The Earthquake at Central Banks

In the past, I had mentally classified arguments in favor of Bitcoin into three broad categories:

1. Bitcoin eats gold.

2. Bitcoin eats fiat.

3. Bitcoin eats both fiat and gold, because something like gold will also eat fiat.

To summarize my position, despite being Austrian-curious, I think the first one is right, and the second and third are probably wrong. Over time, I added a fourth

4. Bitcoin eats (some of) corporate discretionary liquidity

This one might also happen under any of the three above. But it seems that I was naively excluding a fifth.

5. Bitcoin eats central bank reserves

Like every aspect of crypto, it fits into the category of things that are obvious in hindsight, but somehow people don’t figure out ahead of time.

The proximate cause of all this is the decision by the various branch offices of the US Empire to confiscate all the assets they can of the Russian Central Bank. This comes after the loosely related incident where the Canadian Primate Minister froze the bank accounts of protestors against Covid vaccine mandates.

The theme of both of them is a confluence of various factors

-All meaningful money is already electronic, and we operate on what’s effectively a paper standard, where the convertibility of electronic dollars to pieces of paper is an increasingly redundant aspect.

-Electronically recorded assets are enormously easier for governments to seize, if they own the computers or can pressure the people that do

-The declining US Empire, in conjunction with a populace hooked on outrage-bait news stories, seems determined to lash out ever more at enemies foreign and domestic.

The Canadian story is more likely to spook the average person, but the Russian story is far more important.

Every Central Bank in the world is figuring out very fast that any assets you hold that are denominated in dollars, euros or pounds, are liable to be seized in the event that you piss off USG.

Now, what exactly are central bank reserves for? Partly, they’re for propping up your currency in the event of a depreciation. You need to sell some foreign currency and buy your own to keep your exchange rate from plummeting too far. You already have endless ability to print more money to cause your currency to depreciate (subject to how painful it is to cause more inflation). What you don’t have an unlimited ability to do is make your currency appreciate, because for that you need to sell foreign currencies and buy your own. And since central banks like to keep the option of moving their exchange rate up or down, they want to be able to do both. That said, these days competitive devaluations to spur export growth are more popular than trying to have a strong currency or maintain a currency peg, so the desire is likely not for everyday use.

Rather, it’s useful in a crisis. You may want to intervene in forex markets to support the currency when it’s crashing, such as to prevent bank runs and retail shortages from panic buying when people worry they won’t be able to import any more. You may also want foreign reserves to be able to prop up important institutions in a crisis. Recapitalizing banks with something other than your own plunging currency, for instance. Or supporting other public companies that might have debts denominated in foreign currencies, in an economic crisis where firms are on the verge of failing. Or even for just showing that the country has hard assets to back its debts.

What the current situation in Russia also highlights is that sometimes you get very bad crises where all of these problems happen at once. Your currency is crashing, because investors are fleeing the sanctions being placed on you. On its own, this makes imports suddenly very expensive (even if just the ones that you’re still allowed to buy). Ordinarily this depreciation in the medium term might spur export growth, but you have a tough time being able to export anything under the new sanctions regime. Your banks are failing, because their foreign assets are being confiscated and their ability to interact with SWIFT is turned off.

At such ordinary points, you’d start selling US dollars and buying rubles to support the currency. Or you might use US denominated assets to recapitalize your banks and spur confidence in their stability.

Well, bad luck for you, because lots of those USD and Euro denominated assets you held are now gone.

Oddly, the extra aspect of trade restrictions makes the exchange rate stakes here somewhat lower, because it’s not like you can import or export much anyway. But recapitalizing the banks sure would be handy right now. Well, for the banks that haven’t already collapsed. Too bad.

Having seen this lesson once, it becomes apparent that foreign currency reserves are only of any value in a crisis where USG is still firmly supporting you. Otherwise, they may as well not exist. If you’re China, you ought to assume that any crisis might be used against you by USG. Not that it will, but it definitely might.

(As a side note, it's interesting to go back and consider this post on how China could weaponize its Treasuries. I think most of it still holds, but it now has the wrinkle that Treasuries are like a first strike nuke - you have to use them all immediately, or they're going to get deleted the next hour as soon as the Fed can organize its response.)

I suspect China will keep buying treasuries to a certain extent, because they want to keep their currency cheap for everyday export purposes. But if I were the Chinese, I’d be treating this as just a pure expense that results in no corresponding assets. You have them, but when you need them, they’re getting written down to zero.

Which is to say, at a stroke, the days of central banks holding large amounts of major reserve currencies for strategic value are probably winding down. Certainly, the days of China holding lots of USD assets are winding down really fast. You would have to have rocks in your head.

So what might you hold instead, as assets that might be more useful in a crisis?

Well, the question re-phrased is “what electronically transactable asset can you hold that will maintain some likely value, but that is extremely difficult for a hostile government to seize from you in a crisis?”

And the most obvious answer here is Bitcoin.

Bitcoin, along with other cryptocurrencies, have the singular property of being unusually hard to expropriate, because the record is held on so many computers around the world. This is, rather, the entire point. Unless a foreign government can hack your private key because of bad storage practices, it’s very difficult for them to do much. You might also hold gold, but this is much harder to transact in internationally (unless you all agree to leave your gold at the Federal Reserve Bank of New York and just change the record of ownership, which is clearly a disastrous strategy these days). But in a crisis, if you bought Bitcoin with your Renminbi, that’s still going to be there. The treasuries, not so much.

This is the theory, anyway. There are other ways to try and make life hard for particular crypto holders. Pressure exchanges to blacklist certain wallets held by state entities, for instance. You could even pressure or coerce miners to refuse to mine transactions from certain addresses, though it's not clear how feasible this would be. But still. It's a hell of a lot better than having your treasuries / equities / bonds stored on a computer located in the United States.    

Of course, this only half solves the problem. For trade flows, you care about exchange rates with your trading partners. Can you use your Bitcoin reserves, or other currency reserves, to appreciate your exchange rate with USD?

Maybe, but not obviously. If what you care about is the USD/RMB exchange rate, selling your bitcoin to buy RMB mostly is just going to lower the price of Bitcoin, but will probably have the same effect on USD denominated BTC as RMB denominated Bitcoin. You could imagine trying for some tricky indirect effects if you bought third country currencies. In other words, suppose that China could still buy Swiss Francs. In a crisis, it could dump the Francs and cause the Franc to depreciate with respect to RMB, but likely somewhat with respect to other currencies as well. Then maybe the Swiss use their own dollars to support the Franc, so you indirectly end up getting the effect you want (selling USD and buying RMB). Maybe? I tend to find this stuff hard to predict, because the more links there are in the chain, the greater the chance that some other effect that you haven’t fully anticipated comes in and the result isn’t quite what you think.

So at the end of it all, my initial presumption that no semi-hostile central bank (think China) will buy a US dollar denominated asset again is likely wrong. They will, but only for normal times currency management, and treat it as a flow expense not an asset. But to the extent that some of the purchases were also because they previously viewed USD assets as useful in a crisis, I expect that aspect to get significantly scaled back. The announcement is a significant blow to the perception of USD assets (and Euro and Pound ones too), and one that is very hard to undo.

You can also imagine deleterious effects on US dollar hegemony in terms of currencies for trade flows. This is a big part of the Gopinath and Stein model – the global reserve currency becomes the default for trade flows even between third parties. But if you’re a Turkish company trading with Brazil, how excited are you going to be about keeping your trading profits in USD? Or your treasury account for paying counterparties? Unlike Central Banks, these guys can’t just print up more exports if the US government decides to seize all their assets in a fit of pique.

What they end up holding here is less clear. There is still a winner take all aspect to this, and at the moment the winner is still USD, despite this crazy own goal. The question is not “are foreign companies and governments likely pissed off?”. The question is “is there a concrete alternative that they’re going to prefer more?”. The key part of the Gopinath and Stein paper is that whatever currency is used for trade invoices will tend to have a natural demand to be held as assets, in order to hedge future trade obligations. This means that either people will want to switch over currencies in both trade invoicing and holdings at once, or switch neither.  Unless you have a strong case that people right now will prefer BTC or RMB (the two biggest alternative contenders) for both the asset they hold and the asset they invoice in, you’re pretty much going to have to lump it. 

But it's not clear that they'll necessarily just lump it forever. We do not have good models of how or when exactly the equilibrium gets shifted from one global reserve currency to another (like most games where there are two possible Nash Equilibria). In part, we just have very few observations of reserve currency status changing. Spain to the UK, and the UK to the US. And even the ones we have are in scenarios where all such currencies were backed by hard assets, so the logic may not hold as cleanly when everything is pure fiat.

Ironically, the biggest bear case for Bitcoin out of all this is that it may yet end up being an existential threat to the primacy of the US dollar even if it doesn't supplant it for everyday transaction purposes. That is, even if bitcoin only eats gold and not fiat, in the new world, this might be enough to be a serious threat to USG, and thus trigger serious crackdowns. USG may not be able to stop computers around the world storing bitcoin on the ledger, but they have their own version of the $5 wrench attack  - stop trading in Bitcoin (or hand us your wallet password), or men with guns come and lock you in a cage for the rest of your life. 

Still, it seems increasingly likely that the people at the wheel in the US do not have any sense of the possible fragility of the status of the US dollar as reserve currency and the associated exorbitant privilege. It is just treated as one of those facts of the universe, not something carefully obtained by sensible economic stewardship (and iron first / velvet glove hard and soft power coercion). Whereas it increasingly looks like something subject to a tragedy of the commons across different time periods. This indeed seems to be a common thread with other policies like Modern Monetary Theory. Nobody really seems to argue that it applies in Zimbabwe. They also don’t seem to argue that it applies globally for every possible amount of spending. Otherwise just send everyone a check for a million bucks! But they also don’t have a sense of where exactly the relationship breaks down, nor how far away we are from that point.

One way or another, a lot of people in power seem deadset on finding out exactly what the limits are to being a global reserve currency. I suspect they may not like the answer.

The Biggest Obstacle to Texan Independence

Suppose you were a patriotic Texan, planning on how to make your state independent. As Tinkzorg likes to put it, in politics (not just in war), the professionals think mostly about logistics. This comprises two parts. First, the grassroots aspect of how do you build up enough internal support to make independence a concrete aim of a sufficient number of Texans. On this aspect, the people you want are (in Henry Sumner Maine’s phrase) “the wire-pullers”, the successful manipulators of public opinion, and the people capable of building organizations to expand out such messages and grow power. I have no skill nor inclination in that regard.

But there is a second aspect that’s more interesting to me. How do you plan in advance for likely hostile responses from USG? If such responses don’t happen once your Texan mob/democratic expression of sovereignty arises, happy days! In that case, the first step of building support is the only one that matters. But since you probably won’t have too many cracks at this, one needs to plan for how to overcome Yankee resistance.

I suspect that said resistance initially won’t be military. It may not be military at all. The reason this whole thing is interesting is that the level of committed energy seems so low on both sides. This is true across most of the western world. The number of people in Texas willing to die to ensure their state’s freedom is likely very low. But so is the number of New Yorkers or Californians willing to die to keep Texans in the union. So inertia rules the day at the moment. It’s like a market that’s very illiquid in both buyers and sellers. Small changes in demand or supply can result in large price swings in either direction, which is what makes it a live issue. Sure, the Californians hate the Texans. But this version of “Fuck you, Dad!” could just as easily manifest as “Fuck you, I won’t [let you] do what you tell me”, or “Fuck you, you’re not invited to family thanksgiving anymore”.

The default Yankee instinct, however, is probably power and control. It is impossible to have a federal, live-and-let-live model of each state making up their own mind on gay rights, or abortion, or most politically charged issues (including, once upon a time, slavery). And while not every issue resolves itself at the level of the Supreme Court, progressive soft power is directed at solving the monstrous corollary to MLK. That is, if injustice anywhere is a threat to justice everywhere, then only total global domination of the levers of power is sufficient to ensure my security in the Upper East Side, or Georgetown, or Malibu. It’s for my own safety, and the cause of justice, you see, that I must rule you.

If you add this up, the likely USG response is probably to apply unpleasant non-military pressure, and try to make life maximally unpleasant for Texans in a way likely to cause them to either relent, or just blame matters on the independence supporters.

So what are those ways, and how might you circumvent them?

One guide is to look at what they do to foreign states they don’t like, and want to apply pressure to. Of the toolkit they like the most, it’s sanctions, and especially financial sanctions. In the recent case of Russia, USG threatened to cut off their banks from the SWIFT system. This would leave them isolated from US financial institutions, and force other countries’ banks to effectively decide (presumably on threat of the punishment being extended to them too) whether they’d rather do business with US banks or Russian ones. Whatever you think about the long-term consequences of the Fed’s print-a-palooza, right now, that’s not a difficult decision for a Swiss Bank.

(As an aside, if I were the Chinese, I would think about making an explicit threat that if the US cut off Russia, Chinese banks would only do business with Russian banks and not US ones. Let the US find out if it’s actually cutting off Russia from America, or cutting off America from the rest of the world).

But assuming the Chinese gambit doesn’t happen, for Russian banks, being cut off from SWIFT would be seriously inconvenient, but probably wouldn’t precipitate a domestic banking collapse. Inside Russia, their customers can still withdraw their rubles just fine. In the Republic of Texas, cutting off all Texas banks would potentially precipitate a bank run / panic, if people worry that their US dollars are about to be replaced with some new currency that’s worth less. Though if withdrawals are simply frozen or drastically limited (as Greece did briefly in 2012 in the run-up to their vote on whether to leave the Euro), things would probably be okay in the short run.

Weirdly, things would get funky based on the fact that the concept of “Russian banks” is much more coherent than “Texan banks”. Mostly what you have is Texan branches of national or regional banks. The big question is who controls the computer systems. If you’re, say, Bank of America in North Carolina, and the federal men with guns (or just a furious Fed banking regulator) call up and demand that you turn off all the computers of all branches in Texas, you’ll probably comply (unless the systems don’t make that straightforward to do, which is quite possible). Of course, Texas has USAA and Comerica and the rest of the banks headquartered there, which also operate regionally or nationally. Presumably men with guns will be doing the same thing there, dictating what those banks have to do.

The standard way to solve this problem of bank runs in the past was to print up a new currency quickly, and order the banks to start paying deposits only in the new currency, which we’ll call Texars. There is some difficulty in printing sufficient volume of not-easily-forgeable currency in a raging hurry, but presumably you can make do in a pinch. Effectively you confiscate local dollar deposits and forcibly convert them to Texars. People will be pissed, but eventually they’ll adjust.

But I think that it’s a mistake to focus on bank runs and bank stability as the main obstacles in the modern era. These are problems, but they’re manageable problems. Rather, what’s harder to actually solve is payment rails. Most money is already electronic, primarily through credit and debit cards. And for anything online, this is the only game in town. A currency is both a store of value and a medium of exchange, but between the two aspects, the latter is a much more acute problem if it starts to fail. Hurt the banks, the banking industry suffers, and people worry about their savings. But if you cut off payment mechanisms, pretty much all business grinds to a halt. People don’t need to access all their savings immediately, but they do need to be able to fill up their car at the gas station. If they can’t do that, this probably guarantees either capitulation, or military escalation. If you’re Free Texas, you don’t want either. You want to be able to maintain business as usual, and dare USG to go kinetic first, hoping that they don’t have the stones. And every day they wait, you can solidify your local control.

The single biggest obstacle to Free Texas right now is the hegemony of Visa and Mastercard. The extent of the power that these firms have over everyday commerce is colossal and not widely appreciated. They run your credit cards and debit cards, which have moved from being ways to extend credit to ways to pay for anything, anywhere. Not only that, but the US has past form on successfully pressuring these companies to cut off foreign businesses they don’t like (Pokerstars, Tradesports, etc.). They would absolutely do this with Free Texas, probably as their opening salvo.

The challenge is that any electronic payment system needs both a digital currency in question, a mechanism for transferring that currency between buyer and seller, and the technology in each store and consumer’s wallet to make such transfers. When you spell it out this way, you can see why this is incredibly difficult to conjure up in a hurry. Much, much harder than printing up new banknotes and forcing everyone to take them. This also poses a problem even to people who want to use things like Bitcoin. Even if you did everything on the lighting network so there were very low fees and short confirmation times, how long is it going to take for every gas station or website in Texas to be set up to accept this kind of payment? How long is it going to take to get every boomer or retirement home resident to get a wallet capable of spending it at said gas station? How long is it going to take them to get the actual bitcoin to spend? What happens if you're the last grandma in line to convert their dollars over to bitcoin, and the price of bitcoin has gone up 50% from the massive influx of demand?

In some sense, you need the incredibly hard ask of a payment system that can be turned on at the drop of a hat once you declare independence. The crude version is just reverting to cash under newly printed Texars. This will probably work for an initial period of emergency, but you need some way of rolling things out, and it’s not clear that the task gets obviously easier after a few weeks. Not only that, ideally the system can be developed with plausible deniability for its true purpose.

I have only vague ideas about how to do this, and I don’t know which one is best. But I am strongly convinced that this honestly may be the single most important problem to figure out a solution to.  A significant part of the challenge is that many of the initial steps look like a huge needless expansion in wasteful reporting and intrusive data collection.

One such component is that you probably need to set up daily reporting requirements for all bank branches in Texas to a parallel system. You could maybe do this through some local institution you had control over (the Dallas Fed, maybe? Probably too converged), or some new regulatory agency. Every day, banks must report their closing balances for all customers to the State of Texas. This ensures that when you declare independence, you at least have a snapshot of what amount to credit everyone’s account with in Texars. You would probably want to also measure people’s equity holdings too – it’s doubtful you can stop USG expropriating these, but at least if you have records, you can figure out some kind of compensation scheme. Most likely, I would reassign expropriated Yankee-owned shares in every publicly traded Texan firm to Texas residents that had lost equity holdings from the Yankee confiscation. People might not be thrilled that their shares in Microsoft have been converted to shares in Texas Instruments or whatever, but it’s sure better than nothing.

From there, you’ll need to decide what the payment system is. This is where I’m less sure. There are various options, with their own levels of difficulty.

You could try to repurpose the existing Visa and Mastercard networks. The advantage here is that the tech is already out there, both in terms of cards and payment machines. Existing bank relationships with national banks (both cardholder and merchant) could be set up with existing Texas banks. The problem is the Visa and Mastercard networks, which is how the banks communicate with each other. You could create your own one of these and somehow repurpose the machines to transmit through it. Maybe I’m wrong here, but I suspect that reverse engineering this stuff as the State of Texas may be harder than reinventing things from square one.

My guess is that the easier setup (though still extremely hard!) is to actually just set up a central bank digital currency from scratch. In other words, the Texas Central Bank keeps a central database of all dollar amounts that people have in bank deposits (which, remember, it has records of already). A “central bank digital currency” in its most minimal form is just a computer at the Texas Central Bank (TCB hereafter) that anyone can open up an account with. If the Fed let you and I open up the same kinds of Fed accounts with it that Citibank has, America would already have a central bank digital currency.

In other words, we currently have an extraordinarily cumbersome payments processing system because we launder the entire thing between thousands of banks that all need to communicate with each other, verify balances, etc. But if you were redesigning the system from scratch, and especially if you need a system that you can get up and running quickly, you don’t want to duplicate all this stuff. Just let the TCB store all the accounts. Then payment processing is just transferring trivially from one register in a database to another register in the same database.

In this framework, the process is at least simplified – instead of trying to run things through the combination of every bank’s existing legacy IT infrastructure, you just need a way for each consumer and merchant to communicate with the TCB. The simplest way to do this is with an app. Download it, and use the camera to take photos of your Texas drivers license, plus your face next to your ID, plus whatever sequence of random requirements are selected (e.g. take a photo with your ID where you close your left eye, put your right index finger on your nose etc.). Then you’ve got access to your existing bank balance.

Want to pay for a purchase? The vendor generates a QR code that contains the amount of the purchase, and the account to have it credited to. You use your phone on the app to take a photo of the QR code. An alert comes up – do you wish to send $12.95 to “McDonalds Plano, TX”? Click yes, take a photo of your face to confirm your identity, and the purchase is complete.

In this version, the role of banks is significantly scaled back. You go to a bank if you actually want to deposit your money into a savings product with a higher rate of interest, with the money being lent out to borrowers. If you want an actual credit card, you have some arrangement with the bank where they pay for your stuff at the TCB using their own funds, and you pay them back on whatever arrangement you negotiate with the bank. I suspect the demand for this service specifically is actually quite low, and a lot of current credit card demand is really just demand for easy electronic payments. Sure, there are airline miles and other reward programs, but this is just a roundabout way to maintain the duopoly of Visa and Mastercard by effectively fleecing cash-paying customers by a small amount. If all this nonsense disappeared, the system would probably be better off. 

In the medium term, you're going to have the problem that taking all this money out of the banking system will likely increase interest rates, by reducing the amount of funds banks hold at any time that they can loan out. That's a problem (unless you're an Austrian economist, in which case it's a feature), but it's not an immediate problem, and can be mitigated down the line with TCB monetary policy or direct lending to banks. There’s nothing to stop consumers keeping more money in an actual bank earning interest by making risky loans. But if you just want to make and receive payments, you can now do it without a bank. There’s also a longer run risk of centralisation of all money in the hands of the new Texas government. I suspect this already exists with current banks, but people just don't think about it much (ask Conrad Black, when they froze all his assets before his trial which made it difficult to mount an expensive legal defense).

At first, there will be a challenge figuring out the various anti-fraud measures, dispute resolution stuff that banks have worked out for ages. Even getting the whole thing into the hands of consumers is hard, and making sure it scales But it’s at least feasible. The challenges are basically:

-Design an app

-Design a database that stores all the balances.

-Design an API for stores to generate transactions  

-Get customers and businesses to download the app

Then every transaction just requires two people holding smartphones, which they already have. Figuring this out from the business end might be a little complicated, but the consumer end at least doesn’t require sending plastic cards to every person in Texas, or new payment machines to every business. The minimum viable product is that each restaurant has one guy holding a smartphone that implements all their transactions until they can redesign their IT systems to make it smoother.

I mean, this is a several year project! I don’t mean to minimize how hard it is. It's also a long way from the core competency of any government, let alone a future government. It seems likely that you'd need to develop it in secret with some rich, sympathetic Texan fintech CEO or something similar. But the hard work is all doable beforehand. Once it’s go time, you just need everybody to download the app (though you should assume that they’ll also prevent you pushing it to App Store or Google Play, and have plans in place for that).

This isn’t the only variant on the plan. I’m sure crypto boosters can imagine some kind of crypto version where you fork Bitcoin and airdrop tokens to all the existing bank account holders. I suspect the challenges of getting this up and running are quite a bit harder than my version, but who knows.

I am actually less wedded to the specific solution that I propose than I am sure that the problem is probably the most important problem to be solved. As far as I can tell, there hasn’t been a new breakaway country that set up in the age of digital finance against the wishes of USG. If you want to be the first, you would do well to ponder the paraphrased version of Jonathan Swift:

“They have his soul,
Who have his payment rails.”

Moving Porn

[Meta disclaimer: When I look back at some of the posts I've written that I think I got wrong, they're often in the category of what I'd call "therapy posts" - trying to universalise or rationalise some thought process of my own as a general life lesson, especially if I'm trying to convince myself that my actions make sense. I resolved at some point to try to stop writing those. I don't think this is one, but I'm not always a good judge of these matters, at least at the time.]

As Covid worries seem to fade into the rearview mirror, and life slowly gets back to normal, I find myself reflecting on the the strange way that being at home for a long period of time strongly exacerbated the idea of moving porn. Not as in emotionally touching depictions of sexual acts, but the fantasy, sometimes followed through on, that a better life awaits if only we move to somewhere else. 

This is always a hard one for me to think about. I don't want to say that everyone should just stay where they are. It is obviously, trivially false that every place is as good as every other place. So there really are changes in life happiness to be had for certain people in moving somewhere else. Indeed, I've had at least one myself, that I'm very glad about. 

In my case, after enough months of roaming around the same apartment, I had a strong desire to just get out. Maybe temporarily, but probably permanently. I started writing this post back when these feelings were still there fairly strongly, but already subsiding. From the number of stories about this, I don't think I was alone in this. Covid seemed to really send this urge into overdrive among a certain class of aspirational mobile white collar worker. 

There are two stories that can be written about this. The first, and most discussed, is the role of remote work. Covid made lots of educated people's jobs suddenly remote, so they could now move anywhere, at least temporarily. The big obstacle to moving is generally the coordination aspect - a city you want to live in, where you know people, where you can get a good job, where your husband or wife can also get a good job. Take away two of those conditional statements, and the choice set gets a lot bigger. 

But the second part is the one that I think is more interesting. The professional class were also, as a rule, more likely to comply with lockdowns and general social distancing. The net effect was a whole lot of people who hadn't actually spent any time in person with many (or any) of their friends or relatives, for maybe a year at a stretch. The effect of this was to enormously crank up the background sense of ennui and isolation that seems to be a large part of modernity. 

I remember this being one of the stranger aspects of educated Americans when I first moved here. If you grow up in Europe or South America or Asia, you are generally from somewhere. Your sense of place is typically a city. Whereas I'd meet quite a number of Americans whose story was something like "Well, I was born in Cleveland, and lived there for the first two years, then I was in Chicago until age 8, then we moved to Phoenix, then I went to college in Atlanta...". The typical educated American, by the time they reach graduate school, might be on their fourth set of friends, between high school, college, and first work stretch. Their parents may or may not still be living in the place where they were when they were born. 

In other words, the background feeling for a lot of people in the educated classes is already a vague sense of social isolation. Your friends, even your good friends, might pack up and move in a year or two's time. You have to keep investing in new friendships in order to maintain a steady state inventory. 

I can only guess, but I think this feeling is rather widespread, at least to a certain extent. But if it is, then moving cities to try to escape the sense of ennui you've developed is a very high risk strategy. You feel isolated and unhappy because you don't have enough close friends and family. It might indeed be hard to make friends where you are. But when you move to somewhere new, you go back to square one. Rather like changing lines in the customs queue at the airport, you'd better hope the new one is faster, because you start out at the back. 

I don't know how to balance out these two stories in terms of their prevalence. The first one is just a good news story - people can finally leave San Francisco (a city that is desperate to disprove the Lebowski dictum that the bums always lose) and go somewhere less shambolic, while still keeping their tech job. The latter is much less obvious. If your problem was that being rootless made you unhappy, digging up what shallow roots you currently have is not obviously going to help matters. Ironically, it resembles San Francisco's way of dealing with the homeless - the ameliorative steps to solve the current problem in fact just lead to the problem getting worse.  

In terms of telling these two versions apart, one aspect that is striking is the sense of where all these newly mobile people actually wanted to go. It tended to be the same places. Austin, Miami, or sometimes Nashville.

Don't get me wrong, I like all these cities! But still, it's striking that these form such a focal point for a large number of people who are all starting somewhere quite different. To hazard a guess, the main linking factor seems to be "better weather, some fun nightlife, increasingly trendy so my friends won't look at me too weirdly, but still cheaper than NY, SF, or Boston." They are always cities that are described as fun. Which seems to be a shorthand for sociable and full of interesting people to hang out with.

But if the problem you faced in Dallas or wherever is that you weren't able to meet people to hang out with, how exactly do you plan to find your fun circle of friends once you get to Austin? I'm not saying it's impossible. I'm just saying that most of the credible plans you would implement to solve this problem in Austin could also have been implemented to some extent in Dallas. 

The only exception to this rule is if the place you're moving to already has more old friends and relatives in it than the place you're at (and they're likely to stay there). To me, I think this is generally the only good reason to move to a place to escape ennui. 

The fact that all these people wanted to move to the same places tends to imply that this wasn't what was at stake. Maybe Austin helped a ton of people suddenly solve the coordination problem of where to live at the same time. But I don't think that's what's going on.  

If I'm right (and I'm not sure I am), I suspect a bunch of these people are going to wind up disappointed.

How can one tell if this seems like a credible description of one's mindset? I suspect that one telling aspect is the question of how specific and detailed are the ideas of what exactly you plan to do differently when you get to Austin. It's a Saturday. You're in your somewhat larger house, now that you don't live in the Mission any more. You've got the whole day ahead of you. What are you going to do that you can't do in San Francisco? Next day is Sunday. Same question. Then the weekend after. And so on.

I have a feeling that if you don't have a clear answer to that question, you are probably going to find that Austin does not make you as happy as you imagine. 

I would be delighted to be wrong. Austin, Miami and Nashville are all in fact cool cities. I hope everyone who moved there finds it awesome, and pities us saps that stayed put. But I can't help but wonder about the Last Psychiatrist's description of some of how change is often not really change at all: 

The unconscious doesn't care about happiness, or sadness, or gifts, or bullets.  It has one single goal, protect the ego, protect status quo.  Do not change and you will not die.  It will allow you to go to college across the country to escape your parents, but turn up the volume of their pre-recorded soundbites when you get there.  It will trick you into thinking you're making a huge life change, moving to this new city or marrying that great guy, even as everyone else around you can see what you can't, that Boulder is exactly like Oakland and he is just like the last guys.

Lest this all sound like meandering, there is a concrete prediction that can be made here. If I'm right, I expect the number of relocations to drop fairly quickly as life gets back to normal. If you haven't packed up and moved by now, I'll guess that you're not going to. Because as people actually start hanging out with their friends again, they'll slowly remember that the place they're in isn't actually as bad as it seemed in April 2020 when it felt like we were going to be locked up forever.

If you're still on the fence, take advantage of the warm weather to invite all your friends over for a party first. It did me a world of good. 

The Lessons of Bitcoin

Bitcoin is, without any question, one of the most remarkable financial stories of our lifetimes. Simply by running some code on your laptop back in 2010, or putting a few grand into the earliest bitcoin markets, you could be worth hundreds of millions or billions of dollars today. Even quite a bit later in the process, a bold bet that you hung on to could have easily brought you life-changing amounts of money. 

Did you make life-changing amounts of money from Bitcoin?

I didn't. 

I think about that quite a lot.

I made good money from it, in the category of "moving some moderate financial milestones forward a couple of years", which is great. I bought it around the time I wrote this, which still summarises my thoughts on it pretty well. I sold it in February 2018, not long after I wrote this, which I also still like. Short run, the sale was a good call. Longer run, it was a catastrophe.  

If I'd played my cards better and more boldly, at earlier times, I could have ended up with "fuck you" money. For someone writing a pseudonymous blog in 2021, that sure would be handy.

This may sound like a humblebrag, but I promise it's not meant that way.  Internally it feels much more like failure. Chances to make life-changing amounts of money do not come along very often. This was one, and I missed it.

Bitcoin was almost unique in the sense that, to become fabulously rich:

i) you didn't need to have very much money early on (in fact, at the start, you didn't need any at all, just some kind of computer)

ii) you didn't need to risk very large amounts of your wealth to make it happen

iii) everything you needed to do it was publicly searchable on the internet

iv) chances to wind up happily rich persisted for years, including after you probably first heard of bitcoin.

Assuming you didn't make fuck you money from Bitcoin, it's worth pondering what the lessons of this are.

The most obvious instinct, which I fall into from time to time, is essentially just "if only" fantasies. If only I could somehow travel back in time and tell 2010 Shylock to start mining bitcoin! Or to put his life savings into it as soon as possible (and not sell it, and not store it on Mt Gox).

This is the worst kind of loser mentality, taking nothing but fantasy and daydreams from the story. Imagine I had all the future knowledge! Imagine I won the lottery!

But, as it turns out, you don't need to actually transform the question very much for it to be profoundly useful. 

Instead, one is much better off asking "what changes in behavior, mindset and reading habits would I have needed so that I would have actually discovered bitcoin on my own early on and invested in it?"

The reason is that this might actually help you find the next bitcoin. It's possible that buying bitcoin now will still make you rich, but it probably won't make you life changingly-rich (certainly not without risking your whole life savings on it).

The bad news is that it probably will require some hard work and luck. 

It's useful to break the question into two parts:

1. What realistic changes could I have made that might have caused me to come across bitcoin-like ideas earlier than I did?

2. What realistic changes might have shortened the time between first hearing about it and investing (or investing more, or holding it longer)?

At a high level, the answer to #1 is that you need to be reading weirder, different stuff. If you wait to read about an investment idea in the New York Times, it will be long after all the major gains have been made. 

To have been reading about it really really early, you had to be both technically very adept, and reading widely outside the box. Like this guy. Or this guy. Are your reading lists as varied and out there as blog.jim? Somehow I doubt it.

Strangely enough, you might have done extremely well multiple times over since bitcoin became popular even if you just learned the rather narrow lesson "I should learn up to the absolute cutting edge of cryptocurrency, so that I can meaningfully contribute to the small group conversations about what might be the next development in the crypto space". You might have gotten in at the ground floor on Ethereum, or Polkadot, or Chainlink, or a number of others. You might still get in on the next shitcoin to explode. 

In my case, the thing that tipped me over the edge for investing was in 2017 I finally got around to reading Moldbug's essays on bitcoin. I'd read through most of his archives starting in around 2013, but to my great regret, looked at the vaguely finance stuff and decided "eh, I already understand finance, I'm going to skip it." Ha! If there's a single lesson from Bitcoin, it's that in 2009 nobody much understood how money worked. As it turns out, Moldbug's description of bitcoin was entirely correct, he just seemed to me (certainly by 2017) to be wrong about the likelihood of the US government shutting it all down. It seems like hard work, and it's easier to just tax it and enforce know-your-customer requirements on fiat exchanges (which is what happened). 

A related lesson is "you should read more Moldbug, and consider investing in things he talks about, though still take what he says with a grain of salt". That still might yet be a highly lucrative lesson in the fullness of time. 

But I think the real place to improve is actually in #2. 

There are many people who heard about bitcoin back in, say 2013, and thought it sounded pretty weird, and probably likely to collapse. But if they were pushed on the issue at the time, you could have likely gotten them to agree that it was at least worth a punt for a few hundred bucks. 

The question is, how many people actually had that subsequent thought themselves? And moreover, how many actually followed through on it?

Smart people with all the information in front of them frequently fail at both hurdles. They fail to recognise the investment implications of the things they already know, especially when what they know to be true seems strange and unpopular to most people, and thus less likely to be priced in. And they fail to pull the trigger on it in a timely manner. 

The same is true, incidentally, from Covid. A few days after I wrote the post linked, I bought put options on the S&P 500. The thought process initially was "Huh, Covid could be a huge problem, I should buy N95 masks.". It took a couple of days for the follow-on thought (which should have been obvious) to occur "Wait, why am I hedging extreme left tail outcomes in goods markets, but not also hedging (and profiting from) moderate left tail outcomes in financial markets?". That also made me a decent but not life changing amount of money too, about a quarter of which I lost by holding onto my short positions too long instead of buying back in once I sensed that peak panic was passed (the losses are much larger in alpha terms, since you should include the opportunity cost of not being long in April and May 2020, which was huge).   

The thing that may or may not be surprising to you is that I know a fair number of people who read about Covid in early February 2020 and didn't act on it financially at all. I actually understand this. It took me several days to think of it, and I may easily have not done it, or not had the stones. Even when I did, I did it in a panicked and dumb way, just shorting the market. Not airlines, or cruise lines, or buying Zoom. Or, what would have been even better, credit default swaps (if you were one of the big boys ) or call options on the VIX if you weren't. I also managed to predict the wrong thing about Covid, namely that it was going to have a massively high death rate, and managed to screw up most of the market timing decisions I made over the course of 2020. One big good decision, managed to outweigh a considerable number of smaller bad ones, but I definitely didn't come out of 2020 thinking that I needed to do more market timing.

To be honest, the regular reading of weird twitter feeds is one of the things I miss since giving up twitter. It was a complete sewer, a cesspit of aggravation deliberately made to encourage rage-clicks and anxiety, run by people who hate me, and you, and everyone reading this. And yet, there is still material on there that you just can't find anywhere else. 

If you read the same things as everyone else, you will think the same things as everyone else. Not many of those people acquire life-changing amounts of money, except by pure chance.

Some Thoughts Occasioned Upon Recent Fatherhood

Friends, I’m very happy to report that my daughter and firstborn child recently arrived into this world. The acute feelings of anxiety and then great relief at the birth itself slowly become replaced with the pleasant slight haze of the everyday. But since this journal is as much for myself as for my readers, I wanted to write down the thoughts I recall before they slip away.

Most people are more alike than they think. This is part of the reason why most heartfelt sentiments - whether joy at birth, sadness at the death of a loved one, celebration of someone’s birthday, and many others – end up sounding like clichés. The more important something is, oddly the more likely your feelings are similar to everyone else’s. Because of this, sometimes the repeated forms are okay for the important sentiments. As a friend’s priest said about Christmas sermons – if you’re hearing anything genuinely new in it, it’s probably heresy.

I learned this the hard way when emailing friends about the birth. I said something about how she’d been sleeping well and eating a lot so far, and joked that one could obviously extrapolate this out indefinitely. From one or two slightly snarky responses, I realized too late that, even in jest, this is a little like the newborn equivalent of those ghastly “My child is on the honor roll at XYZ Elementary” bumper stickers, but for a much more emotionally fraught subject. (Which painful door would you rather open? “I’m a bad parent” or “My beloved child is just difficult, and experiencing misery that I can do nothing about”? Por que no los dos!) I’ve refrained from bring up the subject since then, and just instead reflect on the ancient Greek observation that no man should be declared happy until he is dead. You have a well-behaved child once they’re married with children of their own. 

Nonetheless, there was one part about my wife’s period of late pregnancy and birth that was quite striking, in a way that I wasn’t expecting.

There is a certain level of narcissism and egocentrism that is inherent to everybody. The way the Last Psychiatrist put it is quite memorable:

“The essence, the defining characteristic of narcissism is the isolated worldview, the one in which everyone else is not fully real, only part a person, and only the part the impacts you.”

I, like a lot of people, always wake up in my dreams just as I’m about to die. There is some fundamental stumbling block that cannot quite comprehend a world without me in it. If the only part of everything else that is real is the part that interacts with you, then your death is literally the end of the universe.

This much gets commented on quite a lot. One can intellectualise death, and imagine the world going on without you. But one cannot really feel it. It just doesn’t compute.

But the strange part, that I hadn’t really  appreciated, is that something similar happens (at least to me) at the early end too.

Having my own child was literally the first time I’d been forced to contemplate in concrete detail what my parents’ life might have been like around the time I and my siblings were first born. The standard way this is described is that until one has children oneself, one doesn’t quite realise how much thankless work goes into changing thousands of nappies and not sleeping properly for months on end.

But at least for me, it’s more than that. I just hadn’t given much thought to the subject. I have images of my parents’ life before me, pieced together from photographs, and stories they’d tell with my uncle sitting around the dining room table after dinner. But these tended to mostly focus on the period when they first met, before they got married. There were some stories after that, about their lives, living with my grandmother, buying a small shack in the countryside and planting trees there, and things like that. But then there was a large gap, a chunk of the map shrouded in cloud, of what it might have actually felt like when we children were first born.

And I think part of the reason for this (at least with me) is the narcissistic tendency. People are only real to the extent they interact with you. And the part of you that counts is the part you can remember. In my case, the earlies memories are from around age 3. When I’m forced to contemplate it, I simply have no empathetic concept of me before that time. To consider myself as a one-year old, or as a newborn breast-feeding, or while in the womb, is every bit as alien to the actual narcissistic self-conception as to think of myself as being dead. I can imagine it. But there is simply no capacity to relate. Without memory and capacity for self-conception, the chain of "I"-ness gets broken. 

Take away this inherent interest and understanding, and the parts of the characters immediately before I mentally appear on the scene simply don’t quite register. The stories my parents explicitly told me register, and those I feel warmly about. And indeed, I can think about times before I was even an idea, what my parents were like as children or teenagers. But the part that interacts with me, in the period where “me” is not something I instinctively empathise with, tends to be a strange and glaring gap.

Until my own child arrives. Then, I'm forced concretely to imagine all sorts of things I didn’t really consider. The scene of sea and sky suddenly inverts to a dizzying new perspective - one in which my parents are fully real, but I am only partially real, and only the part that interacts with them (since the part that is "me" doesn't yet exist). And one sees the whole path of the same scene repeating again and again. My daughter, currently totally helpless, having not the vaguest clue of what my wife and I do to keep her alive, and no real sense of gratitude or even contemplation, until one day, several decades hence, when (hopefully!) her own time comes to pay it forward with her own children, and the cycle repeats.

Thank you, Mum and Dad. At last, just a teensy bit, I understand. I suspect you knew this already.

Welcome to the world, little one. We’re so glad to have you.

Tether - risky, but probably not for the reasons they keep telling you

I keep being forwarded this article that came out in Medium recently. It poses as a big expose of tether, the stablecoin that powers lots of cryptocurrency transactions. We learn that it's a scam and a fraud, and about to crash the price of bitcoin.

The very short tl;dr on tether is that it's a cryptocurrency whose value is kept at a stable $1 USD. Why would you want this? Well, lots of people want to transact electronically in something that's basically dollars, but without the insanely anachronistic mess that is the actual US banking system. But USG has aggressively gone after money laundering by controlling the interface of the banking system and crypto exchanges. In other words, control the fiat/crypto interface tightly, and the rest of legal compliance will follow (apparently). If you as a company anywhere in the world take money from the banking system, you get aggressive demands from USG officials that you comply with US "Know-Your-Customer" (KYC) anti-money-laundering legislation. 

So some exchanges like coinbase specialize in being places that comply openly with the law, where you can hold your crypto and feel like there's a lower chance that it will be stolen, because coinbase is possibly about to become publicly listed, a good hallmark of establishment reliability. And others specialize in the opposite of this - transact there while being less legible to US regulators, take on massive leverage on your trades, pay lower fees due to regulatory arbitrage of not complying with US financial laws. So far, they've been able to do this, barely, because they follow the golden rule of "never touching actual US dollars". Just exchange one digital asset (e.g. bitcoin) for another (e.g. tether), and you never directly interact with the standard financial system. So tether ends up being the numeraire good, the medium of exchange on lots of these platforms. Hence why there's so much demand for it.

It's important to note that the way tether is priced at a dollar is that tether, the company, will (so far!) redeem them for exactly a dollar. As long as this promise is viewed as credible, they'll trade at $1, and they roughly do. Tether rather speaks out of both sides of its mouth on this - in marketing materials they tend to emphasize that tethers can be redeemed for the same number of dollars, and in practice they pay out your redemptions, but in the fine print they say that this isn't necessarily, technically, something promised.

So far, so good.

Well, what's the claimed problem? Here's the article's summary:

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019.

As an aside, the Office of the Attorney General for the Southern District of New York are a pack of assholes who feel justified in arresting anybody on the planet who so much as looks at a financial transaction in a way they don't like, on the highly compelling theory that a) Manhattan has a lot of banks, and b) Manhattan is the center of the universe. If you are not utterly cynical about their press releases by now, I don't know what to tell you. 

And from there follows a very breathless and interesting read of all the ways that tether has been printing tether coins, and this is pumping up the price of bitcoin, and it's all likely to collapse because it's a giant scam. 

 "Nonetheless, based on this evidence, I concluded my risk was now too great. I was long Bitcoin up to my eyeballs; Bitcoin was clearly correlated with Tether; Tether was clearly being issued at a frantic rate; and that issuance had a high probability of being backed by nothing at all."

Have a read. There are a lot of interesting facts in there. In fact, if you feel yourself well versed in finance, go away and read the article and try and find the big glaring conceptual error in it, then come back.  

I am in two minds about this article. 

On the one hand, the author is likely right that tether has a non-trivial chance of being shut down by USG, that it fuels a large amount of leveraged trades in crypto, and that the loss of tether would likely cause a big deleveraging that would probably be disastrous for bitcoin prices

On the other hand, the reasons he thinks this will happen are moronic, ludicrous and risible. They are a great example of a certain kind of stupidity that is annoying prevalent in crypto communities. 

What is the first order problem with the whole discussion?

The gigantic blind spot is that he, like lots of crypto people, seems to not notice the obvious fact that tether is simply a bank. The tether coin itself is a demand deposit, just transformed into cryptocurrency form. It's hard to think of a cleaner example of the hypothesis that money itself started as debt that began to circulate. The company keeps a certain amount in reserves to fund these possible redemptions, and then invests the rest. This is how basically every bank in the world works.

The reason that so few people spot this is that the world is roughly partitioned into 

-people who like cryptocurrencies and who think that all "fractional reserve banks" are scams, and

-people who like mainstream banking, and think that cryptocurrencies are scams.

So as a result, the number of people who are both knowledgeable and agnostic on both fractional reserve banking and crypto is surprisingly few. 

And when you see it this way, a huge amount of the apparent mysteries immediately get resolved. This comparison ought to be obvious, but it’s not, because guys like this tend to have completely moronic ideas about what a bank actually is, and simply think that all banks of any form are “scams”, regardless of how well capitalized they are. He has some huge hard-on of this idea of himself as the narrator in the Big Short, but somehow never learned how a bank actually works. 

Go back to the quote above. Banks are partitioned into two types. Those where every dollar of deposits is backed by 100% literal cash US dollars in a vault, and those where it is “backed by nothing at all.”

Like…did you consider any other possible bank balance sheets? Are these the only two possible cases? 

His idealized type of bank (assuming he even realizes that this is what he's describing, which I doubt) is called a narrow bank. In practice you should be able to set up a bank that just takes investors deposits, in turn deposits them at the Fed, and earns the interest the Fed pays on reserves. Why can't you do that? Well, the Fed has denied licenses to such banks, with largely spurious reasons given as to why, in ways that smell like corruption, even to very mainstream economists like John Cochrane.

So since we don't have that option, every bank is a fractional reserve bank. To a banking agnostic, the crucial question is not "is it a scam engaged in maturity transformation?". Rather, the question is "given how well capitalized the bank is, how likely is it that there will be a bank run that causes depositors to not get paid back in full?".

Suppose tethers are only backed 74 cents in the dollar by actual USD, a claim that’s floated around here. Here’s the question. They took in 100 cents in the dollar in cash. They now hold 74 cents. What does this guy think they did with the remaining 26 cents? Blew it all on coke?

No, what they very likely did is buy the exact cryptocurrencies that the guy laboriously shows that tethers are being used to purchase.

So at the time they bought it, their portfolio was most likely something like 74c cash, 26c BTC or whatever.

Now, a sensible risk weighting would assign a big haircut to these BTC assets, given how risky they are. Sure. But what this guy does, along with places who should know better like Bloomberg, is downweight every single asset that's not cash to a risk-weighted collateral value of zero. This is, to not put too fine a point on it, imbecilic. 

And the reason this is even more egregious is the following. Ex post, what happened to the price of that BTC? It went up like crazy. 

Assuming this much is roughly true, this would make tether among the best capitalized banks in the world. As a betting man, I’d wager pretty strongly that the value of their crypto is way higher than the missing 26c in the dollar or whatever of liabilities they owe, probably by a factor of 2-10.

Buddy, if you think tether is a scam, let me tell you about Citibank. 

So what do you do if you’re now a bank who's crazily over-capitalized, and holding a lot of crypto assets? Well, one option is to say “sod it, let’s print some more tether liabilities, and use those to buy more crypto”.

Absent government regulations, this is an entirely sensible thing to do. The timeline above explains every single “suspicious” fact that this guy points to.

The risk that tether, left to its own business operations, is about to go bust, seems quite low, as long as they’ve likely been using part of their cash to purchase crypto that’s since risen greatly in price. It's true, there hasn't been a proper audit, so we don't know for sure what they've been buying or holding. Maybe they really have just spent it all on hookers. But the strongest bet to me, for a variety of reasons (including those floated by tether skeptics) is that tether has been buying crypto assets. If they've bought some kind of diversified crypto portfolio before March 2020, happy days. Strongly well-capitalized banks do not tend to collapse in bank runs. I would wager quite heavily that, at current prices, they have way more crypto assets than they need to pay off every possible tether holder (even if, as is true, liquidating said assets all at once would cause a big price drop).

So what’s the actual problem with tether?

First, while they are a bank, they don’t say they’re a bank. They tend to imply, falsely, that they’re more like a money market fund, just holding cash and cash equivalents.

Second, if they are a bank, they run the risk of being regulated like a bank, and they sure as hell haven’t been complying with banking regulations, notwithstanding that they’re probably very well capitalized.

Third, their whole business model smells like know-your-customer violations.

All of this means that there’s a decent chance of them getting boned by some up-and-coming NY DA, running the same playbook as for Tradesports, and World Star Poker, and a bunch of others. Freeze assets. Destroy your business because you can't access any of your assets. You dip into some of the reserve cash to stay afloat. They declare you a ponzi scheme, improperly stealing customer funds, and say you collapsed for this reason. Whether you were or weren’t (and in the case of tether, there’s good reasons to think they have more assets than they need, not less), the proximate cause of the collapse is government.

Where this guy is right, is that tether fuels a lot of the levered bets people make on dodgy exchanges. Take away the tether that fuels these exchanges, and you probably get a massive deleveraging. I’d bet on this being a Mt Gox level event for BTC if it happens. If the only demand is now coming from unlevered, KYC compliant bets on Coinbase, that’s a big reduction in likely demand.

At the end, the big irony is that

a) he's right that you should be worried about tether, about the prospect of it being closed down, and the likely impact of this on BTC prices, but

b) the one thing tether gets the most flack for is the one bit that seems least likely to be true - being massively undercapitalized, and unable to pay back depositors. 

Last Thoughts on Voter Fraud

Winston Churchill once observed that a good definition of a fanatic was someone who can’t change his mind, and won’t change the subject.

On the subject of voter fraud, I like to think that I meet neither arm of the test.

On the first part, I feel like I’m definitely open to having my mind changed, but not many people engage with the better evidence on the subject, so I don’t often hear good arguments to the contrary. Then again, every fanatic on every topic feels the same way, so perhaps this doesn’t distinguish me very much.

But I can at least make sure I don’t fall foul of the second arm. Few things in this life, even if true, are worth driving away those near and dear to you, having friends of long standing view you as some crank and lost cause obsessive. My twitter feed the past month has been that of a single issue kook, which has gained me a lot of new followers, but I never really wrote to build a large audience, and definitely wrote for the sheer joy of being able to say whatever was on my mind, not for advancing a single cause.

To know if you’ve started to become viewed as a crank, you have to listen to the silences – the friends that don’t respond to your whatsapp messages when you send them something on the subject, the people on twitter who used to engage that you haven’t heard from for a while. You don’t have to change your beliefs about the election because others don’t agree with you, but you do need to value your audience, especially when they are friends and loved ones.

In finance, most trades are essentially neutral – if you buy a stock, and nothing happens, you stay flat. However, a famous trade in foreign exchange is the carry trade – borrow in low interest rate currencies, and invest in high interest rate currencies. There, if nothing happens to the exchange rate, you win (on the difference in interest rates). This term, “carry”, gets used broadly to describe any such trade with this property, where you win by things staying the same. An anti-carry trade is thus the opposite. If nothing happens, you lose.

Since the Wednesday morning after the election, it has been quite clear that Biden had a strong carry trade, and Trump had an anti-carry trade. Something fairly large had to happen to change the answer. The Supreme Court case with Texas was my last bet on what that something large might be. Related to my post earlier this year on how Republicans can’t get their appointed judges to stay conservative, the answer was depressing, if not surprising. The number of ways the outcome can change at this point is small, most of them would be highly alarming if they occurred, and not many of them seem to hinge upon a great new empirical analysis of voter fraud being written by me.

So having written much on the subject, this is my coda to the past month’s thinking, at least for the time being. Like the Dylan poem to which the title is an homage, it’s not that the issue is suddenly dead, it’s just a way of collecting one’s thoughts and drawing a line under a chapter that seems to be coming to a close. I will probably have more to say on the subject, like every addict, but the time for being a single issue author is passed. Please bear with me even if you feel heartily sick of the subject. I have spent an extraordinary amount of time thinking about these issues over the past month, and I feel confident I may yet be able to tell you something new, the things that at least I didn’t know before I started out. Without further ado, they are as follows.

The average American believes three things about voter fraud in his country.

First, he believes that there is very little of it, perhaps almost zero, and certainly not enough to swing an election.

Second, he believes that if there were a reasonable amount of it in general, he would have heard about it, from experts on the subject.

Third, he feels that if any single election had been fraudulent, said experts would be able to identify such fraud and bring it to light before it was able to decide the election outcome.

I am not going to have much to say about the first point, at least not directly. I suspect that by this juncture, the number of people who haven’t made up their mind about this is very small. My firm belief is that one’s priors on this should be quite wide, but that’s another subject.

Rather, I want to convince you that the second point, and especially the third point, are wrong.

While I don’t want to inflate my credentials here, I am one of those fortunate people (or unfortunate, depending on perspective) whose skills and training puts them in a good position to actually be able to empirically study the question of voter fraud. There are few academic papers on the subject that I would not back myself to be able to read and understand.

I have spent almost the entire past month digging into various ways of trying to find voter fraud. Much of that work has been out of the public eye, and not all of it was ever released officially to anyone. This is how data digging works – you do a lot of analysis for everything you actually write, in the “measure twice, cut once” manner.

And I can tell you, as someone who’s hunted very hard for it – voter fraud is extremely difficult to prove using only public data, whether it actually happens or not.

To which you might immediately think – that’s because there isn’t much voter fraud!

On the contrary. It is not at all difficult to find extremely alarming and weird anomalies in election data.

A good working definition of fraud is “wrong data entered for malicious reasons”. The big challenge is that a good working definition of data errors is “wrong data entered for innocent reasons”.

The extremely hard part is thus not finding anomalous and suspicious patterns in the data, but proving with certainty that these arise due to malicious intent. Moreover, one has to rule out every possible innocent reason these errors could arise, where the functional form of errors is allowed to be incredibly vague. Further still, the counties and election officials are given almost every single benefit of the doubt. Moldbug is right on this point. The sovereign is he who determines the null hypothesis.

One can very easily find loads of extremely suspicious things in the data.

One can find 169 updates in the New York Times county-level election update data where the vote count in one category (in-person or absentee) actually decreased in an update. Here is one of the most suspicious, in Montgomery County, PA which still hasn’t been well-explained. You have not even heard of the remaining 168. Here’s the count by state:


    state |      Freq.     Percent        Cum.
------------+-----------------------------------
         AL |          1        0.59        0.59
         AR |         12        7.10        7.69
         AZ |          5        2.96       10.65
         FL |          3        1.78       12.43
         GA |         24       14.20       26.63
         IA |         20       11.83       38.46
         ID |          1        0.59       39.05
         IN |          1        0.59       39.64
         KS |          2        1.18       40.83
         MA |          1        0.59       41.42
         MI |         21       12.43       53.85
         MS |          1        0.59       54.44
         NH |          1        0.59       55.03
         NJ |          4        2.37       57.40
         NM |          1        0.59       57.99
         NY |          3        1.78       59.76
         PA |          9        5.33       65.09
         SC |         30       17.75       82.84
         TX |         11        6.51       89.35
         UT |          1        0.59       89.94
         VA |         15        8.88       98.82
         WI |          1        0.59       99.41
         WV |          1        0.59      100.00
------------+-----------------------------------

Several of the disputed and contentious states are heavily represented – Georgia, Michigan, Pennsylvania. But so are places you haven’t heard of. Arkansas. Virginia. Iowa. South Carolina.

(By the by, through my various digging, Virginia is my bet for “state with the most election fraud in 2020 that you never read about”, and not just because of the metric above)

Look at how much work went into the analysis of Montgomery PA, which covered one of these data points, trying to rule out every possible innocent explanation, and showing additional evidence that points to fraud. Do you think anyone is digging that much into the remaining 168? The NYT data can be downloaded in a bunch of places, and it's not hard to find these updates. I've looked at them, about half of them are quite small, less than 100 votes. Some of the rest look like a single set of ballots being reclassified from one category to another. But even after taking out all of these, there's a large number of these where frankly I have no idea what's going on, and I doubt you would either.

One can find vote updates that look like colossal outliers in terms of the fairly intuitive rule that updates can be either large, or unrepresentative, but not generally both. Here’s a long analysis of this. The most suspicious, in Wisconsin, Michigan and Georgia (surely a coincidence with the states identified on the metric above!), also came in the middle of the night, and were large enough to swing the election. The defenders argue that this is all just normal absentee votes. At least for Milwaukee, one can also find corroborating evidence in suspicious patterns in down-ballot races too, that at least don’t fit simple stories about mail ballots.

But suppose you don’t believe the New York Times data. That could all just be errors! Indeed. Couldn’t it all.

One can find 58 Pennsylvania registered voters born in the year 1800, 11 born between 1801 and 1899, and 25 born in 1900. Admittedly, these particular cases are more likely just errors - if this is voter fraud, it’s the stupidest form ever, since it’s going to stick out like a sore thumb. But it proves beyond any doubt that errors in this data do not get checked or corrected anywhere. And indeed, these implausible years of birth are in fact the mere tip of the iceberg of suspicious patterns in birthdays, which follow much more notable patterns indicating fraud involving round numbered days of the month and months of the year, plus month distributions that are too smooth. These patterns consistent with fraud are related to counties voting for Biden, including at record levels.

Or suppose you don’t believe statistics at all. You insist on hard evidence! In Wayne County, MI, you can find totally normal scenes from election night, like them boarding up the windows in the vote counting center to stop observers even seeing in. In Fulton County, GA, you had the insane spectacle that on election night, election officials sent all the observers home, telling them that counting was over for the night. In the press, dubious accounts were circulated implying that a burst pipe was the cause, although it turns out that may have been from that morning, or may not have happened at all. In any case, an hour later, they started counting again, with no observers in the room, using ballots in suitcases under a desk that had been delivered at 8:30am that day. Oh, and all this was caught on video. As part of this, you can also watch the officials scan the same set of ballots multiple times.  As has been noted before – if this were happening in a third world country, the State Department would declare it presumptively fraudulent. This isn't an exhaustive list. This is the ones I managed to remember and write down, while working furiously on other things over the whole period, and where the main allegations were actually caught on video. If you go through everything alleged in affidavits in lawsuit, many are much more shocking, though also harder to verify.

My point is not that you should believe this absolutely nails down fraud, let along how widespread you should infer the fraud to be based on these incidents. My point is to emphasise how difficult the task is, even if there were actually fraud. Fraud would look exactly like this. People switching votes back and forth to swing a total, or deleting inconvenient votes from the count. Bringing fake and colossally unrepresentative ballot dumps in during the middle of the night. Registering tons of fake voters to flood in mail ballots. Counting happening in secret after observers are sent home under false pretenses. Reports coming in from whistleblowers in affidavits.

But how sure are you that these aren’t just data errors in very noisy data? That someone incorrectly entered a vote total in a database, and later corrected it? That patterns in absentee ballots, while highly weird, represent odd preferences of mail-in voters? That the ballots in Georgia were all scanned regularly, and that the machine will never count ballots twice if they’re scanned twice, and that there’s not some innocent mixup as to why everyone was sent home? That the witnesses in the lawsuits were confused about what they saw?

If every benefit of the doubt is given to the other side, what's the chances you can ever overcome them all?

Suppose, like a number of readers, you are in the category of someone who still isn’t convinced. There’s some weird stuff going on, sure, but it doesn’t rise to the level of “fraud may have decided the election result”.

Three good questions to ask are the following.

1.      What kind of voter fraud do you have in mind?

2.    What evidence would actually convince you that there might have been this kind of voter fraud?

3.     What data is actually available, and based on this, how likely is it that this evidence might ever conceivably be discovered?

The first question, as it turns out, is actually the most important. Because fraud comes in many different types, and the likelihood of catching them varies enormously.

The most egregious type is to make up election returns out of whole cloth. In this version, the vote totals are plucked from someone’s head, and don’t correspond to any actual ballots or button presses in the real world.

This type is actually the most likely to get caught. Totally fake numbers leave lots of traces that can be studied by things like digit analysis via Benford’s Law. Only the most basket case third world countries do this. I think one can say with high certainty that, at the conservative end, this does not occur very often in US elections, and I would wager strongly in America does not occur at all.

The next category of obvious fraud is when some dictator reports winning 99% of the vote. Like Theodore Dalrymple observed about propaganda in communist countries, this kind of election is not actually meant to convince anyone, but rather to humiliate them, to insist on obvious lies and dare them to say differently.

But even here, most of the argument about fraud is already at the level of a smell test. Suppose you had to prove statistically that it was impossible that these election results in Cuba or Syria were genuine. How exactly would you do it? I suspect you’ll find it’s a lot harder than you might think. Bear in mind, in 2020 the “Norristown 2-2” precinct in Montgomery County had reported mail-in votes up to November 10^th where Biden had won 98.7% of the two-party vote, across 150 votes. Please tell me how you plan to show that this number is genuine, yet Assad’s 88.7% of the vote is not. Not by digging up the raw ballots (though even here, if Assad can produce his fake ballots, you may still be out of luck). From your computer, which is what nearly all of us have had to do.

Or put it differently. Suppose that Assad in Syria decided to rig the elections, but instead of generating insane levels of support, he decided to replace all the genuine ballots with fake ones that showed him getting support levels between 60% and 71%, with turnout at 70% of the electorate. He has total control of the vote counting process.

You know this is bullshit. But that’s not the question. How would you go about proving it?

Almost anything below the first two cases – making up numbers whole, or 90% vote shares – is actually extremely difficult to prove, even if it’s occurring. I mean, he kicked out the observers, which is pretty bad. But so did Fulton County, GA, and kept on counting.

Let’s take some scenarios more likely to actually occur in the US.

You are an election official who is not being closely monitored. There is a list of eligible voters in your precinct. Suppose it is a normal year, with relatively few absentee/mail ballots. You have hidden a genuine ballot box of pre-filled in ballots, with genuine ballot papers, that you know contains 1000 votes total, of which 97% are for your candidate. All registered voters in your precinct are on a list, and get crossed off as they come in. You wait until polls close, and you can see the list of everyone who hasn’t voted. You cross 1000 names off the list, and bring in your pre-filled in box of ballots, mingling it with the main ones.

How do you propose to identify that in the data? If you had periodic updates, you can maybe find batches that look really anomalous, sure. That’s what this analysis did! And this one! The scenario wasn’t exactly the same, but it was similar. Did you find it sufficient proof?

In this particular variant, every voter is a genuine, registered voter. Every voter votes exactly once. Every ballot paper is a genuine ballot. Every vote corresponds to a ballot paper that can be counted and re-counted. No ballot gives any indication it was not cast by a genuine voter.

Let us agree on this much. Unless you catch the person in the act, this will be flat out impossible to detect just by looking at final election results. I actually don’t know how you’d prove it with any other data either. Don’t believe me? Propose a test. I’m all ears. I have heard stories from campaign operatives that this actually happens, I didn’t think up this idea myself.

But I’m not here to convince you to believe those stories. Suppose one accepts, as indeed you’re told, that there is no evidence of this kind of voter fraud. It’s true. There broadly isn’t. Now, ask yourself, what’s the signal to noise ratio of this kind of lack of evidence? If there were no voter fraud of this kind, we’d expect to find no evidence. If there were voter fraud of this type, but we lacked any realistic ability to catch it, we would also expect to find no evidence. So the lack of evidence tells us almost precisely zero one way or the other.

Especially germane to the current election, there are many types of fraud involving mail ballots. It is much easier for a person to send in mail ballots for someone else, than to turn up at a polling station and claim to be five different people of different ages. This mail then gets handled by postal workers, with a crazily weak chain of custody, from the same people that lead to your Amazon packages being stolen with reasonable frequency. This leads to a number of stories you can find for the search string “ballots found in the trash”. Meanwhile, signature verification on potentially fraudulent ballots got greatly weakened in 2020 in many of the key states, just as the number of mail ballots increased massively, as described in the Texas lawsuit. A discussion I had with a campaign operative (which I haven’t been able to verify, so I’m just reporting the claim, not asserting it) said that in Arizona, once the signature was verified on the envelope, the envelope got thrown away, making it impossible for anyone to verify after the fact what it said.

Don’t think about “was there fraud”. I’m not interested in the question of haggling over the specific details here of what precisely happened in each place, and you can make up your own mind on that. Rather, I care much more about the question of “if there were fraud, would it have been caught?”

And here’s the crazy part, if you’re sure that election fraud in general would have been caught. 2020 is actually the single best year in history to catch election fraud. Because unlike in the past, we have periodic snapshots taken by internet amateurs of the update of counts scraped from the NYT website, rather than just the final tally. We can also download a ton of stuff from the internet.

For most past elections, we can get final vote counts at the precinct level if we’re lucky, or the county level more likely. Votes by candidate. That’s it. You want to go back and find out if the 2016 election was fraudulent, that’s basically the overwhelming extent of the data you’ve got to work with. Oh, and four years later, that data is still riddled with errors, because it has to get kludged together from 3300 odd counties, with vastly different reporting systems.

Tell me what kinds of fraud you are confident you can identify from those numbers. Not just you, but “the experts” who study this stuff.

I understand enough about this data to know that while there are clearly some tricks one can do if one is clever, there are large and fundamental limitations to how much fraud you can ever hope to identify from this kind of data.

And that’s it. That’s basically what you’ve got. Or you can hope that someone does something dumb and gets caught in the act. But is that the state of the art strategy? How many would slip through the net for each one that gets caught, like in Fulton County GA? Not that anything is going to happen to the people in Fulton County, which also is quite revealing. In a year, I predict fairly confidently it will be one more rumored and then forgotten local story, and the videos will eventually disappear. Along those lines, if more evidence does come to light, you certainly can't publish them on Youtube, no matter what you find from here on out, as they've said that their policy is to delete all such videos. Big tech has spoken! The matter is closed. There is no evidence of voter fraud, and also, you had a total of four weeks to come up with any of it, before the verdict is entered for all time. 

I think there is a strong case to be made that, for many types of fraud, catching them is extremely difficult.

And so almost the entire question comes down to one of priors. We have no reasonable hope of actually identifying it from the data. Most people are sure it is extremely rare. I am not. The evidence demanded to budge their priors is enormous. That evidence will never be found, whether there is fraud, or whether there is no fraud.

And so finally, we get to the last question. Even if fraud could be caught, eventually, somehow, with enough time and analysis and manpower, would it be caught in time?

Reader, prepare yourself, because the next sentence may be shocking to you. 

The Trump campaign, in many respects, was not very well organized.

But I have come to have enormous sympathy for the sheer scale and difficulty of the task in front of them, even if they were well organized.

A campaign is not a permanent organization, but a bunch of operatives coming together for a particular period and task. I suspect, and it accords with the few anecdotal discussions I’ve had with people who’ve worked on them, that most presidential campaigns are a shitshow at the best of times, but some candidate has to win, so we assume after the fact that their campaign internally must have been great, when it probably wasn’t.

So what happens after the dubious election returns start coming in in the dead of night on Wednesday after the election?

You have a small staff. Most of it is lawyers and political operatives, not statisticians and data scientists. Everyone is absolutely frazzled. You are trying to put out a thousand fires. You are trying to coordinate dozens of people and teams. Everyone is demoralised and worrying about their employment future, since most were working on an implicit promise of employment in the administration if they won, which is now looking unlikely. You are trying to keep track of ten thousand different leads and reports coming in from all over the country. Half of them will be straight up wrong, either bogus third hand accounts, or claims from someone genuinely concerned but insufficiently skeptical and not probing into alternatives. Avoiding this is actually quite hard, to be honest. When one really wants to find fraud (or indeed any empirical result) it is psychologically difficult to then switch gears to convincing oneself of all the ways the hypothesis could be false, and then trying to find evidence of that.

Of the other half of the leads, perhaps 80% will be plausible, but either inconclusive, or admitting of multiple interpretations. Of genuine ones, they may be contained in a two hour video that’s not very well explained, and you don’t have time to watch the whole thing. They may be written down in some long technical piece that you don’t have the training to follow entirely, or which doesn't explain clearly what its doing. Even if you think it seems legit and you understand what it’s doing, you have to take a gamble that it’s not a coding error or bad data cleaning or some other screwup. They may be some anonymous whistleblower that you have to spend resources to try to find out if they’re fake or well-intentioned, if they’re right or wrong, if their claims are provable or unprovable.

Now, you have to figure out, can I get this in an affidavit? Is this author willing to go public? Will this convince a judge? Can I get an expert witness to testify, assuming a judge is even interested in hearing evidence, which often they're not? As far as I can tell, the statistical analyses I liked the most were all written pseudonymously. It is not a surprise that they didn’t find their way into the major lawsuits. The Williams professor who did a god damn confidence interval for the Matt Braynard analysis got dragged in the papers by his utterly contemptible colleagues. The chances that they would do this if he’d computed a confidence interval for literally any other survey in history are zero. Are you surprised that more people aren't signing up to put their professional reputations on the line for what's almost certainly a Hail Mary, and which won't even benefit them personally?

But even if you can find an expert willing to go public, how long do they have to generate such a report? You need to scramble to scrape and download the data straight away from lots of sources, and start analyzing it. Find the weird anomalies, dig into them, try to figure out which ones might be errors. Think of different ways to test them. Think of different data you might get that would corroborate this. Manually do more gathering, and cleaning, and merging. Think of which things might rise above the metric of “dubious” to “very hard to explain with anything other than fraud”. Run the results. Double check the results. Triple check the results, because if you start making false claims, you’ve actively hurt the cause (and you’ll feel like a total fool and fraud). Start writing the results up. Refine the writeup to make it less jargon-y. Try to balance the tension between “easily accessible to public readers”, “understandable to smart but busy and innumerate lawyers” and “detailed enough to withstand public scrutiny by hostile experts or readers”. Also, there’s dozens of different investigative angles you can take. Each one takes a few days or a week to look into, let alone write up, let alone actually get published. You’re pulling 80 hour weeks, but even so, there’s not many weeks you have. How many such analyses can you write? Meanwhile, you're working against the clock without knowing quite what the deadline is for "too late to matter", but you know it can't be very long. 

Now, consider the media environment you are operating in, if you are the Trump team. The same media that in 2016 was willing to report uncritically every breathless allegation of Russian interference, that was willing to circulate as evidence a single anonymous dossier of allegations about Trump and treat it as a basis for campaign wiretaps and impeachment, now is loudly insisting that a) the race is over, and b) “experts assure us there is no voter fraud”. Meanwhile, on the rare occasions they do report on the matter, they only focus on the most ludicrous witness statements and the most easily debunked claims. These are sure to circulate widely, so that by the time previously open-minded readers get around to seeing actual good evidence, they’re largely exhausted and cynical, and often won't even read it.

Partly for the fun of trolling, and partly just as an experiment, I started asking the Montgomery County twitter account, and its commissioner in charge of the election, Ken Lawrence Jr, why it was that their county looked so crooked on multiple dimensions, both in terms of having the most suspicious vote update in America, and the third most suspicious set of voter birthdays among Pennsylvania counties. They never answered. I tried poking newspaper reporters from multiple papers. Most didn’t bite. Ross Douthat, to his credit, linked to the Montgomery piece, admittedly in a one-liner in his NYT article on how weird it is that these kooks believe in conspiracy theories. I asked him in multiple places – have you, or any other journalist, actually just asked these guys in Montgomery County what their explanation is for it? Even just to get a response on the record? No dice. Nobody was interested. Hell, I couldn't even get a response out of the Pennsylvania Republican Party twitter account!

I didn’t really expect anything different, so my demeanour was mostly one of trollish entertainment, rather than disappointment. But at the end, even I found myself more cynical than I expected.

If you are Republican, and alleging voter fraud by the Democrats, the media will be actively opposed to you at every single step. How could they not be? These are the same people that have been writing about how Trump was Hitler for the past four years. Does any reasonable person expect them to voluntarily start digging into stories that might make Trump actually get another four years, when they can just turn a blind eye and end it all? Besides, if they start being called a voter fraud truther, it will be disaster for their career.

There is one more piece of the puzzle worth noting.

How many people do you think there actually were working on this, total, over the past month? At least on the data side?

The average person probably assumes that there must have been thousands of highly paid professionals working on it.

I estimate that the number is perhaps 40 at the high end, and maybe as low as 20. (If the sides had been flipped, it would definitely be more, perhaps a lot more, but I don't know). I’d estimate that nearly all of them were volunteers juggling other full time jobs. I personally knew about ten of them working on analysis, and there were a number of other excellent people helping enormously with data gathering and processing. 

That's it. That's the full extent of resources around the world that have gone into investigating from a statistical point of view whether the 2020 election may have been decided by fraud. With the time and resources available, it's remarkable we found as much as we did.

At least personally, I never really expected to change the outcome. The task was basically impossible, but damn it, we worked until the end anyway.

This is all one can ever do. 

To live not by lies, as Mr Solzhenitsyn put it.

And to fill the unforgiving minute with sixty seconds worth of distance run, as Mr Kipling put it.

To the ten, and to all those I know who helped  in the effort – friends, it was a true honour and pleasure to work with you.