are really their only additional option. Right now there is an ECB bond buying program, but it will only purchase (and inject) about $1 trillion dollars in the Eurozone. The Fed bought about $4 trillion dollars.

To call what JP Morgan has done through this "utilization fee" a negative interest rate is slightly disingenuous albeit still correct in principle, in which case your could call any fee that decreases what you put in a negative interest rate. They want to get rid of these deposits because it improves their balance sheet and lets them operate more freely under the current regulatory regimes, or at least make something on the side if the money stays. The articles does state this but it's buried at the end of the third paragraph.

Then there is the part about moving away from cash. There has been this push lately by well known academics and some main stream economists of an idea that cash is somehow detrimental to the economy. Beyond the privacy implications and the affect this would have on people who are in the low income segment of society and those who are un-banked, I really don't get it and I think it's driven by the need to try and get creative about monetary policy. I suppose with a cashless society you could technically also move to a completely consumption based taxation system, but this idea runs contrary to the idea of trying to get people to spend money since tax liability would be proportional to how much of your income you spend.

It's also difficult to accept the proposition that trying to force people to spend money and increase consumption will improve the economy in a real and long lasting way, when it is savings and investment that drive the real economy. This is my main issue with an extended period of ZIRP or NIRP. No one is inclined to save anything and so investment is funded by further periods of monetary expansion. (And for everyone who is going to say something about the identity S=I, I know, I completely bastardized it and technically it's only true for closed economies but the point still holds the same, savings are important to a having a good economy.)

Negative Interest Rates May Spark Existential Crisis for Cash

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