I was driving my oldest down to stay the night with the grand parents and we had some time to talk. As usually happens, the conversation turned to economics. This happens with surprising frequency when I have time for discussion with the kids. In this case, the issue of government control versus the free market came up. Wanting to present a look at both with an pretty even hand, I chose the Mexican oil boom and subsequent collapse of the Peso.
The first stop on our journey was an example from this case history where government regulation can be helpful. Mexico bet heavily on oil, so much so that there were no production limits. With no production limits in place, producers produced as much oil as they could pump out of the ground. This had the effect of lowering the global price of oil, which harmed every economy that relied on oil as a source of income, but was particularly hard on Mexico which had borrowed to finance their rapid expansion of production capacity.
So in this simplified but accurate example, we can see a need for government regulation.
But, peeling the onion a bit, let us back up and look at what really was happening. Was free market exuberance really to blame for the troubles Mexico faced once the price of oil began to react to the nearly doubled rate of production?
Let's consider the source of the money used to finance the expansion. In this case, Mexico borrowed from other countries. This created a scenario where the value of the currency used in an economy, generally correlated to the GDP of the given economy, was dependent upon the return on investment of the money borrowed that must be repaid in that same currency. Said more simply, the notes Mexico took and promised to repay would be directly affected in terms of value by the ability of the Mexican economy to remain stable. Mexico, under this scenario, had an incentive to weaken their own currency as it would tend to reduce the impact of paying back these loans. For governments, this is no problem except for the fact that it is most certainly a problem for people living under said government trying to live on said currency. When currency values slide, the cost of living goes up.
So, broadly, government intervention was the root cause of the bust that followed the Mexican oil boom. More to the point, government abuse of the power to borrow and then poorly manage things was the root cause. What this helps us to see is the destabilizing influence a government can have on free market activities. Let's suppose Mexico had never borrowed money to finance the expansion of oil production capacity? What limiting factor would have existed on their natural expansion rate? Market Demand. The free market with its ability to self regulate through supply and demand would have prevented both the oil production boom in mexico, which drove oil prices downward globally, and would have prevented the subsequent bust caused by a resulting inability to repay debts, because there would have been no debt.
The full series of mechanical linkages that caused the collapse of the Mexican economy are more detailed and complex than presented here, but as an example of whether we should look to more government regulation or less, this helps give a clear view that some regulation is needed, but usually as a direct result of some other influencing factor, like government subsidies, interest rates set by central banks, or other decisions made outside the natural bounds of the free market.
This is not to say that all decisions made by the free market, collectively, are always good and wise. But the one thing the free market has going for it that no government will ever be able to duplicate is the speed with which the market self corrects and adjusts to new circumstances. It may be very messy, large businesses may go bankrupt, but that is the cost of freedom that must be accepted as a risk factor if we are going to invest in large businesses which we have no real direct control over. So, we can have very little regulation and assured ups and downs, or government regulation and assuredly see wide sweeping unintended consequences affecting huge sectors of the economy across many nations.
Sunday, November 29, 2015
Thursday, April 16, 2015
Algorithmic Impact: Aggregation
Reposted from my G+ page once I realized it belonged here. And, my apologies for the lack of posts to this blog over the last few years. Life has been keeping me busy!
I awoke this morning with a simple half dream where a list of numbers was shown to me, representing an aggregate score. I immediately recognized upon waking that there was a problem represented in this dream and my mind ran down through several scenarios where data aggregation has been misused by accident, and abused by design. But it's not all bad.
First, what's the problem with data aggregation? You might easily see that it obscures the details. While that is the point, the obscuring of supporting details can hide valuable and meaningful information. I have a project under development presently that provides some good examples of this: time entry and reporting.
Let's say I have two employees who have both logged 40 hours this week. Just looking at that aggregate number, 40, I can't tell much about how that time was spent. Did one employee come in late every day but then stay late to make it up? Did the other work late to meet a deadline Wednesday and then knock off early on Friday? Do these things matter? They might matter, they might not, but the point is simply that their meaning is lost through the process of aggregation.
Let's look at something that impacts nearly every American, your credit score. How is this score derived? What rules and measures are used? If I rely upon your credit score as a measure of your credit worthiness, is that a good thing? The abstraction of details into an aggregate score means I don't know a great deal about you. The credit score provides a fairly anonymized way of presenting you as a number that I can infer my own value judgments upon. But is this a good thing? Are you comfortable with that? You may say yes when your score is good, and no when it is bad. Whether it is just or not, it is computed by rules set by someone, perhaps kept secret, and rightly or wrongly provided as a service to those who need to get to know you quickly to decide whether to do business with you. It's the cost of doing business if your business includes taking out loans establishing credit cards. But it has also been used to screen renters, students and customers to decide if there is some bias free way to weed out bad customers. Here, the judgment of the aggregate data has a real impact on human life, just or not.
So as a merit, aggregation provides an abridgment of tedium. In doing so, as with the case of the credit score, it buys for us expediency in commerce, but it comes at the cost of clarity which is an imperfect, impersonal representation of data lacking in deep understanding of our circumstances and recent efforts to perhaps repair damaged credit. We can't tell from a timesheet how hard someone worked and we can't tell from a budget how well it has been followed. We can't tell from a savings account balance how frugal or unlucky someone is.
Aggregation, to be sure, is a shortcut with real value, but it slips neatly into a category of summary knowledge that enables lazy thinking. It provides a seemingly scientific footing for ill founded assumptions that lack a cognisance of the detailed algorithm used to arrive at a particular aggregate number. A wholly ignorant man can speak with authority and mastery he does not possess, and nevertheless be correct in the speaking of the number itself, and yet completely wrong in what merits or demerits he attributes to or derives from said number... and horrifically, an uninformed and dispassionate audience would be none-the-wiser. And therein lies the danger of aggregation. In seeking to provide a good by publishing such information, we enable evil by the looming masses of idle minds, desperate for some measure of recognition of their imagined intelligence.
So, use great caution in both the creation, presentation and consumption of statistics and data presented to tell a narrative. As we tell our children when they go to put something in their mouth they found on the floor: "you don't know where that's been", or the implicit reason for not accepting candy from a stranger: "you don't know where it's from or what it contains".
I awoke this morning with a simple half dream where a list of numbers was shown to me, representing an aggregate score. I immediately recognized upon waking that there was a problem represented in this dream and my mind ran down through several scenarios where data aggregation has been misused by accident, and abused by design. But it's not all bad.
First, what's the problem with data aggregation? You might easily see that it obscures the details. While that is the point, the obscuring of supporting details can hide valuable and meaningful information. I have a project under development presently that provides some good examples of this: time entry and reporting.
Let's say I have two employees who have both logged 40 hours this week. Just looking at that aggregate number, 40, I can't tell much about how that time was spent. Did one employee come in late every day but then stay late to make it up? Did the other work late to meet a deadline Wednesday and then knock off early on Friday? Do these things matter? They might matter, they might not, but the point is simply that their meaning is lost through the process of aggregation.
Let's look at something that impacts nearly every American, your credit score. How is this score derived? What rules and measures are used? If I rely upon your credit score as a measure of your credit worthiness, is that a good thing? The abstraction of details into an aggregate score means I don't know a great deal about you. The credit score provides a fairly anonymized way of presenting you as a number that I can infer my own value judgments upon. But is this a good thing? Are you comfortable with that? You may say yes when your score is good, and no when it is bad. Whether it is just or not, it is computed by rules set by someone, perhaps kept secret, and rightly or wrongly provided as a service to those who need to get to know you quickly to decide whether to do business with you. It's the cost of doing business if your business includes taking out loans establishing credit cards. But it has also been used to screen renters, students and customers to decide if there is some bias free way to weed out bad customers. Here, the judgment of the aggregate data has a real impact on human life, just or not.
So as a merit, aggregation provides an abridgment of tedium. In doing so, as with the case of the credit score, it buys for us expediency in commerce, but it comes at the cost of clarity which is an imperfect, impersonal representation of data lacking in deep understanding of our circumstances and recent efforts to perhaps repair damaged credit. We can't tell from a timesheet how hard someone worked and we can't tell from a budget how well it has been followed. We can't tell from a savings account balance how frugal or unlucky someone is.
Aggregation, to be sure, is a shortcut with real value, but it slips neatly into a category of summary knowledge that enables lazy thinking. It provides a seemingly scientific footing for ill founded assumptions that lack a cognisance of the detailed algorithm used to arrive at a particular aggregate number. A wholly ignorant man can speak with authority and mastery he does not possess, and nevertheless be correct in the speaking of the number itself, and yet completely wrong in what merits or demerits he attributes to or derives from said number... and horrifically, an uninformed and dispassionate audience would be none-the-wiser. And therein lies the danger of aggregation. In seeking to provide a good by publishing such information, we enable evil by the looming masses of idle minds, desperate for some measure of recognition of their imagined intelligence.
So, use great caution in both the creation, presentation and consumption of statistics and data presented to tell a narrative. As we tell our children when they go to put something in their mouth they found on the floor: "you don't know where that's been", or the implicit reason for not accepting candy from a stranger: "you don't know where it's from or what it contains".
Wednesday, January 28, 2015
Insured Deposit Accounts (FDIC)
It seems that many folks these days confuse the presence of a promise with the ability of that promise to be kept. Just because I tell you we're going out to lunch doesn't mean I can pay the bill.
A more commonly accepted-at-face-value promise is the FDIC, or the Federal Deposit Insurance Corporation. FDIC was created to negate panic triggered runs on banks. Since all modern banking is fractional, if we all asked for our total deposits at one time, there would not be enough currency in circulation to pay everyone back. To prevent this sort of mass hysteria, the government implement the FDIC, which at the time sounded like a good idea and in fact was a stop gap for consumers against banks failing.
However, the FDIC was in crisis mode just a few short years ago when a number of banks were on the cusp of failing. It could perhaps absorb the failure of a few regional banks, and did back in 2008, but the strain placed on the system then led FDIC to establish stress-testing standards for banks of all kinds that places a further cost burden on those banks, forcing some of them to deleverage their fractional lending and reinforce their cash liquidity. Meanwhile, the Fed has so retarded interest rates, notably the prime lending rate, that Banks can't pay any reasonable savings to depositors, and their margins on what they lend out are the slimmest they have been in some time, making their failure more likely, or at least diminish their ability to provide that cash to depositors.
Credit Unions are viewed as a better choice, but they have the same mechanism, a federally backed insurance program, the National Credit Union Administration. Same program, same pitfalls, same guarantees.
But most people don't need to worry about this since your average person lives from one paycheck to the next, never setting aside any emergency funds of any kind. Only the frugal and the farsighted need be concerned, and if you're one of those, you probably know enough not to put all of your proverbial eggs in one basket. Diversify your wealth and any single tremendous upset will only perturb a portion of your estate.
A good personal plan for diversification, if your means allow would look like:
- Cash on hand: Enough to cover a month or two of living expenses at market rates
- Cash in the bank: just enough to cover your insurance deductibles and one months worth of bills.
- Physical commodities on hand - that which you or those in your immediate geographic area will need (and that you can use for barter). Think beans, bullets and bandaids.
- Own your home, or some land, clear of any mortgage or lien if possible.
- Reliable foreign currency, preferably in cash.
If you choose to invest, you choose to gamble, which is foolish, but if you want to and can't think of anything else to do wiht your money, mix it up.
- municipal bonds
- penny stocks if you want to day trade, fortune 500 if you want to invest for the long term
- sovereign debt
- commodity contracts
Some safe-guards:
Obviously, don't put it all in one place.
If you can't stand in front of it and physically defend it with a gun, you don't really own it, so anything fitting that description should be considered gambling if you choose to engage in that.
Don't mouth off about what you've got. I only tell people what they can discover in public records. I own land, I almost own my home, I have bank accounts. If you make it known you're a prepper of any description, you're making yourself a target. Not wise unless you relish the prospect of the above.
A more commonly accepted-at-face-value promise is the FDIC, or the Federal Deposit Insurance Corporation. FDIC was created to negate panic triggered runs on banks. Since all modern banking is fractional, if we all asked for our total deposits at one time, there would not be enough currency in circulation to pay everyone back. To prevent this sort of mass hysteria, the government implement the FDIC, which at the time sounded like a good idea and in fact was a stop gap for consumers against banks failing.
However, the FDIC was in crisis mode just a few short years ago when a number of banks were on the cusp of failing. It could perhaps absorb the failure of a few regional banks, and did back in 2008, but the strain placed on the system then led FDIC to establish stress-testing standards for banks of all kinds that places a further cost burden on those banks, forcing some of them to deleverage their fractional lending and reinforce their cash liquidity. Meanwhile, the Fed has so retarded interest rates, notably the prime lending rate, that Banks can't pay any reasonable savings to depositors, and their margins on what they lend out are the slimmest they have been in some time, making their failure more likely, or at least diminish their ability to provide that cash to depositors.
Credit Unions are viewed as a better choice, but they have the same mechanism, a federally backed insurance program, the National Credit Union Administration. Same program, same pitfalls, same guarantees.
But most people don't need to worry about this since your average person lives from one paycheck to the next, never setting aside any emergency funds of any kind. Only the frugal and the farsighted need be concerned, and if you're one of those, you probably know enough not to put all of your proverbial eggs in one basket. Diversify your wealth and any single tremendous upset will only perturb a portion of your estate.
A good personal plan for diversification, if your means allow would look like:
- Cash on hand: Enough to cover a month or two of living expenses at market rates
- Cash in the bank: just enough to cover your insurance deductibles and one months worth of bills.
- Physical commodities on hand - that which you or those in your immediate geographic area will need (and that you can use for barter). Think beans, bullets and bandaids.
- Own your home, or some land, clear of any mortgage or lien if possible.
- Reliable foreign currency, preferably in cash.
If you choose to invest, you choose to gamble, which is foolish, but if you want to and can't think of anything else to do wiht your money, mix it up.
- municipal bonds
- penny stocks if you want to day trade, fortune 500 if you want to invest for the long term
- sovereign debt
- commodity contracts
Some safe-guards:
Obviously, don't put it all in one place.
If you can't stand in front of it and physically defend it with a gun, you don't really own it, so anything fitting that description should be considered gambling if you choose to engage in that.
Don't mouth off about what you've got. I only tell people what they can discover in public records. I own land, I almost own my home, I have bank accounts. If you make it known you're a prepper of any description, you're making yourself a target. Not wise unless you relish the prospect of the above.
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