Octavo Dia

Saturday, February 28, 2009

Fiat Money Rant

I'm used to reading a lot of poor economics writing. I'm more used to it coming from the political left, however, there's a whole bunch of it coming from the far right of late. There's just one thing I want to say:


Okay, I'm better now.

Money is a contract. Rather than simply bartering for goods, you sign a standard contract in the form of currency to be paid at a later date. A government then acts as the guarantor of the contract. The only difference between the "gold standard" and a "fiat" currency is that the gold standard specifies the liability precisely by fixing the price of a commodity, whereas the "fiat" currency allows all prices to float.

Without the guarantee of the government, however, there is no gold standard. The gold standard is a fiat currency like any other.

Laisse Faire Evolution

It is not difficult to breed a new variety of plant or animal. What is difficult is the modification of the environment to suit the new creation. People ignore the environment modification part of breeding, and criticize breeders for creating animals which couldn't survive in the wild. In short, evolution wouldn't have created them, so they shouldn't be. Yet the breeders respond with a huge variety of biota that serves countless purposes. Breeding apparently works.

The same argument plays out in the free market debate. Free marketeers are strong advocates of letting the market evolve as it may. Interventionists, on the other hand, posit many a way in which a little intervention here would improve things. Historically, they've been wrong, but I think it is because they've bred their new creations and then turned them loose. Once you start raising cattle, you need to herd them, water them, build them barns, etc.

In short, I believe that market intervention can work better than simply letting nature run its course, but it takes far more work and attention than a political system is likely to give it.

Monday, February 16, 2009


I was convinced, for many years, that a tax on pollution would be ideal. Tax the negative externalities to provide public goods and even subsidize positive externalities.

The global warming debate has changed my mind.

I can see that even water vapor can potentially be considered a pollutant. The tax pollution idea just gives too much power to the government to be feasible. So while I consider it as an ideal solution, I have dismissed it as being incompatible with freedom. I will accept a far from ideal tax system as a cost of maintaining freedom.

Of course, the current tax system already gives far to much power to government.

The benefits of oligarchies

Why hasn't the huge amount of money pumped into the economy caused inflation? It hasn't caused inflation because the money is sitting in bank vaults. It is not circulating, so it effectively does not exist. If it were released into the economy, inflation would spike dramatically.

It makes sense, therefore, for bankers to sit on the money. When inflation happens, those who own currency-equivalent assets take the greatest hit. That is just about a perfect definition of a bank. The banks have the strongest incentive to hold down inflation. If all the major players agree that the temporary benefit of being the first to release the new funds is overshadowed by having their balance sheet inflated away, they'll sit on the money forever.

Ironically, the foreclosure crisis is making it less necessary for banks to fight devaluation--they're swapping currency-equivalents for real estate every time there's a foreclosure. The more assets they have and the less money, the less harmful a devaluation will be.

The banks are stopping the government from devaluing the currency, which to me is an entirely unexpected negative feedback loop.

Baby, it's cold outside

I was in the Bahamas for vacation, and you could easily spot the native Bahamians. They were the ones wearing sweaters. The human body, it seems, needs to feel cold. No matter what the typical weather, the body will adjust so that it will feel cold part of the time. It makes you wonder if there is some benefit that's triggered from a cold sensation.

Tuesday, February 03, 2009

The future of health insurance

Health insurance is dead.

In business, they say that uncertainty is toxic. Unlike risk, which can be divided, hedged against, and otherwise dealt with, uncertainty is an unknown unknown, so there is no way to prepare for it. Health insurance used to straddle the line between risk and uncertainty. The risk of any particular ailment was predictable--on a societal scale. The risk of an individual getting it was uncertain. Health insurance simply used group insurance to convert uncertainty into risk, and then prepare against it.

As medical science advances, however, uncertainty on an individual level declines, and so the standard health insurance model becomes less and less useful. However, it changes the insurance model to an already extant paradigm. Life insurance insures against an extremely predictable event--but there is uncertainty as to its timing. Health insurance would thus have to follow the life insurance model--it knows what will happen to whom, but not necessarily when.

That will change as well. The advances in medical science will decrease that uncertainty as well. Eventually, health care will have to be funded like another large, predictable, and precisely timed event, like college. Eventually, instead of starting college funds for children when they're born, we'll start health funds. It is the way of the future.