More on the TED AR Embarrasment

Chris Anderson of ted.com in Twitter about the Chris Hughes augmented reality talk scandal:

@UnitZeroOne Chris Hughes agrees we shd take down the current version of his talk. See my comment: http://tr.im/puT5 & thanks.
about 1 hour ago from web in reply to UnitZeroOne

At 1:59, this might be the shortest ever #TED talk. Augmented reality in a browser. It's a wow. http://on.ted.com/1A
about 6 hours ago from web

From "wow" to take-down in 5 hours. Amazing.

Ugly AR Ripoff at TED.com

I am completely dumbfounded. Hacker Chris Hughes made a very short presentation of Flash-based augmented reality in TED2009 without mentioning the open source projects (FLARToolkit and Papervision3D) that his very basic demo is almost completely based upon. In addition, he made remarks that let the audience understand that he had a major role in the development. Read more of the issue at UNITZEROONE.

Could it really have been true that the moderators of TED were so completely unaware of the state of the art in augmented reality? This presentation was a big failure on the part of the TED2009 organizers.

I don't think Chris's response quite cuts it. He should really apologize instead of making lame excuses about the "fear and frenzy" of speaking at a TED conference. On the other hand, I kind of feel sorry for the guy. Having made his appearance at TED practically an obsession, it surely does not feel good for him to come out of it looking so awfully bad.

Anti-Keynesian Insanity in Latvia

Has the Latvian government gone mad? Sacrificing the whole economy of the country to maintain a currency peg is insane. It will most probably result in a devaluation later anyway, with much less results than an earlier devaluation.

It is a question of fairness. The only party that gains an advantage from the currency peg are those with Lat-denominated paper assets. It doesn't make much sense either, because the kind of deflation that is required for keeping up the peg will result in the paper assets being defaulted upon anyway, except for the government paper.

Devaluation will not prevent the problems that were created by excess credit, but it is an important tool in preventing a deflationary spiral.

Robert Anderson and Stefan Wagstyl wrote in the Financial Times about Latvia's conundrum:

With the backing of the International Monetary Fund and the European Union, Riga is hoping that if it can impose enough pain on the domestic economy, it will be able to maintain its exchange rate peg to the euro. That would allow it entry into the single currency zone within the next four years.

After months of dithering, the government last week put together a package of measures that will mean Ms Blumberga – who earns just 280 lats ($552, £337, €398) a month – along with hundreds of thousands of other public sector workers will suffer a 20 per cent pay cut. Even pensioners will see reductions of 10 per cent.

This is just insane. A crash in domestic demand is the only thing that is sure to follow from such moves. There is a very high risk of starting a deflationary spiral.

Landmark property developments such as the twin Panorama Plaza towers on the road between Riga and the airport stand all but empty and shopping malls look forlorn. House prices fell by one-third last year, insolvencies are up and banks are repossessing more mortgaged properties and leased cars. “Business is in hibernation,” says Gunnar Ljungdahl, who chairs the Swedish chamber of commerce in Riga.

How exactly is intentional deflation going to help in this situation? When wages are drastically cut, we can safely wait for even more insolvencies and repossessions. Shopping malls are a dead investment when the purchasing power of the population rapidly shrinks.

In these circumstances, many governments devalue to spread some of the costs to foreign creditors and to boost the economy by making exports – which include wood products – more competitive. IMF officials have indicated that the organisation was divided over the wisdom of defending the lat’s peg but was finally persuaded by pressure from Riga’s EU partners as well as the Latvian government’s own refusal to contemplate devaluation.

So it's actually other EU countries that Latvians can thank for this disastrous policy. I thought the EU was supposed to be a project of peace. Killing a member country to "protect" irresponsible creditors at other member countries is a recipe for serious conflict.

Latvia sees the currency peg as the linchpin of its economic policies. It helped drive down inflation and is the route to euro entry. Latvia’s governments have often been weak but have always defended the peg and supported the powerful central bank, where both the prime minister and finance minister used to serve. “For Latvia the peg is the last pillar of trust,” says Henrik Hololei, an Estonian cabinet head at the European Commission.

All hail The Peg!

Also, Latvian officials argue that in a small economy, where 60 per cent of export value is in imported content, devaluation will not do much except encourage inflation. With some 90 per cent of all loans in euros, they add, it could bankrupt tens of thousands of companies and individuals. But the price of avoiding devaluation will be huge economic, social and political strains. Valdis Dombrovskis, prime minister, admits his main challenge now is “to preserve the social peace”.

"Encouraging inflation" (or discouraging deflation) is exactly what is needed at the threat of a deflationary spiral. Instead, Latvian officials are ready to give the economy a good kick to the backside. The foreign loans that turn out to be unaffordable will be defaulted upon one way or the other. If the income of debtors shrinks the effect is exactly the same. And a defaulted loan in euros is no bigger loss to the creditors, whatever the exchange rate.

So, as there is a wave of defaults anyway, why should there be a wave of deflation as an insult added to the injury. Deflation is an unjust reward of those who hold paper assets, and a punishment for those who hold actual assets.

Cantarell Depletion Rate Reaches 35 Percent per Year

Robert Campbell reports at Reuters about the amazing rate of decline at the giant Cantarell oil field in Mexico.

Cantarell produced more than 2 million barrels per day as recently as 2004, but yield has plunged as the aging field enters its natural decline phase, sending Mexican oil production tumbling to its lowest level since the mid-1990s.

The giant offshore Akal field and several nearby deposits that Pemex groups as Cantarell produced only 713,000 bpd in April, below Pemex's forecast of 756,000 bpd for 2009. Yields from the area have fallen at annualized rates of more than 35 percent in recent months.

Amazing. 35 percent per year. That is some serious cliff diving. If the end of Ghawar will be equally drastic, the world is going to be in a heap of trouble.

Max Boot Shows Sympathy for Fellow Militant Conservatives in Iran

Andrew Sullivan is attentive to neoconservative attitudes to the Iranian election fraud issue:

Max Boot seems pleased. The neocon hope that Ahmadinejad keeps himself in power - barely disguised any more - seems to me premature. The US would be wise to wait and see how this develops before making any policy decisions. We have learned two things we knew already but now know with fierce urgency - that the Iranian people want more freedom and better relations with the outside world, and that the regime itself has a desperate, dangerous core that cannot be trusted. But how we engage these two facts remains a prudential decision best left until this revolution takes its course. What I find a little gob-smacking is that this outbreak of democracy in Iran seems to have left the neocons saddened. Interesting, no?

Max Boot has now made it official: the radical conservatives in US and Iran have a mutually cherished love/hate relationship. Max Boot on June 14 at Commentary:

On the principle of “the worse the better” for our enemies–and, make no mistake, Iran is our enemy–it is possible to take some small degree of satisfaction from the outcome of Iran’s elections.

If the mullahs were really canny, they would have let Mousavi win. He would have presented a more reasonable face to the world without changing the grim underlying realities of Iran’s regime–the oppression, the support for terrorism, the nuclear weapons and ballistic missile programs. He is the kind of “moderate” with whom the Obama administration could happily engage in endless negotiations which probably would not accomplish anything except to buy time for Iran to weaponize its fissile material.

If would be so sad if more reasonable people would come to power in Iran, wouldn't it? Without the Iranian threat there would be no distraction from the pressure for resolution of other issues in the region. This attitude is completely understandable. Peace is such an awful state of affairs.

Insights in to the Financial Crisis

There was a good collection of (US-centric) insights to the credit crisis in a symposium arranged by the New York Review of Books and PEN World Voices on April 30. The symposium was attended by a good number of people who gave copious warnings prior to the onset of the actual crisis.

Yet all these insights seem to be somehow a bit disconnected. A bigger picture is clearly being formed as all these great minds get to put their thoughts together. Too bad that it has to be in hindsight.

Paul Krugman makes a pointed statement about social safety nets:

The other thing not to miss is the importance of a strong social safety net. By most accounts, most projections say that the European Union is going to have a somewhat deeper recession this year than the United States. So in terms of macromanagement, they're actually doing a poor job, and there are various reasons for that: the European Central Bank is too conservative, Europeans have been too slow to do fiscal stimulus. But the human suffering is going to be much greater on this side of the Atlantic because Europeans don't lose their health care when they lose their jobs. They don't find themselves with essentially no support once their trivial unemployment check has fallen off. We have nothing underneath. When Americans lose their jobs, they fall into the abyss. That does not happen in other advanced countries, it does not happen, I want to say, in civilized countries.

Niall Ferguson tries to make a case for the incompatibility of monetary and fiscal remedies to economic downturns.

There is a clear contradiction between these two policies, and we're trying to have it both ways. You can't be a monetarist and a Keynesian simultaneously—at least I can't see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

This view is completely bogus, as explained by the other participants. The point of monetary stimulus is not primarily to drive interest rates down. Its point is to drive up the money supply. When the interest rates are solidly against the zero lower bound, fiscal stimulus is actually helpful in increasing the total amount of credit. Additionally, a downturn is a great time to bring forward public investments that would have to be made later anyway. They can now be financed cheaper that ever.

Ferguson is right in worrying about the solvency of the US government. The other panelists claim to be worried as well, but their overall attitude to the deficits tend to have a somewhat worrying level of cavalier indifference.

There is one quite difficult point in this whole dislocation. Because indebted nations have been living beyond their means, there is no escape from the fact that despite any "solution" to these problems, there will be some attrition in overall standards of living.

These changes will not affect all strata of society equally. It is a very bad thing to bail out the most guilty and undeserving parties at the expense of the whole society. Some losses that, as said, are unavoidable, should be shared equally between all holders of imaginary financial "wealth".

Because huge amounts of eventual losses are unavoidable, the governments of debtor nations should not attempt a return to the "old normal". That would be a self-defeating exercise. The focus should instead be on controlled assignment of losses where they belong. And no, the losses do not all belong to the end-user speculators. Those who lend to speculators are making an equally speculative bet on the creditworthiness of the debtors, as well as any collateral that was willingly accepted.

The issue is completely different in creditor nations with low domestic levels of consumption, like China. These governments should apply fiscal measures with abandon.

Then there is the case of Japan, which has already spent its ammunition in trying in vain to uphold its previous bubble economy. This just goes to show the dangers of trying to sustain the unsustainable. In hindsight, Japan should have let financial assets go down. This would have improved the relative value of real assets and given the government more ammunition against unemployment. Unfortunately it would have hurt pension savings, which are highly dependent on financial assets.

Existing financial assets, level of employment and future debt load form a trifecta, of which any one can be improved only at the expense of the other two.

There is a danger in the US that the financial assets (partially earned through an unsustainable debt-powered boost to GDP) of aging baby-boomers will be overzealously protected at the expense of either real economic activity or future debt loads.

If losses are to be metered to financial assets as they deserve, there should be a combination of monetary expansion (effective sovereign default) and limits to bailing out creditors (of either banks or industry). Inflation actually lifts the prices of real assets, including commodities and equity in solid corporations. It hurts non-speculative creditors of solid corporations and households, so it should only be used with extreme caution. Some losses are, however, in order for all creditors, who should take their share of the overall responsibility for the creation of excess credit.

Paul Krugman tries to pin the roots of this crisis on the tired old explanation of a "savings glut".

One way to think about the global crisis is a vast excess of desired savings over willing investment. We have a global savings glut. Another way to say it is we have a global shortage of demand. Those are equivalent ways of saying the same thing. So we have this global savings glut, which is why there is, in fact, no upward pressure on interest rates. There are more savings than we know what to do with. If we ask the question "Where will the savings come from to finance the large US government deficits?," the answer is "From ourselves." The Chinese are not contributing at all.

Krugman is right in a limited sense. Bad investments have been made because there has been too much money chasing too few investment opportunities. He doesn't shed much light on the root sources of this "savings glut". The glut exists, all right, but it is not individual savers who have created it with their saving decisions.

As surprising as it is, savings are not created by savers. Savings are created by issuance of money and credit. All the money that is in existence is always held by someone. If one person decides not to hold it, it is passed on to the next one, but it is nevertheless always there, until the original debt is paid back, or the money withdrawn by a monetary authority. Society as a whole can not choose not to save if financial institutions just keep on churning out new money.

On the other hand, the "savings glut" is imaginary in a certain sense. Because net savings can not exceed the rate of creation of new base money, every unit of money "saved" beyond that is actually balanced by equal creation of new debt, which is a form of dissaving. Problems are caused when credit and debt are socially or geographically highly separated. This is the cause of the so called "global imbalances". We have seen the world divided between western debt and eastern savings. The problem is also manifested internally in almost all economies in the form of middle and lower class debt "canceling" out saving by the affluent.

George Soros has a good point on the lack of regulation:

About regulation, we have to start by recognizing that the prevailing view is false, that markets actually are bubble-prone. They create bubbles. Therefore, they have to be regulated. The authorities have to accept responsibility for preventing asset bubbles from growing too big. They've expressly rejected that, saying that if the markets don't know, how can the regulators know? And, of course, they can't. They're bound to be wrong, but they get feedback from the market, and then they can make adjustments. Now, it is not enough to regulate the money supply. You have to regulate credit. And that means using tools that have largely fallen into disuse. Of course you have margin requirements, minimum capital requirements; but you actually have to vary them to counteract the prevailing mood of the market, because markets do have moods. It should be recognized that exuberance actually is quite rational. When I see a bubble beginning, forming, I jump on it because that's how I make money. So it's perfectly rational.

It's the job of the regulators to regulate. However, we should try not to go overboard. While markets are imperfect, regulators are even more imperfect: not only are they human, they're also bureaucratic and subject to political influences. So we want to keep regulation to a minimum, but we have to recognize that markets are inherently unstable.

Regulators are human. This is true. And this is the reason that we should strive toward regulations based on fairly stable rules that are equally applied to everyone. We should minimize the role of regulators in making decisions and see them instead as enforcers of regulations. The regulations should thus be clear, transparent and fairly rigid, maybe even a lot more rigid than is optimal in the sense of efficiency. The separation of powers to legislative, executive and judiciary branches has to be enhanced in financial regulation to avoid cognitive capture and arbitrary decisions.

For some reason Soros doesn't mention the one regulatory issue that I somehow feel is the most important of all: reserve requirements. With reasonable reserve requirements there would be a hard limit on the creation of credit, and thus a hard limit on the level of associated imbalances.

One challenge is posed by the shadow banking system (money market accounts, etc.) that has not been operating under the same rules that apply to normal banks. Regulations should be based on the roles that are performed by entities, instead of their legal status.

Paul Krugman puts the issue of regulation in his usually pointed and prosaic style:

As I've written, we need a boring banking sector again. All of this high finance has turned out to be just destructive, and that's partly a matter of regulation. But in the political economy there was also a vicious circle. Because as the financial sector got increasingly bloated its political clout also grew. So, in fact, deregulation bred bloated finance, which bred more deregulation, which bred this monster that ate the world economy.

One thing that was conspicuously missing from the discussion was the unsustainable demand of permanent exponential growth that is required for steady operation of the financial markets. There was no discussion of the limits to growth that are presented by resource exhaustion and climate constraints. In order to have a sustainable financial system, we have to take these limits into account.

The whole structure of the economy has to change away from using credit as a permanent store of value. In a few decades, we will probably have to think about a financial system that can cope with an economy that is actually shrinking steadily. A system where credit is used as a store of value will not be able to cope with such circumstances without significant inflation.

A general move away from the use of money itself as a store of value would be a good idea. Money should be primarily used as a means of exchange, while real assets should take the role of accumulating long term savings. This would be of help in remedying the paradox of thrift that Krugman has repeatedly written about.

Of course, these ideas are not new.

The whole discussion was also centered around the ordinary economic phenomena of savings and investment. I would have expected more discussion of the "paradox of risk" (as so dubbed by Charles Hugh Smith) that is so aggressively manifesting itself at the derivatives market.

Central Bank Profligacy and Massive Malinvestment

I stumbled upon a newly interesting paragraph in an article about IMF fiscal advice from 1990 by Alan Tait:

Central banks are not expected to make losses. In industrialized economies, central bank profligacy is rare. In the last few years, however, significant central bank deficits have become not uncommon in developing countries (central bank losses in Costa Rica were 5.6 percent of GDP in 1982; in the Philippines, 5.2 percent in 1984; in Uruguay, 7.6 percent in 1983; and, in Argentina, 2.5 percent in 1984). This largely occurs when a central bank undertakes quasi-fiscal activities (e.g., net lending or guaranteeing foreign exchange losses) that show up, initially, as a change in the composition of central bank's assets.

The US Federal Reserve has been working overtime to achieve an exception to the first sentence. Sure puts them in an interesting new group of peers.

A later paragraph states:

Frequently, the public sector has undertaken massive investment programs, often with an eye on the symbolic need to "think big." But some of this investment may prove unproductive if the initial capital commitment is not followed up by maintenance. Donors will give capital but are reluctant to fund maintenance costs. Fund and Bank advice may well be to forego some large new projects for the sake of maintaining and operating efficiently the existing capital stock.

Massive investment programs? Yes, sir! Unproductive? You bet.