Tyler Cowen recently challenged us to try to stump an AI named “o1”: 1. o1 is a very good economist.  Try to stump it if you can. I could not find o1, so I used ChatGPT 4o mini.  I hope someone will try the following question with an o1 and report the results in the comment section: The thing I keep noticing with AIs is that they are like a super smart student that is capable of memorizing vast quantities of information, but lack an ability to actually see the essence of a problem.  In the example above I gave one hint after another, practically begging the AI to avoid reasoning from a price change.  It had so little awareness of what it was doing that it ended up telling me that Qd fell while Qs rose and yet the market remained at equilibrium.  Perhaps I used the wrong AI, or perhaps this question is unusually tricky.  (To a college student, “tricky” means a question where you actually have to understand something, and cannot just regurgitate what you’ve read in your notes.)  So let’s take a question that Tyler asked the o1 economist: Please write an essay on how current macroeconomists find inflation dynamics so very difficult to predict, and why that has made them reject various forms of monetarism, even as approximations of what is going on behind price level behavior. The answer is very long, so I’ll just focus on a few key portions of the response: Several factors have contributed to the increasing complexity and unpredictability of inflation. First, the financial innovations and regulatory changes of the late twentieth and early twenty-first centuries dramatically altered the relationship between money and economic activity. Monetary aggregates—like M1 or M2—that once served as dependable indicators of policy stance and future inflation now behave erratically due to shifts in the velocity of money, the proliferation of shadow banking, and the globalization of financial flows. Simply put, where money resides and how quickly it moves through the economy has become too fluid and too complex for older monetarist simple rules to capture. Second, the nature of central banking and fiscal policymaking has changed. Central banks now intervene in a host of unconventional ways, from massive purchases of financial assets to the forward guidance of policy expectations. These tools are not well-explained by the classic monetarist perspective, which centered on controlling a particular measure of the money supply. The recent experience following the Global Financial Crisis vividly illustrates this: The Federal Reserve and other central banks undertook unprecedented quantitative easing programs, dramatically expanding their balance sheets. According to traditional monetarist logic, this rapid increase in the monetary base should have led to substantial inflation. Yet inflation remained persistently below target levels in many advanced economies for years, confounding those who relied on old monetary aggregates as a guide. Third, the determination of prices today involves a bewildering interplay of global supply chains, technological advances, labor market transformations, and shifts in consumer behavior. Globalization means that prices for goods and services are influenced not just by domestic monetary conditions, but also by distant supply shocks, currency fluctuations, and international competition. Technological change increases productivity and can compress prices in certain sectors, while leaving other parts of the economy less affected. Labor markets have also evolved, with changes in union power, demographic shifts, and altered labor-force participation patterns influencing wage formation and cost pressures. These micro-level frictions and structural changes make the older macro-level equations linking money supply growth to inflation too coarse and imprecise. Sorry, but this is mostly a mix of empty clichés and irrelevant comments.  Again, it’s the sort of thing that I’d expect a student to put down if they didn’t know the answer.  I’ll explain why in a moment, but first let me clarify an important point.  I am pretty sure that o1 is more intelligent than I am, at least in the way that most people define “intelligence”.  In other words, o1 knows way more than I do.  It is far more intelligent than I am in roughly the sense that the New York Times is far more intelligent than I am.  And that’s really, really impressive. But o1 is not a good economist.  Sorry, it just isn’t.   Let’s first dispose of the final paragraph, which is utter nonsense.  Technology has been advancing for more than 100 years, and the pace of productivity growth is not accelerating.  So that’s not a factor making inflation harder to forecast.  Union strength goes up and down, and that fact does not make inflation harder to forecast.  Shifts in consumer behavior?  Now the student is really getting desperate.  It’s an “I need to fill up the page with something” sort of comment. Global supply chains?  Again, it doesn’t make inflation harder to predict.  Not at all.  Global commodity prices had a bigger impact on US inflation 100 years ago than today. None of those four factors have made it any more difficult to predict inflation.  Indeed I’m not even sure it is becoming more difficult to predict inflation.  It seems to me that inflation was far harder to predict when I was young than it is today.  The first sentence in the middle paragraph is a bit less bad.  Central banking really has changed in one respect.  And the relationship between the base and the aggregates really has gotten looser.  Unfortunately, the AI seems to have no idea why the relationship has gotten looser.  It mentions a bunch of irrelevant stuff like QE, and misses the key point that the payment of interest on reserves and the zero lower bound problem have made the money multiplier far more unstable.  The AI also says that fiscal policymaking has changed.  That was probably just a wild guess.  I cannot think of any changes in fiscal policy that make inflation harder to predict.  Given that the AI is silent on the issue, I suspect that it also has no idea what has changed about fiscal policy, or why those changes would make inflation harder to predict.  In the first paragraph the AI says: Monetary aggregates—like M1 or M2—that once served as dependable indicators of policy stance and future inflation now behave erratically due to shifts in the velocity of money, the proliferation of shadow banking, and the globalization of financial flows. False.  The aggregates were never dependable indicators of inflation.  Money velocity has always been unstable.  But don’t the textbooks say that money velocity used to be stable?  Yes, many do.  That’s probably where the AI got its misinformation.  It might be more unstable now, but it’s never been stable enough for the aggregates to be good predictors. Also notice the odd list, which includes velocity, shadow banking and financial flows.  That’s kind of silly.  An AI that understood what it was talking about would have put a period after velocity, and then had a separate sentence explaining some reasons why velocity changed.  Right now, it’s a confusing jumble of concepts. If you are a math-oriented person who is confused by economics, this equation might help you see my point: V = PY/M The AI is basically saying that the PY/M ratio is changing due to things like changing V, shadow banking and financial flows.  The ratio is V!!  The other variables help explain why V might change. Even though the NYT is much smarter than I am, when I happen upon a NYT article in an area where I have some expertise, the paper suddenly seems much less smart.  I won’t say “dumb”, because even at its worst the NYT employs talented reporters.  And I cannot expect them to have devoted their entire life to studying monetary economics. In my view, the o1 response provided by Tyler is modestly below the level of the NYT.  At a minimum, the Times would have mentioned interest on bank reserves or the zero lower bound.  Nonetheless, AIs are truly impressive when it comes to the quantity of information they have memorized.  Even within monetary economics, an AI will often have more information at its fingertips than I do.  An AI could write a better essay on all the new Fed policy tools than I could write.  Where it falls down is in a certain type of understanding.  I’m not sure I can even put this concept into words.  Maybe understanding doesn’t really exist, and we just fool ourselves into thinking we have a deep understanding of something.  Perhaps a super-intelligence would mock my writing in the same way that I mock the AIs that engage in reasoning from a price change.  All I know is that AIs have a long way to go before they impress me in the domain of understanding monetary economics.  But outside my field, I’m already highly impressed. Here’s how AI Overview defines Gell-Mann Amnesia: Gell-Mann Amnesia (GMA) is a defense mechanism that occurs when someone reads a news article about a subject they know well and finds it to be full of errors, but then proceeds to read the rest of the newspaper as if it is more accurate. The term was coined by Michael Crichton after discussing it with Murray Gell-Mann (0 COMMENTS)

Tariffs are in the air. Will they help or hurt Americans? Listen as economist Scott Sumner makes the case against tariffs and various other forms of government intervention that go by the name of industrial policy. Along the way he looks at some of the history of worrying about the economic and military dangers posed […] The post Why Industrial Policy Is (Almost) Always a Bad Idea (with Scott Sumner) appeared first on Econlib.

A recent article in The Economist discussed what they assume is the president-elect’s view of interest rates: A more hawkish Fed may, in turn, invite the wrath of Mr Trump, who has insisted that, as president, he should have a say over interest rates. He will surely want to see steeper rate cuts now that he is in charge. This reminds me of a story entitled The Monkey’s Paw, where the protagonist is granted three wishes, which don’t turn out as well as intended.   Let’s consider some possible outcomes, and then evaluate the sort of interest rate path that Donald Trump should prefer. 1. In most occasions, steep interest rate cuts are associated with recessions.  Recent examples occurred in 2020, 2008, and 2001.  Recessions are unpopular. 2. One might argue that The Economist meant that Trump prefers a steep decline in interest rates combined with a strong economy.  And the economy currently does appear quite strong, with the Atlanta Fed forecasting 3.3% growth in Q4.  But there is a substantial risk that a steep cut under that scenario could trigger high inflation.  At the moment, the fed funds futures market is predicting some rate cuts over the next few months, but at a less steep rate of decline than we’ve seen in recent months.  At the same time, market inflation expectations are slightly above target.  If the Fed were to adopt even “steeper rate cuts” than seen in the recent past, despite the robust NGDP growth, there would be a very real risk of inflation re-accelerating.  Inflation is unpopular. 3. Perhaps the Fed rate target is still far above equilibrium.   (But then why is growth so strong?)  Perhaps it will be possible to cut rates and keep the expansion going, as we saw in 2019 and 1998.  But we’ve already seen a 75-basis point cut.  It would be almost unprecedented to see an even steeper cut from this point forward, without either re-igniting inflation or being a response to recession. To be clear, I am not saying that we are likely to get a recession or high inflation.  But that’s because I do not expect to see even steeper rate cuts.  I expect the pace of rate cuts will actually slow in 2025.  And I believe this would be the best possible result.  Indeed I’ll go even further.  If these three scenarios were fully explained to Trump, I doubt he’d be rooting for “steeper rate cuts”, especially if he had recently read The Monkey’s Paw. Or Goldilocks and the Three Bears. This is an illustration from The Monkey’s Paw:   (0 COMMENTS)

  Indiana Cops Seized Their Cash From a FedEx Hub. Prosecutors Just Agreed To Return It. by C.J. Ciaramella, Reason, December 3, 2024. Excerpts: Indiana prosecutors will return $42,000 in cash they seized from a California small business, several months after the owners filed a class action lawsuit alleging that law enforcement is exploiting a major FedEx shipping hub in Indianapolis to seize millions of dollars in cash from innocent owners. The Institute for Justice (I.J.), a public interest law firm, announced last week that prosecutors in Marion County, Indiana, have agreed to return the money to its clients Henry and Minh Cheng, who run a California jewelry wholesaler business. Police seized the cash from a FedEx package en route to them from a client in Virginia. County prosecutors then filed a lawsuit to forfeit their money through a process called civil asset forfeiture, claiming the Chengs’ money was connected to a violation of a criminal statute. However, the complaint never stated which statute. And: “I’m ecstatic at the prospect of getting my money back,” Henry Cheng said in an I.J. press release, “and this is just the beginning. What happened to my company shouldn’t happen to anyone. Indiana should stop trying to steal from law-abiding citizens by seizing property and figuring out later whether there’s any basis for keeping it.” DRH comments: First, it is not true that the prosecutors said, “Badges? We don’t need no stinkin’ badges.” Second, this is another victory for the Institute for Justice, one of the charities I give to annually. Hunter’s Pardon by David Friedman, David Friedman’s Substack, December 4, 2024. Excerpts: A commenter asked how it was possible for Biden to be both corrupt and a decent man. My response is that I judge someone’s personality mostly by how he treats the people immediately around him; people we interact with directly are more salient, more real, to us than distant people, even distant people affected by actions we take. Morally speaking, stealing from Walmart is the same offense as stealing from a friend or a colleague but it doesn’t feel the same and it leads to a different prediction of future behavior. Someone who steals from a friend will feel free to steal from Walmart if he thinks he can get away with it, but probably not the other way around. Someone who gives up his weekend plans to drive a friend to the hospital in a medical emergency and take care of his kids and pets until the emergency is over might do less good for the world than someone who donates ten thousand dollars to a well chosen medical charity but he has given better evidence of being a good person, someone friends can rely on. A decent man. And: I saw it not as a question of what Joe should have done but of what the thing he did do tells us about what sort of man he is. A Joe Biden who cared enough about keeping his promises and preserving trust in the legal system, about his duty to the American people, to let the son he loved go to jail, would be a better man than the Joe Biden who pardoned his son — but that Joe Biden would not have taken millions of dollars of bribes funneled through his son to his family and this one did. A Joe Biden who let his son go to jail to spare himself the embarrassment, the loss of status, from pardoning him after repeatedly promising not to, would be a worse man than the Joe Biden who pardoned the son he loved. He would not be a decent man — and this one might be. Or might not. The pardon not only covered the crimes Hunter had been convicted of but also any crime he may have committed from Jan. 1, 2014, to Dec. 1, 2024. The innocent explanation is that Joe feared further prosecution of his son after he was no longer in a position to protect him. The less innocent one is that Joe feared legal action against Hunter for offenses in which his father was a co-conspirator, leading to legal action against Joe. DRH comment: This is the most interesting thing I’ve read on the Hunter Biden pardon. That does not mean that I totally agree with it. Notice in the first 2 sentences of the first quote above that David shifts from talking about morality to talking about personality. I would say more but I’m still pondering. I put this up mainly because I think many readers will find it interesting.   Kash Patel’s Threats Against Journalists Make Him an Alarming Choice To Run the FBI by Jacob Sullum, Reason, December 5, 2024. Excerpt: What “crimes” did Patel have in mind? Lying about people might, depending upon the circumstances, amount to defamation, but it is not a crime, and any civil remedy for it would depend on lawsuits by the affected individuals, not the Justice Department. Rigging elections, if it involves the sort of fraud that Trump claims denied him his rightful victory in 2020, is a crime. But Trump never presented any evidence to substantiate his stolen-election fantasy, which in any case did not involve journalists who allegedly dumped phony ballots or manipulated vote counts. DRH comment: Reading about Patel’s comments reminded me of the same misunderstanding of freedom of the press that Tim Walz showed in his debate with J.D. Vance.   Is Trump Aiming To Continue Biden’s Antitrust Insanity? by Steven Greenhut, Reason, December 6, 2024 Excerpt: The big news from last week is the Justice Department said that Google should divest itself of its Chrome browser to comply with the court’s finding that the company exerted monopoly power in the search business. “Google’s exclusionary conduct has, among other things, made Google the near-universal default for search and ensured that virtually all search access points route users’ valuable queries and interaction data to Google,” the government argued. I don’t find it particularly shocking that successful companies dominate some aspects of the internet marketplace. Other companies are free to develop their own search engines. I relied on Chrome for the research for this column because it’s the best choice available. It costs me nothing to use it and I had other choices, so it’s unclear how the government is protecting me. If the court follows DOJ’s lead, it will likely make searching more convoluted and less secure. As Google’s chief legal officer explained in a blog post, the DOJ’s filing represents “unprecedented government overreach” as the feds seek to, for instance, require “two separate choice screens before you could access Google Search on a Pixel phone you bought.” Government bureaucrats, attorneys, and the courts shouldn’t be dictating specific application designs, but to populists that’s fine because, well, they’re sticking it to Big Tech. DRH comment: The Google suit reminds me of the suit against Microsoft in the late 1990s, which I wrote about here. It also reminded of the suit against Alcoa in the 1940s. I quoted from the Alcoa judge’s comments in my article on Microsoft.   How Shopping Malls Are Being Transformed Into Apartments In The U.S. CNBC, December 5, 2024.     (0 COMMENTS)

Two main reasons for studying economics are often given in textbooks and classes. First, it helps us understand the social world we live in and, secondly, it informs better public policy decisions. An example comes from Adam Smith in The Wealth of Nations. By understanding what makes a nation wealthy compared to others, we might be able to develop a roadmap for other nations to reach prosperity too. A less often discussed motivation for learning economics is for better personal decision-making. Economists use economic reasoning to make better decisions in their personal lives, but they don’t always propose this as a major benefit to their students or the public. This is possibly because economics is too often conflated with the study of finance or business; economic theory is not a series of recipes for making money. However, it can help students get a clearer idea of how to make the most of life.  There’s a kernel of truth in jokes about how it doesn’t take a genius to get rich. Here’s one:  At a 10-year high-school reunion, a middle school math teacher arrives in a beat-up old sedan and an old buddy of his pulls up in a shiny new convertible and all the trappings of wealth. The math teacher recalls that this friend barely squeaked by in his high school classes. “You seem to be doing well”, he says as he greets his friend, “what’s your secret?” The friend replies, “I just follow the 5 per cent rule. Buy something for $5, sell it for $10.” It’s true, and likely a virtue of market economies, that individuals with little deep knowledge of mathematics or how the world works can amass wealth, yet it is more likely that wealth can be maintained with some understanding of economics. It is possible to have a high income, yet little actual wealth if that income is mismanaged, or if opportunity costs are poorly assessed.  Basic assessment of opportunity cost can inform financial decisions. For instance, it is almost always better to finance something over a period if 0% interest is offered. If you have to pay $1,200 now or $100 per month for 12 months at zero interest, the latter is a better deal, as long as there are no other significant transaction costs that come with that option. If you make payments on time each month while earning simple interest on the money in the bank, and assuming the interest rate is 5 per cent, you will earn around an extra $27 in interest that year. Therefore, you get what you bought and $27 (which would be greater with compounding). Lots of such decisions can add up, and every dollar counts.  A corollary of this is that making early tax payments is likely not worth it. If you get a big refund after filing your taxes, you overpaid during the year and have essentially lent your money to the government at zero interest for the period between your payment and receiving the refund. Individuals may feel frightened of having a big tax bill at the end of the year, which is understandable. One could take the money that you will owe to the government and put it in an interest-bearing account until the end of the year, then pay the taxes and keep the earned interest afterwards. The same example above applies here.  The “efficient markets hypothesis” developed by economist Eugene Fama implies concrete advice about investing in financial markets: diversify and minimize transaction costs, you don’t know more than the market (and professional portfolio managers don’t either). Economics proposes no “get rich quick” schemes, but it does have a “get rich slowly” plan.  To be sure, many economists explicitly provide economic lessons for better decision making. Justin Wolfers and Betsey Stevenson focus on it in their podcast Think Like an Economist, which is still worth listening to, although they stopped producing episodes a few years ago. Steven Landsburg offers usable insights in The Armchair Economist. Tyler Cowen provides advice for using economics in An Economist Gets Lunch and Discover Your Inner Economist. Bryan Caplan, in his blogging and new book, Self-Help is Like a Vaccine, has employed theory and clear thinking to offer actionable advice about real issues that people care about. Many have attested to the value of his advice, and much of this essay has been learned from him through his writing and teaching.  Jane Austen reportedly said that “a large income is the best recipe for happiness I have ever heard of”. While funny and true, the law of diminishing returns suggests that beyond a certain level of income, an extra dollar will not get you much more happiness.  Economists know that money isn’t everything. It is a stand-in for control of resources and the power to live the kind of life that you want. If you can secure that life through non-monetary means, then it makes sense to do so. Of course, many people without formal knowledge of economics are already great at using such thinking to make life decisions, they just may be unaware that they are doing it.    Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University.  (0 COMMENTS)

In a recent Defining Ideas article, “Why Trade Should Be Free,” I made the case for free trade. Although my way of stating it is slightly original, the case for free trade is one that many economists, including Adam Smith, have made. Free trade causes people in the free trade country to produce the goods and services for which they are the least-cost producer and to import goods and services for which people in other countries are the least-cost producers. The case for free trade is no more complicated than the case for hiring someone to mow your lawn. The conclusion that free trade is good for a country’s government to adopt does not depend on other countries adopting free trade. Even if other countries’ governments impose tariffs, we are better off, on average (there could be some losers), if our government refrains from restricting trade. Are there any exceptions to the case for free trade? There’s one main one. Adam Smith himself laid out this exception in The Wealth of Nations: restricting trade when the traded item is crucial for national security. But the case for restricting trade even in such cases is not airtight and, indeed, other ways to assure a supply of such items may be better than restrictions on trade. One such way is by stockpiling the crucial items and that may well involve more trade, not less. Whatever the measures taken to assure availability of crucial inputs to defense, we, unfortunately, depend on government officials with information and competence, two characteristics that are typically in short supply in government. These are the opening two paragraphs of my latest Hoover article, “Does National Security Justify Trade Restrictions?” Defining Ideas, December 5, 2024.   One of the exciting studies I found while researching this article was the work on rubber during World War II by Alexander J. Field, an economic historian at Santa Clara University. I wrote: Because of our climate, the United States has never been a producer of rubber. This mattered during World War II. In a December 2023 paper titled “The US Rubber Famine during World War II,” Alexander J. Field, an economic historian at Santa Clara University, tells the story of US dependence on rubber imports during the war. After the Japanese government invaded Singapore, it took control, writes Field, of “almost all Southeast Asian sources of natural rubber.” Field notes that this “deprived the United States of 97 percent of its supply of the one strategic material in which it had effectively no domestic sourcing” (italics added). The good news is that various US officials saw this coming before the US government officially entered the war. Field notes the three strategies to deal with the loss of imports: (1) domestic stockpiling of rubber before US entry into the war; (2) subsidizing “domestic production of alternative plant-based sources of latex”; and (3) developing a synthetic rubber capability. The bad news, according to Field, is that the chief US official who controlled US policy, Jesse Jones, slowed the pursuit of the first and third strategies. Read the whole thing. (0 COMMENTS)

A thought experiment, dear reader, on how to think about international trade and its impact on the wealth of a nation. Suppose one day, every country in the world suddenly said, in unison, “Hey America! We’ve decided we think you’re just the best and to show how much we love you, we’ve decided that from now on we’re going to send you 10% of everything we produce, free of charge. And in return, you don’t need to send us anything at all! Everything you produce, you can keep for yourselves. Plus, you also get the benefit of everything we send you!” Suddenly Americans are receiving cars, books, electronics, food, and so on, all free of charge. If other countries decided to send us lots of valuable stuff for free, wouldn’t that be great? (Great for Americans, anyway – not so great for the citizens of those countries.) Now, imagine the opposite scenario unfolding. Every country on earth decides to say “Hey America! We think you’re absolutely awful and we’ve decided that from now on, you must send us a tithe consisting of 10% of everything you produce, for which we will send nothing in return. Everything we produce, we will keep for ourselves.” Now, many goods and services that are produced by Americans no longer are able to be consumed by Americans, nor do any Americans consume goods or services produced elsewhere in the world. If we were sending lots of valuable stuff out to the rest of the world but not getting any stuff in return, wouldn’t that be lousy? (Lousy for Americans, anyway – but pretty great for the citizens of those other countries.) New scenario time. It’s the same as the first scenario, only instead of sending us stuff for free, every country in the world decides to send American all this stuff in exchange for 1% as much stuff from us as we are being sent. Getting lots of stuff in exchange for giving up very little stuff isn’t quite as nice a deal as getting lots of stuff for free, but it’s still really good. Last scenario – same as the second, but instead of forcing Americans to send 10% of what we produce in exchange for nothing, all the other countries in the world agree to send Americans 1% as much stuff as Americans send them. Sending away lots of stuff and getting only a tiny amount of stuff in exchange isn’t quite as bad as sending away lots of stuff while getting nothing at all – but it’s still a lousy arrangement. But what if I told you that in the first and third scenarios above, America would actually be running a trade deficit with the rest of the world, while in the second and fourth scenarios, America would be running a trade surplus. Does that suddenly change which scenarios are good or lousy? Clearly not. The trade deficit situations are still much better to be in if you’re an American citizen, and the trade surplus situations are still pretty awful. In the trade deficit scenarios, Americans can consume all (or nearly all) the goods and services they produce plus even more on top, while in the second scenario Americans consume fewer goods and services than they produce, and lack (or barely gain) an offsetting benefit of goods or services produced elsewhere. In international trade, imports are benefits and exports are costs. Paul Krugman put it well when he said “imports, not exports, are the purpose of trade. That is, what a country gains from trade is the ability to import what it wants. Exports are not an objective in and of themselves: the need to export is a burden that the country must bear because its import suppliers are crass enough to demand payment.” A country that is running a trade deficit (or, put another way, a country running an investment surplus) is a country where citizens get more goods and services from foreigners than those citizens send away for foreigners to consume. Those who claim Americans would benefit if only we exported more goods and services while importing fewer would have to conclude the second and fourth scenarios actually enrich Americans while the first and third impoverish us. Too many people think a trade deficit is in some way analogous to a household running a budget deficit. If I’m consistently spending more than I’m making, my household budget is in a deficit and if that goes on too long, things will end very badly for me. People hear “America is running a trade deficit” and think it means America is like a household that is spending more than it is making, but that’s simply a category error. Trade deficits and budget deficits describe things that are categorically unlike each other. The idea that a country running a current account deficit in trade is in any way analogous to a household spending beyond its means, and the populist movements inspired by such muddled thinking, has to be among the most damaging of all the common economic myths out there. (0 COMMENTS)

My friend and monetary theory teacher (of me) Jeff Hummel writes beautiful responses to various friends who comment on monetary issues. In a discussion of Tether, one of his friends quoted a source saying, “Tether is the third largest buyer of three-month US Treasuries and is projected to be the first next year. Tether now owns more US Treasuries than the governments of Germany, the United Arab Emirates (UAE), and Australia.” Jeff responded: Thanks for your interesting comment about Tether. It motivated me to check your source for more details. Here are some direct quotations from the article: “Tether became the third largest purchaser of three-month US Treasuries after the governments of the United Kingdom and the Cayman Islands in the second quarter of 2024, a press release reveals. . . .Tether Holdings owned $97.6 billion worth of US Treasuries in June 2024, a new high. Hence, Tether now owns more US Treasuries than the governments of Germany, the United Arab Emirates (UAE), and Australia. Hence, Tether is now the 18th largest holder of US Treasury bonds.” The Treasury issues Treasury bills every week, and I cannot find any government data on how many of those bills have a maturity of three months. This makes the first sentence I quoted above hard to evaluate. But notice that the next two sentences refer not just to T-bills but also to all Treasury securities held by Tether. So I decided to compare the $97.6 billion of Treasuries held by Tether with the total amount of Treasuries outstanding. The data most convenient for me to access are from the previous quarter, but since government debt is almost always increasing in both real and nominal amounts, that biases upward the measure of the relative amount of Tether holdings. As of the first quarter of 2024, the market value of the total amount of publicly held Treasuries outstanding was $24,693.7 billion (with a face value $2.115 billion higher). And this does not include the additional $7,053.1 billion of the gross national debt that is held by other government agencies, primarily the Social Security and Medicare trust funds, which are not marketable to the public and represent only money the government has loaned to itself and then spent. Thus, Tether’s $97.6 billion amounts to only 0.395 percent of the publicly held U.S. debt. For comparison, the Federal Reserve holds 16.88 percent, money market mutual funds hold 10.30 percent, and commercial banks and other depositories hold 5.08 percent. [Source: Federal Reserve Board, Financial Accounts of the United States (June 2024), p. 119.] The face value of the national debt in the form of Treasury bills of all denominations was $6,061.7 billion in the first quarter of 2024. It is not clear that all of Tether’s holdings are T-bills because, as your source points out, a small amount of them are in the form of repos or reverse repos with the maturity of the underlying securities unstated. Again quoting, “In detail Tether held $80.95 billion in US Treasury bills, $11.287 billion worth of overnight repurchase agreements for US Treasuries, and $997.373 million worth of Term Reserve Repurchase Agreements for US Treasuries, the BDO Italia S.p.A. accounting firm estimates.” Including the total of both repos (which are Treasuries loaned by Tether) and reverse repos (which are Treasuries borrowed by Tether) is technically double counting Tether assets, but by an amount that is minor. So if we count all these transactions and assume they all involve T-bills, that would mean that Tether is holding 1.34 percent of the outstanding amount of T-bills, admittedly a large proportion for a single firm. What about the article’s comparison with foreign holdings? The total market value of foreign holdings of all Treasuries has been declining over recent years and as of the first quarter of 2024 they amounted to $8,114.9 billion (32.8 percent of the total publicly held debt). Foreign governments at that time held less than half of the amount of Treasuries held abroad: $3,815.0 billion, of which only $267.0 billion were Treasury bills of all denominations. The U.S. does not provide a break down by individual country of the amount of foreign government versus private holdings so as to preserve the confidentiality of individual holders. But German, both government and private, holdings of all Treasuries  were $90.2 billion. [Source: U.S. Treasury Department, “Table 5: Major Foreign Holders of Treasury Securities.] That comes to only 0.37 percent of the publicly held debt, or 1.13 percent of the debt held abroad. That puts Germany behind eighteen other countries in its holdings of U.S. government debt as of first quarter of 2024. Thus it appears that the statement in the article that “Tether is now the 18th largest holder of US Treasury bonds” was comparing Tether holdings, not with domestic debt holders at all, but only with foreign holders. Here’s the Wikipedia entry on Tether. Jeff writes, “This is not to deny that Tether has become a revolutionary and useful part of the financial system. It is essentially a digital bank, with fractional reserves in the form of fiat dollars but with most of its assets in the form of financial investments. It issues what could be described as digital banknotes or deposits that are more liquid than ordinary bank deposits, especially for cross-border transactions and transactions with other crypto. Tether thus offers services that traditional banks cannot provide because of government regulations.” (0 COMMENTS)

Some bloggers take bets on the ideas they express in their writing. A few have been quite successful. I have chosen not to do so (thus far.) In some cases, those who refrain from betting are criticized for not having the courage of their convictions. I don’t believe that criticism is reasonable, and I’ll explain why in this post. Before doing so, let me emphasize that I am not opposed to betting, and do not criticize others for doing so. I will merely be expressing my highly subjective personal preferences.  My distaste for betting has two aspects, personal and philosophical.  (It’s not ethical.) Personal objections: Think back to when you were young.  Perhaps some 8-year old boys dared Freddy to pull Mary’s ponytail.  When Freddy refused, they taunted him.  “Nah, nah, nah, you’re afraid do it.”  Maybe he was afraid.  Or maybe he had other reasons.  Maybe he was polite.  Or maybe he was kind.  Fear is not the only human motivation.   Unfortunately, many people seem to have so little imagination that they cannot conceive of why someone would refuse to bet on their beliefs, unless they were afraid of losing money.  Refusal is seen as implying that their stated beliefs were somehow not sincere.  To say I’m not a fan of this sort of childish taunting is an understatement.  But it occurs so often I feel I should respond. Note: Some (not all) of the following applies to my current situation, and would not apply to when I was 30 years old.  If you are young, you may have trouble accepting these claims. Last time I looked, Bryan Caplan had done several dozen bets, and won almost all of them.  When I looked at his bets, many of them were pretty lopsided.  The people he bet against were frequently taking foolish positions.  So I do understand the argument for doing Caplan-style bets.  Often it was like stealing candy from a baby. Good for him!  But it’s not for me. [To be clear, although I almost always would have agreed with Bryan, I still think he did a bit better than I would have–I recall a Brexit bet where I would have taken the other side.  He really did do quite well.] Consider six types of possible bets: small and large bets with friends, small and large bets with strangers, and small and large bets in betting markets.  I’ll start with the three types of small bets. At my age and financial position, I don’t care very much about money, and I hardly care at all about small amounts of money.  I value two things–time to enjoy the last few years of my life, and a lack of aggravation.  Money?  I won’t say it doesn’t matter at all, but it’s way down the list.  Why would I want the aggravation of doing a bunch of small bets, where even if I win the money won’t change my life at all?  Even worse, I have a very non-competitive personality.  If I lose my bet, I feel bad.  If I win $50 from a friend, I feel bad for the friend.  And who cares about a lousy 5o bucks?  If I bet with someone I don’t know, then how do I know they’ll pay up?  But I do know that I would pay up, and that fact tilts the bet in their favor. I while back I recall a tweet from Elon Musk, predicting that Sam Bankman-Fried would escape arrest because he had donated to the Democrats.  (SBF donated to both parties.)  I immediately knew the tweet was dumb.  How did I know that?  Because I’m not 100% ignorant about how the US criminal justice system works.  Of course he would be prosecuted.  Ambitious prosecutors have never refrain from prosecuting someone like SBF.  They live for that kind of target.  (Read The Bonfire of the Vanities.)  To be clear, Musk is arguably the world’s greatest entrepreneur, much smarter than me, and there’s no shame in not being an expert on all topics.  As long as you know that the intricacies of government just aren’t your thing . . .   Suppose I had challenged Musk to a bet.  Most likely he would have ignored me.  But let’s say he took the bet and I won.  That sounds great, doesn’t it?  No, that would be a nightmare. I had thousands of readers at TheMoneyIllusion, many of whom were Russia trolls who hated me.  I would have been bombarded with demands to bet on this or that.  Some of the proposed bets would be too vague to resolve.  If I refused, they’d endlessly taunt me.  If I accepted, I’d be stressed as to whether these trolls would actually pay up.  I just want to spend my last few years reading novels I like and watching old B&W Japanese films.  I don’t need this sort of aggravation. To give you a sense of how much I hate aggravation, there has been more than one occasion when I regretted speaking to people at a major financial firm for a brief period, even though they gave me a large sum of money.  The aggravation came from getting them to pay up, which often involved many back and forth emails and failed attempts at direct deposit.  Most people would regard the money I received as more than enough compensation—I’m different. So if I don’t like betting with individual flesh and blood humans, why not with betting markets?  Before the recent election, I blogged that Trump had a 75% chance of winning, and 50% for winning the popular vote.  That was higher than the betting markets, which I recall had Trump with a 60% to 65% chance of winning the election, and only 25% to 30% for the popular vote.  So why didn’t I bet on Trump?  The thought of winning a small bet was simply not worth the hassle of figuring out how betting markets work, and doing the paperwork of setting up an account.  And don’t tell me it’s “easy”.  I’d say roughly 90% of the time when someone tells me something is easy to do on the computer, I find it hard.  (Mercatus tech support:  “This will just take 5 minutes.”  Two hours later . . . ) So far I’ve been talking about small bets.  What about a large bet?  Why didn’t I bet $10,000 on Trump winning, or $100,000?   Here a different set of issues comes into play.  I’m married, and it’s not really “my money”, it’s “our money”.  For small bets that doesn’t matter, but for large bets I’d wish to consult my wife.  In this area, I’m far from risk neutral, and far more risk averse than I was when younger and single.  Even winning a big bet is no longer life changing.  Indeed one definition of “old age” is the moment you realize that even if you won a million dollar lottery it wouldn’t really change your life.  That realization happened to me a few years ago.  On the other hand, I know that my wife would not enjoy seeing me lose thousands of dollars on a silly political bet.  Thus even if in “expected dollar value” terms the bet was slightly in my favor, in “expected utility” terms it would be a bad bet.   Again, I’m not opposed to bets on ethical grounds.  I can imagine a bet proposal so favorable that my wife would insist that I accept it.  One of those “taking candy from a baby” bets.  But it would have to be an extremely favorable bet to make me at all interested.  You cannot find those sort of extremely favorable bets in betting markets, and do I trust a stranger to pay up on a $100,000 bet?  And do I really want to bet $100,000 with friend?  Perhaps Elon Musk.  He’s so famous he’d be pressured to pay up.  Seriously, while I won’t completely rule out betting, non-Elon bets just don’t seem like an attractive option for me. Philosophical objections: When I was young, I recall a tour guide leading parents around the campus at UW-Madison.  The guide pointed to a building with an observatory on top, and called it the “Department of Astrology.”  I smiled, but no one else seemed to notice. Don’t get too smug.  I sometimes wonder if we should re-label economics as “financial astrology”.  Those who follow my blogging know that I am pretty contemptuous of the cult of prediction.  Due to the EMH, asset prices are basically unforecastable.  Bubbles are a myth.  The business cycle cannot be forecast.  Big swings in inflation are largely unforecastable.   Unfortunately, most people, even most economists, don’t agree.  There’s a sort of fake macho competition to see who is the best forecaster.  This just makes me sad.  It’d be like a bunch of guys at a statistics conference bragging that they are good at predicting roulette.  Of course not all bets are about unforecastable issues, but many are.  I worry that the cult of betting just reinforces the view that economics is mostly about prediction, whereas it is actually about policy regimes.  For instance, I don’t think that I’m very good at predicting big swings in NGDP.  But I do believe that I know how to prevent big swings in NGDP.  (Use level targeting and be guided by market forecasts.) All my old blog posts are still online.  People are free to judge for themselves whether my takes have generally been useful. Summary: Just because you cannot see any reason why someone would reject a bet other than fear of losing, don’t assume that others feel the same way.  Libertarians should be especially receptive to this argument.  Consider some related examples of intellectual arrogance: “I can’t see why anyone would greatly enjoy smoking, alcohol or pot, ban them.” “I can’t see why anyone would like modern art or architecture, they must be faking it. “Rap music seems stupid to me, so it must appeal to dumb people.” My neighbor voted for the other candidate, he must be stupid or selfish or phony or brainwashed.  Don’t assume that non-bettors are cowards, or phonies. PS.  Here’s another take on the aggravation issue, if you remain unconvinced.  Most people pay more than they need to on all sorts of stuff.  If you aggressively search out deals and coupons, you can get lower prices on a wide range of goods and services.  You can rebook your Expedia hotel reservation every time the price drops.  But who does that?  When I was young, I did that on a big TV I bought from Amazon, which had a promise to refund future price cuts after you bought the set.  I applied for and received three rebates, each time the price dropped.  Now I’m too lazy to do that stuff.  I long for a simple life. (0 COMMENTS)

Explaining his nomination of Russell Vought for the position of director of the Office of Management and Budget, President-elect Donald Trump wrote (“Donald Trump Picks Scott Bessent as Treasury Secretary,” Financial Times, November 23, 2024): Russ knows exactly how to dismantle the Deep State and end Weaponized Government, and he will help us return Self Governance to the People. What rational sense can we make of the idea of self-governance of the people? Let’s first note that the word “governance” is often used to launder the coercive element of “government,” the former concept apparently emphasizing the abstract process instead of the governors and their victims. But let’s ignore this diversion and take “self-governance” and the traditional “self-government” as synonymous. We can distinguish four meanings of the expression “self-government (or self-governance) of the People.” First, an intuitive meaning is that “the People” governs itself. Or is it “himself” or “herself”? That question suggests that the expression makes no rational sense except if “the People” is a sort of social organism or anthropomorphic being that can think or do things—and of which an individual is just a cell. Such conceptions of society have inspired or justified totalitarianism in different ages of mankind. For a development of this approach, see my “The Impossibility of Populism,” The Independent Review, Summer 2001. Incidentally, the underlying definition of populism I use and whose implications I pursue is not far from the accepted definition in economics and political science: see Cass Mudde and Cristóbal Rovira Kaltwasser, Populism: A Very Short Introduction (Oxford University Press, 2017). Or consider Manuel Funke et al., “Populist Leaders and the Economy” (American Economic Review  113-12 [2023]), who, in explaining the definition they use for their econometric database, write: More precisely, populists typically depict ‘the people’ as a suffering, inherently good, virtuous, authentic, ordinary, and common majority, whose collective will is incarnated in the populist leader. Academic students of populism emphasize that right and left versions of the regime exist, historically and theoretically. A second, less Frankensteinian, meaning of the self-government of the people takes it as a majoritarian government of the (plural) people’s members. How can this mean anything else than the majority somehow self-governing itself and, more clearly, ruling over a minority that is itself governed by others? A fable by the late philosopher Robert Nozick is worth recalling (see his 1974 book Anarchy, State, and Utopia, pp. 290-292). You are among the 10,001 slaves of a brutal master. At some point, the master becomes nicer with his slaves (including you), stops beating them, and takes their needs, merit, and other such factors into account when assigning their tasks. He then reduces their workweek to three days. He later even allows them to go and work on the open market provided they give him three-sevenths of their wages. He still keeps the power to call them back to the plantation in case of emergency and to restrict their rights to engage in certain personal activities (mountain climbing or cigarette smoking, for example) that could reduce their productive capacities. But continuing the process of liberalization, your master ends up allowing his other 10,000 slaves— that is, excluding you—to discuss among themselves and vote on all the decisions he previously made, including what proportion of the slaves’ earnings, including yours, will go into some common fund and how the money will be used. One day, the 10,000 benevolently decide that you may yourself vote when their votes are tied 5,000 to 5,000 (which never happens). Finally, the 10,000 decide to let you throw your ballot with theirs before they are counted. All the 10,001, now including you, democratically make all the decisions they want regarding the lives of everybody. Nozick’s question: Where in that sequence did you stop being a slave? A third meaning of self-government is that each individual who makes up the people, understood in the plural sense of the several individuals, self-governs himself or herself. This worthy ideal was recognized as feasible, at least partially, by the 18th-century discovery of spontaneous social order. The literal self-government of individuals represents the ideal of classical liberalism and its later extension into the various theories of individualist anarchism (like those of Murray Rothbard, David Friedman, and Anthony de Jasay). These two broad liberal strands are arguably best represented today by respectively, on one side, James Buchanan and the school of Constitutional Political Economy, who recognize an ultimate veto to each and every individual in a political society; and, on the other side, that of liberal anarchism, by Anthony de Jasay, who argues for the total liberty of each individual over his contracts and his property. Let me illustrate with a simple but paradigmatic case of liberal self-government: the liberty of an individual or his suppliers and middlemen to import, say, dolls from a Chinese producer if the parties, importer and exporter, reach a mutually beneficial agreement. The fact that the foreign party to such an agreement does not benefit from self-government in his own country, although unfortunate, does not change the definition of self-government for the party who lives in a free country. It is very unlikely that Mr. Trump espouses the third meaning of the self-government of the people. The only remaining possibility for the meaning of the expression would be a sort of religious incantation or something like an AI hallucination produced by some frequent alignment of words in the zeitgeist. ****************************** Citizen-kings self-governed by themselves (1 COMMENTS)