America, December 31st, 2021

[Editorial Note: I wanted to risk trying something unusual for this blog. This poem was written as my submission for Lomez's excellent Passage Prize, which I ordered, and you should too. It made the short list for the finals (yay!), but not the final prizes (boo!), nor the second round selections for the print edition (double boo!). So you might describe this as being among the worst of the worst of the best, which sounds about right to me.

The following was my introduction to the submission, which I'm not sure if I should get straight to the point and delete, but while I am a confident essayist, I am a nervous poet, so forgive the endless self-effacement:

"Hey Curtis,

Let me begin with an apology of sorts - it has been twenty years since I last wrote a poem, and I never really understood free verse. I kind of think of poetry as divided into either a) regular forms with rhyme and meter, or b) unusually personal imagery-heavy essays broken up to look visually appealing and emphasize certain pauses. I don't know if the latter is your view of free verse, however. To write the following in regular poetic form is probably outside my skill level, would take a very long time and probably would end up worse. Hence the result below. When you describe the meter of your poems, it mostly doesn't register with me, as I just breeze past this and read the sentences, which I really like. All of which is to say – I’m not sure whether this should be a poem at all, or an essay. But it doesn't seem to fit the prompt for the literary non-fiction version. So I figured I'd submit it anyway, if for no other reason than that I very much enjoyed the writing prompt to write something personal that risked being cringe." ]


America, December 31st, 2021

America, that land

That drew me in so long ago,

Is caught, pincer-like,

Between the two great forces

Of decaying empires.

The Scylla,

Of the great deal of ruin in a nation,

And the Charybdis,

That that which cannot continue, will cease.

 

I remember, when I first arrived,

Having occasion to observe,

With some regularity,

That this was a great country.

At billboards advertising

"Twenty Chicken McNuggets for $6.99".

Partly in jest, but mostly serious,

I used to remark:

"These should have the national anthem

Blaring on repeat,

Flag flying in the breeze.

This country believes in value!".

At redneck engineering videos,

Of homemade trebuchets.

At old universities,

Taking classes for free,

With famous and brilliant professors.

At the wonder that every band I loved,

Would just turn up in my town,

And play live every year or so.

At college girls that would find

My accent just cute enough,

For that 5-10% boost,

To come back to my apartment.

 

America, you have been very good to me.

 

I had one such moment recently,

At seeing the winning entries,

In a giant pumpkin contest,

At a small-town country fair.

A two-thousand-pound pumpkin!

Grown simply for the je ne sais quois!

There is still greatness,

Wonder and weirdness,

In odd corners you can stumble on.

But the next thought I had

Was realizing

Just how many years it was

Since last I had that thought.

Partly, the desensitization

Of repeated exposure.

Partly, the ingrate foreigner,

Now successful and dismissive,

Of those that helped him.

But partly, I think,

The decline that is all around us.

 

I used to joke that America

Seemed to be experiencing

The Soviet time-line in reverse,

Except it was crumbling, not strengthening.

Then some mental reflex noted

The multiplying number of epicycles,

And I wondered how sure I was,

That things didn't better match,

To the Roman empire,

Or the Roman republic,

Or the French revolution,

Or the Byzantines,

Or to many others

Of which I knew less.

(The amateur historian,

Confident in his theory,

Would do well to count

How many Chinese dynasties

He can name at all,

Then exclude those where

The mental association maps

Only to a diad,

With a name, and a phrase

Like "vase" or "pottery army".)

The confusing pattern-matching,

Where every peg is a meteorite,

Fractally weird and irregular,

And endlessly able to be rotated,

And every hole is an impact crater,

Blasted into the earth,

Chaos where a neat outline should be.

Beware the advice

Of the reactionary

Who only knows one history

Of decline and fall.

 

Decline, in one form or another,

Is on the lips of almost

Everyone these days.

A Democrat-voting work friend

Asks me if I plan

To home-school my children,

With "Yes" his obvious answer.

I responded that,

I had thought about this, and

Concluded that if there

Is not a nearby school,

Either public or private,

That I would trust to

Educate my child,

Is this actually still

The country I should be living in?

 

The answer, unspoken, lingers in the air.

 

The obvious follow-on question,

Also unspoken, is:

"If not here, then where?"

This one has no easy answer,

As everywhere turns into America.

 

But we have sailed

Very close to Charybdis,

And fail to tack towards

Scylla at our peril.

Is it really about to collapse?

Or is this just

The Twitter talking?

The outrage-bait machine,

Using my brain as

A meat puppet?

The glowing square is

Hypnotic and smooth,

And out of it pours

Misery and anxiety.

The view out my window

Is the same as ever.

 

The conditional is easy to tell.

Fussell understood it well,

Describing the prospect of death

For a soldier in wartime.

If the porridge hits the propeller:

"It is going to happen to me,

And only my not being here

Will prevent it."

This realization,

Fussell thought,

Was what drove them mad.

 

As a foreigner, I can tell you,

Woodrow Wilson was right

About us hyphenated-Americans

(For the first generation at least).

The man who would leave

His wife for a mistress,

Will abandon her, too, in turn,

When the deal's gone sour.

When it is your country,

You will fight.

When you are a stranger,

You will leave.

That is, if you can

Figure it out in time.

 

One day, just like

Niall Ferguson's bond investors,

On the eve of WW1,

You may wake up and find out

That the great deal

Of ruin in a nation

Has finally been exhausted.

 

It is not going to happen, probably,

This week, month, or year, though.

The mean decline is still slow.

The variance is alarming.

 

The young man who once left

His home, carelessly,

Not even really sure

Quite what the plan was,

Finds this an overwhelming question

Now in middle age.

 

So what to do in the meantime?

If now is not, in fact, the right time?

 

Relative to the Soviets,

Our mangled and mismatched metaphor,

We have one great advantage.

We also have an NKVD,

But no one is in charge of it.

Its ad hoc structure gives

Only loose coordination,

And since the only payoff comes

In the debased coin of status,

Our own era's commissars

Simply cannot wait

To announce themselves publicly.

"In this house we believe..."

Solzhenitsyn would have dreamed

Of foes this blatant.

 

I suspect that as things get

Inexorably worse,

The skill that soon,

Will matter most

Is knowing whom to trust,

And whom you can

Speak freely to.

 

I have found just two

Rules of thumb worth relaying.

If you have a

Sense of humor,

And if you can

Debate a point

And not take it personally,

I can likely talk about

Almost anything with you,

If I choose my words correctly.

At least today.

Maybe one day,

The backwards-winding clock

Will strike 1937,

And then everyone will be,

Guilty of something.

 

Wish as we might,

We cannot live

In any era but our own.

One must always try

To avoid the uselessness

And self-pity in

"The whining, the pleas of a coward".

 

So, what can you do with all this?

 

Propaganda succeeds, in part,

When those who disagree with it,

Are afraid to say so.

 

Dissenting openly and publicly,

Especially in the written word,

Is courting great trouble.

It is for the bold,

If you have a heart and spirit,

As firm as Solzhenitsyn,

An old testament prophet,

In this post testament world.

 

But speaking up in private,

To those you can trust,

Builds camaraderie and friendship,

The basis of all bonds that form

Incipient organizations,

Upon which revival may depend.

 

Perhaps this adds

Small brick on brick,

To the start of something new,

The Empire that grows,

From the ashes of the Republic.

 

Perhaps it serves only,

As the intellectual companionship,

Of knowing one is not alone,

In these dispirited times.

That the Soviet mental asylum,

We dissidents are placed in,

Is actually filled with the sane.

 

I may not live boldly

In many things,

But I believe in backing one's judgment

In estimations of character.

Learn how to read people,

Judiciously and carefully,

To figure out whom you can trust.

 

But to let them know

That they can trust you,

To break the higher order uncertainty,

Someone generally has to have

The courage to say something

Out of sync with modernity.

 

Might you get it wrong?

Of course you might get it wrong!

I have got it badly wrong

Exactly three times, so far.

None were fatal, thankfully.

Did you really think that there

Was some option, in this morass,

That didn't come with risk?

 

Reader, you would go

A fair way towards

Being conditionally trusted,

Knowing not much more

Than that you stumbled across this poem. 

Living History Forwards

I have recently been working my way through the excellent History of Rome podcast series. I had been meaning to do this for some time as my previous knowledge had been mostly from another excellent series, The Fall of Rome , which I've written some thoughts from before. I realized in hindsight that I was doing things in a mistaken order. Perhaps due to my own slightly pessimistic nature and preoccupation with the current political situation, the narrative of decline and why it happened was very appealing. But before you can delve into the big picture forces (which Wyman does well in the Fall of Rome), it's helpful to understand the basic sequence of what happened when. Not only that, but you can't really hope to understand the fall of Rome unless you also understand its rise, and all the times when it could have fallen, but didn't. Going through the story made me want to go back and read all sorts of things again with a better knowledge of the events, from the Asterix comics, to Horatius at the Bridge by Macauley, to The God Abandons Antony by Cavafy, to Blog.Jim's posts on normality bias.

One of the interesting challenges when listening to the narrative is to try to invert the ex post story back into the ex ante perspective at the time - what people would have or should have thought, knowing only what they knew at the time. History is told backwards, but must be lived forwards. The simplest version of history tells things as a story, describing the important events that happened. But quickly students of history want to move from what happened, to why it happened. In the language of statistics, this means fitting the right ex-post model to the data, so you can understand what variation drove what outcome. Even this is hard to do - you might overfit the model, or select the wrong variables (and you don't get to re-run things to find out if you're right.) The causes you identify are probably there, and perhaps even contributed, but are they actually the important ones? This is a lot of the challenge of historians. But from a statistical point of view, the next step is the ex-ante one. If you'd run this same model using only the data you'd observed up to that point, even if you'd thought of the same variables, what relationship would you have estimated? Price to dividend ratios predict market returns reasonably well at long horizons ex-post, if you believe Campbell and Shiller. If you run it out of sample, Goyal and Welch say they don't.

The statistician's version of this is quite easy - just run the same model on less data, and see what it produces. So why is it so hard as a historian to do the same? Because you're not really running models, you're evaluating things according to your own judgment. This isn't a knock on the field, per se. Some bits of history lend themselves to quantification, like Robert Fogel did, but others (including a number that you really care about) simply don't. When you form your own judgment of things, it's hard not to fall victim to the curse of knowledge. That is, when you know something, it is very difficult to credibly put yourself in the position of someone who doesn't know the thing. It will always seem like things that you know after the fact should have been easy to forecast at the time, but they often aren't. 

In history, we always know how the story ends, so identifying what counts as a major event, or a turning point, or a transition, is always made with the benefit of hindsight, so as to give the most informative narrative. This leads people to make a significant mistake when translating history into their own lives. They assume that when some major shift occurs, there will be lots of signs to indicate this fact. But there might not be. Maybe what's important won't be obvious until much later. Reading about the last days of the Roman republic, one of the interesting aspects is that what in hindsight seem like important turning points. When the Gracchi brothers started using mobs of plebians as threats to get their political will, it might not have seemed that shocking. But it draws a line to Marius becoming consul seven times and leading an army into Rome to institute a reign of terror, and then Sulla being declared dictator for life. Except Sulla stepped down, and attempted to restore the Republic. You can imagine that things might have seemed back to normal then. But instead, this is described as more steps towards empire. Even Caesar Augustus, who consolidated power single-handedly more than anyone since Tarquin, kept a lot of the forms of the Republic, and only changed his status quite gradually. There was still a senate, and consuls, and praetors. To someone wanting to convince themselves that things weren't actually that different, it was probably easier than you might think. Indeed, one narrative of Julius Caesar's downfall is that he attempted to shift power to himself too quickly, and got stabbed to death by the Senate for his troubles, even after all his triumphs. This seems to suggest that the prudent strategy is probably to maintain the old forms, and pretend like they're still in operation, even as they're gradually undermined.

Which perhaps should make you wonder - has this... happened in America? Almost certainly. As Moldbug describes, America has gone through at least four versions of the Republic since its founding. The main reason people don't notice this is that they all swear fealty to the same piece of paper. But look around! Does the paper actually describe the government? If it does, why is the government so radically different, even as the paper is the same? Try explaining the CIA to George Washington, or the modern interpretation of the Commerce Clause to Thomas Jefferson. (As a party joke, I enjoy asking law students to list as many hypothetical pieces of legislation as they can that they're sure would not be justified by the Commerce clause. There's, uh, gun-free school zones? And ... hmmm, did I already mention gun-free school zones?). 

Is FDR delivering his inaugural address, which basically demanded absolute authority from Congress under threat he'd just take it anyway, and threatening to pack the Supreme Court when he didn't get his desired judgments, and serving an unprecedented four consecutive terms, breaching the 150 year old norm of only two, basically equivalent to a less violent form of a Caesar? The case is at least arguable, but you can be damn sure that you won't read this argument in your high school civics class. Was Nixon a corrupt figure that was justly impeached, or was he stitched up in a deep state coup? Also at least arguable.   

Or, to take one that's not yet a fait accompli in where it will end. You can also observe a gradual breaking down of existing norms and compromises that served to keep the parties' relationships with each other civil. The Democrats breach the previous norm that presidents basically get their Supreme Court nominations, by filibustering the eminently qualified Robert Bork. Republicans targeted Clinton, first with special prosecutors empowered to go on endless fishing expeditions (like starting out looking into dodgy Arkansas land deals and ending up looking into semen-stained dresses), and impeachment over purely process crimes like perjury when the underlying events were not actually criminal. Or the FBI illegally wiretapping the Trump campaign and Carter Page. Or Trump calling mobs to the capital to protest what he (and I) saw as election fraud. I happened to think that the January 6th mob was obviously going to be useless for anything other than theater with no coherent plan. But still, it is a notable shift from previous norms. Just like the Gracchi brothers. Maybe this is one more step towards perdition. Maybe it's just rumblings that will eventually settle down, like the secession of the plebs.  

In other words, we expect changes of government to look like America and Russia turning up in Berlin in 1945 - the game is over, and everyone knows it. But even the collapse of the western Roman empire doesn't quite work like this. One might think that when Rome gets sacked, that's basically the end. But Rome got sacked by the Gauls in 390 BC and bounced back. It got sacked by the Visigoths in 410 AD which was bad, but things still limped along. It got sacked again by the Vandals in 455 AD, by which time things were looking pretty dire indeed, but Odoacer declaring himself King was still twenty years away.

The challenge, in other words, is to be able to estimate the versions of history that could have happened but didn't, and the probabilities one should have attached to them. 

And when people imagine the idealised version of what this could be like if done well, those with a sci-fi bent will immediately think of Isaac Asimov's psychohistory. Imagine a fully worked out statistical model of psychology, sociology, and economics. Asimov's idea was that the perfect version of the social sciences should operate akin to the gas laws. The behavior of any one person is random, just like the movement of any one gas molecule. But the behavior of quadrillions of gas molecules or people is highly regular, and thus can be predicted quite well.

I am a huge Asimov fan, and found his writing highly influential in my teenage years. But the more I've pondered it, the more I think the idea of psychohistory has a tendency to lead people badly astray as to what ought to be possible, even in theory.

The version of psychohistory in the first foundation novel starts out with a version that presents the science as statistical, in the sense of assigning probabilities. 

Gaal said, "Indeed? In that case, if Dr. Seldon can predict the history of Trantor three hundred years into the future -"

"He can predict it fifteen hundred years into the future."

"Let it be fifteen thousand. Why couldn’t he yesterday have predicted the events of this morning and warned me. -No, I’m sorry." Gaal sat down and rested his head in one sweating palm, "I quite understand that psychohistory is a statistical science and cannot predict the future of a single man with any accuracy. You’ll understand that I’m upset."

"But you are wrong. Dr. Seldon was of the opinion that you would be arrested this morning."

"What!"

"It is unfortunate, but true. The Commission has been more and more hostile to his activities. New members joining the group have been interfered with to an increasing extent. The graphs showed that for our purposes, matters might best be brought to a climax now. The Commission of itself was moving somewhat slowly so Dr. Seldon visited you yesterday for the purpose of forcing their hand. No other reason."

Gaal caught his breath, "I resent -"

"Please. It was necessary. You were not picked for any personal reasons. You must realize that Dr. Seldon’s plans, which are laid out with the developed mathematics of over eighteen years include all eventualities with significant probabilities. This is one of them. I’ve been sent here for no other purpose than to assure you that you need not fear. It will end well; almost certainly so for the project; and with reasonable probability for you."

"What are the figures?" demanded Gaal.

"For the project, over 99.9%."

"And for myself?"

"I am instructed that this probability is 77.2%."

In other words, psychohistory predicts a range of outcomes, and their associated probabilities. This sounds like something I can imagine in the hyper-competent social sciences. But you can already see the tension in the paragraph - how is it that the death of a major figure has a 77.2% probability (three significant figures!), but the model also predicts events in 1500 years without the error bars blowing up to infinity? Admittedly, the project itself was predicted to succeed with 99.9% probability, and that was (in the book) the more important driver, so maybe it's not totally inconsistent, but still.

As the books go on, the mention of probabilities barely rates a mention again. Instead, the recurring narrative of the book is how Hari Seldon, the father of psychohistory, has recorded hologram messages for people hundreds of years into the future, explaining to them that the dramatic events that just happened were all foreseen and were part of the plan. The initial tension between probability and horizon gets resolved into the more satisfying plot device of the perfect forecast.

Asimov understands the idea of model risk. In one of the plot twists (I won't give much in the way of spoilers), eventually there appears the character of the Mule - a random structural break that couldn't have possibly been foreseen. But the general pattern is that the model works almost perfectly well in forecasting at very long horizons, right up to the point that the world has a dramatic and one-off shift.

Asimov later said that he should have actually called his science "psychosociology", not "psychohistory". I actually think this is a very revealing admission, and gets to the heart of the matter. History, in the popular version, is about predicting the ex-post path of exactly what happened. When you conceive of the task as being to predict history, it suggests knowing the precise series of events that the historian could narrate. Sociology, even when it works at all, is much more uncertain in its predictions - the 77.2% chance of death version, not the precise predictions in 500 years time version. The wrong choice of name was not innocuous - it showed an ambivalence, if not confusion, about the scope of the task.

Because Asimov's version of psychohistory is fatally flawed for two reasons. One of them he should have known at the time, the other one he probably couldn't have. 

Where Asimov should have known better is that he reveals himself to be a great storyteller, and an excellent scientist, but a poor statistician. In his conception of the gas laws, he emphasized the importance of there being millions of planets in the galaxy, in order to get a sufficiently large number of humans that he felt his statistical concept would work. But he also saw that democracy simply won't scale at that level, so he imagined the existence of an emperor.

The problem is that Asimov misunderstood the statistics behind the gas laws. The crucial factor that enables prediction is not that you have Avogadro's number of molecules. Rather, the crucial thing is that the molecules are essentially independent. This, not sheer number, is the crucial thing that makes the individual noise cancel out. If things aren't independent, you can keep adding more and more observations, and it won't help you. If one molecule is the emperor, it doesn't matter how many subjects you add.

And human beings simply aren't independent. Indeed, his own conception reveals this. If the Emperor has any actual power at all, then they're susceptible to being laid low by a bacterial infection, or killed from falling down stairs, or having a bad night's sleep due to some weird dream on a crucial day, or a thousand other random and idiosyncratic events that no model of psychohistory will ever be able to capture. The only way it can work is if the emperor is in fact not an emperor at all, and 100% of his choices, literally every single thing that matters, are already pre-determined by impersonal forces. If he dies, he will be replaced by someone else who will then do the same.

As long as the great man theory of history has even a kernel of truth, which it surely does, your chances of making eerily accurate hologram images for 500 years' time goes roughly to zero. You knowledge will only ever be probabilistic, and its accuracy will decline with time, like almost every statistical model. In many ways, this is the big danger of inferring things from fictional evidence - if your premises are subtly incorrect, you'll still write the whole story as if they were right. 

All of which might make you wonder - why wasn't this mistake obvious to Asimov at the time? 

I think this gets to the second part, which Asimov probably couldn't have known. Specifically, he was writing in the 1940s and 50s, before the age of cheap computing power and large, easily available datasets. That is to say, Asimov almost certainly had no experience actually constructing and testing statistical models. He couldn't have! Unless he was inverting the matrixes for the OLS estimator by hand. 

And as a result, he missed out on the single most important lesson you get from actually testing quantitative models. Namely, you find out how often your intuition about the world is just completely wrong. Or the effects are kinda-sorta there but much weaker than you thought. Or you start to worry about which of the many variations on some predictor variable you should be coding up, or whether there might be data errors, or whether linear models really are the right choice here, or whether there's reverse causality going on, and a thousand other things. You learn, in other words, that predicting almost anything you actually care about is surprisingly hard. And the work of doing so doesn't look at all like psychohistory, where one mathematical genius comes along, and suddenly you've got perfect predictions. Rather, it's about the slow grind of finding one new variable to improve the R-squared, or some new estimation technique to get the mean-squared error down. Sometimes a new discovery improves things a fair bit. But you never have a sense that you'll get the R-Squared to one, until your number of predictors equals the number of observations, at which point you've played yourself, as the Beastie Boys put it. Indeed, you quickly hit the law of diminishing returns on this type of thing. Initially, you add the large, big picture effects that have the most predictive power. But then what's left over is increasingly random and noise-driven, coming from outside forces and quirks mostly orthogonal to what you're interested in studying. Like Zeno's paradox, you might get closer and closer, but there's no hope of getting to the final goal. 

Even this is in the idealized version! Often you come away just convinced of your own deep epistemic uncertainty about the universe. You'll never really even perfectly explain what happened in a dataset, let alone forecast out of sample, because the world is just a shockingly complicated place. And all the bits you leave out end up in your residual term.

Nobody who has ever run a regression could really believe in psychohistory, if they thought about it hard. But many, (like me until very recently), suspended their disbelief in the face of the wonderful story, and just didn't think about it. But when you do, you realize it's just not how prediction works. Not in practice, and without independence, not even in theory. Models don't fail just because the Mule comes along. They fail because the task itself can only be statistical and uncertain. 

But if you never actually run these tests, you'll evaluate your theories of history on a heuristic basis, and make all sorts of kludges and exceptions, and be surprised when the world doesn't work out with as much certainty as a history book. 

What does genuine, significant, high stakes predictions actually look like, in the heat of the moment? Before you actually know how it's going to go down? 

When Russia first invaded Ukraine I spent an inordinate amount of time trying to figure out what the probability was that this would turn into a nuclear exchange. Because if the probability were non-trivial, it was time to get out of America, for at least weeks, to see how it was going to pan out. The important question is not "was it going to happen". Rather, the better question was, and is, "what would be the trigger events that I could observe at the time that would indicate a significant increase in the probability of dramatic escalation?" 

My guess was that the highest probability path to large scale war between Russia and America (and thus potentially going nuclear) was the US imposing a no-fly zone. Which is to say, shooting down Russian jets. The chances that this might spiral out of control, and quite fast, seems decent. Large overt NATO troop present in Ukraine would also be in the category. Other wild-card events like Poland unilaterally sending troops might also could, but it's harder to know where that goes. 

As it turns out, thankfully none of this seems likely any more. Whether it was ever likely is a separate question, but the identification of trigger events doesn't hinge on this question hugely, except for the question of whether the mental exercise is worth your time. Fortunately, the Biden administration repeatedly said early on that it wasn't interested in a no-fly zone, something we can all be very grateful for. But even if he had declared one, I suspect you probably would have had time to get on a plane out of America within 24 hours if you acted immediately, as things probably don't go nuclear at the first downed plane. On the other hand, it seems highly likely to me that most people wouldn't act, and would just sit there. Which is lucky really - the plane capacity to leave America each day is only a tiny, tiny fraction of the population. The plan only works if nobody else acts. But this in turn means that you need to act, and quickly, exactly at the point when everyone else thinks you're weird and paranoid. How else could it work? If you wait until the air raid alerts are being sent out, you will probably just die getting incinerated in your car, stuck in the biggest traffic jam in the soon-to-be-concluded history of the city. 

This is why forecasting things usefully ex-ante is hard. People expect there to be a big glaring sign that everyone will see. But there probably won't, at least until the historians write about you in 200 years' time. 

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.