Archive for January, 2008

Oil Money

Oil is currently purchased in dollars. That means that the price is set in dollars, and oil producers accept payments in dollars. There are occasional suggestions that the price should be denominated in some other currency, typically euros. This is generally intended to weaken U.S. hegemony. But does it make any sense?

In today’s financial world, the major currencies can be transformed to another at the press of a button. While the currencies float against one another, there is no immediate penalty to moving from one currency to another. The amount of money which currency speculators move around the world every day is actually far higher than the amount of money which moves in and out of stocks every day. So even if oil is sold in euros, somebody holding dollars can simply conver to euros and buy the oil.

It’s true that since oil is sold in dollars, holding dollars means that even when the dollar falls, you don’t therefore pay more for the oil. If oil were sold in euros, and you were holding dollars, and the dollar fell against the euro (as it has been doing recently), then you would have to pay more dollars for the oil.

However, the price of oil is already fairly volatile, and the volatility in the price seems considerably greater than the volatility in exchange rates. So if you have some other reason to hold dollars, I don’t think stability in the price of oil would be a convincing reason to switch away from dollars.

In short, it seems to me that selling oil in euros would have little or no real effect. It would certainly send a signal that the euro rather than the dollar was the world’s reserve currency. But it wouldn’t by itself make people switch away from dollars. At least, that’s how it seems to me.

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Lord Shakespeare

There are various theories that the plays attributed to Shakespeare were actually written by somebody else, such as the Earl of Oxford. I think one of the stronger arguments against this claim is the considerable lack of great literature, or great art in general, produced by members of the aristocracy.

I don’t believe that great art is associated with suffering. Everybody suffers in their life, no matter how well off they are–unrequited love, unexpected death, an unsightly pimple before the school dance. Great artists are not the people who suffer greatly, they are ones who can turn their suffering, or their imagination, into great art.

However, I do believe that great artists, at least prolific great artists, have immediate needs and long term aspiration. The pressure to produce something is an important element. Wealthy people are far less likely to have that pressure.

This is different from science, where, at least in the past, it was possible to make real discoveries as a dilettante. Several notable scientists were aristocrats. And of course there are exceptions. Lord Dunsany wrote quite a lot, and while there is only one Shakespeare, some of Dunsany’s work remains in print today.

Still, I think it far more likely that Shakespeare was a member of the middle class of his day, and I think it very unlikely that he was a member of the aristocracy.

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Free Theater

I’m sure everybody who works with free software has occasionally encountered the question as to why anybody would work on it. Obviously people do work on free software, and there are many different reasons why they do. However, there is a certain type of person who finds it all rather mysterious.

I recently thought of a better explanation than the ones I’ve tried in the past. Consider a community theatre group. There is no mystery about community theatre; people enjoy doing it, for various different reasons. Different people work on different things, based on their interests: acting, directing, sets, lighting, etc. Even a medium size community can often find enough people to put on an occasional play. Nobody finds any of this surprising.

Free software is the same way. The only real difference is that software can be easily copied; you don’t have to go to the performance, you can just use a copy. Because people can collaborate on the Internet, free software groups can easily get pretty large–although most free software programs still have a relatively small group of core developers.

And so on. The point is: it’s just as silly to wonder why people work on software for nothing as it is to wonder why people put on plays for nothing. People do all kinds of things for all kinds of reasons. It’s a mistake to think that there is no reason to work on free software, and it’s a mistake to think there is just one reason. And in particular it’s a mistake to think that everybody is motivated by money and/or reputation, although naturally that is true for some people.

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SF Book Covers

I’ve always liked the science fiction author Eric Frank Russell, who is best known for short stories like “Allamagoosa” and “And Then There Were None.” I happened across an old novel of his in a used book store, The Mindwarpers. It was OK, not great, but really struck me afterward was the cover.

The novel is a near-future story set in the Cold War (thus making it today some sort of past near-future story–we need a name for those). All the characters are ordinary human beings. The only advanced technology in the story is a sort of brainwashing device–not mind control, just the insertion of some false memories. It’s barely a science fiction story at all; it would work just as well as a Robert Ludlum novel.

Now look at the cover, which can of course be found on the web. It’s some sort of space ship flying past a planet. It’s obvious that whoever painted the cover, and whoever decided to put that painting on this novel, never even read it.

I don’t expect all that much from a science fiction publisher, but surely it’s not going overboard to expect them to actually read the book.

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China Money

The flow of money in the U.S. for the last several years has been as follows. Somebody in the U.S. buys something made in China. The dollars are aggregated and sent back to the Chinese manufacturer. The manufacturer converts them to Chinese renminbi at a Chinese bank at the government mandated exchange rate. The Chinese bank is required by the Chinese government to send the dollars to a couple of government controlled institutions. Those institutions wind up with a lot of dollars–a million dollars a day, or something like that. They take most of those dollars and use them to buy U.S. Treasury bonds. I may have some details wrong, but that is the general trend.

The Chinese goverment keeps this flow running smoothly by controlling the exchange rate. The exchange rate is lower than one would normally expect. This has the effect of keeping prices in the U.S. low: the dollars we send buy more renminbi than one would expect, which multiplies the effect of the relatively low wages in China. Conversely, it means that Chinese workers get less renminbi than one would expect, which means they have less ability to buy things made outside of China. Thus the policy encourages the U.S. to import goods from China.

However, most of the money actually winds up back in the U.S. By consistently buying U.S. Treasury bonds, the Chinese government is holding down interest rates in the U.S. This makes it easier for people in the U.S. to borrow money and buy more things, many of which are made in China. Without this money flow, the interest rates on Treasury bonds would rise. The U.S. government can not stop issuing bonds because it is so deeply in debt. If the money flow stopped, he effect would be that money in the U.S. would be diverted from productive investment into investment in Treasury bonds. It would be more expensive to borrow money. Of course, on the Chinese side, money in China is being forced into investment in U.S. Treasury bonds, rather than being used as productive investment in China.

So this flow of money is good for the U.S.–interest rates stay low, money is invested productively, the government can run a large debt without pain–and bad for the U.S.–goods are imported from China, discouraging local manufacture, effectively exporting manufacturing jobs to China. And the flow of money is good for China–lots of exports to the U.S. mean lots of local jobs–and bad for China–the money being made by Chinese workers is not being invested in China, Chinese workers can not afford to buy imported goods.

As a steady state, this is workable. Since workers in China are starting from such a low base, even the share of money and investment that they do receive is a significant improvement. It will take a long time for them to get up to the level of the U.S., when some adjustment would have to be made.

However, it’s not a steady state. The Chinese goverment is getting more and more dollars, and using them to buy more and more U.S. Treasury bonds. That process can not go on forever. Therefore, it must stop.

One good way for it to stop would be for the U.S. government to stop running a deficit. This is not silly–until the early ’80s the U.S. was the largest creditor rather than the largest debtor, and even recently the U.S. ran a surplus in the late ’90s. If the U.S. started to run a surplus it would stop selling Treasury bonds, and the Chinese goverment would find new things to do with their dollars. They could invest them locally in China, or, if they wanted to avoid the resulting inflation, they could invest them back in the U.S. in some more productive way. The accumulation of dollars in China would stop, and the bonds which the Chinese government currently holds would be paid off over many years.

That does not seem to be a particularly likely scenario at the moment. However, it is not impossible. If the next president is a Democrat, it is likely that the Bush administration tax cuts for the very wealthy will expire, and it is likely that spending on Iraq will decrease. These steps could move the U.S. economy back toward a surplus without significant harmful effects.

Another likely scenario is that the Chinese goverment stops buying U.S. Treasury bonds, and instead starts investing their dollars elsewhere. The U.S. government will still be running a deficit, and will still have to sell bonds. Interest rates will go up significantly. It will be harder to borrow money in the U.S. Investment will go down. The economy will slow down. People will have less money to spend on Chinese goods. The Chinese govermnent will accumulate fewer dollars.

A responsible U.S. government will break this money flow in a way which is advantageous, or at least not harmful, for the U.S. Unfortunately the current government is not responsible, and none of the candidates are talking about how they would handle this issue. The problem only gets larger over time. The sooner it is tackled, the better.

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