Onus Probandy

Bitcoin Likelihood

2012-03-01T16:00:00.000Z

After talking this morning about the rampant success of Bitcoin I thought I would look at the likelihood of that success and whether it’s a good idea to get involved. I am always wary of rationalisation, so perhaps one of my more economically literate readers can tell me the fault in my reasoning here.

Bitcoins today cost $5. Investing $5 in them would therefore get you 1 bitcoin.
Bitcoin will either fail utterly or succeed massively. I can’t see a middle ground.
Hence they will either fall from their price today to $0 or will rise enormously to thousands (if not tens of thousands).
Potential loss: $5. Potential win: thousands.

On that logic obviously invest. However, that logic is valid for the national lottery as well; and every other hair-brained scheme that you’ll come across.

I am not so dull as to think that is all there is to it. We must consider the question of expected value, which takes into account the probability of reward as well as the reward — this is nothing more than the sum of the potential payouts of all possible outcomes, multiplied by the probability of that outcome. Let’s then invest $x$ and assume that “success” equals a price of $1,000 or 200 times the price now, and failure is the loss of our investment, $x$ . Probability of success will be $p$ , and therefore probability of failure is $p - 1$ .

Therefore expected gain from our investment, $E$ , is given by:

$E = (- x) (p - 1) + 200 x \times p$
$E = 200 x p - x p + x$
$E = 199 x p + x$

And hence, expected gain per unit invested ( $= \frac{E}{x}$ ):

$\frac{E}{x} = 199 p + 1$

Let’s calculate the break-even likelihood. That is to say, when our gain per unit is greater than zero:

$\frac{E}{x} \geq 0$
$199 p + 1 \geq 0$
$199 p \leq - 1$
$p \geq \frac{1}{199}$
Translating: if the probability of success is better than 0.5% ( $\frac{1}{199}$ ) then it’s a good bet.

That assumed a final price of $1,000 versus a current price of $5; but it’s easy to adjust for any factor we like.

$p \geq \frac{P_{n o w}}{P_{f u t u r e} - 1}$

So, there we go, pick a future price and that equation tells you how likely that price has to be before it’s worth investing. You’ll have to judge for yourself how likely that future price really is. For me, I think there is more than half a percent’s chance that bitcoin is going to be successful; and “successful” means a price of at least $1,000 per coin.

Bitcoin and the Future

2012-03-01T10:10:00.000Z

Start with this assumption (rightly or wrongly): bitcoins will one day be worth at least $1,000 each.

There are then three phases (for the purposes of this missive):

Unnoticed. Trading “cheaply”.
Noticed. Price ramps up rapidly.
Stablised. Price plateau’s and varies very little year-to-year (as much as a stable world currency now… a few tenths of a percent on a “big move” day).

Consider then that there are three classes of people making up these three stages:

Early adopters. Today’s bitcoin geeks. Not rich. Risking their money on something that might collapse.
Financiers. These are the guys/organisations with money. They have to buy the currency because their customers (the end users) want to use it. Once bitcoin looks like it will be successful, they will instantly start buying and buying big.
End users. Average Joe. The guy that didn’t “see the point of email” ten years ago; but uses it now. There is no stigma to not seeing the future; wait until it turns up and adapt. It’s a good plan.

If you buy 10 BTC today, at $5, then you are an early adopter. Early adopters get rich (they deserve to, they are priming the pump now, without them and their risk taking on the potential failure that is bitcoin, it will never succeed). After the ramp up those 10 BTC will be worth $50,000. You will have profited to the tune of $49,950. That money had to come from somewhere. Where did it come from?

It didn’t come from the end users because they held their dollars during the run up — $1 is still $1. They can buy exactly their net worth in bitcoins, losing and gaining nothing.

It must come from the people who run the price up then. The finance industry.

In other words: the success of bitcoin would mean a pretty large redistribution of wealth from the current rich elite to the early adopters. Not 100%, none of them are going bust (nor should they), and not on any world-wide scale, but there are going to be quite a few lottery winners paid by the Bill Gates and Warren Buffets of the world. That’s quite nice really isn’t it?

The above is a completely naive view of economics. The “success” of bitcoin will come only because people are using it. The early adopters are going to be paid their profit from the growth of the bitcoin economy itself. The above isn’t completely wrong though, there will come a time when the big boys notice, and the price will shoot up — that’s when the majority of the “early adopter tax” will be paid.

Avoiding Capital Gains

2012-02-29T12:52:00.000Z

All the talk of Barclay’s and their tax avoidance scheme made me think of my own.

I dream of the day when someone will give me an asset that is worth lots of money (I imagine shares in a company that I have done sterling work for that subsequently go through the roof — it’s my fantasy, be quiet). Obviously I won’t want to pay tax on that. I’m therefore often thinking about ways to get around capital gains tax.

It’s my understanding that I would be taxed when the asset is initially given, as if it were income. That seems a little unfair. Let’s say I work for a company on a project for ten years, at the end of the ten years they give me a lovely bonus of £200,000 worth of share. (It seems a little unfair that I can’t spread the receipt of this one-time-only event over a number of years to prevent myself from getting hit with a massive tax bill in one year; but perhaps an account will tell me how to do that when I wave some fivers at him).

Now, I wait ten years. My £200,000 worth of shares has become £1,000,000. I believe that capital gains tax is only due when an asset is liquidated (which seems fair; there is no way of knowing that tomorrow it’s value won’t collapse to £0).

Here’s the ideas that occurred to me (I’m fairly sure that I am not enough of a financial genius that HMRC hasn’t already thought of and legislated against these).

Slowly liquidate the asset, making sure I am always below the capital gains allowance in any year. However, that has the drawback that I have to leave it at risk (if I think the shares are going to tank, then I want to be able to sell them all at once).
Open a company and inject it with my shares as equity. The company can then liquidate them, making no profit (since it still owes me the equity), then slowly pay out the cash as dividends in whatever manner suits me.
Get a hold of the share certificates. Leave the country to live in one that doesn’t have capital gains tax (Barbados, Belize, Cayman Islands, etc, etc). Realise my asset. Wait five years (or whatever the statutory period on moving residence is). Move back. Assuming I want to. There might be problems when moving assets between countries.
Get a loan secured on my shares. I’m willing to bet there is some banker somewhere who specialises in “loans that are never intended to be paid back”. Similarly, I could “loan” someone my shares, and they could “loan” me the money. No realised capital gains, simply a big asset and a big liability.
(I’ve talked about this one before, but I’ll say it again). Divide the unlaundered cash into 35 piles. Go to a casino. Put each pile on one of the numbers on the roulette table. Lose 34 of the piles, win back 35 times one of the piles. Voila, unlaundered cash is instantly converted to gambling winnings, which is untaxed. (There’s a bit more statistical jiggery-pokery to it, we’d have to cover the house’s percentage by playing more than one round, and playing with smaller chunks, but you get the idea).

It’s only really worth doing this sort of effort when we’re talking millions, which means I will fortunately never be faced with the above sort of problem. Still, it’s nice to dream.

Incidentally, if taxation was only by LVT then I wouldn’t need to do any of this, and wouldn’t care that much about paying my LVT every year. I wonder how much tax is being avoided for real and how much of the costs to legislate and police that avoidance that wouldn’t be necessary under LVT.

Faux Libertarians

2012-02-28T16:00:00.000Z

Mark is often talking about faux-libertarians; particularly with reference to home ownerism. It’s sad to find one in your blogroll though…

Firstly, I’ll admit to either snobbishness or good taste (depending on your point of view) in relation to how homes look. I scorn laminate floors, despite having one in my kitchen, wince at ‘Tudor’ plastic windows in honest Victorian frontages, despair at concrete blocks paving over front gardens and yes, loathe satellite dishes.

Me too. I like a good looking building. Good so far, we’re happy in our “entitled to our own opinion” little world. Then, the cliff edge approaches…

Most of the time it’s none of my business how other people’s houses look, except perhaps if my neighbour covers his elegant Edwardian facade with stone cladding and Tudorbethan ‘leaded’ plastic windows augmented with a 6’ satellite dish; this would make my own home less saleable and lower its value and would be of legitimate concern.

“Most of the time it’s none of my business how other people’s houses look”. Should have stopped there. Having your neighbours make your home less saleable is the risk you take by owning a house. Why does your taste supersede your neighbour’s right to do what he likes with his own property? What will be the name of the QANGO you will create to enforce state-selected standards of decency on the nations houses? What will you pay the head of that department? What will you do when they don’t like the colour of the flowers you have planted in your garden?

This is the reasoning of the NIMBY — “my house came with a view of some rolling countryside, and it should be protected forever”. This is a gain given to the current owner of a property at the expense of the non-owner of the property that is never built, who is then forced to pay more for the artificially supply-limited house he can buy.

Avoidance of Doubt

2012-02-28T14:00:00.000Z

For the benefit of the dickheads at the BBC, HMRC and the Treasury:

TAX AVOIDANCE IS LEGAL.

Also: “retrospectively applied laws” should scare the shit out of every last one of us. It’s evidence of how far from unbiased the BBC really is that the issue of a retrospective law wasn’t even blinked at.

Children In A Burning City

2012-02-28T10:15:00.000Z

I wrote this a while ago and never published it. I was reminded of the sentiment when talking over at Mark’s place about child benefit; and how I had chosen not to have children.

When I was a lad, I imagined that I would have children one day. I like children and considered (and consider) myself a decent guy, who would be a good parent, and have good (whatever that means) children. My wife is similarly decent, so I would only hope that both the nature and nurture boxes would be ticked.

Time has changed things though.

At first, we simply thought “once we’re in our thirties, we’ll start thinking about having children”; then our thirties came and we’re now thinking “we enjoy our life as it is too much to change it at the moment, or in the foreseeable future”. I think that’s where my wife has stopped — happy, so why mess with it? I’ve carried on though.

I have looked at the world, and am unhappy with what I see. Not in the broad sense, which has always been filled with suffering, but in the localised sense: people who do their best to live contributory lives, asking for no special treatment from anyone, causing no trouble, and paying all that they are asked to pay, are … mugs. I am one of those.

While I accept, I do have a lot more than a massive proportion of the world; and that that is due largely not to any special talent I might have but is entirely an accident of the time and place of my birth. I don’t accept that I should be punished for that. I don’t accept that I should have my freedom suppressed, my ability to choose what to do with the products of my own labour removed, and that I am to be an indentured tax slave for the rest of my existence. Unfortunately, that is exactly what I am — and barring a political miracle in this (or any other developed) country, that is not going to change. In fact, it is my evaluation that things are only going to get worse.

Birth rate amongst the productive has dropped below replacement levels. While we often hear talk of multiple generations of people who have never worked; we don’t often hear of the multiple generations who have, and do work. As far as I can tell, that second group is shrinking. That means those who are productive and remain will have a larger burden to bear to support the increasingly large population of unproductive.
Class society is on the increase. This might sound like a strange complaint from one who dislikes lefties so much, but I do have an explanation. I don’t mean economic class. The vast majority (even the unproductive) of the population of the UK is rich. By any historic or international standards, we have tonnes of money. No, I mean that there are distinct privileged political classes appearing — children of MPs commonly work in politics. They are often SpAds, and I suspect that at the next election we’ll see the start of safe seats being gifted to them. They are the new aristocracy, and they’ve lined their pockets with enough of our money to buy their land. They’ve learned the language, and know the right shoulders to rub. The Benns, the Goldsmiths, the Straws, the Milibands, the Balls (nee Cooper), the Wintertons, the MacKays (nee Kirkbride), the Keens, etc, etc. How can it possibly be that of the, say, 40 million people who could be MPs so many of those 650 are married or related to each other? Given that it is a closed shop, how would a mortal like I ever make a change to a system that I don’t like? How many politicians are from Eton/Oxford/Cambridge? How many BBC newsreaders are? How many of their children are? Note that I care only about publicly-funded class privilege; private citizen’s can do what they like; but I should not be squeezed to pay for increased privilege of those who squeeze me. So, I don’t mean “class” in the economic sense; I mean in the power sense. There are those with power, and they mean to keep it.
The EU. We are already merely a region in the EU; we just don’t recognise it yet. The EU is a socialist wet dream. It is unstoppable by any individual nation. Ask yourself what would happen to the EU if 100% of this countries MEPs became Euro-sceptic — the answer is nothing. How is that in any way democratic? Our parliament is no longer sovereign — through its own choice.
Enterprise. I would like to run my own business; I have some ideas, that could work. Only could though; I’m not saying I’ve got the next Google in my pocket. I am stopped by the need for a secure income to pay for my mortgage, and by the impossibility of running a business without the government and a stack of legislations being used to batter me into oblivion. I know some people succeed, but many don’t, and I do not wish to take that risk. My mortgage is too big to allow flexibility, and that is not my fault — it is the fault of, primarily, the government who allowed prices to be pumped up for political benefit (people feel good when their houses are worth a lot — for one generation only). I could employ someone to run the business while I kept my job — except I can’t, because I daren’t employ someone because they have all the rights and I have none. Should I overcome all these obstacles, and be lucky enough to have any measure of success, I’ll be allowed to pass on 10% of my invested capital and effort to my potential children. That’s a 90% tax on enterprise from the point of view of my children. Here’s the big one though: it wouldn’t be any fun; I feel no excitement at the thought of running a business, because I’ve seen how much I would be tortured by the state for doing it.
Education. State schools are churning out barely-literate, leftie-eductated, entitlement hounds. Generally. They believe the world is going to end at the hand of the great god Seeyotou; and that they are the most important thing in the universe. Where is the next generation of innovation going to come from? I suspect that the answer is China and India.
Politicians. Are morons. In ever increasing quantities, politicians are bland, uninspired, esthetes, with a completely blinkered view from their parliamentary seats of privilege. They believe the money comes from nowhere, and that there are no real consequences to their dire mismanagement of the national finances. Here’s how I know: the national debt is non-zero and growing; the debt is anticipated to grow and has been included in forecasts forever. Since borrowing can be used to purchase votes, there is no incentive for a politician to cut spending. The borrowing is increasing, but what’s worse is that it increased during the good times. These people know no restraint. Eventually that house of cards will tumble.
Energy. Suddenly, probably around 2014 (although I suspect by then they’ll have deferred shutdown of a few due-to-be-decommissioned plants by then), the lights are going to go off. Renewable energy cannot supply the power that is necessary to run this country. Even if it could, it is not being installed fast enough. Nuclear power would work, and would be cheapest, but we should be building those power stations right now. We aren’t. Instead we have at least a decade to wait before sites and planning permission are found (guesstimating using Terminal 5 at Heathrow as a model of a large scale build with lots of opposition). Gas power would also be acceptable, and gas is being found all around the world. However, the greenies will see that one off. Of course, once the lights go out a few times, attention will be focussed a little more than it is, but by then we will be on energy rations which will completely halt growth. The EU is also going to ban petrol cars. Given that other countries won’t do that, living in the EU is going to become economically suicidal. Interestingly, energy use is an excellent proxy measure for production — when the lights go out, production stops too.
Old Age. There won’t be enough money to pay me my pension. Despite taking (by the end of my working life), I anticipate, millions of pounds, I will not be looked after, nor provided for, nor even allowed to take my own life should I end up suffering more than I can bare; instead all that I have spent a lifetime earning will be stripped from me. The net profit to me (and my estate) of my lifetime will be approximately zero. Even my private pension (such that it is) is subject to regulation that forces a proportion of it to be invested in the very government I dislike so much. I’m fairly sure that sooner or later they’ll have their way and mandate that most of the rest of it be invested in Greenie shit of the government’s choice. At the very least they’ll grab control of it “to prevent mismanagement by greedy pension companies”.
Wars. We have started yet another stupid, pointless, never-ending war; the evidence points to this being a continuous cycle, the west is now always involved in some sort of military action somewhere. Each subsequent war is justified by the precedent of the previous one. The justification is now regime change for the benefit of X% of the target nation’s population (X being considerably less than 100). Our presence in these countries is not universally appreciated; and we are simply enacting Bastiat’s broken window on a national stage. I have no personal disagreement with those whose deaths I am paying for, but I cannot choose not to purchase those deaths.
Stupidity. Our entitlement culture is now ingrained. Left-wing and statist is our national politics. Centrist politics is left wing. Labour weren’t destroyed in the last election despite being in charge of the biggest depression ever and being led by the worst prime minister ever; the LibDems are in power; even the Greens got a seat. Conclusion: the majority of the population do not vote based on performance, they vote based on rosette colour — actually, the majority of the population do not vote. The so-called “right wing” party is no such thing, and is only the tiniest bit less of a spendthrift than the last lot. They are all authoritarian statists. Government expenditure hit 52.1% of GDP. Growth is pathetic, unemployment is up, inflation is up — what more evidence would people need that the current strategies are failing? And yet still the population demands that more be stolen from them to pay for these buffoons. Despite the fact that the (non-)cuts have been as weak as could be conceived, that very few public sector workers have lost a job, and on the contrary government is still hiring, there are people in the streets smashing property to force the taxpayer’s teat back into their mouths. Everywhere I go I hear moans about the evil Tory cuts. How does one reverse intellectual decline of this magnitude? I can think of no way. I had hopes that the Internet generation would behave differently, that the presence of facebook and bloggers who rip every detail of government action apart would change things — the last election proved me utterly wrong, people flip between the big three. “Protest” votes are no such thing when it’s for the other majority party.
Freedom. It is my supposition that we are each of us slaves. I certainly don’t wish to minimise the suffering of those who were slaves hundreds of years ago; but I believe the difference is one of scale not of state. You cannot buy land without the state’s permission; you cannot build on that land without the state’s permission; you cannot leave the country without the state’s permission; you cannot transfer wealth without the state taking a cut; you cannot earn a pound without the state taking a cut; you cannot spend a pound without the state taking a cut; you can be deprived of liberty for disobeying a rule, without harming another; you cannot marry without the state’s permission; you cannot divorce without the state’s permission; you cannot end your own life; your existence must be registered with your owner, the state; you cannot entertain others without the state’s permission; you cannot drink certain things, eat certain things, ingest certain substances without the state’s permission; you cannot sell drinks, food, and other substances without the state’s permission; you cannot sell certain drinks, foods and other substances at all; you cannot knowingly put your life at risk (helmets, seat belts, head phones, cigarettes, fatty foods, salty foods, etc); and so on, and so on. Not one of these restrictions is about preventing you from harming another, and yet the state subjugates your wishes to its own. Just because you have never tried to leave the prison, doesn’t mean you aren’t in one.

Given all of the above; and no sense that any of it is going to change. Given that my children would, I anticipate, be productive slaves, just like I, why should I do that to them? Why should I provide more fuel for the fire that is our modern day Rome? My children, and my children’s children are not to be tools of some leviathan state, to be spied upon, chastised and milked for their lives. I believe that they would be net earners for the country, so in protest I choose not to give them; I choose the simplest method of not handing my children over to this world: I simply never become a parent.

I choose to wipe out my entire future family because this country cannot be trusted with them.

You see? Incentives matter.

What It Feels Like For a Libertarian

2012-02-27T11:11:00.000Z

Good article:

I’ll tell you. It feels bad. Being a libertarian means living with an almost unendurable level of frustration. It means being subject to unending scorn and derision despite being inevitably proven correct by events. How does it feel to be a libertarian? Imagine what the internal life of Cassandra must have been and you will have a pretty good idea.

Imagine spending two decades warning that government policy is leading to a major economic collapse, and then, when the collapse comes, watching the world conclude that markets do not work.

My only complaint is that I would imagine that almost all people with strong political views would tell the same story: “I predicted it would be a disaster, and it was”. It’s called confirmation bias; and no one is immune.

However, being a libertarian I think we’re the ones who are right :-)

Bitcoins and Capital Controls

2012-02-22T16:32:00.000Z

A tricky problem, and perfect example of why Bitcoin is needed in this world.

A girlfriend and I are hoping to move together to Europe from Argentina. I’m from Europe.

She has savings in a bank account here which is well in excess of what the tax authorities allow her to convert. This is also devaluing at about 25% a year.

Typically what people here do to avoid this is:

take cash to a neighbouring country and exchange it there

buy things like property and even cars

However, the first is not a good option because there is a limit of $10,000 and also carrying and storing this is a risk too.

How do we get this cash out of the country?

At first I thought I could sell her something in a different currency outside the country via a webcart checkout and credit card. Add item “Being a great boyfriend for a year” and x5. But the problem with this is that the transaction will be routed through the central bank of Argentina and they convert and reconvert the currency - double conversion costs. This would be in addition to a ~4% Google Checkout fee. The other problem is that the transaction is logged to her account. If I go unverified with Paypal, Moneybookers or Google Checkout then I can have some anonimity but I’ve heard so many horror stories of unverfied accounts on these services. Is this worry justified? It shouldn’t be a problem for someone who isn’t intending to visit Argentina.

The next one I thought of was just to buy a load of gold here. But then we’re coming into Europe with a stash of gold and that looks dodgy as heck.

The second way of spending the cash on something could be an idea but I can’t think of many things that are liquid (easy to sell) this way. It’s not enough for a house but is enough for a car…

Seriously, think about what money is. It is a representation of work you have already done (or a benefactor I suppose). It is a method by which your effort can be moved through time and space to where it can act most efficiently. Money is simply a proxy for barter — it lets a carrot seller buy apples when the apple seller wants potatoes.

Governments have forgotten that money only has value because we trust that it is possible to use in this way. When it does not, it is devalued. What value then would you put on a currency that cannot be controlled? Bitcoin is absolutely the answer to these sort of problems; it only requires that enough people see it.

Update 2012–02–28

And so it continues:

Authorities in the US have refused to return 137,000 kroner that was confiscated from a Danish policeman who attempted to legally purchase Cuban cigars from Germany.

If this transaction had been performed with bitcoins, then it would have been near-instantaneous; detecting what it was for and who it was between would have been impractically difficult; and stopping it would have been impossible short of shutting down the Internet.

Every day the case for bitcoins becomes stronger.

John Nash Was a Clever Bugger

2012-02-22T13:07:00.000Z

About 30 years before the rest of the world (publicly) caught up, John Nash wrote an eerily accurate letter to the NSA about cryptography.

Now my general conjecture is as follows: for almost all sufficiently complex types of enciphering, especially where the instructions given by different portions of the key interact complexly with each other in the determination of their ultimate effects on the enciphering, the mean key computation length increases exponentially with the length of the key, or in other words, the information content of the key.

Remember at the time, the world didn’t think of cryptography in terms of number of bits in a secret key, nor in terms of one-way functions, nor indeed that algorithms could be public knowledge. John Nash did though.

Laff? I Nearly Cried

2012-02-22T11:26:00.000Z

Lots of noise today about the indications that the 50p tax rate is raising less revenue than expected (by whom, certainly not round our way). In fact, the figures suggest that the 50p rate is raising less tax than would have been raised had it never existed. Colour me shocked. Laffer one; government nil.

Lot of subsequent noise about cancelling the 50p rate.

What isn’t being talked about is going further. If, as it seems, less revenue is raised by a 50p rate than a 40p rate. Why might it not also be the case that more revenue would be raised by lowering the 40p rate?

Mostly the talk about the 50p rate is that the rich avoid it by managing their money. That isn’t the whole story though; tax is a yoke around the neck of the productive. It is perfectly conceivable that if you reduce the weight of that yoke — for everyone, not just the rich — that the economy would get a boost. So much of a boost that total revenues would increase, while individuals pay a lower rate. Everybody wins.

Even leftie poster-economist, Keynes, was in favour of tax cuts.

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more — and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

A Climate of Reality

2012-02-21T15:51:00.001Z

I’ve not done much on the climate of late — what’s the point? Nothing has changed. Still, an occasional dabble is nice so our information is fresh.

Some scientists have gotten together and written an open letter in the Wall Street Journal. It contains this amusing graph:

Reality versus Alarm

This shows what the surface temperature was predicted to be in various IPCC reports, and what it actually turned out to be. Remember, the scientific method is Observe -> Hypothesise -> Predict/Test -> Revise. There is nothing wrong with having your hypothesis proved incorrect (and that happens when your prediction is compared against reality), there is something wrong with persisting with a hypothesis that doesn’t predict correctly.

The thing that strikes me most about the plot is how biased it is. All bar one of the predictive lines are extrapolated from the most recent peak. No analyser of data would ever think that was appropriate.

It’s also completely incorrect to keep reextrapolating from a new start point. William Briggs ably shows us what a difference a careful selection of start point can do to a curve fit.

Regression cherry picking

Finally: what’s all this straight line crap? The idea that a system as complicated the climate will fit itself to a straight line regression is just nonsense.

We end were we began: nothing new to see. The climate scientists are still at it. Climate sceptics are still beavering away trying to verify their findings.

Greeks Borrowing Gifts

2012-02-21T12:00:00.000Z

Some points about the Greek bail-out:

Greece is in trouble (one assumes) because the government expenses exceed government income. A “bail-out” or “loan” as the rest of us like to call it, does not make that problem vanish.
Therefore the purpose of the loan cannot be to fix the problem.
There are two times we literally “bail-out” — when there is a slow leak in the boat and when there was a leak in the boat and it’s now repaired. It would be better if the Greek bail-out were the second case. It isn’t.
Loans have a number of potential “good” uses. And an infinity of “bad” uses.
Wages are a function of average productivity (traditionally in some homogeneous economic area).
Productivity is a function of capital investment. Productivity improvements are almost never due to the work force. By working harder a workforce might be able to double output — if they try really, really hard. What can they then do next year? There is a hard limit to productivity increases from mere effort: and it is the physical limitation imposed by our humanity.
Productivity increases therefore come from investment in automation, mechanisation and specialisation. The key word… “investment”.
A loan can supply productivity investment. Used correctly they speed growth by moving productivity increases from the future to the present and hence increase the time for which those increases are available. That increased availability of increased productivity is what pays back the loan (and then some).
If the bail-out funds were being used in this way, then there would be hope for Greece. They aren’t.
Loans can serve a secondary purpose. In the event of an already-productive concern suffering an unexpected and unprepared for costly setback (hurricanes, recessions, CEO hit by a bus, legal troubles) a loan can prevent that setback from wiping out an otherwise productive entity. The instantaneous shock of the setback can instead be spread out.
If Greece was productive pre-crash, then there would be hope for them. The loan would get them over this difficult time and they would return to profitability. They weren’t productive pre-crash.
I know a guy. This guy can get me a million pairs of socks at a 50% discount in a one-time-only all-or-nothing deal. I sell socks. I am certain that over a year I can sell a million pairs of socks at a profit. I don’t have the capital needed to buy a million pairs of socks. A loan would let me make use of this opportunity.
Greece doesn’t “know a guy”. There is certainly an argument that Greece has unrealised potential though. How could it not?
Austerity measures are a good thing (from the point of view of the whole economy). The government can only apply austerity to its own spending, that will make working for the government considerably less attractive. In other words: a huge incentive is created to innovate in the private sector. It takes time for a population to move towards innovation and production though. It is extra hard for brain washed public sector workers.
In truth Greece is not using its bail-out money for any of these “good” things. It is, in fact, using it for “bad” things. Just as a credit-card junky would borrow from one to pay off another, so Greece is:
- Continuing to fund a still-too-large public sector.
- Continuing to subsidise too much unproductive private sector.
- In turn bailing out banks that are too big to fail.
- Paying massive interest on its 160% of GDP debt.
As austere as Greece is reportedly being (although I’m not sure I can believe the BBC), the “bail-out plan” reportedly relies on unprecedented growth in Greece. Where is that to come from? They can’t use the public-sector growth trick that they’ve been using for years since that’s incompatible with lower government spending.

Conclusion: Greece is not bailed-out in any significant way. Greece will be back. Given the scale of their debt, they will be back soon.

Let’s be clear: the only plan that would work is to make expenditure less than income. I’m willing to bet they haven’t cut to the bone yet. They haven’t because they’ve got no private sector experience — the private sector is good at saving its own neck, it does so by getting back into positive cash flow (if not profit) as quickly as possible when the shit hits the fan.

Watchers Watching

2012-02-20T12:30:00.000Z

Nick Clegg, 2010

It is outrageous that decent, law-abiding people are regularly treated as if they have something to hide. It has to stop. So there will be no ID card scheme. No national identity register, no second generation biometric passports. We won’t hold your internet and email records when there is just no reason to do so.

You’ll note at the time I was a little concerned over the “no reason” part.

Coalition Home Office, 2012

Landline and mobile phone companies and broadband providers will be ordered to store the data for a year and make it available to the security services under the scheme.

The scheme is a revised version of a plan drawn up by the Labour government which would have created a central database of all the information.

A Home Office spokesman said: “It is vital that police and security services are able to obtain communications data in certain circumstances to investigate serious crime and terrorism and to protect the public.

The criminals who scare me are the violent sociopaths who walk the streets in gangs late at night. Politicians have no experience of the hell these people can inflict, even indirectly. They make it impossible for the decent among us to use public transport, have a quiet drink, go out on a Saturday night or watch a football match without having to keep our “danger radars” on their “stressed out” the whole time. These are the same people who are stabbing each other; shooting at each other; and rioting and looting at the slightest opportunity.

None of them are “terrorists”. Increased monitoring facilities are not necessary to be able to catch them — they are already known, regularly caught, processed, and released by the justice system. They are criminals that make my life measurably worse.

Even if, and it is a big if, a terrorist attack succeeded. Even if it was devastating and killed thousands it would not be as damaging, in aggregate, as the everyday criminals who injure, rob, and intimidate millions of law-abiding decent citizens on a daily basis.

I wonder if any politician is going to write “a sense of perspective” on their campaign manifesto? It would be welcome.

$ echo "Fuck you" | gpg --encrypt --recipient "Onus Probandy"
-----BEGIN PGP MESSAGE-----
Version: GnuPG v1.4.11 (GNU/Linux)

hQEOA061XL1Yx4jKEAP7BAOULMOJK9zyJsJJ7N/azXwMTSUOWhUEJeZXPX0ZFOaH
eFi3s/9g7fwNL5+mUEJteQy8oP65hkETqQ6p/GnBfr0q6gCXQP2d1R0aA9hLBmny
Ep+nZWbLIWTQwBSCNLwSjPQQOoVz1dsUdE2WQz85bOizt6zcjafS6KWuVN8E2dQD
/2RVRM+7r08v1tUFkgRA98A62GGrD5v9rL4LkE1LTT34u4jtdmL8DSkwz60KAuCm
oC+MzH9JU9aM/nPETa9OeKHmSTZ2ShHbqlXUog3VEQr30TSSAw4o53ioLIwXm9YL
eB66mKNJhoQQrEm2E4WedW3eIlPQiqcpw27JpQ1DQOOE0kQBgbRDLAcIvfONVs/D
SfCHKuxWB1j8m+ycWv5RIbRKz0uSX2jdyCht4er8BIARf4hyDw5/lwrATroRqc6b
rzP2vlO8Gg==
=D0NV
-----END PGP MESSAGE-----

My public key, should you want to say something to me without the government reading the postcard that is normal email:

-----BEGIN PGP PUBLIC KEY BLOCK-----
Version: GnuPG v1.4.11 (GNU/Linux)
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=73Rn
-----END PGP PUBLIC KEY BLOCK-----

That Which We Call Slavery

2012-02-20T12:08:00.000Z

My two cents on the Tesco/Workfare slavery thing:

Demanding work in exchange for payment is not slavery.
Paying jobseekers for working is not slavery.
Paying anyone for working is not slavery.
Gifting Tesco free taxpayer money in the form of workfare jobseekers is wrong.
Has anyone else noticed that Tesco probably aren’t the bad guys here? That this is all the result of a national minimum wage? Tesco can pay £0 per hour or £6.08 an hour but nothing in between… something is rotten in the state of Denmark.

Update:

Utter brilliance from CityUnslicker (the comments are good too). I’m ashamed of myself for not seeing that these “slave” jobs are actually costing the businesses.

Companies don’t have a labour shortage as they did 5–10 years ago. When you read of Landrover having 20,000 applications for 1,000 jobs and A Tesco mini mart having 1,000 applications for 80 shelf stacking jobs its pretty clear that companies aren’t desperate for workers.

The above does reinforce my point that the minimum wage is damaging. The supply of labour is high, the demand is low. With a minimum wage in place there is no way for the market to clear. Hence: rising unemployment.

Homeless Market Showing Signs of Recovery

2012-02-20T10:59:00.000Z

I’ve read this sentence again and again and I really can’t understand it:

A shortage of private accommodation in London could mean homeless people are moved as far away as Hull, where rents are cheaper, housing charities are warning.

Homeless people don’t pay rent do they? Normally I understand leftie-speak; even when I don’t agree with it, but this one has me stumped.

However, let’s allow them their illogicality and carry on.

They fear there will be an exodus from the capital of people at the bottom of the housing ladder as the coalition’s Localism Act, which comes into force this spring, empowers local authorities to place homeless people in private rented accommodation.

Hmmm, “homeless” has become “people at the bottom of the housing ladder” (I’ll try to control my blood pressure over the implicit assumption that it is the taxpayer’s job to move everyone in the country up the “housing ladder”).

The only conclusion I can come to about all this is that the writer thinks these things (and assumes their readers do to, and that they are so fundamental that they don’t need stating):

Homeless people are a good thing. Them leaving London and going to Hull would be bad.
“Homeless” means “not a home owner”. This might be the source of all my confusion. I had assumed “homeless” meant “sleeping on the street” rather than “accommodated in social housing at taxpayers’ expense”
Homeless people, being gifted somewhere to live, shouldn’t be asked to move to where the housing is, the housing should be provided near the street they have chosen to live on.

Surely homeless people have the lowest geo-inertia of any demographic in the country? They should have the smallest number of ties, and the biggest incentive to get a roof to live under. Why on Earth should we use the finite resource of London-located social housing on them? If economics is about anything (and government should be about the same) it is about the optimal allocation of finite resource. How can we get the most for the least?

“The fact that councils may be considering making use of these powers to offer people homes away from their local areas – potentially having to uproot families from schools, communities and jobs – is testament to the scale of our housing crisis,” Campbell Robb, the chief executive of Shelter, said.

Homeless people with children and jobs? We’ve veered off topic a little here.

“This upheaval could have a devastating impact on children’s education and a family’s wellbeing. Taking families away from their support networks at the time when they need them most is not going to help them back on their feet.”

Oh fuck off. There are a great many children being moved around right now because non-subsidised parents are moving to follow work. While it must be hard on the child it is not “devastating”. My wife grew up all across Europe, bouncing from school to school as her Father’s work moved the family. It was certainly not a walk in the park; but it had its advantages as well as its drawbacks and she still managed to get a good education and not be “devastated”.

Also, let’s remember that everything is a trade off in this world. In this case the choice is:

Free house away from where you are now and a slight disruption for your children
No free house

Jon Dalton, a housing manager for Harrow council, said it had already helped more than a dozen households to move out of London. Dalton said: “Because of the welfare reforms, many non-working households that are dependent on benefits will not be able to afford to live in the local private rented sector.”

Sounds like the policies are working perfectly. Let’s remember that the lowering of demand for housing in London is going to lower London rents and raise $NORTHERN_CITY rents. Lovely — imbalances are being addressed through (effectively) arbitrage.

“Not enough thought has been given to the impact of the welfare reforms on outer London boroughs like Sutton,” said Ruth Dombey, deputy leader of Sutton council. “We fear there’s going to be an exodus to the suburbs, with families being forced out of central London and into more affordable areas of Greater London.”

I’m back to utterly confused. It sounds like she thinks “more affordable” is a bad thing.

A Life Less Ordinary

2012-02-13T15:40:00.000Z

Millions of people I don’t know die every day. I am not sad that they are dead. Nor am I happy.

I didn’t know Whitney Houston. I am not sad that she has died. Nor am I happy.

Hence, I fine opinions like this from Hecklerspray pretty weird:

When ordinary people die, it’s sad. When people like Whitney Houston die, it’s dumbfounding.

Celebrities are the new aristocracy of course. That’s pretty obvious. When did that become so ingrained that it became okay to divide the world into ordinary and not-ordinary?

Whitney Houston/Amy Winehouse/Michael Jackson all had talents and failings I don’t have. I have talents and failings they didn’t have. Just like every other human on the planet. Doesn’t that make us all ordinary?

Getting Started With Tor

2012-02-10T08:00:00.000Z

I’ve heard lots about Tor, and thought it was about time I learned how to use it. I have no actual use for it; but in the same way I have no emails that are really private and yet still use OpenPGP, I like to know how to use the technology that keeps prying eyes away from me should I need it.

Tor is a so-called onion-router. It’s job is to hide the two ends of a connection from each other. This is done by introducing multiple intermediate nodes who only know about the next intermediate. In fact there is no way for any particular node to know if it is talking to an end point or not.

The Tor network is run by volunteers that are willing to pass packets to and fro under instruction from other Tor nodes. They each publish a public key for their node. That list of public keys allows the “onion” to be created. At the centre of the onion is the payload, this is the message you want to send. Let’s assume that the endpoint is public, but you want to hide your communication from any observer (like, say, the Chinese government).

Select a random path through the Tor network
Work backwards from the end point.
For each node on the network you create a wrapper. That wrapper says where the inner layer should be delivered next.
You encrypt that wrapped package the target node on the path.
Now you move to the node in the path next closest to you, and repeat. Wrap, encrypt.
And so on.

Eventually, you are holding an “onion” packet that has been wrapped and encrypted; wrapped and encrypted; wrapped and encrypted and is ready to be delivered to the first node in the path. That node is the only one able to unwrap that “skin”, read the wrapper and see who gets the next layer.

It doesn’t matter who sees the packet, they can’t connect the input to the node to the output from the node and they can’t see where it’s final destination is. Only the last node (called the exit-node in Tor parlance) gets to see the final destination, and they don’t know where it came from. Assuming the core packet is itself encrypted, then not only is no node able to read the communique, no node knows simultaneously who sent it and who it is addressed to.

The above was a method for hiding access to a publicly known service. What if you want to hide the service as well? In that case, the server runs inside the Tor network. There is no exit node. That means any one of the intermediate nodes could be the destination node. None of the other intermediates know that. Only that destination node can decrypt the packet and see that it is addressed to it.

The target service is therefore identified not by IP address (it wouldn’t be very hidden then) but by a so-called pseudo-domain. You will be familiar with normal domains, www.google.com translates to an IP address using the DNS network and your computer then connects to that address. Tor relies on the client software to understand the .onion top-level domain. Of course not all software is Tor-enabled — you can try typing a .onion domain into your browser. You’ll get nothing.

For software that does understand .onion domains, rather than querying the DNS system (which maps names to IP addresses); the client software queries the Tor network itself, which knows how to resolve these addresses. The implication is that you need either a plugin or specially customised versions of your clients (like your web browser) to use a hidden Tor service.

Key feature of Tor:

You can browse any site without that site knowing your IP address.
You can browse any site without any intermediate (like your ISP, BT, the government) being able to see that you are doing so.
You can browse ‘hidden services’ who don’t want to reveal their IP address to anyone.
Hidden sites operate a name resolution system outside of the internet standard, DNS. That means those sites cannot be shut down in the normal SOPA/ACTA/DMCA/SIPA/IWF sense. Your internet connection is yours to do with as you please.

Here’s what I did on Debian:

$ apt-get install tor
Setting up tor (0.2.2.35-1) ...
Something or somebody made /var/run/tor disappear.
Creating one for you again.
Raising maximum number of filedescriptors (ulimit -n) to 32768.
Starting tor daemon: tor...
Feb 09 15:39:25.584 [notice] Tor v0.2.2.35 (git-73ff13ab3cc9570d). This is experimental software. Do not rely on it for strong anonymity. (Running on Linux i686)
Feb 09 15:39:25.585 [notice] Initialized libevent version 2.0.16-stable using method epoll. Good.
Feb 09 15:39:25.586 [notice] Opening Socks listener on 127.0.0.1:9050
Feb 09 15:39:25.586 [notice] Opening Control listener on /var/run/tor/control

Then I went to the Tor check page, which happily told me that I wasn’t connected using Tor. Which didn’t surprise me, I haven’t told the browser to do anything but connect directly. Similarly, the Tor guide actually says

Please note that it is important that you use the browser that comes with the bundle, and not your own browser.

Tor comes with a pre-configured and modified-for-Tor browser. I’m more a do-it-yourself sort of person though. Debian very nicely packages the Firefox plugin that will take care of the magic for us.

$ apt-get install xul-ext-torbutton
Setting up xul-ext-torbutton (1.4.5.1-1) ...

Then restart Firefox, and you will see a new button on the address bar: a little onion with an ‘X’ on it. Push it, and reconnect to the Tor check page. This can be considerably slower than your normal browsing experience because the packets are travelling along a far more convoluted path and with considerably more encryption done inbetween. Eventually though you will get a congratulatory page.

If you were a dissident, you could now breathe a little easier. Your oppressive government can’t watch you. They might be able to tell that you’re using Tor (however Tor uses ports 80 and 443, so it’s hard to tell apart from normal encrypted web traffic), but they can’t see what you’re doing or who you’re talking to.

The Tor plugin, Torbutton, is really just an interface to an automatic settings switcher. Torbutton disables leaky features (plugins, etc) and changes your browser proxy to point at the local Tor client. Any application that supports proxy configuration can therefore also use Tor by setting the proxy manually:

SOCKS v5 proxy    127.0.0.1:9050

Now, let’s try accessing a hidden service. With Torbutton still active, connect to

http://3g2upl4pq6kufc4m.onion/

This is the Tor hidden service address for the DuckDuckGo search engine. If you can see that, you should be able to access any hidden service you wish. I had no trouble seeing Silk Road; but not being into drugs found it had nothing I want — YMMV.

Quantitative Comedy

2012-02-09T12:55:00.000Z

I don’t know why, but this is making me laugh.

The Bank of England has agreed to extend its quantitative easing (QE) programme by £50bn to give a further boost to the UK economy.

When completed, it will bring the total amount of QE stimulus to £325bn.

It gets better though:

It added that without another stimulus from QE, inflation was likely to fall from its current 4.2% to below its 2% target,

Yes, they really are saying that they thing deflation is a risk.

Just so we understand:

When inflation is above 2%; well we just um-and-ah and say “well hopefully this’ll sort itself out soon”.
When inflation is below 2%; it’s all hands on deck, quick fire up the printing press we cannot allow even a hint of deflation (incidentally, 0% is the ‘deflation’ threshold not 2%).

A bit of deflation (i.e. our wages being worth more, our savings being worth more and prices dropping) would be most welcome around now. Let’s remember though: INFLATION ISN’T EVEN BELOW 2%. This round of quantitative easing is being done in anticipation of lower than 2% inflation. This from the crystal-ball geniuses who brought us the ridiculous interest rates of the early 2000’s; the post recession concern that deflation needed tackling; and the complete non-reaction to massive target-missing on inflation of the last three years. We can be sure that our economy is in good hands. Roll those presses.

It’s yet to be adequately explained why, if we are to have some money printing (and to be honest I favour that over borrowing — but not borrowing funded with printing), why can’t everyone in the UK be sent the proceeds? That would be wealth redistribution on a grand scale. £375 billion divided by a population of 70 million is £5,357 each. Why would that be any worse than this buying-our-own bonds shit they do with it now?

Loan For Childcare

2012-02-09T12:18:00.000Z

Unusually, the BBC had an interview with a think tank that had had a good idea.

Here is the problem:

Parents want to work
Parents have children who can’t be left alone
Childcare is expensive
So expensive that it isn’t worth going to work
Childcare is only needed for a limited period
Parents’ careers are damaged because they have to give up their career for that limited period

Solution: loans for parents to pay for child care.

Perfect. The idea seemed to be that the childcare loan could be paid back on terms very similar to the terms for student loans. The argument for why it’s good is exactly the same as why student loans for tuition fees are good.

This sort of thing is exactly what loans are for: amortising a short term need for a lot of capital over a long period.

For once I can see why the government is needed (almost). No bank is going to hand over a loan for childcare. Having children is not profitable. No bank is able to dip in to the PAYE system. No bank is able to offer a “social” benefit to a loan (i.e. if you can’t afford to pay it back, the public purse will cover it for you). (I might argue that the government could simply act as a guarantor for a private loan, but I’m not that bothered really).

Blog Meta

2012-02-08T15:16:00.000Z

I write this blog using a format called Markdown. It’s a plain text format that has tools to convert it to HTML. Very handy as it is considerably more pleasant to write than raw HTML; and the source files remain readable without a browser.

I’ve previously been using a markdown converter library for python to create the HTML for publishing to blogger; but I’ve recently discovered a nicer tool — pandoc. This supports standard markdown syntax plus some nice extensions.

The particular extension I’m interested in is support for embedding LaTeX-formatted equations inside the markdown file (for those who don’t know, LaTeX is yet another document format that is used by to write high quality technical documents suitable for publication, typically by academics). LaTeX has a well-known and fairly readable way of describing mathematical symbols without resorting to GUI editors. pandoc understands this format and can convert it to MathML, which is the web standard for equations (although it doesn’t render as beautifully as native LaTeX does).

In short, it means I can now write things like this:

$x^{2} + y^{2} = 0$

$x = \frac{- b \pm \sqrt{b^{2} - 4 a c}}{2 a}$

$P (x) = \frac{1}{σ \sqrt{2 π}} e^{- \frac{(x - μ)^{2}}{2 σ^{2}}}$

MathML is apparently supported by Firefox, and WebKit. Chrome hasn’t got it enabled yet. Opera partially supports it. Internet Explorer and KDE’s KHTML do not.

If you’re using Internet Explorer: well you deserve what you get; and I think it’s only me that has ever used KHTML.

If you can’t see the equations; well I’m very sorry but I won’t be working hard to find you a solution. I doubt I have enough readers for it to be worth the effort of dual-mode equations anyway. That being said; if you’re bothered — speak up so I can at least gauge how dependent I should become on the facility.

I’m not planning to do a lot of maths; but having it available is very convenient for those few times when I want it. As a demo, I’ve rewritten the ‘weights and measures’ puzzle article using the new facilities.

Ship Shape and Bristol Fashion

2012-02-07T16:57:00.000Z

Bristol are working on the Bristol pound

A group of independent traders in Bristol are launching their own currency, with the backing of the council and a credit union.

Being a Bitcoin proponent, I’m delighted at the idea of currencies that compete with government fiat. Only this isn’t that.

They will print notes in £1, £5, £10 and £20 denominations. A Bristol pound will be worth exactly £1 sterling.

People will open an account with the Bristol Credit Union, which is administering the scheme, and for every pound sterling they deposit, they will be credited one Bristol pound.

So they’re pounds then? What’s the point? You might as well say that your deposit book at your building society is a new currency. After all, it’s a bit of paper with a number denoting pounds written on it.

It’s worth exactly the same as a pound is it? Except I can only use it in a tiny subset of Bristol? In that case they aren’t worth the same as pounds are they? Since I can’t use them anywhere pounds can be used; but I can use pounds anywhere. Their utility is lower, so ten Bristol pounds are worth less than ten pounds sterling but cost ten pounds sterling.

Does anyone else see a small flaw in this plan? Like a complete disregard for economics?

They couldn’t bring themselves to do the sensible thing: if ten Bristol pounds are worth less than ten pounds sterling then you have to sell it for less than ten pounds sterling… obviously.

If they really wanted this to have a chance then they should get the shops to agree that ten Bristol pounds will buy ten pounds sterling of stuff; but the credit union should give you ten Bristol pounds for 9.50 GBP. Surely?

Ciaran Mundy, the director of the Bristol Pound, explained the concept behind the currency.

“Big companies just hoover up money from a local area,” he told me.

“Money goes into their financial system and typically out into London and into the offshore sector.”

Feel free to laugh. Big companies are apparently stealing money from a local area. They definitely aren’t offering products and services that people want more than the local providers can provide. No, no, no.

Look “Ciaran”, if local people are voluntarily engaging in trade with the big company over the local company then that is because they are getting more value for their money. If you make it so that the big company isn’t welcome, you are ensuring that the local people are worse off.

This is the same dirty little secret that is true for all protectionism based thinking. “If only we could stop all our money being sent outside of $ARBITRARY_BOUNDARY_X. Why we would be much richer.” No. You would be poorer.

Well, now if people really want to support independents, they can quite literally put their money where their mouth is.

I have no idea why people couldn’t do this already if they want? Do Bristolians not know which are the national chains and which are the local businesses?

Now, the key thing for a currency like this is that it must offer greater utility, not less. Less widely accepted is not good. Don’t worry though, they’re well ahead of me — they do have an excellent feature.

Also unique is the ability to pay local business rates in local currency. The council leader, Councillor Barbara Janke, is fully behind the scheme.

Oh. This is some previously unknown use of the word “unique” I assume? Is the council going to refuse to accept pounds sterling (Mark Wadsworth has discussed the fact that taxation can give any arbitrary magic token value a few times, but I can’t find a link)? No, I didn’t think so. In that case it’s not a “unique” feature is it?

Bitcoins on the other hand do have some unique features:

Are not centrally controlled
Are personally controlled
Have an exchange rate, so are correctly valued
Can be sent over the Internet
Can be stored/spent/received on your mobile phone
Are anathema to current bankers… the banker isn’t needed.

If Bristol council really were interested in stimulating a local economy, they could do a hell of a lot worse (oh wait they already are doing worse) than simply announce that they will accept bitcoins as payment for taxes.

Distribution Games

2012-02-07T09:55:00.000Z

There is a story told to engineers (well, it was told to me) about resistors. Resistors are a component used in electronic circuits. They come in different values on the ohm scale. You can buy the different values at different tolerances. So for example, you can purchase a 100 kohm resistor at 1% tolerance, or 5% tolerance.

Here's what you think you're getting:

1% tolerance: nominal 100k can be anywhere from 99k to 101k
5% tolerance: nominal 100k can be anywhere from 95k to 105k

If your application depends on having a particularly accurate value (most of the time in electronics, 5% variation won't matter) you buy the more expensive 1% tolerance (there are even lower tolerances when it matters too).

It's not quite as simple as the above; as with most processes; production of resistors results in a normal distribution. Given that fact, inexperienced engineers are surprised to find that the 100k @ 5% tolerance box is unlikely to contain any 100k resistors. How can that be? A normal distribution has its peak at the mean, there should be more at 100k than any other value.

You have to have a think about what the manufacturer of resistors does. They don't have two production lines; they have one production line and a meter. They test the resistors coming off the line and if they are within 1% of nominal they go in the 1% box; if they are within 5% they go in the 5% box. That means all the best resistors have gone in the 1% box. While the probability distribution of resistors from the production line started out as normal (or Guassian), that distribution has been messed with.

From the Telegraph press-releasing a report from ACEVO:

This year alone, high youth unemployment will cost government £4.8bn in lost tax revenues and unemployment benefits, more than the budget for further education for 16 to 19 year-olds, and cost the economy £10.7bn in lost output, the report said.

From which we can conclude that the report writers are morons.

They're making the assumption that the probability distribution of earning ability/social contribution/work ethic is identical in unemployed 16 to 19 year olds as in employed 16 to 19 year olds. That if only we could remove the educational/social shackles from them then they would take their true place in the tax revenue raising probability distribution.

Nonsense. The employed 16 to 19 year old are from the 1% tolerance box. The unemployed are from the 5% box. The distribution has already been messed with by choosing to isolate employed from unemployed when drawing the charts.

I don't know that the true answer would be; but the report's numeric conclusions should be seriously discounted.

Their conclusions about the causes are pretty good:

"Too many young people do not have the hard and soft skills they need to progress in education or work,"

True enough. So much so that it's close to being a truism. "Unemployed young people aren't in work because they don't have the skills to be in work". Well, duh.

Their proposed solution is standard leftie fare... more government.

ACEVO called for the Government to "up its game" and give employers more incentives to hire the under-25s.

Unless by "incentive" they mean "scrap the minimum wage", "cancel employer's national insurance", or "reduce VAT"; then we can ignore them quite safely.

Bitcoin Ponzi

2012-02-04T08:00:00.000Z

A notorious ponzi-scheme operator has apparently been released from prison. He's had a while to think about his crime and has decided that the best thing to do is... commit the same crime again.

The company is called 'MMM' and is touting for "investors".

With a twist though...

As MMM shares will be used by electronic coin Bitcoin. They have a very good defense and international circulation. Program for operations can be downloaded here http://www.bitcoin.org/. Download the program and start the process!

And pay for these coins may be using different payment systems, including international ones.

He's collecting bitcoins to do the scamming.

Don't be fooled into thinking this is a bitcoin ponzi. Just as it's not the fault of dollars when you are scammed out of dollars; it is not the fault of bitcoins when someone runs a ponzi scheme using them.

I think that if I were an international scam artist; I too would want to scam bitcoins. Scam artists want lower banking fees and easier liquidity too you know.

h/t

Huhne Out To Dry

2012-02-03T19:17:00.000Z

Chris Huhne is a tit. Anything that gets his hands off the controls in the department of energy is fine by me. My low regard for politicians requires that I presume him guilty of the offence; but as long as he isn't in charge of the windmill ordering any more, it doesn't really matter.

Not that his replacement will suit me any better. It'll be a LibDem; but perhaps we'll get one that's not so blindly green.

Analogue versus Digital

2012-02-03T13:21:00.000Z

Yesterday on Radio 4’s PM, there was some guff talked about music quality. It’s standard guff talked by people who call themselves “audiophiles”, but in fact know absolutely nothing about electricity, signals, or in fact any mathematics whatsoever.

They were very vague about it, but in essence the claim was that digital music is rubbish and vinyl music is great. This is nonsense. There is in fact no reason why either one of these is inherently better than the other (although there are good practical reasons why digital is better).

Today then, we’re going to be talking about sampling theorem, digitisation and quantifying noise. Feel free to step away now.

The world is almost entirely analogue. The word analogue is used to mean “continuously variable”. For example, for the temperature to have changed from 15°C to 20°C it must pass through all the temperatures in between; we can guarantee that the temperature was 15.67829281872716152°C at some time (even if we don’t know what time). Similarly, time is analogue; we can always break it apart. Half a second is 500 milliseconds, half a millisecond is 500 microseconds, half a microsecond is 500 nanoseconds, and so on. To get from 16:00 to 17:00 the time has to pass through 16:42.9282827165621. Has to.

For all analogue variables, if we were to plot them on a graph, our pen would never leave the paper. Each measurement is connected to the previous measurement, the line would be continuous. Hence we call these variables continuous variables.

Some things are not analogue. They can only take on a particular set of values. There is no in between. For example; “how many marbles are in this box?” (assuming we define marble to mean “a whole, non-broken, marble”). This variable can only take on whole number values. There can’t be 10.87 marbles in our box. “Is the front door open”? It can only be open or closed. “How many grains of salt are in this salt seller”? You get the idea. If we were to plot these variables on a graph, our pen must leave the paper. There is no inbetween. We call variables of this type discrete variables, because they can only take on discrete values.

In computing we can only deal with discrete values. There is a finite amount of memory in the computer, there is a finite precision to any number, and there is a finite resolution to any sensor. If we want our digital devices to interact with the real world, there therefore has to be a way of converting the discrete values of the computing world into analogue outputs; and vice versa.

Transducers convert one form of energy into another. For our purposes today we’ll be interested in those transducers which convert from electrical energy to and from point air pressure energy. In other words: microphones and speakers. The microphone converts air pressure (changes) into electricity. Remember that sound is nothing more than a pressure wave in a gas. This electrical signal is what engineers would call an analogue signal. The voltage (say) varies continuously as a function of air pressure — so while it has been changed in form it is still continuous.

With a few complications omitted for the sake of brevity, that electrical signal is used to drive a mechanical carving tool that physically alters a wax (say) master disc which is then used to produce a hard stamp for a press that can mass produce vinyl records. The carving tool, being physical passes through all positions from A to B, and each electrical connection on the way takes on any voltage from A to B. The whole chain is continuous.

Again brushing over some detail; we can convert a continuous signal into an discrete one by sampling. That is to say that we decide on a sampling period (say 20 microseconds), and then each period we note down the current analogue reading. There is a further complication: our method of measuring the analogue signal has finite resolution. While the source can vary continuously our output can only take on discrete values. For a three bit (one bit being capable of being zero or one) analogue to digital conversion, with maximum deflection of 1 volt, the outputs force our continuous input to take on one of 8 possible discrete outputs. This process is called quantisation.

000 -> 0 -> 0.000 volts
001 -> 1 -> 0.125 volts
010 -> 2 -> 0.250 volts
011 -> 3 -> 0.375 volts
100 -> 4 -> 0.500 volts
101 -> 5 -> 0.620 volts
110 -> 6 -> 0.750 volts
111 -> 7 -> 0.875 volts

So, for example, if our input were 0.9 volts, our output would be 7, and we wouldn’t be able to distinguish it from 0.875 volts. Similarly, 0.80 volts is indistinguishable from 0.75 volts. The more bits we add to our converter, the smaller the range of voltages that can be mistaken for each other.

We repeat this thousands of times a second, and end up with millions of these samples as a discrete sequence. Those samples get written digitally to a CD — i.e. the CD stores each number in its binary representation. This is done by burning pits into a surface with a laser.

Here’s the big lie that audophiles believe: since the digital samples can only take on discrete values, and the analogue system is continuously variable, the analogue system more accurately records the original input. Hence vinyl is better than CDs.

This would be true except for one thing we’ve missed out of the discussion. Noise. Noise is a random addition to our signal that adjusts it from its true value. When we think of signals we often think of them as being made up of these two components.

$S (t) = s (t) + N (t)$

In an ideal world, $S (t)$ , which we measure, would be equal to $s (t)$ , the desired signal. It isn’t though, $N (t)$ the random noise is added to it. Being random, we can’t predict it, and have no way of subtracting it from our $S (t)$ . What we want then is that our desired signal be very large compared to the noise. You may have heard this value discussed as the signal-to-noise ratio, or SNR. This is (a function of) the ratio of $s (t)$ to $N (t)$ (if you really care, SNR is ten times the log of the power ratio of $s$ to $N$ ).

Electrical noise is impossible to get rid of. It can never be reduced to zero. Noise is always present because electrical components aren’t perfect. Even if they were we would still have, for example, the noise added by the molecules vibrating in the wires because they are not at absolute zero temperature. We would have the noise of the air molecules banging against the microphone. Any wiring acts as a antenna in some shape or form and so is picking up any stray radio waves floating around.

Let’s go back to the digitisation process. We saw that quantisation meant that input values could not be perfectly represented by the output values. The difference between the true input and the presumed output is called quantisation noise.

$q [n] = O [n] - I [n]$

Where $I [n]$ would be the sample value if we had infinite precision. $q [n]$ is therefore a function of how many bits we assign to our $O [n]$ representation (and sampling hardware). The more bits, the smaller the quantisation noise.

What’s interesting is that quantisation noise is characteristically very similar to normal signal noise. We can, in fact compare it directly to our analogue noise:

$S (t) = s (t) + N (t)$
$O [n] = I [n] + q [n]$

( $q [n]$ is random and zero mean, so we can reasonably say that $q [n] = - q [M]$ ). Now, it’s worth remembering that our input signal was analogue and came with its own noise. So it’s perhaps more accurate to write:

$O [n] = S A M P L E [s (t) + N (t)] + q [n]$
$= I [n] + N [n] + q [n]$

That is to say, our sample, $O [n]$ is made up of the true input plus a sample of the analogue noise plus quantisation noise. (This is actually a simplification, noise is characterised by its variance, and the variances add in quadrature, so total noise variance, $σ$ would be equal to $\sqrt{{σ_{N}}^{2} + {σ_{q}}^{2}}$ )

Here is where we can put pay to the audiophile lie then. If the quantisation noise is small compared to the analogue noise — small enough that it is negligible, then there is no difference whatsoever between analogue and digital. Given that we can choose (within reason) our quantisation noise (by sampling at higher resolution — i.e. more bits), our quantisation noise can always, potentially, be negligible.

(A quick note: while at first glance it appears that our period sampling of the analogue signal has thrown away all those analogue values that we never looked at; it doesn’t actually matter. By sampling what we have done is throw away bandwidth not information. Provided there was no information contained in that bandwidth of the analogue signal, the digital samples can perfectly reconstruct the analogue signal. We’d have to start talking about Fourier synthesis to understand this; and this article is already too long.)

If the digital signal can perfectly reconstruct the analogue, then the two are equivalent. One can’t be better than the other then, right? Right (neither analogue nor digital is inherently “better”). Nearly. “Nearly” because we have to bring in the practicality that we want to send/record our source signal from where it was generated to the place where it is wanted (your ears).

When noise is added to an analogue signal, the signal is damaged irreparably. When noise is added to a digital signal, within certain bounds, the signal may be reconstructed. This is because the digital signal is only ever ‘on’ or ‘off’, so the noise has to be very big to push an ‘on’ into something that looks like an ‘off’.

Let’s say we want to send a signal 100 miles. Every 25 miles, the signal has halved in power (noise never degrades, so relatively the noise is bigger — get your VHS out and record a recording of a recording and you’ll get the same effect). With digital we can place a repeater station at 25 mile intervals to detect and reconstruct a noise-free copy of the original. For an analogue signal, we can’t do this. The best we can do is amplify the signal before sending it on again. Unfortunately, that amplifies the noise as well. This is why the world is going digital — if you can get the signal through, then the original can be reconstructed perfectly. The key property that digital representations have is that they can be perfectly copied.

If we keep the digital path of the signal as long as possible and only convert from and to analogue as close as possible to the sources and destinations then we can keep noise at an absolute minimum. All the noise added during the transmission can be completely bypassed by using a digital representation. Provided we have sampled at high enough resolution (and frequency, but dragons lie the way of that discussion) then our quantisation noise will be negligible compared to the inherent analogue noise and reconstruction will be perfect.

There is a legitimate argument that CDs today don’t sound as good as old vinyl records. The reason it’s legitimate is nothing to do with analogue versus digital; it’s to do with monkey versus man. You see, being digital puts enormous powers to shape and manipulate the sound that were not available to analogue audio technicians. Unfortunately with great power goes great responsibility — and modern sound engineers (or more likely their record company bosses) misuse that power. They tend to turn the compression dial up full; they mess with the equalizer to optimise the sound power at various frequencies to match human hearing frequency response; and in general make a godawful mess of what they’ve got.

It’s all subjective though. Perhaps this pushing and prodding makes it sound better to more people. So be it, what do I care? However, if you find yourself thinking that it is CDs and MP3s that are to blame for why music sounds awful to you — think again.

Update:

I wanted to point out that I’m not arguing that every digital music device produces perfect sound. They are still products with varying qualities. A crappy CD player will sound worse than a good vinyl record player — it’s nothing to do with the CD or the vinyl though — it’s merely engineering quality. There is also the bizarre contradiction that since with digital it is harder to get it completely wrong; a great many manufacturers produce rubbish digital equipment because it’s “good enough”. If they had used the same standards for analogue equipment manufacture it would not have been “good enough”. Contradiction: digital music often sounds worse than analogue music because digital retains its quality more easily.

Benefits Cap in Hand

2012-02-01T16:53:00.000Z

The BBC offer what they think is an article demonstrating how hard the benefits cap will hit poor people. It does anything but.

As MPs resume their debate on the Welfare Reform Bill - the government wants to cap benefits claimed by families to £26,000 a year - we look at one family that may be affected by the changes.

The article actually reveals how much the average worker is subsidising a better lifestyle for the workless than that average worker can afford for themselves.

Unemployed father-of-seven Raymond (not his real name) and his family rent a former council house on a social housing estate in north Wales. They do not own a car or take a regular annual holiday.

Cars and holidays being a necessity to life, right? I won't be having a holiday this year; and haven't for the last four years. The miles I do in my car are 99.9% travelling to work.

Also: "father-of-seven"? Why are you having children if you have no jobs?

Raymond, a former educational software writer, has been jobless since 2001. His wife Katherine suffers from bipolar disorder with an anxiety disorder and is also unable to work.

Says Ray: "The market for my skills dried up 10 years ago - there's a total lack of work in my area of expertise."

Software writer? Look, I'm a software writer too (amongst other things), and I can guarantee that the skills necessary to write software to do Job_A are easily transferable to Job_B. So "total lack of work in my area of expertise" is just a load of bollocks. Contracting work for software is on the increase.

Also: the Internet plus ten years is enough time for you to learn any set of skills you want.

Ray, 45, says: "I would love to be able to say that we are living in one of these eight-bedroom mansions that everyone is up in arms about, but no, we are stuck in a three-up, two-down house that has external measurements of barely 19ft by 25ft.

You ungrateful fucking shit. When you say "stuck" do you mean "have been provided with, completely free of charge"?

The family receive a total of £30,284.80 a year in benefits - well over the £26,000 cap proposed by the government. But, says Raymond, "If these proposals go through we will take a massive hit to our finances - and it's not as if we could move into a smaller or cheaper premises.

Perhaps you will then understand the advantage of being independent of the state? Choice is what it buys you.

"I see eight people here having to choose between eating or heating."

I don't (see below); but the idea that eight people in a tiny house can't keep warm is ludicrous. Cold? Stay in the same room, close the fucking door and wait a bit. You'd be surprised how much body heat eight people can generate. Not warm enough? Try playing with the five year old for 20 minutes. Every time my godchildren come anywhere near me I end up feeling like I've spent the evening at the gym.

Let's get to the breakdown; where the real meat is (not withstanding the stupid BBC graphics department's crayoning over the data).

Income per week:

Child benefit, £87.30
Child tax credit, £301.10
Jobseeker's allowance, £100
Council tax benefit, £18.00
Housing benefit, £76.00

At least we know why they've got seven kids now -- "Child tax credit".

Expenditure per week:

"Other", £91
"Entertainment", £20
Phone + Internet, £7
Water rates, £15
Sky TV, £15
Council Tax, £18
Public transport, £30
Mobiles, £32
Energy bill, £38
Rent, £76
Weekly shopping, £240

This is £582.40 a week. Or £30,284.8 a year. The proposed cap would reduce this to £26,000 a year; or £500 a week.

I wonder if it is possible that we'll be able to squeeze £82.40 worth of savings out of this somewhere. Obviously I don't have high hopes; I'm certain every last penny is essential spending.

Let the fun begin...

Rent £76

£76 a week is £329. Sounds about right for social housing in the middle of Wales. However, I'd like to point out how low this is relative to the other expenses. The idea that people are going to be put out of their houses is clearly nonsense.

Council tax £18

£18 in; £18 out. Nothing to be done about council tax.

Water Rates £15

We'll assume this is fixed and there is nothing to be done to reduce it.

Phone + Internet £7

£7 a week is £30.33 a month.

Hmmm, let's gloss over the necessity of an internet connection. BT line rental is £13 a month. I would expect zero phone calls, since they've got mobiles and it's fairly easy to get cheap mobile deals. Plus the Internet connection can be used as a phone if you like.

That leaves £17.33 for Internet. There are cheaper deals than that. Especially if you've got Sky, for example. Even if you don't, you can get pay as you go deals; and O2 do a mobile + internet deal too I think.

Still; let's let them off. The Internet is close to being a necessity these days; certainly for a job seeker.

Sky TV £15

WTF? You've got no job. Sky is a luxury. Get freeview; or freesat. Also note that this isn't just Sky, this is (going by the price of £65 a month) the full package of Sky (base + movies + sport), HD and an additional multi-room box. Seriously: a multi-room box too?

£15 back in my pocket.

"Entertainment" £20

The sarcasm-quotes are because of this:

'I go out once a week, on a Friday night. I meet up with my mates in the pub and have three or four pints.'

FUCK RIGHT OFF. I don't see why I'm subsidising your entertainment at the pub. If it's deemed a human right, then I want fucking £20 a week out of general taxation to pay for my pints too. Fun is earned.

There are millions of people who get by just fine without a weekly visit to the pub.

£20 back in my pocket. Drink less.

"Other" £91

£4,732 a year!

'There are four children to supply school uniforms - including gym kits - each year. The school trips aren't days out to Alton Towers - they're educational trips for several of the courses, like history, geography and media studies, that the school tells us will form an important part of their course. Then there are seven birthdays a year, and seven children to make Christmas happen for each year.'

Hell's teeth these children must have an awful lot of uniforms, and go on an awful lot of school trips.

Uniforms are bought once a year (although I'm forced to wonder why cast offs can't save a bit of money there when you've got seven children), and they cost near nothing from ASDA's George range. School trips are once, maybe twice, a year and the school will charge about £5 for them. I'm not entirely sure that there isn't provision for letting children on free school meals go on school trips for free.

Let's go mad with the uniforms and spend £20 each; and send all the children on their three school trips a year. (20+(3*5))*7= £245. Leaving £4,487 for Birthdays and Christmas... £641 per child.

No, no, no, no. How many Playstations each are these children getting? Have they all got a laptop each? Let's be generous and leave them with £500 per child; saving £987 a year.

£18 a week back in my pocket.

Mobiles £32

'My wife and I have mobile phones, and so do all of the teenage children. You try telling teenagers they're going to have to do without their mobiles and there'll be hell to pay.'

Hell to pay? What about "bills to pay"? Parents paying for their own children's mobile phones can do what they like. The taxpayer should be buying necessities only for welfare recipients. Welfare isn't there to bring you level with everyone else; it's there to make sure nobody dies. Also: show me these phones, they'd better not be fucking iPhones/Blackberries/Androids.

£32 a week for mobile phones is scandalous. Giffgaff do a pay-as-you go SIM that costs £1; then £5 a month will get you 60 minutes and 300 free texts plus free giffgaff-to-giffgaff calls; or, unlimited texts for the teenagers. Let's say five phones at this rate. That's £25 a month. £32 a week is £138 a month. Fuck that.

£26 a week back in my pocket. And I'm being generous letting the teenagers keep their phones.

Weekly Shopping £240

Just under half the weekly expenses are going on groceries. And include:

24 cans of lager
200 cigarettes
Large pouch of tobacco

Obviously: no, no, no, to all of that. 24 cans of lager I might let you have as long as you're buying the supermarket piss that costs 10p a can.

'Our biggest expense. We do all our shopping at Tesco or Morrisons in one big go. Mostly we buy the "value" range - tinned meatballs, baked beans etc. On the cigarettes, my wife tried to give up, but she missed one appointment on the course and they threw her off it.'

Firstly: "threw her off the course". What the fuck? (1) Is it impossible to quit smoking without a "course"? (2) why the fuck are you missing appointments if you don't have a job? (3) who paid for that "course"? (4) Why haven't you given up? (5) Can't you even cut down? Twenty fags is what, £7 these days?

Morrison's is considerably more expensive than Tesco; Tesco is more expensive than ASDA; and for a certain subset of groceries Lidl, Aldi and Netto are cheaper than any of them. You've got nothing to do all day; optimize your shopping.

"We buy the 'value' range". You fucking liar. There is no way you're buying the value range and spending that much money. You're buying a couple of value items and then brand name crisps, fizzy drinks, and biscuits. I'll bet you're buying ready meals too. I'll just take a quick journey to ASDA online...

Eggs, flour, milk, butter, let's go mad and say £10
1kg bag of ASDA rice, £0.40
500g of ASDA spaghetti, £0.25
2.5kg ASDA Potatoes, £1.35
500g ASDA Tomatoes, £0.78
ASDA Apples, £0.71 for five
A load of dry spices, that would last a month, say, £5.00
'value' supernoodles, £0.25
Packet soup, £0.30
'value' pasta meal, £0.30
'value' biscuits, £0.30
'value' chicken, £1.78/kg
'value' cola, £0.17
Baked beans, spaghetti loops, etc, approx £0.30
etc

Let's get loads of all this stuff; five each of the carbs; ten of the snacky stuff, seven of the meat (for each day of the week), etc, etc. I make that £56.91. Okay; there's still your washing powders, liquids, loo rolls, a few luxuries, etc; so let's say I've seriously underestimated and bang that up to £150 a week. There; I've fed your family and left you £100 a week to spend on whatever else you need to keep the place running (there's probably even space for a few cans of lager and your fags).

£90 a week back in my pocket.

Summary

Without even reducing these people to absolute bare survival (which would be legitimate given the purpose of welfare):

£15 Sky
£20 "Entertainment". i.e. drinking at the pub
£18 "Other". Stop buying Playstations, iPhones, iPads, iPods, Nikes, Uggs, Berghaus, DKNY, etc for the kids for Christmas.
£26 Mobiles. Pay as you go. No data contract. Cheaper phones.
£90 Shopping. You're wasting money on expensive branded foodstuff instead of bulk buying basic ingredients.

Total: £169 a week; £8,788 a year. We've not even broken a sweat.

Don't tell me it can't be done. I grew up in a household that didn't have benefits and got nowhere near £30,284.80 a year before or after tax.

Goodwin and Good Luck

2012-02-01T11:59:00.000Z

My tuppence worth on the Goodwin knighthood.

Fred Goodwin was given the knighthood for "services to banking". Given that he close to single-handedly triggered the crash of the UK banking sector it seems perverse to leave him with such an award.

Those arguing that we shouldn't be removing honours merely because a business fails are missing the point that the knighthood was for not having a failed business. Jesus; _I_ lost the banking sector less than Fred Goodwin did -- where is my knighthood?

The analogy: Sir Terry Pratchett was knighted for services to literature. If he subsequently starts a multi-national bank and it goes bust; then he can quite reasonably be left with his knighthood. If, on the other hand, it was discovered that it was actually his wife who was writing all the books; then "services to literature" would seem unjustified and he could reasonably be stripped of his knighthood.

To be honest; it's not even just that RBS needed rescuing. It's more that all the great stuff that everyone thought Fred Goodwin was doing has turned out, in hindsight, to not be that great at all.

Let's not feel too sorry for his loss of title anyway; he's still sitting on a pension pot worth £12 million. That will probably go some way to consoling him. And paying for the new letterhead.

Quit It

2012-01-30T12:16:00.000Z

I have no particular love for the massive bonus culture of the banks; and certainly not for the massive bonus to state-owned bank CEOs.

However; if I were Stephen Hester, here is what I would be very tempted to say...

"Hello dribbling BBC and Guardianistas of the world. Hello stupid middle England conservatives. On Friday you all began a weekend campaign to stop me receiving all of my contractually guaranteed remuneration for work I have done over the last year. I have, this morning, decided to voluntarily turn the share bonus down. That has saved you about £1 million. You can be happy now can't you? Except, on the same day, the share price in RBS has dropped, losing its shareholders (that's 82% the state, for the woefully misinformed) around £320 million.

Given that you all hate me so much; and my value is clearly underestimated; and that I am already staggeringly rich I have decided to do what you all want and fuck off. Yes; I resign.

Let's see what the share price does tomorrow shall we?"

Incidentally, for reference; the CEO of Apple will be receiving $320 million this year.

Incentives

2012-01-29T08:00:00.000Z

The other day I was talking about behavioural modification and its relevance to prison reform. Coincidentally the Speccie has an article about incentives for bankers; and it continues on from that prison article quite nicely.

A researcher conducted an experiment in the relative powers of varying incentive sizes.

Ariely offered volunteers bonuses for winning games which tested their reasoning skills and cognitive ability. The volunteers were divided into three groups. For the first group, the bonus on offer was equivalent to a day’s pay for the average local worker. Winners in the second group received a bonus worth two weeks’ pay, and in the third group, 5 months’ pay.

You would expect those with the most to gain to be the most motivated and perform best. In fact, those in line for the biggest bonus performed more slowly and less successfully than those chasing more modest windfalls.

This accords with what animal trainers find about reward schedules, constant, big rewards aren't as reinforcing as many randomly dispersed small rewards. Reward fatigue sets in. It's almost as if the reward becomes expected, so no effort on the part of the actor is needed.

Also to be considered is the risk/reward ratio; and the asymmetry of losses and wins.

An incorrect risk/reward ratio can be damaging: if a human risks little but has potentially huge reward, then you will get more risky behaviour to try and win that reward. Bankers might consider that the massive potential personal payoff if one of their schemes comes off is worth risking the loss of their job if they lose all your money. The large reward has to be measured against their own risk, not your risk.

Humans are also terrible at correctly perceiving the relative value of losses versus wins. This is sometimes called the sunk cost fallacy. The problem is that you will value what you have already lost higher than you would if you hadn't lost it. In other words, you value £10 that is in your wallet lower than £10 you have already lost. That is a recipe for disaster: if the £10 in my wallet is worth less than the £10 I have already gambled away, then it is sensible to use the £10 in my wallet to win back the £10 I have already lost. In fact, psychologists found that you require a payoff of at least double what you risk before you will play -- you value loss at twice gain. The sunk cost fallacy is a fallacy because sunk costs are those which are already gone -- you cannot recover them; and yet you include them in your calculations.

Clicker Training for Libertarians

2012-01-28T08:00:00.000Z

I was writing an article about incentives, and this was part of it. It grew a bit too big so I've turned it into its own article.

Essentially this is: how to train an animal, while enjoying it, without beating the crap out of it.

As with most of the subjects I spout about on this blog, I have only a surface understanding of the subject (despite presenting myself as if I'm an expert on everything -- but then that is the fun of having a blog); but again, I won't let that stop me. My knowledge of this subject comes from reading about how to train my dogs (I didn't do a very good job, because I stopped once an acceptable level was reached -- but I do understand how it should be done); there is an excellent book about the subject called Don't Shoot The Dog, which I can recommend even if you don't have animals -- it's more about behavioural science (and in particular operant conditioning) than about training a dog.

The only sensible way to train an animal is with positive reinforcement. I say that not as a huge defender of animal rights, I say it as a realist engineer. Any training that involves hurting your pet both damages the pet's personality, your relationship with the pet, stresses you out, and requires far more deductive power on the part of the stupid animal than it can possibly have. Positive reinforcement means using rewards.

Let's say you want to teach your dog to raise it's left paw on the command "left". From scratch, then.

Get yourself a stack of treats. Tiny, but tasty. A cut up block of cheese works very well.
Get a "clicker", this is a little device that makes a click when you push the button on it. It's not absolutely necessary, but the consistency and immediacy of the click is very helpful.
Chuck a handful of cheese on the floor, spread out a bit. Every time the dog eats a piece of cheese, click. It must be as close as possible to the moment of eating the cheese.
This establishes that the click is a positive thing.
Now, the entire magic of operant conditioning is contained in this next step (strangely, I don't think it's ever made entirely clear in the clicker training guides you will read online how significant this bit is)... Introduce a delay between the click and the reward. The click comes first. Click, wait a beat, and then chuck a bit of cheese to the dog.
Let the dog lose attention, then click. If the dog turns expectantly towards you when it hears the click, then the clicker is "charged".

The reason it's magical is that all training is represented by this one association. You have created a behavioural chain with a trigger. It's not much of one, it's simply an attention grab. Click...attention...reward. Repeat this a bit more to really establish the meaning of the clicker. Everything from now on is an extension of the chain.

You'll continue to use the clicker, and it will become more and more powerful the more you do, provided you obey one simple rule: a click leads to a reward... always. If you click, you give the dog a treat. That treat doesn't have to be food, but food is quick and easy to administer, unlike a 30 minute walk. Lots of small treats are better than one large treat.

The charged clicker is important; you see the clicker becomes so associated with a positive outcome that it is, in itself, a reward to be worked for. The dog is no longer trying to earn treats, it is trying to earn clicks, which lead to treats.

Let's teach the dog its name.

Wait for lack of attention
"Fang"
Wait for attention. If you don't get it after a while, you can repeat the trigger; but don't ever go "Fang, Fang, Fang, Fang, Fang" as you will be teaching that the trigger is "five repetitions of your name".
Click
Reward

You have probably instinctively already done this. By calling a dog for dinner; or by giving it attention when it comes from being called you have connect the trigger "Fang" with a positive outcome.

This sort of dog training is very enjoyable, because for the first time ever you have rudimentary communication channel with your pet. By using the clicker, we have a way of instantly telling the dog that what they are doing at exactly that moment is what we want. Without the clicker, the dog will be scrabbling around blindly trying to work out which thing it does that you like. The clicker tells it.

It's worth noting that the chain has to be built backwards. That is to say, that we teach the trigger last. First we need the behaviour. I'm jumping ahead a little, as you'd probably teach "come" and "sit" and all the rest of them first, but the principle is identical for everything.

First we need to elicit a behaviour we can reward. This is always the hardest part. You'll be surprised how quickly you can get the behaviour the second time; it's the first time that's the killer.
Sit down with the dog. Stroke its left paw, lightly. Tickling it almost. It's important that you don't force the lift, it's got to be under the muscle control of the dog. Otherwise you are teaching "you get rewarded for letting me move your paw". The tickle will often be enough to make the dog twitch its paw.
If you get the slightest sign of a lift, click and reward. You should not expect a full lift, just the tiniest response. Very quickly you should find you don't have to do any tickling.
Repeat this. Clicking at any sign of the correct response. If you're trying to teach left from right, then only click and reward for movement of the left paw.
Stop click/rewarding for tiny movements, and set your bar a little higher -- the paw must leave the ground, just for a millisecond. It's important to have the criteria you'll accept established in your own head, so that you can constantly increase it. It should always be in small, achievable steps though. Nothing is more damaging for the dog than failing to be rewarded and not understanding why.
Slowly increase the criteria; stop rewarding for paw merely off the floor, start rewarding for the paw in the air.
The dog should now be very pleased with itself; following you around and raising a paw at you. This is again the magic of clicker training. The dog is actually training you -- "If I do this then a treat appears from nowhere. Ha. I'll do it again. Look another treat".
The chain is now left paw lift -> click -> treat. We now want to put a trigger on it. That means the chain is going to be trigger -> left paw lift -> click -> treat. The trigger can be anything the dog can distinguish. Some people report very good results from hand signals, as dogs find visual stimulii much easier to distinguish than subtle human language. However, 'left paw' will work fine.
Your new criteria for clicking then is left paw lifted only in response to the command 'left paw'. The dog will already be following you around lifting its paw to earn treats; but you now start only clicking and rewarding when it's done in response to your command.

Ta da. Done. Importantly at this stage (i.e. once the behaviour is established): start varying your reward schedule. Randomly spaced, unexpected rewards have been shown to be far more effective at maintaining a behaviour than constant, expected rewards.

I can honestly say that clicker training is magical. It leaves you with an inquisitive, eager to please dog, and can be used to create incredibly complex chains, should you wish. There is no reason you have to stop at command -> behaviour, you can keep adding to the front of the chain, and then put a command on that whole sequence.

I've given only the most cursory introduction; there are books worth more on the subject. Most interestingly, there is good evidence to suggest that the same procedures work on humans. You have to be a little bit more subtle with humans, because feeling like you are being trained like a dog would be a huge negative reinforcer for a human.

EU-style Democracy

2012-01-27T11:04:00.000Z

Many moons ago, I wrote

There are 736 MEPs who sit in the European parliament. Their one power is that they can vote yes or no on laws that are presented to them. Yep, presented, the MEPs do not write the laws. The people you vote for do not write the law.

I was talking about the upcoming ratification of the Lisbon Treaty; and pointing out that the European parliament is a complete illusion. I suspect, in fact, that it is simply a way of supplying the gravy for the gravy train that is the EU.

Today, the guy handling the ACTA agreement for the EU said this:

This agreement might have major consequences on citizens' lives, and still, everything is being done to prevent the European Parliament from having its say in this matter. That is why today, as I release this report for which I was in charge, I want to send a strong signal and alert the public opinion about this unacceptable situation. I will not take part in this masquerade.

The European Parliament, not getting a say? How unusual.

Oh... by the way, 22 EU members signed the ACTA agreement on Thursday. With no parliamentary approval required. Remind me what a vote is for again?

Even if the EP is eventually allowed a vote, it will be on legislation that is presented to it fait acomplie. In true parliaments the legislation is debated in parliament first (ref: even our own watered down embarrassment of a democracy is having a ding-dong over wording in the benefits cap legislation -- rightly so, that's what a parliament is for).

FYI:

ACTA was negotiated behind closed doors; and was an attempt to get written into global law that people accused (yep, "accused" only) of copyright infringement could have their internet connection turned off. Imagine living in 21st century Britain with no Internet. Banking? Communication? Investments? Shopping? Your job? Now imagine it happened because your 12 year old downloaded the latest Justin Beiber single.

It's been watered down since then, but it opens the door to "alignment" of "intellectual property rights" enforcement. Whatever the hell that means (I guess, whatever American record executives say, is what we'll be allowed to do with our Internet connections).

Tax Rate Richness

2012-01-26T12:38:00.000Z

Some observations about "tax rates" as it applies to "millionaires who pay less than their secretaries".

"less than" is being used here to mean "considerably more than". Millionaires pay millions in tax. Secretaries do not.
Start with two millionaires: Warren and Buffet. Warren qualifies for zero income tax; and Buffet qualifies for 30% income tax. They both earn gross $10,000,000. Warren hands over $3,000,000 and invests the rest. Buffet invests all of it. The investment pays back 50% in a year. Warren's capital gain was $7,000,000*0.5 = $3,500,000. Buffet's capital gain was $10,000,000*0.5 = $5,000,000. The fact that Warren paid 30% income tax has reduced his capital gain by $1,500,000 of a possible $5,000,000 (30% for the hard of thinking) before a single dollar of capital gains tax is applied.
Dividend income is taxed. This is despite the fact that dividends are paid out of post-tax profit. i.e. the company has already paid corporation tax on the profit.
Capital gains is due only when an investment is converted back to liquid cash. A millionaire might declare an unrealised 50% capital gain increase -- that doesn't mean any tax is due on it.
Capital gains that come from the growth of a company represent the net future value of the dividends of that company. As we've already said, the dividends are taxed; so the capital gain is less than it would have been with no corporation tax.

Millionaires can certainly play silly buggers with their money (and why shouldn't they; provided it's legal?). Arguing that the rate of capital gains tax is lower than the rate of income tax means that the millionaire pays less than the secretary is stupid.

Want to get the millionaires? Really? Swap income tax, capital gains tax, and corporation tax for a land value tax. There is no hiding from a land value tax. Note the complete absence of millionaire-hating lefties calling for LVT. Why? Because those self-same lefties all own property in overpriced London and would see the value of that property (correctly) shrink if LVT were introduced. They certainly don't (despite what they write in their Guardian columns) worry about poor widows being evicted (since it would be trivial to charge the LVT against the property using the land registry -- just like banks do with mortgages right now).

FFS O2

2012-01-25T12:38:00.000Z

Do you have an Internet-enabled phone? Are you with O2 (or one of the companies that piggyback their network, like Tesco, Giffgaff, etc)?

Then they've been giving out your phone number to every web site you visit while using mobile data.

O2 customer Lewis Peckover recently discovered that when you're browsing over 3G on O2, your handset's phone number is often included in the HTTP headers sent to each website you visit, in plain text.

Visit Lewis's site to confirm that you are affected (at time of writing it was still active for me).

Note: this is not information that is added by your phone; it is added by O2's web proxying servers as your web traffic passes from their network to the wider internet.

Prison Maths

2012-01-23T10:49:00.000Z

Start the week was a leftie love in today. Andrew Marr was talking about prisons and justice. I switched it off after a while; as it made no sense.

One of the guests was an ex-prison governor; making the usual short-sighted arguments about prison (we lock too many up; what do we do when they are released, blah, blah). What I wanted to note though, was two statistics he gave:

There are approximately 88 thousand people in prison
We release 80 thousand prisoners every year.

Deduction: assuming a mostly stable population, we are therefore locking up 80 thousand people a year. Further, the 80 thousand people a year we do lock up are getting sentences less than or equal to a year.

If that is true, I really do wonder how we (them rather) can be coming to the conclusion that prison doesn't work. For most of them, it's clearly a trivial sentence.

Go and read a few police blogs (Gadget, PC Bloggs), and you will hear a different story:

The police know who the bad guys are. They arrest them regularly.
The police know that it's not worth arresting them, judges aren't giving out custodial sentences. The bad guys know this and so there is no disincentive to their bad behaviour.
The bad guys know that the police are impotent; that the worst they can do (given the lack of custodial sentences) is lock them up for the evening.

Some observations:

I've also heard (although I can't find a source right now) that its estimated that the majority of serious crime in the UK is committed by about 120,000 people. Therefore if the prison capacity is any less than 120,000 then it will always appear that "prison doesn't work".
The academic on "Start the Week" literally said that "the statistics show us that prison doesn't work". He neatly avoided mentioning that while the statistics do indeed show appalling reoffending rates for ex-prisoners, that the statistics for any other rehabilitation mechanism suggested show considerably worse results. In short: prison is the best of a bad bunch; and has the advantage of at least locking the crims away from the rest of us for a while.
Are prisons horrible enough? The point of prison is surely that it's not nice. For those of us who live non-criminal free lives, then I suspect that prison would not be nice. However, if you live your life smashing stuff up, hanging around with your equally criminal friends, and getting in fights; then prison is not that big a change for you. In fact, if someone else is keeping the place clean, paying the bills and cooking your dinner, it could well be a step up for you.
Education is always waved about as the answer. It should be. Regular readers will know that I believe education to be a silver bullet. However, it is literally education that I believe to be the silver bullet; not the pretense of education; not the assemblage of unwilling participants in a locked room and some woolly-brained leftie telling a load of ne'er-do-wells that it's okay to fail. Education only works when it is done to people who want it. You cannot force-educate someone. More money will not equal more education.
The champagne socialists who live in their "criminals are just misunderstood" world have no experience of the evil that is the actual underclass. I went to a secondary school filled with them; I've lived next door to them; I've worked in the same building as them. They are not "misunderstood", the are evil. They have been made evil, I grant you, probably not through any fault of their own -- crappy parents produce crappy children. That doesn't change the fact that they are evil. The victim culture that has sprung up in the UK gives them a get out of jail free card; by basically saying "as long as their is a reason why you are a hateful shitbag; then it's okay that you're a hateful shitbag".

Behavioural science tells us how to alter behaviour:

Positive reinforcement: this is the introduction (positive) of something nice when a desired behaviour occurs.
Negative reinforcement: this is the taking away (negative) of something nasty when a desired behaviour occurs.
Positive punishment: this is the introduction (positive) of something nasty when an undesired behaviour occurs.
Negative punishment: this is the taking away (negative) of something nice when an undesired behaviour occurs.

Behaviourist research found that positive reinforcement gets the most long-term results. The subject works for a reward. The lefties have all seized on that, and think that giving sweeties at the appropriate time is the best way to fix criminal behaviour. They've not read far enough into the book and they've confused animal training with the more subtle reward system a human will use.

The reason positive punishment is usually rejected is that in animal training, positive punishment has very limited use. The animal can't be reasoned with, nor explained to, and usually doesn't know what it has done wrong that results in a punishment. I promise you, if you smack a puppy for peeing on your carpet, then you are damaging that puppy -- it doesn't know what it did wrong and can easily pick up the wrong association -- for example, let's say it chooses to pee in the kitchen. You come home, find the pee and smack it with a newspaper. The puppy can form the association that it isn't allowed in the kitchen; so it never goes in there, or is scared when you make it. It starts peeing in the living room, so you smack it again. Now it thinks it's not allowed in the living room. Eventually the puppy will pee somewhere you don't notice and the smacking will stop. Positive reinforcement works much better on animals.

Positive stimulii are not necessarily reinforcing. They have to be a consequence of a behaviour first. Lefties tend to give out sweeties at all times. Therefore there is no correlation with behaviour. They don't even take them away (negative punishment) as a consequence of bad behaviour. Result: no change in behaviour.
Criminal behaviour is self-reinforcing (as is almost all behaviour in fact, that's why we do them). The behaviour creates its own reward. On a short timescale, that reward is often significantly better than any positive stimulus society can offer for "good" behaviour. There is no competition then, the criminal behaviour will always win out. If the reward for criminal behaviour is thousands of pounds, some lovely drugs, a joy ride in a BMW and a box of iPhones; then your reward for good behaviour cannot win. Worse; positive reinforcement is very bad at removing behaviours -- just because you get rewarded for a good behaviour doesn't mean that the reward for bad behaviour is removed. Result: you get both good and bad behaviours (this is obvious in criminals that have learned the right things to say to social workers, and judges and yet still go right out and commit crimes).
For a similar reason, negative punishment won't work. If we take something away from them, then the reward for criminality increases as it can replace that which we've taken away.
Negative reinforcement is inhumane. We can't beat someone continuously, merely so we can stop when they do something we approve of. (Interrogators who use torture are quite at home with this as an option).
That leaves society one option: positive punishment. We must introduce something nasty when behaviour we don't want appears. In other words: prison. The puppy example above is why it is argued that prison won't work. It's nonsense. Positive punishment will work, provided the right association can be made. If we could tell the puppy "you must pee outside or you'll get a smack", then the puppy will work to avoid the punishment and will pee outside. In the case of humans we can explain exactly that. Positive punishment will be perfectly effective.

Positive punishment then is all we can use for humans; and it will work. It has to obey the behavioural modification rules though:

The punishment must be known to be a consequence of a particular behaviour. It must be consistent.
The punishment must be disliked.

Our justice is too arbitrary. Depending on which judge they get; or whether they can play the victimhood poker card on the day; the behaviour doesn't necessarily result in the punishment -- no association can be formed. Our justice system is failing on the first point. Prison is (relative to their life outside) too nice, so fails on the second criteria.

Reward good behaviour and punish bad behaviour. Is it really that hard?

Short Hindsighted

2012-01-21T08:00:00.000Z

Mark Wahlberg has said a stupid thing.

“If I was on that plane with my kids, it wouldn’t have went down like it did. There would have been a lot of blood in that first-class cabin and then me saying, ‘OK, we’re going to land somewhere safely, don’t worry.’”

Now; it is indisputably stupid because it's fairly disrespectful to the people who actually died in those planes, and he has a career dependent on being liked by the public. Further, Mark Wahlberg's presence wouldn't have made any difference; he would have behaved just as the other passengers did.

However, there is an important point that comes out of his attitude. That is that the only reason the terrorist attack on those flights worked is because there had never been such an attack before. Terrorists took over the planes using small knives. Not guns. Knives.

Given that we've all had time to digest what happened on 9/11, that we know the details, that we know what happened to the people on those planes; ask yourself -- "what would I do in their position now?".

The answer is obvious. A plane full of people, post 9/11 (that bit is important), would very quickly kick seven shades of living shit out of the terrorists. Why? Because they know they have nothing to lose. If they do nothing then the terrorists crash the plane into a landmark and everyone on board dies. If twenty of the passengers jump on the terrorist, at most two or three suffer some knife injuries. A plane full of people could easily overpower a small number of knife-wielding terrorists, provided they can be persuaded to try.

This is nothing to do with bravery; it is simply survival instinct. Having no frame of reference, those poor souls on the 9/11 planes probably hoped for the best. Hoped that the planes were (like most hijackings prior to 9/11) being rerouted and landed somewhere horrible, where they would eventually be rescued. Passengers would not assume that anymore.

Is it a surprise that no plane has been hijacked and rerouted since 9/11? Terrorists know that that would be a failing strategy these days. Unless you can get guns onto the plane (and even then I'd have my doubts), the passengers will assume this is a 9/11 repeat and will take any risk at all to stop you.

Mark Wahlberg isn't special; he's just like everybody else in the world now, correctly exercising hindsight. His mistake is in forgetting that hindsight isn't available at the time.

Fair Open Primaries

2012-01-20T09:23:00.000Z

Daniel Hannan and Margaret Becket were just on the Today programme debating the efficacy of open primaries. Daniel Hannan was, quite correctly, in favour; and Margaret Beckett wasn't (unsurprisingly, since she is a long term holder of a Labour safe seat).

Margaret Mary Beckett (née Jackson; born 15 January 1943[1]) is a British Labour Party politician who has been the Member of Parliament (MP) for Derby South since 1983

Open primaries are a good thing. Their job is to move power away from the party centre back to the constituents. In safe seats (and there are such things, regardless of what Margaret Beckett thinks -- let's consider the possibility of a Tory MP being elected in Glasgow/Liverpool/Manchester shall we?), the MP doesn't owe their position to the electorate; they owe it to the party -- since it is the party that assigns them that seat. With open primaries, there is a threat of losing your safe seat to a rival colleague. Excellent.

Margaret Beckett's primary objection seemed to be what she called "cross-party naughtiness". Revealing what a shallow individual she is she said that if the conservatives held an open primary in her constituency, she (as a Labour voter) would vote for the worst candidate.

Okay Margaret; I've got you covered on that one.

Here's the rules: open primaries are held on one ballot sheet... for all parties. All the Labour candidates, all the Tory candidates, and all the LibDem candidates go on the same ballot -- anyone who wants to run can run. The voter can only vote once.

Ta da. Where's your cross-party naughtiness now, Mags? For a voter to indulge in such nonsense, they have to forfeit their primary vote for their own party. That's their choice of course; but the point is that there is now a cost to such misbehaviour.

Cost was also mentioned as a factor. Well, if we're really struggling, why not make the above ballot, the ballot. Add an option per-party for "whomever the party would select", for those who aren't interested in their MP and a single vote can be both primary and election. (I accept that it would make campaigning a little difficult; but it's an answer to the cost problem, if it really is a problem).

There really aren't any good reasons that open primaries shouldn't be used. It won't happen though -- politicians love their safe seats; and political parties love the power that they can wield over a safe seat MP.

Work Subsidies

2012-01-19T12:12:00.000Z

Normally I don't have much of a problem with what Tim Worstall writes; but I'm surprised at today's defence of work benefits.

Here is the market value of labour. It is what it is. We don’t have monoposony at this end of the labour market. Retailers aren’t able to deliberately hold down wages. However, we as a nation, a culture, say that (however hard some of us scream that it shouldn’t be so etc, this is the general view) to be left to live on that market value of labour is unfair. So, we’ve a system by which we all chip in a bit from our higher earnings to send money to those with a low value to their labour.

This seems to completely misunderstand how a market functions, which is unusual for pro-market Tim (or perhaps I'm misunderstanding markets).

First, let's imagine that all subsidies are thrown away; and that there is no minimum wage and no out-of-work benefit.

Supermarket offers £1 an hour for bottom of the ladder menial job.
Potential workers compare £1 an hour with what they require to live. They find it lacking. In fact they find that it would not even cover the cost of them travelling to work.
Supermarket gets no applications at £1 an hour.
Supermarket offers £2 an hour.
etc, etc
Supermarket offers £5 an hour.
10% of potential workers calculate that they could live on this; and that they would be in profit.
Supermarket starts to get job applications. Posts still lie unfilled though.
etc, etc

Eventually the supermarket offers enough money that there are enough (acceptable) applicants to fill all the posts they require. We'll assume that the supermarket has found the minimum pay level; and as such there is no one in the job market willing to work for less than they are paying (otherwise the supermarket could pay less).

Supermarket competitor, Hypermarket, enters the fray.
If there is no one left in the job market willing to work for less than what 'Supermarket' is already paying, then Hypermarket will have to offer more to fill its required posts.
Supermarket employees, seeing the higher wages available at Hypermarket, start to jump ship.
Supermarket has to match wages with Hypermarket to keep staff.

Ta da. Wages are set, in the end, by what your employee could earn elsewhere. It's not the job they're in that sets their wage; it's the job they could be in.

Let's assume that the wage this market process found was £6.50 an hour. By definition, there is no one left in the market willing to work for less than this, because the supermarket would rather pay them that lesser amount but can't find anyone who will accept less. Let's, for the sake of argument, assume 100 thousand employees in the sector. The total wage bill of all supermarket employees (at this level) is therefore 100,000 * 6.50, or £650 thousand.

Enter the in-work benefit of £1 per hour subsidy.

Out-of-work-Alice, who is unwilling to work for £6.49 an hour hears that the government will hand over an additional £1 an hour top up.
Out-of-work-Alice, being rational realises that she can offer to work for £6.49 at the supermarkets, since the £1 top up will let her take home £7.49.
The supermarket is delighted, and fires Got-a-Job-Bob, replacing him with cheaper Alice.
Lather, rinse, repeat.

The sector's wage bill is now 100,000 * 6.49, or £649 thousand.

Bob recalls that he was, before the subsidy was introduced, surviving perfectly acceptably on £6.50 take home pay. With the £1 per hour subsidy, he was taking home £7.50 and was replaced with someone who took home £7.49.
"Sod that, I want my job back"; Bob is now willing to work for £6.48 plus subsidy. Alice is fired, and Bob gets his job back.
Lather, rinse, repeat.

The sector's wage bill is now 100,000 * 6.48, or £648 thousand.

Lather, lather, rinse, rinse, repeat, repeat.
This process can go on and on; until the original balance point between minimum acceptable by the employees is reached. i.e. that they take home £6.50 per hour.
The difference of course is that that is made up of £5.50 per hour from the supermarket, and £1 per hour subsidy.

The sector's wage bill is now 100,000 * 5.50`, or £550 thousand. The subsidy is £100,000. The subsidy has not gone to the employees; it has gone into lowering the employer's wage bill.

Competition being what it is; that lowered wage bill is unlikely to take the form of profit. Instead it will take the form of lower prices.

Thing is though, you can see many people nodding their heads when this “benefits are subsidies to corporations” line being trotted out. And what’s needed is some punchy point to show the absurdity of it. Which I’ve not really found yet.

Colour me unsurprised. Tim has not found a snappy counterexample because it is a subsidy to corporations.

Worse, once it's introduced, it cannot be removed without seriously hurting the lowest paid. The lowest paid could happily cope during the adjustment period while their take home went from £7.50 down to £6.50. They will not cope during the period that take home goes from £5.50 back to £6.50. They will, in fact, quit. Resulting in sudden, massive, unemployment.

If in work benefits are a subsidy to employers, then out of work benefits must be a subsidy to unemployment?

Yes; of course they are. Was that ever in any doubt?

This is so out-of-character for Tim, that I wonder if he's being contrary for the sake of rhetoric.

There is a get out clause.

A lower wage bill is unlikely to be turned directly into profit. Competitive forces mean it will end up as lower prices. In-work benefits are therefore a subsidy to lower prices. Lower prices are a benefit to poor people more than to rich people; and the subsidy is paid more by rich people than by poor people (even for a flat tax rate, rich people pay more absolute tax). We can therefore argue that the in-work benefits are a subsidy to prices for poor people.

However, an in-work benefit is a convoluted and crap way of achieving that. Why not just take the subsidy and use it to raise the tax free allowance, to whatever level of benefit you want to give the poor people.

In short: whichever way you look at it, in-work benefits are a waste of time and resources, and the end result can be achieved more directly, and with lower wastage by just altering the tax free allowance.

(Or even better of course; scrap the tax-free allowance and introduce citizen's income; and then even the unemployed poor get a share).

Power Planning

2012-01-18T16:04:00.000Z

Some observations about HSR2 and airports.

HSR2 is going to cost £40 billion (at least). A part of that is going to buy (effectively) the planning permission component of people with houses on the route.
HSR2 is also going to gift a load of location value to people with houses near the route.
What is the location value of Heathrow airport?
What would be the location value of houses built at centre-of-London densities on the area currently occupied by Heathrow airport?
What is the location value of land not currently used for an airport in the Thames estuary (given that no planning permission for it has been granted)?
What would be the value of land with planning permission for an airport in the Thames Estuary?
What would the landing slots at a new airport be worth?

It seems to me that waving a magical government planning wand to convert low value "not an airport" land into "can have an airport on it" land, and then selling it to an airport developer would raise quite a lot of money, without needing to spend any at all.

It also seems to me that an additional charge could be made for the landing slots at that new airport; raising another load of money without the need to spend.

Why are we even considering a railway line where all the money flows from public-purse to land owners; instead of an airport where all the money flows from land owners to public-purse?

We've not even considered the fact that an airport, which increases international trade, would be considerably better for the British economy than an internal-only railway line duplicating functionality we already have.

Bitcoinica Margin Trading in Action

2012-01-18T08:00:00.000Z

I had planned to write an article about how margin trading works in practice in the bitcoin world on the Bitcoinica site. Exciting events that happened last night have morphed it into the story of a margin call.

Let me explain: bitcoins were trading at around $6.5; Bitcoinica was known to have run out of reserves for buy-side hedging (it had stopped allowing people to go long). Someone with deep pockets decided to take advantage of those who were over-leveraged on Bitcoinica. They sold an enormous number of bitcoins that ate up all the open bids in the Mt.Gox order book. More importantly though, those who were long on Bitcoinica started to show losses.

Those who were leveraged at 1:1, were probably fine (even a sell off that massive wasn't enough to move the bitcoin price by 96%). Those trading at 1:2.5, could have scraped by if they had enough funds on deposit. Those at 1:5 and 1:10 had real trouble though.

The huge price drop (remember at 1:5 and 1:10 leverage the drop is scaled up from their point of view) pushed them below their margin call threshold, and their positions were force-liquidated. That liquidation is done by selling on Mt.Gox, which in an already cleaned out order book, lowers the price more. Read that again: one big sale started a margin call, which triggered more sales, which lowered the price more, triggering more margin calls, which triggered more sales, and more calls, etc. Positive feedback. Bitcoin prices dropped to $4.64 at their lowest.

Seeing a huge opportunity to buy cheaply (bicoins were not fundamentally different at $4.64 from what they were when they were $6.5), speculators started buying, and the order book quickly filled back up and the price shot upwards again. Let's go back to the start. When prices were $6.5 -- some speculators had anticipated a drop and had gone short, and had (like those going long) over-leveraged themselves to do so.

One trader boasted about how much money he'd made being short. He did so by posting a screenshot of exactly how much he was leveraged and how much he'd paid for that position. There is a suggestion that the naughty deep pockets saw that and saw another opportunity. The deep pockets, plus the rush to buy cheaply meant the price stormed passed $6.5, to $6.9. Those who had a highly-leveraged short position experienced a margin call, force liquidating them too; including the boaster, who saw his highly leveraged profits vanish as quickly as they had appeared (he's now claiming he's been defrauded).

I think the above is all marvellous. Why? Not because people were wiped out; it's cruel to take pleasure in the misfortune of those who were, after all, doing nothing to harm me. That doesn't mean they were wise though -- leveraging is great when the market moves your way; but it's so easy to forget that downturns can wipe you out. I feel sorry for them losing their money; but I wouldn't return it even if I could (which is what regulated markets try to do). No, I am pleased because it has shown the good functioning of a free market.

Being a small market, it doesn't take impossible sums of money to move it. This was possibly the biggest (genuine, not due to a hack) single day movement in bitcoin's history. It didn't crash to zero.
When the market hit bottom at $4.64; there was no avalanche of panic selling that you would get in a bubble. In a bubble, everyone knows that the security is overpriced, so any drop at all results in a drop to zero as everyone cashes out. The high speed drop in this case was down to automated liquidation of margin trader positions. What is interesting is that when that was over, what happened? People started buying, and buying fast. That is hugely indicative of underlying confidence.
Bad investments were cleared out. Just as recessions play a necessary role by weeding out the bad investments, freeing up capital for use in good investments; this crash cleared out those who were over-leveraged long, and those who were over-leveraged short. Let's remember that leveraging is borrowing. There was a little credit bubble forming in the bitcoin world, and the market took a chainsaw to it.
A swing such as this has left the market, unsurprisingly, a little skittish; and it is still volatile as a new, deleveraged, price is found (given that all that leveraged money has been withdrawn, we'd expect it to be lower). But importantly -- that price is being found. Markets have one job -- price discovery -- and it's happening exactly as it should.

Margin Trading

2012-01-17T10:06:00.000Z

I've been reading a lot about a relatively young bitcoin trading site, Bitcoinica. It's different from the bitcoin exchanges, like Mt.Gox, in that it supports margin trading. While I have a broad understanding of what margin trading is; I don't know the details or the terminology. As usual, when I don't understand something, I write a guide about it. That usually helps. Here we go then. I'll write in the context of trading between bitcoins and dollars, but obviously the principles are the same whatever is being traded.

Broadly, margin trading solves two problems:

You own only dollars, but want to profit from your opinion that bitcoins will decrease in value. If you owned bitcoins you could sell them for dollars; but you can't sell something you don't have.
You own only bitcoins, but want to profit from your opinion that bitcoins will increase in value. If you had dollars you could buy bitcoins; but you can't buy something you can't afford.

The markets came up with margin trading as a solution to these problems. The two main types of deal leave you in two positions:

Long, where you expect prices to rise.
Short, where you expect prices to fall.

Deals of this sort are handled by using what you own already as collateral for a loan of the security you do not own. This collateral is called the "margin".

The ability to go "long" doesn't really change much for a trader in terms of facilities (although there is more to say about margin trading below); going "short" is a significant change though. Shorting has got itself a bad reputation -- it is blamed for stock market crashes. It doesn't deserve that reputation, shorting is actually an enormously stabilising influence. Last year, bitcoin prices experienced a bubble. The problem with bubbles is that they are self-reinforcing; buying drives prices up, which makes your investment profitable. A profitable investment attracts more investment, and more buyers drive the price up more, making it look even more attractive. Investing in a bubble is rational. Until the party stops.

Financial bubbles are positive feedback in action, and we know that positive feedback leads to instability. Positive feedback reinforces any output, making the output larger, and the feedback larger. Quickly the output of a system with positive feedback hits the physical limits of the system, and crashes back. That crash is itself reinforced so the system sets off full tilt in the opposite direction. In the case of a bubble, the price of the commodity hits the limits of reason -- it cannot be worth as much as its trading for. Everyone knows that day is coming, so any downturn is as magnified as the upturn was as all traders rush to get out. Voila, financial crash.

What we need for stability is negative feedback. Negative feedback moves to oppose any change in output. All stable systems incorporate negative feedback. When a high temperature activates your thermostat, the heating is turned off -- i.e. the movement is opposed. A pendulum moved from its centre experiences gravitational forces pulling it back to that centre. Financial systems then are more stable if the market can profit from stopping a bubble. Shorting is the mechanism.

Let's have an example of shorting. Let's say Alice owns 100 bitcoins and Bob owns $500. Bitcoins are now trading at $5. Bob believes that $5 is overpriced; Alice believes $5 is underpriced. Bob cannot sell bitcoins and then them back after the price falls because he has none to sell. Alice cannot buy more bitcoins, as she has no dollars. Each of them has what the other wants.

Bob offers his $500 as margin to Alice if she will loan him her 100 bitcoins.
Bob instantly sells those bitcoins for $500, enabling him to express his view that bitcoins will fall in price. (Note: Bob going "short" equates to a sell, which drives prices down).
If they do fall in price, say to $2.5, then Bob can buy 100 bitcoins for $250. He can return those 100 bitcoins to Alice to repay the loan, and keep his $250 profit. He started with $500, and ends with $750.
If he is wrong and they rise in value, say to $10, it will cost him $1000 to buy 100 bitcoins. He will have to use all of the $500 he loaned, and all of his margin. He started with $500 and ends with $0.

Clearly, if the price goes higher than $10 then Bob has a negative net balance; margin trading systems therefore limit the loss you are allowed to make. For example, the system might have rules that Bob must turn his dollars back into bitcoins if he has lost 96% of his margin. This is a so-called margin call. It essentially means you are wiped out. The 4% saved is there to act as a buffer in a fast moving market.

What about the other way around though? Alice wants to go "long".

Alice offers her 100 bitcoins as margin to Bob if he will loan her his $500.
Alice instantly buys 100 bitcoins with that $500. (Note: Alice going long equates to a "buy", which drives prices up).
If bitcoins go up in price, say to $10, Alice can sell 50 of her 100 bitcoins to get $500 to return to Bob. Alice started with 100 bitcoins, and ended with 150.
If bitcoins go down in price, say to $2.5, Alice has to sell the 100 she bought, and her margin to get $500 to return to Bob. She started with 100 bitcoins, and ends with none.

Again, a margin trading system will monitor the price, and the margin Alice offered and will force her to liquidate if she has lost 96% of her margin.

Can we combine these two states at once?

Alice loans Bob 100 bitcoins, and Bob loans Alice $500.
Alice instantly buys 100 bitcoins with the loaned $500 (and is owed another 100 bitcoins)
Bob instantly sells the loaned 100 bitcoins for $500 (and is owed another $500)
If bitcoins go up in price, say to $10, Alice could sell 50 to get $500 to return to Bob. The $500 Bob is holding will only buy 50 bitcoins to return to Alice, and Bob will still owe Alice 50 bitcoins of the 100 she loaned him. Fortunately, Alice owes Bob $500, and has it -- at $10 per bitcoin, the two debts cancel out. Bob is left with nothing, Alice is left with 150 bitcoins; just as they were in the separate cases. Note: if the price goes higher than $10, then Bob has insufficient assets to cover his liabilities; so Bob must be liquidated before then.
If bitcoins go down in value, to say $2.5, Bob can buy 100 bitcoins with $250 of the $500 he is holding, enabling him to repay Alice with $250 left over. The 100 bitcoins Alice is holding are only worth $250 to repay Bob, and Alice will still owe Bob $250. Fortunately, Bob owes Alice 100 bitcoins and has them -- the two debts cancel out. Alice is left with nothing, and Bob is left with $750. Note: if the price goes lower than $2.5, then Alice has insufficient assets to cover her liabilities; so Alice must be liquidated before then.

Consider Bob; what he did was to leverage his $500 to get him $500 worth of a security. This is 1:1 leveraging, for every dollar he owned, he was able to borrow another dollar. When bitcoin prices went up so much that his loaned dollars no longer covered his loss, he was liquidated. However, there is a balance between Bob's liquidation threshold and how much he borrowed; there is no reason that they have to be equal. Let's say Bob only had $100.

Bob offers $100 as margin on a loan of 100 bitcoins. At $5 each, that gets him $500.
If bitcoins go down, to say $1, Bob can repay the 100 bitcoin loan for $100. Allowing him to keep $400. He started with $100 and ended with $500.
If bitcoins go up, to say $6, then the $500 Bob is holding will only buy 83.33 bitcoins. He will have to use his $100 margin to make up the shortfall.

See the difference? Bob's profit was as much with $100 this time as it was with $500 previously. However, the threshold at which he is liquidated has changed from $10, to $6. He is at much higher risk with a small downturn in the market. His profits were scaled up, but so were his losses. At 1:1 leverage, he lost 100% only if the price went as high as $10; at 1:5 leverage, he lost 100% if the price went to $6.

Obviously there are more than two participants in the market, and matching shorters (usually called bears) with longers (usually called bulls) is not 1 to 1 as I described with Alice and Bob; effectively each participant loans from "the pool", and puts their margin in "the pool" as collateral. The trading platform is balancing two pools: a pool of bitcoins and a pool of dollars, just as an exchange does with its bids and asks. The complication is that those pools balance on the market price, not 1:1. A further complication of course is that bid and ask prices are different.

Bitcoinica runs a complicated algorithm for doing all this. I can't say I entirely understand it. Further, to get the market flowing, Bitcoinica itself supplies some liquidity when the net shorts don't match the net longs by maintaining its own reserves of USD and BTC and then hedging using a standard exchange. If the market sentiment is, say, strongly long, then it's perfectly possible for there to be no speculators taking a short position to balance those longs, and for the reserves at Bitcoinica to run out.

This is indicated by a "no reserve" status on an order, and by a "*" next to the price indicator. When that happens: it's tough luck, there is no one willing to accept your offer to trade. (FYI: it took me a while to find out, but the little superscript numbers don't mean anything, they are simply an extra digit of the price written little).

Right now; Bitcoinica is permanently starred on longs. That tells you that Bitcoinica users are heavily biased towards expecting growth. Make of that what you will.

Captain Controllers Moneybin

2012-01-16T10:22:00.000Z

Apparently (if you read Dutch), Belgium is to begin implementing capital controls. Cash transactions over €5,000 are to be illegal.

Italy is having a "Transactions exceeding 1,000 euros must be electronic" law.

Don't be surprised to see more of these laws; in more countries. I don't expect the UK to be immune. I also expect it all to be in the name of "fighting the war on drugs", "combating terrorism", or "preventing tax evasion". That's all excellent; I'm almost certain that people who are already criminals, as with gun laws, will be bringing themselves into full compliance. I say "almost certain", I mean "hahahahahahahahahahahahaha, in your dreams window lickers".

If you would like to retain use of your own money, to transfer in whatever quantities you wish, to whomever you wish, then it's time to start buying a stash of bitcoins.

Cap In Hand

2012-01-13T15:27:00.000Z

The benefits cap:

Every pound that the state spends has to be earned by someone, somewhere.
£26,000 as a benefit is £35,000 as a gross salary.
£35,000 as a gross salary comes with an additional parasite tax of £4,500 in Employer's National Insurance.
"The welfare cap boils down to 'poor people shouldn't live in nice places'" -- Steven Baxter. I'm sure he meant "poor people can't afford to live in nice places". Or "people living at another's expense shouldn't live better than those who are paying the bill". And since when did "poor" become equal to "jobless"? There are plenty of poor people who are going to work. Why shouldn't they live in nice places? Steve?
What is it about houses that make people lose all sense of reality? The above logic can be continued, "The welfare cap boils down to 'poor people shouldn't drive Ferraris'"; or "poor people shouldn't own rare works of art"; or "poor people shouldn't holiday in the Maldives". The idiocy of such thinking is obvious when not talking about houses.
Only in the mind of a London-based leftie would "crap house" equate to "less than £26,000 a year". I guarantee that those being paid more than £26,000 a year now, and who are about to get cut, are living in the South of England. I further guarantee that they could move to a larger, NICER, dwelling in the North and end up with more free cash than they have now.
I could live, quite comfortably, on net £26,000 a year without changing my lifestyle very much at all. How can that be? What advantage then am I getting from going to work over carefully positioning myself on benefits? Nicer house? No. Nicer car? No. More leisure time? No. Less stress? No. More time to spend with the (non-existent) children? No. I'm feeling a little like I must be insane for going to work; what am I doing?
If you aren't working, why is the location of your abode important?
If you aren't working, your presence in an area is increasing demand for housing and is driving up rental prices for those not being state funded. Not only are they paying for you, they are making their own costs higher.
The response to every leftie objection to a benefits cap is this: THEN THEY CAN MOVE CAN'T THEY? Every objection is based on the assumption that people who live in the South East of England and claim benefits should never have to move, ever. While people who live in the South East of England and do not claim benefits should move constantly to worse and worse accommodation to cover any increases in rent that those on benefits do pay.
The benefits cap, while morally valid, is economically a waste of time. It's introduction saves us a piddling little amount.
If we were going to do something... 30% of disability benefit claimants stop claiming when they are asked to attend a medical checkup to validate their disability claim. That's just by sending a letter -- you don't even have to do the checkup.

Physical Bitcoins

2012-01-13T08:00:00.000Z

I bought a couple of physical bitcoins; more for their potential future nostalgia value than to use as money (I'd rather use Bitcoins electronically). They're very nice.

It was also my first purchase of something using bitcoins. It was simplicity itself.

I already had a few pounds in Intersango. Depositing from a UK account takes a day and is free.
I put bid offer in to convert my pounds to bitcoins.
On the Casascius page is a simple order form. I filled it in and push "get address" button. That created my order, but left it unpaid for, and issued me a bitcoin address to send payment to for completion. I also got an email with this address in it.
Back to Intersango and I pushed the "withdraw" button, cut and pasted the address from Casascius into the appropriate field, filled in the amount and voila, payment done.
As usual with online purchases, receipt email, tracking email, etc, etc all start flowing. Very nice; all as I'd expect.

Key things to note:

I could have paid from any bitcoin source I control; an online wallet, any exchange, my mobile, whatever.
Payment is a "push" process. That is to say I, the payer, sent the payment to the payee. This is counter to normal online payments, where the payee "pulls" payment from my card supplier using the semi-secret information I give to the payee. Do you see the difference? The payee has to be trusted to take the right amount; the payee can retain that secret information and "pull" again whenever they like; the payee can store that secret information insecurely, putting them at risk. With bitcoin the payee just receives the money; they don't get told any secrets.
The payee can be confident that the money received is real. There are no chargebacks with bitcoin. You might not see this as a good thing, but the merchant does and can reduce his prices accordingly. Given time, a payment insurance company will spring up. Maybe upon purchase you'll be offered two payment addresses, uninsured: X BTC; insured X+3% BTC. The market will sort that out.
Notification that payment has been authorised (equivalent of a card in a chip-and-pin machine) happens within 10 seconds.
Payment, actual, genuine payment, not just the promise of payment from a card machine, happens in about 10 minutes. That money is cleared from the banking system.

I should say a little bit about how the physical coins work. Remember, bitcoins actually work by transferring value from account to account. Your bitcoin address represents the target that someone can pay; it is a public key to which only you have the matching private key. The private key is what gives you ownership to the account, and hence control of any coins sent to that account.

The physical coins then are made so that there is a little cut-out in the coin. A private key is printed out (and we assume an honest minter has only that one copy of the private key) and placed inside that cut-out. A tamper-indicating hologram is created with a small window in it. The matching public key is placed in the cut out in the coin such that the private key is hidden, but so that the public key will be visible through the window in the hologram. The hologram is then stuck to the coin. You end up with a coin that has a public key visible on the back of it, with a private key hidden, but accessible if you were to pull the tamper-evident hologram off. The public key is then loaded with the face value of the coin.

Any coin recipient can now do two verifications:

Check that the tamper evident hologram has not been peeled and restuck. These are pretty reliable, and are designed exactly for this purpose.
Type the public key into any block explorer web site and confirm that that key has the face value of the coin.

The second of these checks is a check of the honesty of the minter. The guy, Mike Caldwell, making these Casascius coins has given his name and address out publicly and would be libel to criminal charges if he did spend these coins. He states that the private keys were known only to him, and that he supervises every installation of one in a coin.

I, as a receiver of one of these coins, having made these checks can believe that I hold something that can spent electronically to the face value of the coin. If I wished, I could peel the hologram (invalidating the coin, because no one will subsequently accept it), type in the private key and transfer the value to any address I wish. That would defeat the purpose of these coins though: which is a physical manifestation of that virtual value. There is no point in peeling the hologram, it would be better to simply trade the coin for a non-physical coin.

To be honest, I don't see a huge future for physical bitcoins, they are novelty items only; but they are lovely novelty items for we early-adopters of bitcoins.

The potential scope for fraud:

What stops a counterfeiter using the same public/private key pair for a thousand coins, and then using the time between issuance and discovery to head to the bahamas? This is effectively fractional reserve coinage -- more than one person owns the same value (that this situation is so obviously fraud tells you a lot about fractional reserve banking).
What stops a counterfeiter copying the design of a reputable minter and abusing that design to make their own, less trustworthy coins?

Bitcoin Babysteps Revisited

2012-01-12T12:19:00.000Z

Since my 'Bitcoin Babysteps' series, the world of Bitcoin has moved on; and my advice for a new user is different now.

First, the news:

Bitcoins hit $30 in June 2011
A chap called 'allinvain' had about $500,000 worth of bitcoins stolen from his home computer (it seems likely that he foolishly used the same passwords in multiple places, and was uploading his wallet unencrypted to dropbox; I'm not sure I have a lot of sympathy).
The biggest bitcoin exchange got hacked in July 2011. They were never really clear; but it sounds like the attacker used SQL injection to get read-only access to the passwords database. A few users had easy-to-crack passwords and lots of bitcoins. The attacker wanted cash and so sold hundreds of thousands of coins in one go; at any price. This caused the reported price to crash from around $19 to $0.01. Fortunately, the withdrawal limits at Mt.Gox prevented the thief from getting away with millions -- a few thousand was all that was lost. Mt.Gox shut down for a few weeks to do an audit, and rolled back the trades performed by the hacker, and covered the small losses out of their own pocket. While it wasn't a shining example of technical ability; it was handled fairly professionally. Upon reopening, trading settled at around $17.
The Polish bitcoin exchange, bitomat, accidentally deleted the file that held their users bitcoins. Duh. They had to declare bankruptcy as they could not cover the losses. Capitalism stepped up to the plate though; Mt.Gox bought bitomat and took the losses on in exchange for the business (which to be fair was pretty good).
The online-wallet service, MyBitcoin, announced that an attacker had found a way to drip-steal coins and closed down. It subsequently paid 50% of deposits back. There is a lot of doubt about how true this story is; and the proprietor, Tom Williams, is now the subject of a lot of questions, and has vanished. There are now a lot of very smart people tracking him down and the public nature of the blockchain has revealed that the announcements weren't necessarily true.
The Bitcoin network itself (which is completely separate from the services provided by the above companies) carried on working exactly as it was intended. Despite there being obvious attention from evil-doers, no attack has yet succeeded against the block chain itself.
Bitcoin prices, on the back of the above negative publicity, continued a long, slow slide; bottoming out at around $2 in November. At which point, a "floor" seemed to appear. There was enough faith in the project itself that the price steadfastly refused to drop below $2 (for long). It seems that the finding the presence of a floor was enough to restore some faith -- if there is a floor, then the risk of collapse to zero is reduced. Prices started to increase.
Over the holiday period prices jumped from $4 to $6; and are this week nipping at $7.
There is a "Bitcoin booth" at this year's CES.
There is a Bitcoin-based episode of The Good Wife airing this Friday in the US.
The bitcoin application now has a rewritten GUI, and is much more pleasant and professional looking.
The bitcoin application now supports wallet encryption. That means even if someone broke into your computer and stole your wallet file, that they can't get at the keys in it without your password. (This would have protected allinvain above.

I expect that there will now suddenly be more interest in getting started with Bitcoins. While a lot of the information in my 'babysteps' articles is still valid; the simplified, "what should Joe Bloggs do?" parts aren't. This post is meant to address that.

The key thing for getting started is this: online wallets.

I previously pointed at MyBitcoin as a simple online wallet. Obviously, given its collapse and the potential theft, I no longer think that that's a good place to go. If you wanted a quick online wallet of this form, then InstaWallet will work fine, as, in fact, would either of Intersango or Mt.Gox. Not so fast though.

The failure of MyBitcoin has given a push to some new developers to go a step better than an online wallet. User-controlled online wallets. The problem with MyBitcoin (and others like them) is that you are depositing money with them. It's out of your control. When you run your own bitcoin software, it is impossible for anyone but you to transfer them. The important bit of control is the private keys. These newer wallets are doing something special, that makes them comparable with a personal bitcoin installation: they don't keep a copy of private key -- you do. Kind of.

Let's take blockchain.info/wallet as an example. It stores an encrypted copy of your private keys. However, it doesn't store, or even know, the decryption password. Instead, when you go to the website, your browser downloads that encrypted copy and entirely in your browser, on your computer only, you enter the decryption password and the private keys are available to you.

This is a huge step forward, the only thing the website knows about you is a randomly generated identifier that is created when you first connect. It's essentially a big URL, that you store and gets you (or anyone with that URL) access to the encrypted wallet. The encrypted wallet only. It doesn't matter who has that encrypted wallet, the website, an attacker, anyone who manages to sniff your web traffic enough to see the URL. You could (but don't), broadcast that encrypted wallet to the world. It is only useful when combined with the secret password you select when you create the wallet. Some clever JavaScript in your browser then decrypts the wallet as needed.

There is still risk. The software for doing the decryption and wallet management, is all provided by the site operator. There is, in principle, nothing to stop them from changing that software to send a copy of your password back to their website. However, that risk is mitigated by these points:

You can independently check that the javascript you get is the same this time as it was last time; you simply download it and hash it. There are enough interested parties though that you don't have to do this.
The site operator's name and address (he's UK based) are known.
The source code for the wallet management has been published as open source software. It can be examined for back doors.

None of these are 100% guarantees, but they are enough that I would risk my current-account money to it. I'd still keep my savings (if Bitcoin ever develops to the point where current-accounts/savings in bitcoins are relevant) in my own personally-controlled system though.

For your Android mobile, there are now full wallet implementations. I personally think they are overkill, and far too resource hungry for a mobile device. But the option is there. I prefer instead a mobile wallet with server support. There is one called BitPay, which is simply an interface to InstaWallet. However, that suffers the "not under my control" problem, that the website does. It's certainly usable, but I wouldn't trust more than a few tens of pounds worth to it (and the operator of InstaWallet says the same: it's not a bank). Better, in my opinion, is BitcoinSpinner. This operates on a similar principle to the blockchain.info wallet I described above: the private keys are held only on the mobile phone and a server acts to do all the hard bitcoin work after you sign transactions locally, making it impossible for the server operator to spend/steal your coins -- they are effectively on your phone only. This has the additional advantage over blockchain.info that the application is downloaded only once, not every time you connect. It is also open source so can be checked for faults.

Recommendations then for a new user:

Download BitcoinSpinner.
Get a blockchain.info/wallet account.

There is enough security there to begin with. Both these applications offer backup facilities which you should use to protect you against theft of your phone, or forgetting of URLs. If you've previously commented on this blog, I can even be persuaded to just send you a coin.

As to buying a few bitcoins, the site I recommended previously, Britcoin, is still going strong but has had a massive overhaul and expansion into other currencies and is now called Intersango. It's fee-free for now (they seem to be more keen on growing Bitcoins than making money. The operator, Amir Takki does an awful lot for the Bitcoin community).

Once you've bought a few coins you can either stash them away, or try and profitably trade with them. Bouncing back and forth between USD and BTC is probably best done at the largest exchange, Mt.Gox. Profiting from day trading like this is possible (although I'm very bad at it). Profiting from arbitrage between exchanges is even more possible and is mostly risk free. My suggestion is to buy a few and hold them long term.

I don't want to sound like a zealot; I really don't care what you personally do. I am offering this advice as I would to friends (and have done). I base my anticipation of its growth on these points:

Bitcoin is technically resilient. It's worked exactly as it should although the turmoil of last year.
Bitcoin is filling a financial niche: decentralised money is very attractive. A bit of competition for the financial industry can only be a good thing.
Bitcoin market cap (Number of coins * current price, about $55 million) is less than it would cost to buy a typical Cineplex.
Western Union transfers about $150 billion dollars a year. At current volumes (97k bitcoins in the last 24 hours), Bitcoin is transferring $35 million a year.
Paypal transaction volume was over $100 billion in 2011.
Estimated money in the world (by some measures, it's not an easy question) is $40 trillion. Bitcoins represent 0.0001% of that at present.
Estimated daily volume on the FOREX markets is (a staggering), $4 trillion. Or $1.04 quadrillion every year. Even the tiniest percentage of numbers that large are still enormous.
Government fiat is dying. It didn't have to, but it's being dragged out to the woodshed with a shotgun as we speak. Those printing presses are rolling all around the world. Gold is a reasonable hedge, but performing actual commerce with it is not so convenient.
Bitcoin is often accused of being a Ponzi scheme. No. Ponzi schemes don't bounce.

To my mind, there is potential for growth there. Buy one today for $7 and it might be worth $1,000 in five years. What have you risked? $7.

Bitcoin Backtracking

2012-01-11T16:25:00.000Z

Ars Technica is doing a bit of backtracking on their Bitcoin stance. You see they had previously called the death of Bitcoin. The recent recovery of bitcoin prices (you did all buy a load when I said they were $3 and climbing didn't you? You'd have made 150% by now; they're hovering around $7) has thrown a spanner in their "bitcoin is doomed" narrative. To be fair, they admit that.

This presents a bit of a puzzle for Bitcoin skeptics. The original run-up in prices could easily be explained as a speculative bubble, and the subsequent decline as the popping of that bubble. But if that were the whole story, then the value of Bitcoins should have continued to decline as more and more people lost confidence in the currency. That hasn't been happening.

The story has to change therefore; they still don't like Bitcoin, so we get:

Bitcoin is a bad currency

But they grudgingly admit

While Bitcoin isn't a very good currency, it has the potential to serve as a "metacurrency": a medium of exchange among the world's currencies.

The problem with Bitcoin has been (and will be for a while yet) one of foresight. Those who are in favour can see how good all its feature will be in the future. None are really arguing that it is an appropriate currency right now -- it's far too volatile. But it will build, little by little.

The first stage was getting some liquidity into the market. The potential high rewards for early adopters seems to have achieved that; certainly to the level sufficient for small commerce to take place.

That liquidity makes it possible for stage two to begin: trade, using the bitcoin system as a proxy for trading existing currencies. This is the what Ars Technica has labelled "metacurrency". That it can be used to transmit value. They can only see that as useful as competing with Western Union. Basically they are saying, "well, bitcoins might end up useful for money transfer, but that's it".

What they're not seeing, is that a successful stage two will inevitably lead to a stage three. That's were the foresight is required.

Imagine that bitcoin gains broad acceptance as a money transfer mechanism. Millions of dollars are moved from A to B, or from B to A. Think about what is necessary for money to move via the Bitcoin system:

A has dollars and uses them to buy N bitcoins (with N depending on today's price).
A now has bitcoins and uses the bitcoin network to transmit them back to his homeland, Poland, and his family, B. This takes 10 seconds to transmit; 10 minutes to confirm; and probably 60 minutes to clear (depending on the house rules of the receiving exchange).
B has N bitcoins at a polish bitcoin exchange; he sells them for Polish Zloty at today's exchange rate. We'll assume, thanks to the well-entrenched speculators from stage one, that arbitrage means that the USD/PLN exchange rate is implicitly obtained (if the rates don't balance, then there is profit to be had by buying on one exchange and selling on another, hence they very quickly do balance).

What we've missed though is C and D. D wants to send Zloty to C at the same time. Exactly the same sequence occurs as above; but with all the buying and selling reversed. D effectively buys bitcoins from B in exchange for Zloty. C effectively sells bitcoins to A in exchange for dollars.

Scale this up, and up, and up. The speculators on the exchanges are now a significantly smaller percentage of the day-to-day trade. As more and more money is fed into through the system, the price of bitcoins goes up and up. More importantly though, the price becomes more and more stable. A higher price is harder to move because it requires more and more fiat currency to make a given percentage change.

What happens next then? Let's rack our brains considerably more than Ars Technica have. The merchants are safer... the merchants see that the day-to-day price of bitcoin doesn't change as much as it used to. In fact, the money-transmitting market is so large that the merchants start to feel safe in holding bitcoins for a while; they're not worried about instantly converting back to fiat currency.

Welcome to stage three; the inevitable result of a successful stage two. Merchants holding bitcoins for longer pushes the price of bitcoins up some more. As more and more merchants feel more and more secure, they (in aggregate) gradually remove their offers to sell bitcoins from the exchanges. That lowers supply, and hence higher prices are needed to balance the supply-demand scale. Bitcoin prices go up more, making it even harder for a given amount of fiat currency to affect it.

Obviously the merchants will eventually trade for fiat, as their needs require it. However, the fact that they are holding bitcoins safely for longer periods will eventually result in stage four.

Stage four is inevitable when stage three is successful. Alice sells computers for bitcoins, Bob sells hard disks for bitcoins. Alice buys hard disks from Bob for USD, but "metacurrency"-style, makes the transfer using bitcoins. What did stage three imply, again? That merchants are holding coins for longer; and that the exchange rate is stable. In that case, why can't Bob quote Alice a price in bitcoins instead of dollars? If Alice sells a computer for bitcoins, why will she bother converting all of it to dollars when she knows she's going to send bitcoins to Bob?

Bitcoins are now a currency.

The stages I've described obviously wouldn't be as clearly delineated as I've described, the whole process will be incredibly organic and gradual. I'm also not arguing that these steps are guaranteed. Simply that if one stage is successful, the next stage will successfully begin. Ars Technica is saying that Bitcoin could operate successfully as a money transfer mechanism. I argue then that Bitcoin could operate as a currency. You can't have "potentially a metacurrency" while excluding "potentially a currency".

It might not happen, but it's not as written in stone as "Bitcoins are a Bad Currency" would have you believe.

HS2

2012-01-11T10:34:00.000Z

I can't really get worked up about HS2; it's just another example of foolish vanity spending by a cookie-cutter government. It shouldn't be a surprise that HS2 was Labour's idea, nor that the Coalition government are happily trundling along with it: of course they are, they're all the same party.

Some observations though:

There will be widespread moaning about destruction of natural beauty. This despite the fact that rail tracks through countryside can be quite attractive features. It's going to be what, a 10m strip?
Those who live in the proposed path will be rubbing their hands together. They're planning on some lovely compensation. The value of their land just shot up with no investment on their part.
Those who live near the proposed path will be rubbing their hands together. Being nearer a transport link to London has just gifted them a big fat boost to their property value with no investment on their part.
£32 billion is almost certainly an underestimate (Cough Olympics cough). It's more likely to be double that.
Completion of stage one is scheduled for 2026. Let's say they start in 2014. £32 billion over 12 years is £2.66 billion a year. It barely registers on the profligacy scale that is our government.
The £32 billion, for some reason, doesn't count as increasing the deficit. Back in the real world, we'll notice that it still has to be paid for; and given that there is no money in the pot, that means it has to be borrowed (~2% say); let's then say it takes at least as long to pay back as it takes to build. (1.02^12 * 32 =) £40.5 billion when you add in the interest. (I've not been particularly careful with that calculation, but you get the idea).
It is, apparently, going to knock 20 minutes off the journey time.
It is, apparently, going to increase capacity. I've yet to have it adequately explained to me why buying a longer train for the existing route doesn't achieve the same.
The BBC is in a quandary over how to report this. They simultaneously want to moan about the environmental impact; but they love it when the state spends large quantities of money.
Forecasts of demand sound grossly over estimated. It's unlikely this project is ever going to pay for itself. Not that I ever thought it would. If this was a money making venture, it wouldn't need to be done by government, would it? Government having no trouble at all with massive losses that can simply be passed on to the taxpayer.
For reference, the original London to Birmingham line was built in five years with private finance.

You May Take Our Lies, But You'll Never Get Our Referendum

2012-01-10T14:41:00.000Z

One party in the row wants this:

A referendum on Scottish independence held sooner rather than later
A referendum to offer only "yes" or "no" options
Any referendum to be legally binding

One party in the row wants this:

A referendum on Scottish independence delayed
The referendum to offer "yes", "no", and "not really independent, just a bit more cash from our masters in Westminster".
Any referendum to be advisory only

One of these lists sounds like a list of demands from a fiercely nationalistic group, wanting only freedom for Scotland. One list sounds like the watered down list of pathetic, qualified, can-kicking demands we have come to expect from all politicians who want to maintain the status quo.

Imagine my surprise to discover that it's the nationalists who want the crappy list.

Justice and Counting

2012-01-09T10:41:00.000Z

Just so we're clear, the following are gone:

Right to trial by jury
Immunity from double jeopardy
Right to silence

And now these are looking shaky:

Immunity from retrospective prosecution
Equality under the law, public justice, habeas corpus, access to legal counsel, access to the evidence against you

The removal of these rights is always done to "get" someone who is a popular target, Stephen Lawrence's killers, terrorists, or bankers. That's not to say these groups are not guilty; but the removal of these rights damages all of the 65 million of us who haven't done anything wrong.

Add up the damage done by that removal in aggregate and it is far worse than the temporary satisfaction granted by "getting" the popular target.

It's all deeply worrying to be honest; but even more worrying is the absolute silence from the mainstream media about any of the civil liberties issues.

Ice Age Assumptions

2012-01-09T09:24:00.000Z

The Beeb have been pushing this one all morning. A paper has been published that essentially says that the CO2 levels are now so high that the next ice age will be delayed.

I haven't read the paper, but I would like to offer a thought about how one might come up with the conclusion found in the paper. Put yourself in the mental position that you are a climate scientist, and you believe all the results as already published.

The world is warmer than it would be if it were not for mankind's presence.
There are huge (unspecified, unproven) feedbacks that mean that small changes in CO2 levels are amplified to cause huge changes in global temperature.

Now, we might express the real temperature signal with time, m(t) like this:

m(t) = g(t) + a(t)

Where

m(t) is the measured/predicted temperature our instruments will record
g(t) is the "Gaia" temperature; i.e. that which our instruments would measure if there were no manmade changes to the climate. This is presumed (by climate scientists) to be ideal.
a(t) is the deviation from g(t) owing to anthropogenic activity.

Our assumptions as a fully paid up climate scientists mean that we have an m(t) signal which we believe; and our CO2 models give us an a(t) signal which we believe.

The sceptics might disagree that m(t) is trustworthy, given that it is subject to "adjustment", but let's for now assume that it is valid. Problem one for the climate scientist is that it's stopped showing global warming in the last decade and a bit. Since 1998 the global temperature signal has been cooling.

The sceptics main problem is with a(t). This is entirely hypothetical, it is the output of their computer models and though it is merely a computerised encoding of a hypothesis, it is treated as if it is fact. It is calculated (primarily) as a function of CO2 concentration, and has some huge feedbacks built in.

If we are a climate scientist though, then a(t) is fact. Let's rearrange our equation then to give us the only thing we don't yet know, g(t) -- what the climate would be.

g(t) = m(t) - a(t)

Consider then that m(t) is showing a plateauing global temperature (and it's getting harder for climate scientists to spin otherwise). a(t) is an increasing-with-time signal. g(t) is therefore a constant minus an increasing value; or a decreasing-with-time signal.

Conclusion:

The reconstructed g(t) tells us that the world would be cooling
The fact that m(t) doesn't equal g(t) tells us that it is only the contribution of the anthropogenic signal, a(t) that is preventing the world from falling into an ice age.

Presented like this; it's obviously nonsense. It's an entirely circular argument. The calculation of g(t) is entirely based on the hypothetical signal a(t).

As I said; I can't be bothered to find and read the real paper. I am confident however that the above will turn out to be exactly the argument used though. How can I be so sure? Because the g(t) signal is completely unknowable; and without g(t) you cannot speak about what the world would be doing.

Being a cynic, I also find the turn around from "global meltdown" to "delayed ice age" a bit too convenient for a increasingly incredible climate science community.

Central Banks

2011-12-24T08:00:00.000Z

I do like my economics island stories. I wanted to show how central banks printing money isn't the end of the world; but certain provisos should be in place.

On an island there are twenty-six people and a central bank. The central bank "creates" some money, and issues each of the twenty-six a loan of $1,000. There is therefore $26,000 worth of cash; and $26,000 worth of debt.

The $1,000 is perceived by the population to have value (perhaps the bank tells them it's backed by gold). They do what people do what they do and start producing and trading. No matter what they do though, there is still on $26,000 of cash on the island. Through trade though, it becomes established that $1 will buy you one coconut. Alice sells coconuts.

The bank manager wants some coconuts. The bank manager has no cash though; so he offers to accept one hundred coconuts in lieu of $100 worth of debt repayment. Alice now owes $900. The island still has $26,000 worth of cash circulating.

Lather, rinse, repeat. All the islanders trade with each other and get either (a) cash, which the bank will accept to pay off debt; (b) goods, which the bank will accept in lieu of debt.

Eventually the island has $10,000 liquid cash and $0 debt to the central bank. The islanders have, by inspection, created $36,000 worth of value ($10,000 left over, after paying back $26,000 worth of loans). $10,000 is enough liquidity to continue running the economy. Production now simply raises the value of all dollars.

At this point, the bank could shut its doors. The economy has self-established, and produced enough to pay for the bank's initial loan of $26,000 (which we assumed to have value). The central bank played an important role in seeding this economy. They aren't all bad.

This bank behaved itself because it refrained from doing what all central banks actually do:

The bank manager wants some coconuts. The bank manager has no cash though; so he prints $100 and buys them from Alice. There is now $26,000 worth of debt and $26,100 of cash. As this continues, the debt is paid back in reduced-value dollars. The island ends up with $62,000 of cash, and has effectively given a load of production to the bank manager.

Banks don't want coconuts, they want value. They buy currency from the population using devalued currency that they print.

Et Tu, Bitcoin?

2011-12-23T08:00:00.000Z

In the interests of balance for my constant bitcoin love-in, here are the downsides. Mostly they are temporary and will be mitigated with time and success.

Bitcoins are a free-floating currency. Their value, like other currencies, is relative not absolute. That wouldn't be a problem except that the bitcoin economy is relatively small and hence subject to quite dramatic moves. The problem will reduce as bitcoin becomes more successful and the exchanges have enough depth that the market can't be moved.
Getting fiat money into exchanges is harder than it should be. The primary problem is that bitcoins are like cash, and transactions are irreversible. People are therefore reluctant to accept anything other than cash in exchange for bitcoins. There have been numerous cases of people buying bitcoins using paypal, then contacting paypal to get the transaction reversed. The seller then has no paypal money and no bitcoins. Bank transfers are about the only trusted transfer mechanism; and that makes moving cash to an exchange difficult.
The exchanges are single points of failure. While the bitcoin network is decentralised and hence unstoppable, the exchanges are not. They are single points of entry and exit for fiat currency, and so could be shut down by governments (and there have certainly had trouble with banks).
Shallow depth at exchanges. As well as resulting in volatility, the small volumes available at the current price make it hard to make large sales for bitcoins. You would find it difficult to accept bitcoins when you sold your house, if you subsequently wanted to instantly get fiat currency. You would have to add a large margin to cover your exchange losses.
Online wallets are a risk. One big one, mybitcoin, went belly up (they claim they were hacked) and took 50% of the coins deposited with them. There are other online wallets of a similar style -- those that take control of your coins by storing them in their wallet -- use of these gives you convenience but takes away some of the benefits of bitcoin. They share the same centralisation risk that all other currencies have; plus their newness makes them riskier. The community has come up with a counter to this problem, a class of online wallet is starting to appear where control of the wallet stays with you: the private part is stored locally in your browser, and the website acts only as an interface to the Bitcoin network. Bitcoinspinner and blockchain.info are both of this new class, and should make you feel considerably safer.
Acceptance is still low. You can't yet pick a merchant and expect them to accept bitcoins. This is a chicken and egg problem of course, merchants won't start accepting them until they are widely used, and they won't be widely used until merchants start accepting them. Time and luck are all we have here. For my part; I take them. Although I can't say I'm overwhelmed with demand :-)
Bubbles are likely. Bitcoins are so attractive, that people do see the potential. Too much so. In May and June 2011 people bought and bought driving the price up to above $30. The subsequent fall was slow, but inevitable. The underlying economy didn't grow fast enough to keep up with that growth. I'm pretty sure that the same will happen again. "Markets will stay irrational longer than you can stay solvent".

There are those who have some economic and political objections to bitcoin. I don't agree with them, so I'm not listing those as negative. The above are, to the best of my understanding, real negatives.

Double Entry Bookkeeping

2011-12-22T11:58:00.000Z

The ECB has printed €498 billion... sorry, of course it hasn't printed any money. That's not allowed.

First let's take a look at some physics. In particular: antimatter. It's common in science fiction, so most people are familiar with it. Anti-matter is matter's opposite. If matter and antimatter ever come into contact, they combine and the mass-energy equivalent energy of those masses is released (violently). We take 1kg of mass and 1kg of anti-mass, put them together and we end with zero kilograms of anything (but quite a lot of energy). In effect we have cancelled the two masses out. In principle, there is nothing stopping the reverse from being possible, we take zero and pull it apart into X kilograms of matter and X kg of antimatter.

Double entry bookkeeping is a marvellous tool for accountancy, and it does for economics what equations do for physics. It makes you tell the truth by recording both sides of any transaction.

Double entry bookkeeping is governed by one key equation:

Assets = Liabilities + Equity

or in its expanded form

Assets = Liabilities + Equity + (Income - Expenditure)

We're going to look at the ECB, and the non-expanded form will be fine. The rule is that any entry we make must have both a "from" and a "to" account (there's a little bit of magic that goes on when we involve income and expenditure, to do with what direction a credit or debit moves the account, but we'll brush over that):

From                       To                            Amount
--------------------------------------------------------------------
Equity:Opening Balance     Asset:ECB                     0
Asset:Owed by Member Bank  Liability:Member Bank Current 498 billion

A balance sheet is a snapshot at any moment, and it must always sum to zero (see the fundamental accounting equation). The ECB balance sheet will add up to zero, because the assets equal the liabilities. The member bank holds a current account at the ECB, which is set such that it is a liability to the ECB -- the ECB owes the member bank that money. Simultaneously, the ECB loan account is a huge asset, because the member bank owes them that same money.

Magic, eh? No money needed printing. We've done just as we did in the antimatter example: we've taken a zero a ripped it into a big pile of plus stuff, and a big pile of minus stuff. When I say "we", I mean the ECB.

There is no need to run a printing press to do this; it's just numbers on a computer. Companies have to provide balance sheets to auditors so that this sort of jiggery pokery can be stopped. For example, I could go to my computer and say "Andy the borrower owes Andy the lender £1,000". What I can't do is use that (virtual) debtor (Andy the borrower) as collateral for a loan from the bank. They will ask to see my books, and will quickly discover me.

The ECB has no such limit, they are the lender of last resort, there is no one to show their books to that can tell them "no". What's worse is that they can transfer the balance from their virtual current account to a real bank's current account. This would be like me saying "Transfer £1,000 from my asset, Andy the Borrower to my HSBC current account".

While they didn't print any physical money; the effect is identical. A big pile of liquid cash which didn't exist yesterday, exists today. There are then some enormous debtors too; but that's just to keep the books balanced -- they need never ask for that debt to be repaid.

We should all see this for what it is: a pre-emptive bail out created by inflating the money supply.

Rich Tea

2011-12-22T11:13:00.000Z

Another guilty, rich, American claims that it is a "Fiction That Rich People Create The Jobs".

Now, there have long been many problems with this argument starting with

Taxes on rich people (capital gains and income) are, relative to history, low, so raising them would only begin to bring them back in line with prior prosperous periods, and

Dozens of rich entrepreneurs have already gone on record confirming that a modest hike in capital gains and income taxes would not have the slightest impact on their desire to create companies and jobs, given that tax rates are historically low.

First let's note that these points are completely orthogonal to the author's thesis. In fact they are slightly contradictory.

The Laffer curve tells us that there is an optimum level of taxation (from the point of view of a government collecting revenue). It is perfectly possible to tax rich people more and get more tax revenue. The Laffer curve also tells us that the inverse is possible too -- more taxation can lead to less tax revenus. It is also completely irrelevant. The thing under discussion is job creation, not tax revenue. The Laffer curve is not just an expression of individual behaviour, more taxation equal more tax avoidance. It is also a recognition that less taxation can lead to a bigger economy. Why would we get a bigger economy? Because the rich would be using their capital productively instead of in paying the government.
If rich people don't create jobs, why should we care what rich entrepreneurs say about their desire to create jobs? Oh, you mean rich people do create jobs after all? This second point is explicitly recognising that it is the rich who are creating jobs.

These are just introductory nonsense though, Nick Hanauer, our tale's token guilty rich person has this to say:

What creates the jobs, Hanauer astutely observes, is a healthy economic ecosystem surrounding the company, which starts with the company's customers.

Let's think about job creation. Job creation is easy; you get a big stack of money and you give it out to people who don't have jobs. This is essentially the model that government uses when they "create" jobs. It's useless. It's useless because the big pile of money is a key component, and really it needs to be a constantly replenishing big pile of money if these jobs are going to exist again next year -- and someone is going to have to supply that replenishing money. Therefore it's not simply "job creation" we're interested in, it is "productive job creation". That is to say: a job that pays for itself; a job which pays less than it generates.

That is why rich people are necessary. In fact it would be fair to say that in a intervention free market, the rich people have already created jobs. The thing about rich people is that they usually want to be more rich, and the only way to do that is to create something that costs you less to make than you can sell it for. Often that process includes real job creation.

This "healthy economic ecosystem" waffle is meaningless words. The process certainly does not start with customers. Rather, it ends with customers. The thing that the customer is buying, that the customer wants must already have been created. If the product exists, then the jobs for producing it exist. Therefore the thing that creates jobs is the willingness to risk capital on production of something for which there is, as yet, no demand.

Remind me again what we call someone with capital?

The company's customers buy the company's products, which, in turn, creates the need for the employees to produce, sell, and service those products.

How, pray tell, did the customers buy products without there already being employees? The "in turn" in the above sentence is utterly wrong. The job must exist before the customer. Chicken and egg this isn't.

Now, of course entrepreneurs are an important part of the company-creation process.

"Important part"? They are the company-creation process.

But, ultimately, whether a new company continues growing and creates self-sustaining jobs is a function of customers' ability and willingness to pay for the company's products, not the entrepreneur or the investor capital.

This is a truism. Of course the company needs customers. The thing we're worrying about though is the creation of new companies, new products, new demand. Not the sustainment of the existing companies. Growth necessarily requires creation. For that we need entrepreneurs and capital. There is nothing there to be self-sustaining without them. The self-sustaining aspect is why they risk their time and money to start with, once a company is self-sustaining, they get their reward: profit. Without that reward, there would have been no risk taking.

Not all rich people are entrepreneurs. Not all rich people invest in a way that creates growth. But some do. And they are necessary. And they do alter their behaviour based on taxation. If the profits in the example above were taxed at 100%, there would be no reward possible and therefore their would be no risk taking and therefore no creation. If the profit were taxed at 0%, then the risk of creation would be considerably lower (since the reward is proportionally higher). Unlike the Laffer curve argument, there is no justification for a non-zero corporate tax rate. Taxing the income of the newly created employees, the consumption of the customers or, best of all, the land used for production would all result in more growth because of raised rewards for the investors.

The mental flip-flops get really extreme now:

Or, to put it even more simply, it's like saying that a seed creates a tree. The seed does not create the tree. The seed starts the tree. But what creates the tree is the combination of the DNA in the seed and the soil, sunshine, water, atmosphere, nutrients, and other factors that nurture it. Plant the seed in an inhospitable environment, and it won't create anything. It will die.

The question that isn't addressed is how you get the tree without the seed; which, after all, is what this monstrosity of an article is concluding.

The part where my argument in favour of rich people falls down is because of something I said earlier, "...in a intervention free market...". We don't have an intervention free market though do we? A great many of our rich people are rich not because they are servicing the needs and desires of a customer base; they are rich because they have bought themselves some friendly legislators to write their profits into law.

It's not "the rich" that need stamping out; it is the parasitical rich. Those who use the organs of state to protect themselves from competition and in some cases to legislatively force consumers to purchase from them (I'm thinking particularly of the medical industry in the USA).

It's not the 1%, it's the 0.1% that need kicking.

Wither, Bitcoins?

2011-12-22T08:00:00.000Z

As I mentioned yesteday, bitcoins are better than any other centralised online currency or transfer system. Here's why:

My bitcoins cannot be taken from me.

They are currently allocated to a cryptographic public key, to which only I have a copy of the matching private key. There are 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984, 665,640,564,039,457,584,007,913,129,639,936 different private keys that an attacker would have to try to brute force access to my money.
Every day, my computer automatically encrypts a copy of all my private keys using GPG and sends them automatically to multiple other locations. Those locations can be public or private, I can send copies to my friends, my lawyer, I could store a copy on a USB key and drop it in a safe deposit box at my option; I could even print out a copy on a sheet of paper (assuming I was willing to type in a very long string of digits). Being encrypted, it does not matter who gets a copy -- without the magic passphrase stored in my head, they are all just random numbers of no use.
There is no way to know if any particular bitcoin public key belongs to me.
There is no way to know how many key pairs I have generated.
Should an attacker resort to physical violence to obtain my key, there is no way for him to know that he has been given the real key or if there is another one that I have not told him.
Should my mobile phone, containing one of my private bitcoin keys, be stolen from me, I can simply run to the nearest computer and use a copy of that key that I will fetch from one of my many encrypted backups to move that money off that address. Then I can delete the address and the thief is left with nothing (except my mobile phone of course).

The bitcoin network cannot be shut down, and cannot be regulated by any government.

There are approximately 4,100 publicly accessible bitcoin nodes running right now.
Access to any one node gets me access to my coins.
These nodes run in many countries, in many legal jurisdictions. The level of co-ordination required by governments is, for all practical purposes, impossible.
There are web-based interfaces to the bitcoin network available. Shutting these down would require some pretty draconian rewrites of the law (certainly in the west). Access to any of these would enable me to spend my money.
There are an unknown number of bitcoin nodes running on the covert layer of the internet operated by the tor network. Access to a tor-connected node is, effectively, untraceable, again requiring massive worldwide monitoring of the whole internet. Again, a computer and a bit of knowledge would get me access to my money.
A single internet connection from an bitcoin-opressing country to a non-bitcoin-opressing country would be enough to join to sides of a network. Being peer-to-peer and being that every node keeps a full copy of the transaction history, a join between any two nodes on adjacent sides of a barrier is enough to keep the network coherent. Have a think about how (un)successful the Arab governments were this spring in restricting Internet access of their dissidents.

I'll talk about some negative aspects of bitcoin tomorrow.

Goldbuggers

2011-12-21T13:20:00.000Z

Goldbugs and Bitcoin proponents should have a lot in common (they do have a lot in common in fact). Both want a method of storing value that cannot be inflated or debased by some central state. Both are often more persuaded by the Austrian economics school (as are libertarians). For some unknown reason, Goldbugs hate Bitcoin.

I personally have no problem with gold -- if you want it, fine, buy it. What I have a problem with is the idea that it is inherently any better than bitcoins as a store of value. Note that I say "inherently". It might well be that gold is historically better. It might even be that in five years, with some hindsight, gold will prove to be financially better as an investment. Neither of those are implicit though; gold is only valuable because it's valuable. As are all currencies. As are bitcoins.

Here though is another example of why I am so taken with the Bitcoin project. This time, it's an email from the company GoldMoney to their customers.

We are writing to advise you of a change of services we currently offer to our customers with a Full Holding. Since the launch of GoldMoney in 2001, we have continued to change and adapt to the global increase of compliance requirements for payment service providers. Due to this growing trend of regulation we have decided to suspend the following services until further notice with an effective date of the 21st January 2012:

The facility to make and receive payments in precious metals to or from other GoldMoney Full Holding customers.

The facility to convert directly between the various currencies.

Basic Holding owners do not have access to these features and are therefore not affected by this change.

Our research has proven that our customers' use of the metal payments and currency exchange services is not significant and we trust that the suspension of these services will not be inconvenient for the majority of our customers.

In accordance with our Customer Agreement, we are providing advance notice of this change to our services that will take effect on the 21st January 2012 at 12am local London time (GMT). You will be able to make metal payments and currency exchanges up to this date.

Some observations:

If this "GoldMoney" stuff cannot be transferred to anyone, in what way is it "money"?
Gold certificates mean you own a certificate, not some gold.
Even if you did have gold in your hand, it could be easily confiscated.
The very people you will go to to get away from government-issued waste paper we use as money will roll over on command when a government tells them to.

Here's what goldbug Doug Casey said about bitcoins in June:

Frankly, I can’t see why anyone would [use bitcoins], when there’s already an electronic digital currency like Bitcoin but backed with gold: GoldMoney. I should disclose that I’m a small investor in the company. But I have to say that I really do like GoldMoney. It does everything Bitcoin does – or did – but is backed by something of real value: gold.

"everything that Bitcoin does"? Well, yes, until the regulator stops it. As it has. GoldMoney is not "like bitcoin but backed", since GoldMoney is, like every other previous online currency, centralised.

That, my friends, is why I like Bitcoin. The most important feature it has, over and above even "something of real value" like gold, is that it is completely decentralised.

Feel free to replace GoldMoney with Beenz, Flooz, PayPal, Dwolla, Liberty Reserve, Facebook Credits, PSN Credit or online banking in the above. They are (were in some cases) all online stores for value you have earned that are not under your control. Not one protects that store as much as bitcoin does. Every single one would cave in instantly if any authority told them to.

I'll cover why bitcoins cannot be taken or regulated tomorrow.

The Forsyth Saga

2011-12-21T13:12:00.000Z

It's nice when someone with a bit of eloquence writes something you agree with.

For us the crucial corner of our economy is the financial services industry. Although parts of it exist all over the country it is concentrated in that part of London known even internationally as “the City”.

It is not just a few greedy bankers; we both have those but the City is far more. It is indeed a vast banking agglomeration of more banks than anywhere else in the world.

But that is the tip of the iceberg. Also in the City is the world’s greatest concentration of insurance companies.

Add to that the brokers; traders in stocks and shares worldwide, second only, and then maybe not, to Wall Street. But it is not just stocks.

The City is also home to the “exchanges” of gold and precious metals, diamonds, base metals, commodities, futures, derivatives, coffee, cocoa… the list goes on and on.

And it does not yet touch upon shipping, aviation, fuels, energy, textiles… enough. Suffice to say the City is the biggest and busiest marketplace in the world.

It makes the Paris Bourse look like a parish council set against the United Nations and even dwarfs your Frankfurt many times.

That, surely, is the point of what happened in Brussels. The French wish to wreck it and you seem to have agreed. Its contribution to the British economy is not simply useful nor even merely valuable.

It is absolutely crucial. The financial services industry contributes 10 per cent of our Gross Domestic Product and 17.5 per cent of our taxation revenue.

A direct and targeted attack on the City is an attack on my country. But that, although devised in Paris, is what you have chosen to support.

I'll shut up; I'm not going to be able to outwrite Fredrick Forsyth am I?

Capitol Controls

2011-12-20T15:23:00.000Z

Another step along the bitcoin-goes-mainstream road:

If there is a silver lining to this very dark cloud, it is the likelihood that a fresh leg to the crisis will result in some fresh thinking. Some evidence for this comes in a Bank of England working paper released today which argues that it might be necessary to reintroduce capital controls and protection in order to repair the international monetary and financial system.

Only the twisted economics of the Guardian could think capital controls are a "silver lining".

My title for this post was well chosen... "capital controls" are "capitol controls". That is to say, that the state controls your money. Capital controls are simply a trade barrier; and trade barriers make the citizens of a country poorer. Think of this: the Swiss make better watches than the British (or any other product you like were some other country has a competitive advantage); trade barriers mean either (a) you have to pay more for the Swiss watch you want and are therefore monetarily poorer than you would have been; (b) you have to buy some crappy British watch instead of the Swiss one that you wanted and are therefore materially poorer than you would have been.

Transfer of value using bitcoin can be done as easily and as quickly as sending an email. Any value can be transferred, and no one can stop you from doing it (short of disabling the Internet for the entire country; and even then there are ways around it).

Think about the fact that the Bank of England has published a report seriously talking about having government control not only the money they've forcibly extracted from you, but the money they benevolently allowed you to keep. While you're thinking about that, head over to Intersango (the new name for Britcoin), transfer yourself some pound in (while you still have control of your money) and buy some bitcoins. It's just a little additional protection.

A bitcoin is (today) trading for around £2.65. If government's really do start clamping down on capital movements, and hence the ability to buy bitcoins, then bitcoins will become exceedingly valuable, exceedingly quickly. They could suddenly be worth £1,000 each. You therefore don't need many to protect yourself. Personally, I'm willing to risk ten quid on the chance that they become worthless, or that financial Armageddon never happens against the risk that governments are even more incompetent than I imagine.

If you're someone I like, I'll even send you one for free if you put the effort in to get an address.

For the Benefit of Mr Kite

2011-12-20T11:01:00.000Z

For the benefit of George Monbiot and his commenters, who have all woefully blurred the line between "libertarian" and "right wing" (for fuck's sake, this sort of shit is how the word "liberal" came to mean "left wing"). Libertarians are neither "left" nor "right", and find plenty to dislike from both the traditional political camps.

Further: libertarianism is not anarchism. It cannot be, since the enforcement of individual rights and contracts requires some sort of state apparatus. Equally, most libertarians appreciate that a private police force, court system, or military would not be conducive to freedom.

In the name of freedom – freedom from regulation – the banks were permitted to wreck the economy.

The banks didn't wreck the economy. Their collapse was the pin, not the bubble. It was not the deregulation that caused the problems, it was all the western government's inflating a house price and credit bubble, then when the shit hit the fan, bailing out the very same banks. "Deregulation" is also a very strong word for what actually happened. In an real deregulated market, we would expect to see new competitors not constant merging of banks to form ever-larger monsters.

Rightwing libertarianism recognises few legitimate constraints on the power to act, regardless of the impact on the lives of others.

This is just utter lies. The defining feature of libertarianism is this: you are free to do what you like, provided that does not impinge on the freedom of another.

Numerically, George is right, libertarianism recognises only that one constraint as legitimate. However, it's a pretty damned big constraint and implicitly specifies that "the impact on the lives of others" is what matters.

So why have we been been so slow to challenge this concept of liberty?

Perhaps because it's about the most solid basis for liberty that exists? Any attempt to define another will result, inevitably in the definer limiting the rights of those he doesn't approve of. Well if one group can be limited by A, then B can limit the rights of the next group, right? And the whole house of cards falls down.

The great political conflict of our age – between neocons and the millionaires and corporations they support on one side, and social justice campaigners

Whats that, George? "Neocons and millionaires"? I thought we were talking about libertarians? Neocons are not libertarian. In fact, the are most broadly (certainly in America) characterised as being corporatists. Libertarians have as little love for corporatists as they do for socialists.

Rightwing libertarians claim that greens and social justice campaigners are closet communists trying to resurrect Soviet conceptions of positive freedom.

... and we're back to libertarians now... do pick the group you're trying to besmirch and stick to them. As to this "positive" and "negative" freedom stuff. I think he's twisted the truth because of the use of similar phrases by libertarians. Libertarians worry about "positive rights" and "negative rights". Negative rights are those that require something be taken from another in order to provide the right; the "right to education" being a good example. The only way that right can be provided is by forcibly extracting the means to pay for it from another. Libertarians argue that that is no right at all; and would prefer that every right is "positive", in that it exists on its own. My right to freedom of use of my earned resources supersedes your right to an education.

That isn't to say that libertarians don't believe in all the purported positive outcomes of these negative rights; it's simply that we believe that they will be better achieved and more universally achieved if people are allowed to use their positive rights to provide them for themselves.

It's also not hard to see, simply by reading the Green Party election manifesto that they do believe in USSR style control and suppression of individual freedom.

As Berlin noted: "No man's activity is so completely private as never to obstruct the lives of others in any way. 'Freedom for the pike is death for the minnows'.

Cheeky, George. That is exactly what the libertarians defend against. Freedom for the pike should not be allowed to mean death for the minnows. That is the very defining point of the limits to libertarian freedom.

The negative freedom not to have our noses punched is the freedom that green and social justice campaigns, exemplified by the Occupy movement, exist to defend.

Ha. Libertarians would be right on board if that was were the social justice nobs stopped. They don't though do they? They don't demand only that the minnows be left unmolested, they demand that the minnows be allowed to feast on the pike instead.

The problem with lefties is that they've picked exactly the same end point as the righties -- one master, one slave -- they just want a different group to be master (universally, their group).

In The Fallen Elm, John Clare describes the felling of the tree he loved, presumably by his landlord, that grew beside his home.

The landlord was exercising his freedom to cut the tree down. In doing so, he was intruding on Clare's freedom to delight in the tree, whose existence enhanced his life.

The alternative: the landlord was forced to maintain a tree, at his own expense for the benefit of Clare's continued enjoyment of the tree.

The landlord at least has the fact that it is his tree on his land as a justification. Clare's/Monbiots justification is simply, "because I like it". What is their solution to the tenant who would prefer to see the view that is blocked by the tree, and demands that their slave, the landlord, cut the tree down against his will?

George Monbiot has singularly failed to appreciate the very concept he is espousing -- freedom only exists when you cannot be controlled in the exercise of another's freedom.

But rightwing libertarians do not recognise this conflict. They speak, like Clare's landlord, as if the same freedom affects everybody in the same way. They assert their freedom to pollute, exploit, even – among the gun nuts – to kill, as if these were fundamental human rights.

This is just outright lies. No libertarian thinks that polluting, exploiting and killing another is a fundamental right. How could they, and still maintain that they are libertarian?

No; the libertarian would demand that in order to pollute you must do so with the permission of the owner of that which you pollute. In order to "exploit" you must do so having secured agreement (and presumably recompense) for the "exploitation" -- or "employment" as we would like to call it. In order to kill you yourself must have your own life/property/family in danger (the non-aggression principle makes it pretty clear that a libertarian does not initate force or fraud against another).

... debated climate change with Claire Fox of the Institute of Ideas, one of the rightwing libertarian groups that rose from the ashes of the Revolutionary Communist party

You've got to be kidding me? Rightwing libertarians from the communist party? That doesn't sound like a libertarian to me...

Yet when I asked her a simple question – "do you accept that some people's freedoms intrude upon other people's freedoms?" – I saw an ideology shatter like a windscreen.

Oh look, not a real libertarian. If what George reports is true; then this was no libertarian. For the very reason I gave right at the start: a libertarian explicitly recognises that it is possible for the freedom of one to intrude on the freedom of another -- and places the limit that that defines the limits of freedom.

I used the example of a Romanian lead-smelting plant I had visited in 2000, whose freedom to pollute is shortening the lives of its neighbours. Surely the plant should be regulated...

Regulation should not be necessary (although, my personal view is that government's one role is to internalise externalities of this sort, so I wouldn't have a problem with a bit of taxation in this example). Rather, that polluter is illegally (i.e. without owning a contract permitting it) damaging the property/person of "it's neighbours". The libertarian would have no problem at all with the legal system being used to punish that polluter. The argument goes that once you arrange the world to be operated in such a way, the marketplace will sort out the problem: the price demanded by the victims of the pollution would be so high in negotiation of a contract that operating a clean factory would be cheaper. Ta-da, externalities internalised and the result is the optimum balance between polluter and pollutee.

In fact: regulation is actively harmful in our corporatist-run world, since you need only purchase yourself the most pliable politician and you can have whatever regulations you want.

Modern libertarianism is the disguise adopted by those who wish to exploit without restraint.

It may be so that a bunch of corporatist types have labelled themselves "libertarian". What of it? If I wrote "Socialist Onus Probandy" at the top of this blog, would George Monbiot decry all socialists as libertarians?

This bastardised, one-eyed philosophy is a con trick, whose promoters attempt to wrongfoot justice by pitching it against liberty.

The only bastardised thing in the vicinity, is George's misrepresentation of libertarianism. Please define for me George the following words that you have used so hastily:

Justice
Liberty

Here's some more from the comments

Funny how here in the US, according to the right-wing "libertarians", it's not ok for the state to interfere with polluters, gun control, or profit but it's fine for the state to interfere with the right to choose or same-sex marriage.

THEN THEY AREN'T LIBERTARIANS YOU MUPPET.

That which we call a rose would smell as sweet by any other name. The anti-gay, pro-pollution, corporate shill, religious right are not, by any stretch of the imagination, libertarian.

The freedom those at the top end of the stratophere enjoy is the freedom of pirates to board and raid a ship at will. No responsibility to society there.

In what way is piracy compatible with the libertarian non-aggression principle?

to call out "libertarian" Ron Paul on his "free market" approach to controlling pollution.

In a recent interview on YouTube, Ron Paul explained how pollution could be reduced in a free market, by a strict enforcement of private property rights. Rather than enacting complex federal regulatory schemes, Ron Paul would hold companies and individuals legally liable for any harm they do, to people or their property

When one has a proper respect for property rights, environmental concerns go away. In a society that respects the property of others, it is cause for legal action if someone pollutes your land, or the water coming across your property, or the air which floats above it....

Not too hard to spot the holes in that.

"Not too hard"? Obviously too hard to actually list any holes though.

Greens are clearly localist. They are by far the most libertarian party in government - they are just left winged libertarians not right winged libertarians.

"Localist" means that they want to disperse power away from the centre. Greens are only in favour of that until they actually get into power, or until the "local" decision isn't the one that the Greenie wants.

Besides, "localist" is still a form of collectivism; it's just a smaller collective. The best localism for a libertarian is the locale of "me".

Update:

He's stirred up a bit of a hornet's nest. Others making similar points about this article:

[Raedwald][http://raedwald.blogspot.com/2011/12/monbiot-rant.html]
[Tim Worstall][http://timworstall.com/2011/12/20/dear-lord-george-dear-lord/]
[Old Holborn][http://bastardoldholborn.blogspot.com/2011/12/in-name-of-freedom.html]

Dumb Shows are Dumb

2011-12-13T08:00:00.000Z

Apparently

Take note, fans of mindless reality shows like "Jersey Shore": New research suggests watching something dumb might make you dumber. In other words, you are what you watch.

No, no, if you watch this shit you are dumb already. You're just unpolishing a turd when you make yourself dumber.

Beans and Bits

2011-12-12T16:15:00.000Z

This is how revolutions begin. An out of work Greek engineer talks about his new business:

I think what is the problem of bitcoin and i believe is that real enought. Maybe you can buy some tecnology staff or service, but this is not enought. If we want this to be real we have to sell simple staff like food. Not fast food, this is still tertiary sector. Food from the source, primary sector.. we have the anker at the bottom of the market.

With this i mind i decided to start my own tiny bussiness (i am jobless any way). I will sell beans. Just bean. Greek bean at the pack of one kilo and delivery them via post. This is my plan, and i am prety excited right now."

The blog owner reporting on this reports a huge spike in traffic from Greece.

If enough of this sort of thing happens, bitcoins will move out of the playground of geeks and techies and have real world uses. I yearn for the day when I can pay my bar tab with bitcoins; because I know that it will be a trade between me and the publican, no one else.

Listen lefties: all the hatred you have for corporations is just misguided. What you hate is that these large corporations prosper at the expense of another. I can get on board with that. Corporatism is as bad as socialism from my point of view. Corporatism is taking the fruits of my labour and subsidising a feckless industry with them; socialism is taking the fruits of my labour and subsidising a feckless population with them. In both cases the fruits are taken because government has control of the monetary system --- let's begin then by taking control of that money out of the hands of the few and giving it to the many. Bitcoins will do that.

This Greek bean grower might succeed or he might fail; he has the right idea though: sell what you've got to someone who wants it and get paid for it. Surely lefties, righties, and even libertarians can all agree that that is a good thing? Bitcoins cut the middle men out of these trades. They no longer are necessary; they might turn out to be needed. Great, if they are, we'll trade with them too. But with Bitcoins it would not be at their behest, it would be at our choice.

Speculation

2011-12-12T10:45:00.000Z

I'm rereading East of Eden, and came across a part that contained a common economic fallacy. Adam Trask loses a lot of money on a business experiment (refrigerated transport of lettuce); he doesn't care as he's not that interested in money. His seventeen year old son, Caleb, secretly goes into business and makes back the money his father lost. It is thanksgiving and Caleb has wrapped up the money as a present for his father.

"What is it? What--" He stopped.

Cal swallowed. "It's -- I made it -- to give to you -- to make up for losing the lettuce."

Adam raised his head slowly. "You made it? How?"

"Mr Hamilton -- we made it -- on beans." He hurried on, "We bought futures at five cents and when the price jumped -- It's for you, fifteen thousand dollars. It's for you."

Adam touched the new bills so that their edges came together, folded the tissue over them and turned the ends up. He looked helplessly at Lee. Cal caught a feeling -- a feeling of calamity, of destruction in the air, and a weight of sickness overwhelmed him. He heard his father say, "You'll have to give it back."

Almost as remotely his own voice said, "Give it back? Give it back to who?"

"To the people you got it from."

"The British Purchasing Agency? They can't take it back. They're paying twelve and a half cents for beans all over the country."

"Then give it to the farmers you robbed."

"Robbed?" Cal cried. "Why, we paid them two cents a pound over the market. We didn't rob them."

In the book there is more to Adam's rejection of this gift than is covered here; but I raise it because this is the attitude of those who rally against speculators all over the world. Even today; we still have the attitudes of an ill-educated man from a fictional novel.

Cal's confusion here is the confusion we should all have. Speculators don't steal or cheat anyone. They pay over the odds now for a commodity they will collect in the future. The payment now is what the producer can use as capital to actually produce the commodity -- buying seeds, materials, and effort. The producer benefits because they have sold something that they don't yet have for a guaranteed price. Their risk is gone. The key feature is that the speculator overpays now; if he does not, then there is no reason for the producer to agree to the deal.

The speculation is that in the future someone will be willing to pay more than the overprice now. The speculator takes a risk that that is the case. If it is not the case, then they will lose money. If it is the case, then they will make money.

"What do we care for the speculator?" goes the cry. "We," (the unwashed leftie hippies of the world), "want them to fail; and we don't want them to make money; they are stealing from farmers and making food more expensive for children". Consider what happens without them though:

The producer doesn't produce. The risk of producing now with no guaranteed price in the future is too much for them to bear. So supply is reduced in the future. Lower supply means higher prices (we assume that the demand is unchanged; with food that is certainly a reasonable assumption). The speculator's presence therefore lowers future prices, not raises them.

This is relevant to bitcoins. There is plenty of noise on the forums that the price volatility of bitcoins is because of those speculators. Dirty speculators -- messing with prices. No. Forget futures. The speculator can take two positions:

I expect that the price of bitcoins will be higher in the future. (Bulls).
I expect that the price of bitcoins will be lower in the future. (Bears).

The bulls buy now, increasing demand now (and hence the price). Assuming they are right, they sell in the future (to take their profit), decreasing prices in the future. They are acting to move the price in the opposite direction that it has moved -- this is classic negative feedback; and negative feedback is always a stabilising force.

The bears do not buy now. They wait for the future, when they can purchase the same thing cheaper. That is to say -- when the price drops they add demand. Again, acting against the direction of movement. Negative feedback.

For a speculator to act to destabilise a market, they would have to be willing to make a loss. Most people want profit; and by wanting profit they are always acting to stabilise a market.

Blow The Belt

2011-12-09T12:26:00.000Z

It's a bit unfair: turbines failing like this doesn't invalidate the principle (although the principle is broken too); it is quite amusing for those of us on the anti-wind side of the fence:

h/t

Surprise

2011-12-09T11:55:00.000Z

It's not often that I am surprised by a politician.

Even if, as I suspect, the use of the veto was because David Cameron was painted into a political corner; it's rare to find them in a corner that they won't hastily fill with a trap door.

This was certainly the right thing to do. The choice was only really: Britain becoming even more tied to the EU (which would never have passed parliament) or ... Britain becoming less tied to the EU.

The Eurozone will probably now begin its (originally intended) role of binding its members closer. The Eurozone is going to be EU 2.0; which is fine. As that will leave the current EU to become EFTA 2.0; with Britain included in it.

Good.

(None of this solves the Eurozone's financial problems; but we're well out of it).

Update

Whatever Cameron might say, the European Council is not negotiating a treaty amendment – it cannot. Inter alia, it is deciding whether it wants to convene as an IGC in order to negotiate a treaty amendment. The Council muddies the waters though, by not sticking to its own procedures. It is sometimes difficult to ascertain the precise legal format, under which the "colleagues" are operating.

Perhaps I'm getting naïve in my old age.

LVT Idea

2011-12-08T17:03:00.000Z

An idea for Mark to shoot down:

People don't like LVT because they don't like that they can receive a bill that they don't have the means to pay. I'm of a similar mind myself; but have been persuaded that LVT is such a good idea that it would be worth that problem.

Here's my idea though: what about one of these:

Your income tax rate is set by the value of your house
Your LVT rate is set by the size of your income

There would be a 100% LVT rate; and your income would then push you up or down that number. Perhaps someone who earns £150,000 would have to pay 100% of the nominal LVT. This retains the advantage of LVT: that we are all free to set our tax rate by picking a location; but sorts out the problems that progressives have with LVT.

It has the advantage of encouraging families to live together, since the total LVT bill wouldn't change, but each household member's contribution to it would as the number of householders increased (the downward pressure being that we like our own houses rather than house shares).

Rich bankers in mansions: solved.
Poor widows in big houses: solved.
Rich bankers in little houses: solved.
Retired "worked all my life" anti-LVTers: solved.

Alternatively, it could be done so that LVT on your property is whatever it is, but it is paid by putting a lien on your income. If you have no income, then it simply builds up until you do; or until you sell your property.

More Euro Hysteria

2011-12-08T15:49:00.000Z

Douglas Carswell has started foaming at the mouth:

Maintaining the Euro at any price won't bring prosperity to either Britain or Euroland. The Euro is a recessionary mechanism. A monetary monster that condemns millions of Europeans to a life of falling living standards and rising debt.

His logic isn't wrong: the Euro won't bring prosperity; either to Britain or anywhere else. However, it's not the cause of stagnation either.

I'm against the EU as much as anyone. It does none of its members any (net) good. Free trade is great; but that doesn't require the EU (or the Euro for that matter). I'm fairly sure that the Euro was nothing more than a tool for further integration. However, let's not be silly: the EU is not the Euro. The Euro is a currency; it's just bits of paper. In principle, anything will do as a currency in principle -- bottle tops, or signed photos of Louis Walsh. The idea that it is the Euro (rather than EU policies, or member state government policies) that has triggered stagnation or recession is just plain nonsense.

The only thing the Euro has done to its member states is prevent them inflating their own currency. So what? They shouldn't have been doing that anyway. It isn't the Euro that created "rising debt" it was governments borrowing money that did that. It isn't the Euro that is causing "falling living standards" it is the reduction of per-capita income that is doing that (called recession). The fact that these debts are denominated in Euros is neither here nor there.

This is definitely the perfect time for the UK to be turning up with a list of demands. When else will we have any leverage at all? But leaving the Euro wouldn't save the collapsing economies of the Eurozone; just as fiscal union isn't going to save them. The current negotiations about closer union are, without doubt, political not economic. The UK should make political use of the moment -- that's it though.

Balance of Trade

2011-12-07T11:11:00.000Z

Here's what most people understand about imports and exports:

Imports are bad. Exports are good. Every import to a country sends that money abroad to some dirty foreign devils.

It's nonsense. Adam Smith showed how it was nonsense about 200 years ago. Its nonsense for three reasons:

If I am buying an import rather than a locally made product, I am doing so because it is cheaper. That leaves me richer. Forcing me to buy local product by introducing trade barriers would manifestly make me poorer. If me, then everyone. Trade barriers make a country poorer.
If it takes the effort of 100 Englishmen to make one cup of orange juice in the UK, but of 1 Spaniard; then it is better to buy the labour of one Spaniard, and free up the labour of those 100 Englishmen to do something they can do more efficiently than the Spaniard; making the Englishmen 100 times richer than they would otherwise have been. This was what David Ricardo (thanks Mark) called [comparative advantage][ca].
Our local currency doesn't "leave" the country. There are X pounds in the world; and unless more are printed, there can only be X pounds in the world.

I want to look specifically at that third point. Let's say we buy TVs from China. How do we buy them? We buy them with our GBP. The seller of Chinese televisions therefore values the GBP we offer higher than the televisions he owns (and vice versa). He does so because he believes he will be able to use those GBP to purchase something he wants. The key thing though: he has GBP, nothing else.

If he doesn't want GBP, he might desire to trade them for Chinese Yuan. If so, he has to find someone who will accept GBP in exchange for Yuan. That person must therefore want GBP. The GBP still exist, they're just owned by someone other than the TV seller. Perhaps the Yuan seller is a British exporter who has just accepted Yuan, but wants GBP.

There will be a supply of GBP and a supply of Yuan; there will be a demand for GBP and a demand for Yuan. Those all combine to create an exchange rate. x Yuan buys me y GBP. If the value of pounds falls, then the whole country takes a pay cut. Our exports are then relatively cheaper to foreigners and so more are purchased and the exchange rate reaches some new quiescent value.

Alternatively the Chinese TV seller, who now has pounds, might choose to invest them... in the UK. Where else? The investment has to be made in someone who wants an investment of GBP. This is essentially a lowering of demand for the Yuan; the TV seller would prefer a UK investment to Yuan. Again: the exchange rate will adjust to compensate for that too.

Let's say this more clearly: a trade imbalance results in two things: foreign investment in the UK and exchange rate changes. Neither of which is a problem.

Given that our exchange rate hasn't taken a nose dive (it's dropped, but it's not a death spiral), we can say that as much value is flowing in or staying in as is flowing out. It is impossible for any currency not to be in balance like this (without changing the exchange rate).

Part II. The Euro.

The Euro is a single currency for multiple countries. It can therefore quite easily flow out of one member country to another, leaving nothing behind. There is no exchange rate to offer a compensatory correction to make exports cheaper.

If there were no inertia, this wouldn't matter. The country would collectively lower its wages/prices and the result would be the same: increased exports. There is inertia though; people have become blind to market forces. We have minimum wages, demands for certain standards of living and "human rights". They all act to stop the necessary price adjustments that one Euro country needs to make to compensate for the success of another.

Imports suddenly are bad.

Countries are also single currency zones, and this same problem occurs. The successful part of the country has higher wages, and higher prices than the unsuccessful part. We aren't politically willing to let prices and wages adjust properly within a country either. The political solution is transfer payments: the rich parts subsidise the poor parts. It's not efficient, but it is what we've collectively chosen.

The Eurozone is eventually going to realise that that is exactly what it will have to do across national borders. The rich countries will have to subsidise the poor countries (or leave them to rot). The rich country will produce or borrow, and the poor country will be gifted a portion of the result. This is in replacement for the convenience of exchange rates.

There is nothing inherently wrong with a single currency. To work well it needs a willingness for all parties to freely adjust their prices; this is signalled by leaving the poorer parts to suffer. To work reasonably it needs transfers from the rich parts to the poor parts. The reason the Euro isn't working is because governments have gotten used to operating with their own currency -- were printing more is an option. A single currency limits (if not prevents) money printing; and you get burned for your previously learned bad behaviours. The Euro crisis is that burning writ large.

The reason the UK could never join the Euro is not because single currencies are bad, it is because we have years and years of learned governmental behaviour that simply will not work with a currency that is not controlled by that government.

Incidentally, if bitcoins ever became a world currency, then they would behave as a single currency too; resulting (at least until governments started being fiscally responsible) in exactly the same sort of crisis we see in the Eurozone. I don't necessarily think that would be a bad thing (just as the Euro crisis isn't a bad thing in itself, as it's forcing them to stop spending money they don't have).

Update:

Tim Worstall reporting on someone making a very similar point (sorry, he didn't supply a link) but expressing it far more succinctly than I:

If the intra-EMU currency misalignment is so extreme that free floats would cut Greece by 80pc, and Spain by 50pc, it surely validates the eurosceptic argument that monetary union has become a preposterous and unworkable arrangement.

Money Saver

2011-12-07T09:31:00.000Z

Just a quick tip. You may have heard that Google are doing a 10p app giveaway. A few premium apps are temporarily (10 days) being offered at 10p.

Perhaps, like me, you aren't that interested in most. Or perhaps, like me, you don't have space on your phone for such hugely bloated software (they are all in the multi-megabyte range). This tip is for you.

Buy them anyway. Your Google Market purchases are recorded against your account. Once purchased, they are yours forever, regardless of whether you actually download them.

I pressed "buy" and then as soon as the download bar started, cancelled the download. That marks the app as "purchased" but not installed. In ten days when they put the price back up, these apps will still be yours to download at your leisure any time in the future. Plus, if in a year's time you upgrade your phone and have a whole load more storage, you might look on the space requirements of these apps differently.

Give yourself the option; spend a pound now and get (I think) about fifty pounds worth of apps.

Hope you grabbed yesterday's while you could. There's a new set today.

AirSync Beautiful Widgets Bernstein Bears Bedtime Battle Christmas HD Flick Golf Fruit Ninja NFL Rivals Read it Later Pro Reckless Racing Star Chart

Beautiful widgets is worth having if you don't have HTC Sense and Star Chart is a nice replacement for Google Sky Map. I can't say about the other stuff.

Majority Fuckup

2011-12-06T16:22:00.000Z

Perhaps things that I think are simple aren't simple. I thought that GCSE maths was pretty simple. I thought that people running the economies of entire continents would be well versed in such simplistic ideas. Perhaps things that I think are simple aren't simple.

Calculating a mean; a mean is simply the arithmetic centre of any set of samples. It's a bit like the centre of gravity of those values; the place that they all orbit around.

S = (x_0 + x_1 + x_2 + ... + x_n)
E =  S / n

Marvellous.

Let n = 17. Let x_i = net debt of country i in the Eurozone.

When fiscal union occurs E will be the average debt per country; S will be the total debt owed by the entire Eurozone.

Some countries will have debts less than that average; some countries will have debts higher than the average. With fiscal union, there can be only one credit rating: the same for all; based on the average (or total, whatever your ratings agency prefers). Those whose current debt is greater than the average will get a boosted credit rating. Those whose current debt is less than average will get a reduced credit rating.

Simple.

The grand bargain struck by Germany and France to save the euro and restore confidence in the single currency was facing its first challenge within hours of being negotiated, after 15 eurozone nations were warned that their credit ratings could be downgraded.

NO SHIT SHERLOCK.

EU members: 27
Eurozone members: 17 (62%)
Non-eurozone members: 10 (37%)

The fiscal union is going to make those 17 strongly connected, and for almost all purposes they will have to vote as one (it could well be that they will be forced to, as their sovereignty is reduced). What possibility is there that the UK (or any of the non-eurozone members) will be able to say no on any issue when one party controls 62% of the vote?

It's like owning 51% of a company -- you can win any vote. "Vote to remove the 51% stakeholder from the board; all those in favour say aye at a volume proportional to your stake"... "oh".

What the fuck are we doing here? Why is our government spending any time at all at these summits and meetings? We have no say. Why are we agreeing to be bound by rules that can only be imposed on us with our agreement? What are we getting out of this EU thing?

Paypal is Too Big For Their Boots

2011-12-06T13:21:00.000Z

Why do I like Bitcoin? Because this sort of thing pisses me off:

PAYPAL: Only a nonprofit can use the Donate button.

ME: That’s false. It says right in the PDF of instructions for the Donate button that it can be used for “worthy causes.”

PAYPAL: I haven’t seen that PDF. And what you’re doing is not a worthy cause, it’s charity.

ME: What’s the difference?

PAYPAL: You can use the donate button to raise money for a sick cat, but not poor people.

Read the whole lot to see the corporate insanity that is Paypal in full swing.

This sort of thing goes on all the time; paypal for some reason think they control your money. Note that none of the donators are complaining, there is no victim here; but paypal are sticking their unwelcome nose in transactions between mutually consenting adults.

If they had used bitcoin then this would be impossible. No one can stop you sending money to anyone you wish to.

When I asked how to close my account, he said I had to “refund everything, write a letter saying you understood what you did WAS WRONG AND YOU WILL NEVER DO IT AGAIN, and then request permission to close your account.”

Then, for good measure, they froze my personal account, which has revenue from my book sales, e-books and all the other Finnish Folktales Swag. They’ll be holding that money for 6 months.

A quick howto for the Retsy people.

Open an account at Mt.Gox
Set a standing order to sell 10,000 BTC for 0.0001 USD each. It will show as "not enough funds".
Go to "manage funds", and get a BTC deposit address.
Publish that address as the donation address.
Whenever BTC is received, Mt.Gox will (thanks to your very low bid price) instantly convert it all to dollars at the best market price (don't worry it won't sell them for $0.0001).
Withdraw those dollars whenever you like.

This allows you to not care in the slightest about bitcoin price volatility, and to completely avoid dealing with the likes of paypal.

Competition, That'll Never Work

2011-12-02T08:30:00.000Z

The area I get into trouble with some libertarians is over intellectual property. I am not fundamentally against copyright (although the specific implementation of copyright the world uses has some serious, serious problems). I am fundamentally against pretty much all patents.

My problem is that no invention stands on its own; it took a hundred thousand years of civilisation to get to where we are now; it took education, society, functioning economies, and a myriad of supporting inventions to get to the point where an individual can, today, invent something that is patent worthy. It seems then churlish to me to claim that anything you invent is truly yours. Web patents are particularly offensive, since they require a functioning web browser, web server, multiple standard languages and document types to even function. Saying "like a shopping cart, but on a web browser" takes away from the fact that you didn't actually do anything other than use the tools that you were given for exactly the purposes they were intended.

Patents are a market distortion; and if someone else can independently repeat what you have made; the fact that you got their first should protect you (modern calculus was actually created by Leibnitz, who was actually beaten to it by Newton. Leibnitz's did it better though -- we are all very lucky that Newton didn't have a patent).

Patents though, eventually expire. Look what happens when they do:

Given the stakes, it should be no surprise that Pfizer is doing everything it can to slow Lipitor’s decline. The efforts started a year ago with a new coupon card that brings the patient’s share of Lipitor costs down to $4, less than a generic.

Lipitor, which now has competition is still profitable for Pfizer, even with generic competition appearing. It's just become cheaper for the customers now they are forced to compete.

The idea is that patents encourage innovation. I'm not so sure. Lipitor generated one fifth of Pfizer's revenues. Do you think during the time that the patent was valid, Pfizer was (a) desperately searching for new drugs; (b) enjoying sitting on its laurels watching the money roll in. The problem is that once you have a huge success, there is no need to innovate any more.

The same is true of ever extending copyright terms. If an artist can expect to collect royalties on a creation for the rest of their lives -- are they more or less likely to create again? Certainly I can't see the justification for allowing copyrights to exist past the death of the artist. The "artist's family" are always the ones in court arguing that they should continue to get cash... why? What advantage does society (which is the only guarantor of copyright) get from letting Roal Dahl's great grandchildren collect unearned revenues, when they are incapable of creating new works?

There is, to my mind, a distinct parallel between land value tax and copyright. It is society that gives value (and ownership) to land, and it is society that gives value (and ownership) to copyrights and patents. No man is an island.

Recursive Gambling

2011-12-01T10:26:00.000Z

John Redwood explains some ECB insanity:

We also were told that the bond buying programme of the ECB has now bought more than Euro 200 billion of bonds, largely sovereign debt in the weaker countries. This is meant to be bought by the ECB on the basis that it mops up the equivalent of the cash it makes available for the purchases...

We, the proles, aren't meant to understand all this bond, gilts, quantitative easing and stability stuff. I'm grateful to all the blogs I have been reading over the last few years for taking the psychobabble language politicians use and making it clear what is really happening. I feel much more able to understand what the above really means. What I understand from the above (assuming I understand correctly) is terrifying.

See, when we mortals want to borrow money, we go to the bank and get a loan. When you are a large organisation, you don't do that, you issue bonds. If you are a government wanting to borrow you issue gilt-edged bonds. They get that bonus name because government bonds were always thought of as being utterly reliable -- governments can't go bust in the traditional sense.

The bonds are basically contracts that say "we will pay X for this certificate in Y years". The government offers these bonds for sale in an auction and the market bids for that certificate. The market is willing to pay less than X for them, since they want some return on their money, lets call it 'x'. The percentage X/x - 1 is the bond yield (usually expressed as an annual rate rather than lifetime rate); and the smaller it is, the more the government likes it (of course), and the more the market considers that the likelihood of repayment (and by extension of currency stability) is high.

There is a secondary market in bonds. Governments don't directly care about that secondary market. What do they care if I sell my bond to you? They care because the secondary market gives them a live indication of the current market value of a bond. If I can only sell my €100 bond to you for €70; then the government can anticipate that at their next bond issue they aren't going to get €99 for it.

Back to the plot: the ECB is seeing exactly the above situation, and says "we'll provide an artificial price floor to keep the bond values high". That means that if the market will only pay, say, €90 for a €100 bond, the ECB will pay, say €95 for it. Governments throughout history have tried this sort of crap; it never, ever works. If I am the owner of a €100 bond that would be worth €90 if offered in a free market, what would I do when the ECB offers €95 for it? I jump at the offer, that's what.

... It should avoid printing money overall to carry out the bond buying. This week there was a modest shortfall in the amount of money deposited with the ECB to cover the bond purchases in full.

Inevitably, when anyone tries to manipulate a market, they lose. Of course they've run out of money; anyone who could get €97 for a bond from a party other than the ECB would do so. Anyone who could get €90 for a bond from another party will sell to the ECB. The ECB is buying €50 notes for €55. There is a queue around the block.

What they are doing is the equivalent of bidding on your own auction on eBay.

The part I don't understand is how this actually helps anyone. It keeps the reported bond yields at some artificially low rate, but what matters is what the market will pay at the next auction. Unless the ECB starts bidding in them as well, it is the unmanipulated price that's going to matter; since that is what the market will pay.

The ECB is therefore achieving nothing but a bit of financial propaganda, and it is costing a fortune in the form of money transferred to bond owners who can't get rid of the shit they're holding quick enough.

This "modest shortfall" then. The manipulator has run out of money (as they always do), the price must return to its true value. The Euro-loons can't allow that though -- they're going to print money. That is inevitable too. This one isn't mathematically inevitable, it is politically inevitable. They are loons in charge of a printing press.

Remember the rule: price manipulation never works. Printing money might let them continue propping up the manipulated price, but by doing so they are lowering the real price of the bonds underneath that manipulated price. The person who would only get €90 for their bond in a free market, would now only get €89, then €88, then €87, etc. The benefit to ditching your junk on the ECB grows and grows. The ECB need more and more money to prop the price up, and every time they print more, the queue of people lined up to sell at that propped up price grows longer. But still, there is no one willing to buy the government issued bonds at that rate.

The law of supply and demand is up there with the big boys: the laws of thermodynamics; conservation of momentum; relativity. It is fascinating that it is, because it is (as far as I can see) the only social-science rule that has that sort of power. Fighting laws of nature gets you clobbered. The EU is about to get an object lesson.

Update:

I do love being right:

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.

...

It’s only coordinated in the sense that the Federal Reserve is printing the dollars and the European Central Bank and other central banks put the greenbacks in the virtual vaults of mangled commercial banks that are drowning in European debt.

Wade your way through all this "bilateral liquidity swap" stuff and you'll realise that what the ECB are doing is getting the USA to print money for them; so they can pretend that they aren't.

Two Wrongs Don't Make a Right; But Three Lefts Do

2011-12-01T08:30:00.000Z

Speccie reports on a poll:

while the government has men broadly on its side in the battle against the unions, women are far less supportive. 51 per cent of men told ComRes that public sector workers are wrong to strike today, but only 42 per cent of women agreed:

I don't care about the result (although I'd point out that the ratio of men to women in the public sector isn't 50:50 either). What I care about is this "wrong" and "right" stuff.

I'm terribly rude about these union bods. I have previously shouted that they are lazy and greedy and aren't in any position to be moaning about their deal. I think they are wrong to strike. I should clarify what I mean when I say "wrong" though. I use it to mean that I think their reasoning is incorrect. I do think they are entitled to strike. I can't claim to be a proponent of freedom and say that they can't.

So; I think murder is "wrong"; and I think these strikers are "wrong". In one case I mean "morally and ethically unjustified"; in the other I mean "incorrect".

The result I want from the strikes is no result. I want the government not to cave. That is the part that affects me. Striking just saves me money.

Let's count using figures from my memory:

52 x 5 working days a year = 260
1 unpaid day off in 260 = 0.4% of annual salary
Average public sector salary = £25,000
Public sector employees = 6 million
Public sector employees on strike = 2 million
2,000,000 * 25,000 / 260 = 192,000,000

Correct me if I'm wrong, but this strike has just saved the taxpayer 192 million quid.

A few more days like today and they'll have paid for an increased pension contribution.

"Wrong"? These strikes couldn't be more right.

Bitcoin Explained (VI)

2011-12-01T00:00:00.000Z

This is the final part, part VI in my "Bitcoin Explained" series.

Details then. Not necessarily relevant for understanding.

Bitcoin's transactions are a little more sophisticated than the paper analogy reveals. Each transaction is itself uniquely identified, and acts as a hub for transferring from any number of arbitrary sources to any number of arbitrary destinations. As long as the sum of (signed) inputs is less than or equal to the sum of outputs, the network will consider the transaction valid.

TX#5000:out#3 =  50 BTC --\             /-- 80 BTC -> PUBKEY#9292
TX#5001:out#5 = 150 BTC ---+- TX#5004 -+
TX#5002:out#2 =   5 BTC --/  (155 BTC)  \-- 70 BTC -> PUBKEY#8755

There is an awful lot contained in this diagram. The outputs from TX#5004 are not to another transaction (how can they be, the transaction that uses them doesn't exist when TX#5004 is being created?), rather they are being sent to particular public keys. These are the keys of the people TX#5004 wants to pay (they need not be the same person). In order to fund those two outputs, TX#5004 is claiming the output of three earlier transactions, TX#5000, TX#5001 and TX#5002. However, it is only claiming one output from each of those transactions. Those outputs are (just like the outputs of TX#5004) to particular public keys; and in order to successfully claim those outputs, TX#5004 must provide signatures generated with the matching private keys.

Notice that the inputs total 155 BTC, and do not equal the outputs, which total 150 BTC. We'll come back to this, but whoever generates a block containing this transaction is allowed to claim these for themselves as a transaction fee. It is intended that these transaction fees will eventually replace the block reward as the miner incentive.

One transaction can have multiple claims
One transaction can have multiple outputs
Payments are claimed using a private key and a reference to a preceding transaction.
Payments are sent to a public key
Any difference between the sum of outputs and sum of inputs will be claimed by the miner.

We have seen how public keys are used as the destination for transactions. That means for you to receive money you need to have a public key (and matching private key if you ever want to be able to spend it) to give the person paying you. For reasons that we needn't cover here, public keys in Bitcoin aren't actually keys. They are the type, hash and checksum of a key, and this representation is referred to as a Bitcoin address. They are still numbers, but so that they take up less horizontal space when typed, they are represented as base58 numbers with ASCII characters used for the additional 48 symbols needed for the digits. You needn't concern yourself other than to know that your Bitcoin client will display your public key in this form, and it is that that you must give to the person wanting to pay you.

The block reward for miners is not fixed at 50 BTC. It will reduce over time. It "reduces" in the sense that the Bitcoin client is programmed to reject any generated block that doesn't follow the generation rule, which is that the reward halves every 210,000 blocks (approximately four years). Since the block reward is the only method by which bitcoins can enter the system, that ever-decreasing value means that the total number bitcoins created will be approximately 21 million.

Mining is designed to be close-to-break-even. Consider that the network is constantly compensating for increases in computing power, therefore the rate of reward is fixed at 50 coins every ten minutes. The network compensation means that those 50 coins are spread around according to computational power contributed. That computational power has a cost, both in electricity and capital expenditure. If the current exchange rate for bitcoins is such that the proportional block reward is smaller than the proportional costs, then the miner will simply stop mining. That will reduce the network power until miners are covering their costs and hence stop switching their machines off. This is a classic negative feedback control system, and will result in cost-of-mining equalling reward-from-mining. It's possibly not quite as simple as this, because there is an element of price speculative behaviour on the part of miners, so there is likely to be a little bit of oscillation; but the end point is inevitable.

For any block of interest (say one that pays you money), the more blocks that have been constructed on top of that block, the harder it is for your block to be undone by an attacker. The number of blocks on top of a block-of-interest is called the confirmation number; received wisdom is that six confirmations is as close to undoable as any practical use would need. In reality, block reorganisations are rare, and double spend attempts are so expensive for the attacker, that small transactions can probably be considered safe with one or two confirmations.

It takes, it is estimated, about 10 seconds for a new transaction to propagate through the network. It takes, typically, 10 minutes for a new transaction to make it in to a block. It takes, typically, one hour for six confirmation blocks to be built on top of that; at which point the transaction is, for all practical purposes, written in stone. To use the nomenclature of the banking system, it is "cleared" and spendable.

A merchant can listen for that first broadcast, and assuming a low value item (i.e. one that it isn't worth purchasing a computer more powerful than the top 500 supercomputers combined to subvert), they can release the goods within ten seconds. Ferrari sellers should probably wait the full hour.

Yesteday, formertory, asked some good questions about Bitcoin. They weren't really technical questions, they were economic and political; but they are as important for Bitcoin as the technical stuff in the previous articles.

I thought I would try and answer those questions (and some others) here to finish off.

Given the price volatility of bitcoins, what makes it a safe currency?

The answer is "nothing". They are worth only what someone will pay you for them. Over the last year the exchange rate has fluctuated from less than a dollar, to above thirty dollars, to two dollars. The price seems to be creeping up again at the moment, towards three dollars.

Holding bitcoins is risky. They could be worth nothing tomorrow. That is actually unlikely, they are volatile, but not that volatile. Moves of 50% in a day are not unheard of though. The solution to that is that you don't hold them. There are already companies appearing that offer a straight-to-fiat conversion service for merchants; bitcoins sent to a dedicated account are instantly converted back to dollars, and so are completely immune to currency fluctuation.

Over time, if bitcoin becomes successful, the non-speculative part of the bitcoin economy will become bigger; so much so that the money needed to move the price will not be practically available to anyone. This is exactly the same effect that protects dollars, pounds or any other currency.

Who issues the coins?

Being decentralised, there is no one issuer. Nor are they issued "backed". That is to say, nobody says "I will feed $300 dollars in at the moment that I create 50 coins". Bitcoins are issued by the algorithms run by each node in the network; you can't give yourself an arbitrary amount, because the other nodes will not recognise that transaction. You would have to persuade everybody else that you should get special treatment and get more reward than they can get... i.e. it's not going to happen.

In this respect bitcoins are (at present) highly inflationary. It's the equivalent of a government printing more money on a daily basis. The difference with Bitcoin is that all the participants know that this is happening, know that the inflation is dispersed to the participants rather than accruing to a central authority, know exactly what that rate of inflation is, that that rate reduces daily, and know that it eventually (2033) will come to an end. Those facts are hard coded into the Bitcoin software.

Bitcoin will fail because it's not backed by anything, like gold.

What is gold backed by?

Gold is valuable because of some key properties it holds that make it useful as a store of value.

Bitcoins are valuable because of some key properties they hold that make them useful as a store of value.

Dollars/pounds/euros are backed by 'full faith and credit' of a government

It is entirely at your option what value you put in that "full faith and credit" of a government. Make sure you know that since the end of the gold standard (and quite a bit before as well, if we're honest) governments have consistently debased their currencies at the expense of the citizens who hold that currency.

Then have a think about the euro-crisis. That is the result of misusing the "credit" of a government.

Bitcoins are a bubble

Bitcoin value can be a bubble; and arguably over the last year a bubble has been inflated (to $30) and deflated (to $2). But, as with the famous tulip bubble, bubbles are a human construction, not a commodity construction. Tulips existed before the bubble, during the bubble, and after the bubble. As will bitcoins. They may be temporarily over valued -- but that's the market's problem, not the currency's problem.

Gold and silver have both experienced bubbles. They are both still around, and both still have value.

Aren't bitcoins a Ponzi scheme? Ponzi schemes are bad.

This one turned up a lot when the price of bitcoins was shooting up. Not so much when they didn't. The argument goes that that early adopters are rewarded at the expense of the later adopters. The same is true of any speculation. The defining characteristic of a Ponzi scheme is that it requires there to be more investors next week than there were this week. Bitcoins don't require that, and therefore aren't a Ponzi.

There is also no gatekeeper creaming off a profit.

And here's the killer response: Ponzi schemes don't bounce. Bitcoin exchange rates hit a bottom of $2 and started increasing again -- that's impossible with a Ponzi scheme.

Bitcoins are deflationary, and deflationary spirals are deadly; hence bitcoin will never succeed

I admit to finding this the most bizarre argument against bitcoins. The only way bitcoins will be deflationary is if they are a success. The deflationary spiral means that people anticipate that next week they will be worth more than this week, and so refuse to spend. Refusing to spend will shrink the economy making them worth less next week. i.e. there are two market forces both pushing against each other.

As with all things left to freedom, the market will sort it out.

There, I'm done for now. I've covered as much as I can. Hope it helps someone somewhere.

Right to Buy to Let

2011-11-30T16:40:00.000Z

I despair when even the Adam Smith Insitute can't get it right. Consider these two completely contradictory opinions:

A £40bn business loan scheme, mortgage guarantees, £5bn of infrastructure spending, 'youth contract' apprenticeships, start-up tax reliefs, new R&D tax credits, extending free child care – these are all Gordon Brown-style tinkering measures that look good in the papers but end up being bureaucratic and wasteful. Far better to leave the money in people's pockets and cut taxes, which will boost confidence.

It's also good that people's right to buy their council houses will be invigorated, with discounts up to 50%. This is a good way of getting capital into people's hands, and helping them take charge of their own future.

Splutter!

Where, prey tell, Dr Butler, is the money for that 50% discount coming from?

What, prey tell, Dr Butler, do you think a council tax tenant does straight after they have just paid 50% of value for an asset?

Who, prey tell, Dr Butler, is going to live in that ex-council house once the previous tenant has bought it from the government and sold it to a buy-to-let landlord?

Answers: taxpayer; sell it; someone on housing benefit.

For the umpteenth time:

Propping up housing market: bad
Gifting assets to people: bad
Paying to rent back the assets you owned last week: extra bad

On the theme of "not getting it", here's another (more forgiveable) misunderstanding of economics.

Schools have stopped spending and the firms that sold to them are making big redundancies as illustrated by the cuts imposed recently by RM plc. My college has frozen all posts and within ICT the only post to be unfrozen is a web developer post. All of our ‘mission critical’ apps are available through the web (which is how I survive using only my Chromebook) so it seems obvious to me that the conventional model of Domains and their technical armies will naturally wither away

Jobs are a cost, not a benefit.

The people who were working full time to "support" the crappy software installed at the schools are now available to work on other things.

The above argument (which he mistakenly attributes to open source, rather than to web services) is exactly the same argument for why we shouldn't be buying cars when horse carriage manufacturers will have to make redundancies; calculators should be illegal to protect slide rule manufacturers; and iPods should be blasted out of cannons to protect CD press companies.

Money Supply

2011-11-30T12:00:00.000Z

For my own edification I wanted to find out what exactly the big-M money supply values represented. This is the answer.

Each Mn includes M[n-1]; I won't repeat that fact again and again in the following table.

M0 is the physical notes and coins in circulation plus the total credit that organisations (probably banks) have with the central bank.
M1 so-called "demand deposits". Essentially this is the sum of all money on deposit in current accounts. It's "demand" because we, the depositors, can just turn up and demand that the bank (our debtor) pay us the equivalent in M0 money immediately. It includes cheques and other bank-issued money equivalents; which are simply a written form of the demand. It's not common practice now, but you are allowed (I believe) to turn up to the bank of the person who writes you a cheque and demand the cash.
M2 long term deposits. Essentially, non-demand deposits or savings. It's your money, but there are conditions attached to its withdrawal. Usually time. I'm not entirely sure why cheques aren't included in M2, since there is a clearing time for them.
M3 really long term deposits; usually of large amounts. I suspect they mean pension funds, company shares, and the like. Money that you aren't ever expected to (unexpectedly) withdraw (certainly not in one lump sum).

Fractional reserve banking creates additional M1 and M2 over and above M0.

It's widely thought that the Great Depression was exacerbated because M1 reduced so rapidly. People were scared that their money wasn't safe in the banks so withdrew it all.

These days we have a good solution to that problem. The central banks. The central banks act as a so-called "lender of last resort". If I have understood correctly, it means that the central bank effectively issues unlimited credit to the banks in times of need. That means that a bank always has a way of getting money for people during a bank run. Effectively, as M1 reduces because of the withdrawals, M0 increases.

Once everyone has their money, they calm down, realise the bank is still standing, and deposit it back again -- either with the original bank, or a new bank. At which point the central bank can demand that that loan be repaid and everything is back as it was (potentially with a bad bank having a massive debit at the central bank). The bad bank can still fall, but the money stays in the system.

The total money supply is a good measure of the money at work in the economy. Apart from that which is hidden under grannies bed, money is never idle. Store it in a bank and it gets loaned out again and put to work. That's a good thing, for it is money movement that makes an economy, not the money itself.

Given the above, that makes this a very worrying sign:

The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe's long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements.

I'm of a mind that it is utterly necessary. It's a demonstration of the fact that banks had completely overvalued the assets they had. They never really had the €59 billion; they had a balance sheet with 59 billion written on it. All those "toxic" assets are now gradually (or not so gradually) being honestly valued. That can only result in a reduction of balance sheets across the board. Hence, a reduction in M3.

The reason it's going so fast? Governments have demanded it. Last year I pointed out President Obama's misunderstanding of the fundamental accounting equation:

Assets = Liability + Equity

They aren't making new share issues, therefore for every decrease in liability, they must make a corresponding decrease in assets. What is a bank asset? Why it is a loan. Ta da. Credit crunch 2.0.

Of course, I don't really know what I'm talking about.

Bitcoin Explained (V)

2011-11-30T00:00:00.000Z

This is part V in my "Bitcoin Explained" series.

At the end of part IV we saw how a signature chain can be used to create an unstealable ownership record; but that a dishonest person in the chain can easily create multiple copies of a valid signature chain.

17283726152                17283726152
I will pay the owner...    I will pay the owner...
--------------------       --------------------
Alice owns this            Alice owns this
     signed Governor            signed Governor
Bob owns this              Bob owns this
     signed Alice               signed Alice
Charlie owns this          Charlie owns this
     signed Bob                 signed Bob
Dave owns this             Dave owns this
     signed Charlie             signed Charlie
Ernie owns this            Ernie owns this
     signed Dave                signed Dave
Harry owns this            Fred owns this
     signed Ernie               signed Ernie

Two valid signature chains, ending with two different owners.

The solution is one we have already seen. The block chain. Remember the block chain creates a timestamped public record. It's not easy to create an analogy using our paper-based chain, but we can get the effect by making it temporarily centralised.

Imagine now that there is a central authority willing to accept and record copies of all bits of paper like this.

When Ernie signs ownership over to Harry; Harry wants to verify that this signature chain is valid. "Hello, central authority, this is Harry? Could you tell me the current owner of 17283726152?", "Yes, send us a fax showing you are the new owner, and we will tell you." ... "Ernie was the previous owner, Harry is noted as the new owner".

Done. It's now impossible for Ernie to double-spend this paper, since as soon as Fred contacts the central authority for confirmation of Ernie's ownership, they will tell Fred that that serial number has already been registered to Harry, with a signed confirmation from Ernie. Ernie, being the only person who could have done that will look suitable embarrassed at having been caught trying to double-spend.

Let's unwind our analogy a little, the Bitcoin block chain is a public record. That means anyone can check it. The need for a central authority is now unnecessary. Your identity is provable using your private key, rather than your name as in the paper example above, making the public record a record of transfers from number to number.

17283726152
I will pay the owner...
--------------------
28171 owns this
     signed 27371
10632 owns this
     signed 28171
99263 owns this
     signed 10632
63527 owns this
     signed 99263
23498 owns this
     signed 63527
19243 owns this
     signed 23498

Since each person can create a new number to identify themselves as they wish, no identifiable information is stored in the public record (that's not to say there can't be some identifiable information stored elsewhere).

The "governor" in our analogy is representative of the coinbase transactions we spoke of in part IV, creating coins from nothing, which are given to the miners as their reward, and as the way in which new coins enter into the system. Once coins have been created, from then on, they are transferred forever.

The Bitcoin software takes care of updating your balance, broadcasting ownership updates and checking for double spends automatically. All that faxing and ringing is unnecessary (obviously).

The Bitcoin network is going through these processes:

Listening for new blocks, and updating their local block chain copy and address balances as appropriate
Listening for new transactions (optionally, they don't have to)
Miners including new transactions in their potential block
Miners broadcasting "solved" blocks with new transactions in
Generating new transactions as the user desires

What does a real double spend attempt look like though? Transactions are created by the spender, they construct a signed transaction block and broadcast it to the network. The transactions are relayed just as new blocks are, peer-to-peer. Either the beneficiary of the transaction has a client connected, or they don't. If they are connected, then their software will note that a transaction sending them money is pending for inclusion in a block. If they aren't connected then eventually that transaction will be included in a block by a miner and will be broadcast to the network. Eventually they will reconnect and their client will download all the latest blocks, and will again notice a transaction in their favour, and will update their balance. A double spend attempt will create a second transaction, spending coins that have already been used. Either nodes will have already seen the first transaction or they won't. If they have, then the second attempt will simply be discarded and will never make it into a block. If some see the first and some see the second, then there is potential for a damaging block chain fork. However, block chain forks get resolved quickly (by chance, one miner will always find a block faster than another), and either the first spend or the second will be in the ongoing chain -- so the chain will record the coins being spent only once. That will happen within six confirmations; so the receiver will know.

To really try a double spend attempt, the attacker would need to have a large amount of computing power available to them on demand. They would have to synchronise their double spending attempts so that the two transactions are generated at logically separate points in the network (including their own subversive part of it) but at nearly simultaneous times; then they would still have a finite window before the honest nodes resolve the chain fork and discard one of the transactions. In short: nobody is going to be walking away with two yachts unless the yacht salesperson isn't willing to wait an hour to be sure the funds have cleared.

Remaining miscellaneous details will be covered in part VI.

That Which Is Not Seen

2011-11-29T12:58:00.000Z

If you work for the public sector, please put an amount on the following benefits that you receive, but do not count towards your income:

Gold-plated pension. Worth considerably more than any private sector equivalent. Worth considerably more than your contributions to that pension justify.
Security of job. It is incredibly rare for a redundancy to be made in the public sector. In the private sector; you can be booted out because the chairman of the board decides he is on his "downsize" month.
Lack of discipline. It is incredibly rare for any public sector worker to be fired. You can behave monstrously, in a way that would get you fired on the spot in a private company, and you will merely get a "conversation" with your line manager, who will offer you access to many of the fine counselling opportunities available to a public sector worker to help you deal with whatever personal issues are affecting your work. Strangely "being a lazy tosser" is never addressed.
No oversight of sickness. My wife works in the public sector. The number of times she returns home to tell me that another staff member hasn't turned up, or that the same staff member who was off last week with "stress" has gone off again because being back was "just too much". Why is it that every other local council worker has got an ingrowing toenail, asthma, epilepsy, depression, back pain, house maid's knee or any number of other chronic illnesses that can only be treated by taking every Monday and Friday off?
No oversight of timesheets. Once you get passed a certain point in local government, you don't have any direct oversight. You can turn up and piss off whenever you feel like it.
Petrol allowance. You don't want to think about what the mileage paid per mile is for a local council worker. HMRC (a branch of government) allow 45p per mile. LGE (local government employer's association) recommend 65p per mile for a 1200cc engined car. After 12,307 council miles you could have bought an £8,000 car outright.
Union control. The unions control pretty much everything in government, and they control it in favour of the employees. Want to reorganise to modernise your employment structure? Union says "no". Want to a department of people who have their own separate office to the central building to reduce costs? Union says "no". Want to change some job descriptions? Union says "only if everyone gets a grade promotion when you do". (All of these are real examples).
Unthinking adherence to employment law. I'm not suggesting that private companies ignore the law. I'm suggesting that the private company will try to interpret it in the way most beneficial to the company, but still within the law. Council's will blindly implement anything. Always in favour of the employee. Too cold, too hot, computer breaks, tea breaks, ergonomic chairs, air too dry, air to cold, too much light, too little light, the wrong sort of light, pampering to made up disabilities.
Health and safety. In the same mould -- never will you find a more belligerent set of employees that you find in the council. "Would you mind holding this door for me while I move these..." "What? You might injure yourself?" "You're kidding me, I'm just delivering your ergonomic chair, can't you hold the door?" "No, I promise I won't hit you in the head with it." Health and safety law gets blamed for a lot; but a lot of what it gets blamed for is simply made up by stupid, lazy people. Every employment contract everywhere says something like "... and any other reasonable tasks that could be expected of any able-bodied person".
Litigation. Council's just pay up. It's not their money, why would they fight it?
Promotion. To a great extent, you get promoted for time served, not competence.
Pay cuts... never. There hasn't even been a pay freeze in the public sector, let alone pay cuts.
Subsidised mortgage deals. I know they're there you buggers.
National pay bargaining (thank you formertory). This has only one possible result: those inside London are underpaid; those outside London are overpaid. There are a lot more outside London.

All of the above are worth something, not nothing. They are undeclared and untaxed benefits. You are not underpaid, by any stretch of the imagination. The private sector has taken a beating on its declared pensions, pay and benefits over the last few years. All this "get what we pay for" nonsense on your pensions is manifestly untrue once you understand that you already get more than you pay for.

I've not even covered the fact that most of you don't do anything that is of any benefit to the rest of us. There is a vast army of hidden bureaucracy that never even speaks to a member of the public.

Strike all you want you greedy fuckers. It's a day we don't have to pay you for. How much do you want a bet that despite it being the biggest public sector strike in 30 years, that the public will barely notice?

Strikers whose absence will actually make a serious difference to the public:

Teachers
Nurses
Doctors
Municipal tip operators
London Underground train drivers (can't we please privatise the fuck out of these sods?)
Air traffic control

Seriously? If that's it, then surely this is a list of people who we'll keep, and we can just fire the rest?

Bitcoin Explained (IV)

2011-11-29T00:00:00.000Z

This is part IV in my "Bitcoin Explained" series.

At the end of part III we saw that the Bitcoin network's primary function is to act as a peer to peer timestamping system. That the blocks could, in principle, verify any data its operators wished.

The catch of course is that those operators need an incentive to operate that system. There is nowhere near enough demand for verifying lost works of copyright music, photographs of cheques, or preventing contract fraud to encourage people to dedicate their computing resources to running such a timestamping network. In that sense then, it is absolutely necessary that the primary application for a peer to peer timestamping system like Bitcoin must be financial. What's more, some of that finance must be diverted to the node operators; or more particularly, the miners (the non-miners in the network are connected for their own benefit/interest, rather than for monetary reward).

We're therefore going to move on to talking about how the Bitcoin block chain is used to implement the bitcoin currency. We're going to be concerned almost entirely with the payload part of the blocks now; with only the connection between block and payload relevant to us. The payload of the Bitcoin block chain's block is a list of bitcoin transactions. A hash (of special type) of that payload is included in the block header -- no more. From a certain perspective, the block payload is only that special hash; but as a convenience the entire list of transactions is available from the nodes as well.

Let's get the reward out of the way quickly. Being the creator of a block gets you one special ability that nobody else has. You gain the ability to write the first entry in the transaction list and you get to write it as a special type of transaction; one that generates coins from nowhere (for now). That then is your incentive to contribute your computing power to the network: if you are the miner that finds the block, you get to keep those freshly generated coins. Now: you can't just generate any number of coins you like, the other nodes in the network will simply reject your block. You can (for now) give yourself fifty coins. There is more to say on this, but it can wait until a later article; all we need for now is that there is an incentive, and simultaneously (and more importantly) a way in which new coins enter the bitcoin economy.

Let's leave Bitcoin for a little while, and talk about public key cryptography. In particular cryptographic signatures. Digital signatures and public key encryption go mathematically hand in hand. Public key cryptography is typified (regardless of the underlying mathematics) by having two-part keys: a public part and a private part. These two parts are inseparably joined, they are only valid as a pair. There is no particular mystique about them, fundamentally they are two long numbers. Usually long numbers like these are represented using hexadecimal for computer systems; so they look scary to non-computer scientists. You shouldn't be scared: they really are just numbers, and in general the user doesn't have much to do with them -- they're usually just stored in a file. From a user perspective though, here's what you need to know:

A public key can be used to encrypt a message such that only the person with the matching private key can decrypt that message.
A private key can be used to sign a message such that anyone with the matching public key can verify that the matching private key was used to make the signature.

Bitcoin makes no use whatsoever of encryption. It is entirely based on digital signatures. It has to be: it is a public record, not a public store of private records. These signatures, to any reasonable degree of confidence, are unfakeable. The mathematics of why this is so is beyond the scope of these articles, but be aware that all your banking, secure internet browsing, chip and pin credit cards and digital television content protection work off exactly the same bits of mathematics: trust me, they are unfakeable.

Imagine that real-world signatures were as unfakeable as digital signatures. Imagine a bit of paper with a serial number and the message "I will pay the owner 50 govcoins worth of gold" written on. Further pretend for now that the Bank of England has some gold, and a trustworthy Governor. There is plenty of blank space on this paper. Imagine now that we run a chain of custody for money rather than the haphazard possession-is-ownership system we really have.

Two pieces of paper come into your possession.

17283726152                17283726152
I will pay the owner...    I will pay the owner...
--------------------       --------------------
Alice owns this            Alice owns this
     signed Governor            signed Governor
Bob owns this              Bob owns this
     signed Alice               signed Alice
Charlie owns this          Charlie owns this
     signed Bob                 signed Bob
Dave owns this             Dave owns this
     signed Charlie             signed Charlie
Ernie owns this            Fred owns this
     signed Dave                signed Gail

Both Fred and Ernie can prove their identity by creating a new signature in front of you. Would Harry take Fred's copy, or Ernie's copy as payment for a debt? Remember, signatures are unfakeable. Do you see the magic here? The paper is irrelevant, it can be stolen but ownership does not transfer with possession. It is the signature that is important. Think about what's going to go on the paper next:

17283726152                17283726152
I will pay the owner...    I will pay the owner...
--------------------       --------------------
Alice owns this            Alice owns this
     signed Governor            signed Governor
Bob owns this              Bob owns this
     signed Alice               signed Alice
Charlie owns this          Charlie owns this
     signed Bob                 signed Bob
Dave owns this             Dave owns this
     signed Charlie             signed Charlie
Ernie owns this            Fred owns this
     signed Dave                signed Gail
Harry owns this            Harry owns this
     signed Ernie               signed Fred

Harry would be a fool to take Fred's signature on this paper; Fred's ownership is not part of the chain; Dave did not sign over ownership of this paper to Fred, he did sign it over to Ernie. Ernie is therefore entirely capable of signing it over to Harry. If anyone can verify a signature, then anyone can verify the ownership.

Congratulations; you now understand Bitcoin transaction chains.

A quick aside to cover some economic rather than technical issues:

"I will pay the owner 50 govcoins worth of gold"

What a sneaky devil I am. I'm almost as bad as a government. What, exactly, is "50 govcoins worth of gold"? I didn't say 50oz of gold, or $23 worth of gold. The answer is: whatever amount you can get from the seller of the gold.

What is a govcoin worth? Whatever you can get for it.

What is a dollar worth? Whatever you can get for it.

What is 50oz of gold worth? Whatever you can get for it.

What is a bitcoin worth? Whatever you can get for it.

Did you spot the hole in the system? Fred can't produce a valid signature chain just because he stole the paper, but any of the real owners can copy the paper, getting multiple copies of the valid signature chain.

17283726152                17283726152
I will pay the owner...    I will pay the owner...
--------------------       --------------------
Alice owns this            Alice owns this
     signed Governor            signed Governor
Bob owns this              Bob owns this
     signed Alice               signed Alice
Charlie owns this          Charlie owns this
     signed Bob                 signed Bob
Dave owns this             Dave owns this
     signed Charlie             signed Charlie
Ernie owns this            Ernie owns this
     signed Dave                signed Dave
Harry owns this            Harry owns this
     signed Ernie               signed Ernie

If Harry walks in to two different shops; what stops him signing these two copies over to two different people? As it stands, nothing.

We'll talk about this problem in part V, when we'll discuss double spending.

The Evolution of Semantics

2011-11-28T12:45:00.000Z

Jan Moir says this in the Mail:

Another week, another comedy low. On his current stand-up tour, Jimmy Carr has been criticised for making a joke about children with Down’s syndrome. Here, for your delectation, is the joke. ‘Why,’ he chortles, ‘are they called Sunshine Variety coaches when all the kids look the same?’

...

Gervais claims he used the word ‘mong’ — short for mongoloid — unaware that it still caused offence and was liable to upset many with Down’s syndrome. Pull the other one, it’s got a calliper on.

Language is such a treacherous minx isn't it Jan? (Incidentally, what on Earth is she talking about callipers for?)

"Spastic" becomes "spaz" becomes THOUGHT CRIME.
"Mongoloid" becomes "mong" becomes THOUGHT CRIME.
"Retarded" becomes "retard" becomes THOUGHT CRIME.
"Down's syndrome" becomes "downy" becomes THOUGHT CRIME.

To then have a metaphorical custard pie slapped in their face by someone as cretinous as Jimmy Carr or Ricky Gervais is too much to bear. Some unfortunates just do not deserve to be mocked. Stop it now. Please.

Some unfortunates, on the other hand, seem to be paid far more for their scatological outpourings than would seem appropriate given their intellect.

From The Collaborative International Dictionary of English v.0.48 [gcide]:

Cretin \Cre"tin\ (kr[=e]"t[i^]n), n. [F. cr['e]tin; of uncertain
   origin.]
   One afflicted with cretinism.
   [1913 Webster]

From WordNet (r) 2.0 [wn]:

cretin
   n : a person of subnormal intelligence [syn: {idiot}, {imbecile},
        {moron}, {changeling}, {half-wit}, {retard}]

From the medical dictionary section of the free online dictionary:

cre·tin·ism
   n.
   A congenital condition due to thyroid hormone deficiency during
   fetal development and marked in childhood by dwarfed stature,
   mental retardation, dystrophy of the bones, and a low basal
   metabolism. Also called congenital myxedema, cretinoid dysplasia.

"Cretin", for the benefit of Jan Moir, is just as much a word that mocks a medical condition as is "mong", "retard", "spaz" or "cock gobbling thundercunt" (maybe not that last one).

So... you half-witted, reactionary, holier-than-than-thou, politically correct, hypocritical, joy-harpy; why don't you get yourself an education before you start chucking disparagement around about the lives of others who's crime seems to be that you don't like them?

Bitcoin Explained (III)

2011-11-28T00:00:00.000Z

This is part III in my "Bitcoin Explained" series.

The problem we left at the end of part II was that while we had a way of constructing a coherent chain of blocks, and of having them verifiably claim an arbitrary level of difficulty of creation; we had no way of deciding how difficult a block should be.

We have discussed how a block may be given a certain level of difficulty, via it's target parameter. We want to ensure that the chain we use was not easy to create, in fact, the harder the "real" chain is to create, the more difficult it would be for an attacker to generate a new chain with transactions beneficial to themselves in it. We do that by demanding a particular target in any new block; but target is a number with arbitrary units, what is the right value for to demand?

To answer that we have to spread our thinking a little wider than a single node. Think now of the whole network of Bitcoin nodes, they are all sending blocks between each other, verifying them and adding them to their own local copy of the block chain. We know that to generate a block, the system requires a certain amount of brute-force number crunching be done to find a nonce that creates a block that meets the difficulty set by target. Who is doing that brute-force number crunching though? The answer is the miners.

The miners are special Bitcoin nodes. They are special in that they are dedicating themselves to producing new blocks, rather than simply listening for new blocks. That is to say, they choose a target, write it in their potential block, then start trying different nonce values in that potential block until it results in a hash acceptable to the rest of the network. Once an acceptable block is produced, it is broadcast to all the nodes connected to that miner; they in turn broadcast it to all the nodes connected to them. In this way, new blocks propagate through the network. Since the nodes will only hold the block to be valid and add it to their chains if it meets their validity checks, the miners know that there is no point in broadcasting fake blocks.

Miners are motivated to do this work because there is a reward for finding a valid block (we'll come to what that reward is later). All the miners are simultaneously trying to win that reward, and be the first to broadcast their solution. It is a reward that you are more likely to win if you have the biggest, fastest computer. Hence there would be (in the absence of any limiting factor) a race to produce as many blocks as possible as fast as possible, probably by purchasing ever increasingly powerful computers.

This isn't what happens, because in reality there is a limiting factor. That limiting factor is determined by the network picking a target that is harder and harder to achieve as the power of the miners gets faster and faster. How do we know how fast the miners are though? We can't visit everyone's computer and measure their CPU speed. The answer is that it is estimated retrospectively from how fast blocks have previously been generated.

Bitcoin nodes pick an acceptable target by aiming for one block to be produced every ten minutes. target is adjusted by examining the previous group of 2016 blocks; and adjusting the new target to be such that that previous group would have taken two weeks to generate. Phew. Sounds complicated, but it's clearer if we look at each step in detail.

Assume stationary network power (i.e. the number of nodes, and the speed of their CPUs is fixed).
If one block is generated every 10 minutes, then in the 20,160 minutes that exist in two weeks, there should be 2,016 blocks.
Each block has a timestamp in it; subtract the time for the first block in the group of 2,016 from the time for the first block in the next group of 2,016. This gets us the measured interval for those blocks.
That interval will be (a) smaller than two weeks; (b) larger than two weeks.
If (a) then the target used for those 2,016 blocks was too small; reduce the new target in proportion.
If (b) then the target used for those 2,016 blocks was too high; increase the new target in proportion.

If the assumption that the network power hasn't changed is valid and the nodes will only accept blocks that meet this new difficulty target, then blocks will have to be generated at a difficulty that makes one new block every ten minutes (on average). That assumption isn't entirely valid, but the power of the network has (so far) not changed significantly enough over 2,016 blocks that the calculation has been wildly wrong.

The phrase "on average" was important in the previous paragraph. There is no way to predict whether any particular nonce will result in an acceptably difficult hash, so it is entirely statistical whether a randomly selected nonce will be "right". Sometimes a miner will find an acceptable hash on its first attempt (if its really lucky), sometimes no miner will find a solution until well after the ten minute target. These two situations will average out though, resulting in one block approximately every ten minutes.

One final property of the block chain worth noting. The easiest block to replace is the latest one. If you had the same computing power as the current Bitcoin network at your disposal then it's likely that 50% of the time you would generate the winning block. If you were an attacker then, you could put your own payload in the block and 50% of the time your payload would be accepted by the network (for this reason we want as much computing power in the publicly visible Bitcoin network as possible -- currently the Bitcoin network is more powerful than the combined power of the world's top 500 super computers). However, once another block has been added to the chain, if you want to replace the second to top block, you have to have enough computing power to calculate two blocks before the honest network calculates one. You need two Bitcoin networks worth of power. To replace the third to top block, you need three Bitcoin networks worth of power. And so on, and so on. Thus, the more blocks that have been built on top of a block you are interested in, the more securely that block is fixed in the public record.

We've reached a milestone then. We have a network of systems that self regulates the production rate of blocks that are verifiably hard to produce, and verifiably form a chain leading back to a trusted point. This, in fact, is the true achievement of Bitcoin, rather than its financial uses. The creator of Bitcoin called it a peer-to-peer, distributed timestamp server that doesn't require mutual trust. The payload of each block is included in the hash calculation, so the payload cannot be changed at a later date; plus anyone can validate that payload and check the timestamp written on the block that contains it.

As a simple example of the utility of a timestamping server, let's say you wrote "Candle in the Wind" in 1952 and Elton John stole it from you, subsequently making a load of cash. You want to sue him, how do you prove you wrote it? If, in 1952 you had taken a photo of you holding the sheet music you wrote, included a JPEG of that photo as the payload in a block chain, then you would have incontrovertible proof that that sheet music existed in 1952 (assuming all those technologies existed at the time).

Let's say you signed a contract with Microsoft to buy your Web Browser software in 1996. Later Microsoft raided your house, stole your copy, burned their own copy and now deny all knowledge that they owe you anything. Again, you could have taken a photograph of the contract, but this time just stored the hash of the JPEG in the block chain in 1996. Incontrovertible proof is then stored forever of the existence of that contract at that date.

Let's say you sign a cheque (you can see where I'm going with this can't you?). Store a hash of a JPEG of the cheque in the block chain. Cheque exists. The person you send the cheque too can now doesn't need the cheque; the evidence of its existence can (with a few additional rules) be used instead of cash.

We're now at the point where we can talk about Bitcoin transactions. I've gone through the above to demonstrate that the transactions are orthogonal to the block chain; the block chain can be used as a timestamped proof of existence of anything you can represent digitally. Bitcoin transactions happen to be one particularly excellent use of the block chain.

We'll talk about transactions in part IV.

Bitcoin Explained (II)

2011-11-27T00:00:00.000Z

This is part II in my "Bitcoin Explained" series.

The problem we left at the end of part I was that the construction of a valid chain of payload-storing blocks is trivial (for a computer) to create. For a financial system we want it to not be trivial, we want it to be incredibly hard to recreate a chain, so hard in fact that there can be only one chain.

The solution that Bitcoin uses is a proof of work system. Here "work" means computational work. It's worth noting that the work we choose must have two very important properties:

It must be very hard to do (this is the "work" part)
It must be very easy to verify (this is the "proof" part)

There is no point in a proof of work system that requires as much work to check that it is valid as it did to create the work. This is what renders suggestions that Bitcoin should use folding@home or SETI@home as its computational work, invalid. While the work done by those two systems is indeed hard to do (meeting criteria #1), there is no way to verify the correctness of that work other than by repeating it (failing criteria #2).

The proof of work system used by Bitcoin is one that combines nicely with the block chain system it already has. An additional piece of data is stored in each block. This data has no purpose other than to alter the final cryptographic hash of the block (any change of input alters a hash significantly). It's called the nonce; it's not (for UK readers) a paedophile, its use comes from the noun "nonce", meaning "The one or single occasion; the present reason or purpose (now only in for the nonce)". Strangely, given the purpose of a cryptographic hash, the nonce's job in a block is to be a use-once number that effectively brute-forces the block hash to a particular value.

That brute forcing of block hash is hard work, but, (drumroll) is easily verified. Exactly what we want for our proof of work system.

The "particular value" of hash being searched for is any hash less than a pre-determined target; we'll come to how that target is determined later, but for now simply accept that there is a hash-target, and that target is itself listed in the block (i.e. changing it would also change the hash). Finding a nonce is hard because there is no way to know without recalculating what effect any value of nonce will have on the final hash (if there were then the cryptographic hash would be a failure). If we're looking for a nonce that results in the hash being numerically less than some defined target value, there is only one way to find it: we have to try many different values of nonce, one by one. However, once we have found one, it's easy for someone else to do the same calculation using that found nonce to see that it really does result in a hash less than the claimed target.

I, as a Bitcoin node, get sent a block by my peer. I do not trust that peer, since it is just some computer on the Internet, it could be feeding me bogus data. I perform two initial checks on that received block:

I calculate this new block's hash, that calculation uses both the nonce and the target values. If the hash that I calculate is less than the target value the block claims, then I can believe that its creation was "hard" to the level described by target.
Is it part of my previously accepted and "trusted" chain? I do this by positioning it in my ever-increasing block chain. Provided the new block claims as its parent a block I have previously accepted as trustworthy, then that new block is part of the chain.

Our node can now reconstruct a chain, and estimate how hard it was to create that chain. It can do that without needing to trust the nodes that fed it those blocks. If bogus blocks are fed then they can be rejected because they aren't really part of the true chain, or because they weren't as hard to create as they claim to be. ("Bogus" here is going to mean "not agreed on by a majority of nodes")

We're left with a similar problem to the one we started with. Constructing an arbitrary chain is trivially easy, so we required that it is not trivially easy by use of the verified target value. What is to stop us creating a valid chain that honestly claims to be easy, and is? Provided no block has a target that doesn't verify, isn't that chain valid; and couldn't I include a "pay lots of money to me" entry in my easily-created, but valid looking chain? Well yes. Our defence against that is going to be that we don't allow easy chains. To do that we have yet to talk about how target is determined.

We'll come to that in part III, when we discuss mining.

Bitcoin Explained (I)

2011-11-26T00:00:00.000Z

Bitcoin's core technology is a very clever, and yet surprisingly simple, idea. It's got distinct parallels with the git version control system; and the concept would work for a great deal more situations than just a virtual currency.

There are plenty of ill-informed articles by mainstream (and some tech) writers who haven't really understood how Bitcoin works. This series of articles then is my attempt to add to the pile of not-ill-informed articles; hopefully it will turn up in Google searches to counter the erroneous information.

My goal here is to explain to a non-technical, but interested reader, how Bitcoin secures their money. Note: this is an in-depth explanation over a series of articles; it is not, by any means, required reading to be able to use bitcoins (for that, just download the client, or use an online wallet). My hope is that it serves as a demonstration of where the trustworthiness of Bitcoin comes, and why Bitcoin technology (even if the world ends up using some implementation other than Bitcoin) excites so many people.

A quick note about centralised money transfer: it's incredibly simple. Persons A, B, C and D all sign up for an account on your centralised server/system. B sends money to the centralised service by credit card, bank transfer, or cash to create a credit. With an entry in a database, that credit can be transferred to A, C, or D. Credit can be converted back to money and given to A, C, or D by bank transfer or cash. Most services are run such that the credits are denominated in units of fiat currency, probably the same as what you deposited. Don't kid yourself that they aren't credits though -- they are, and could be denominated in any arbitrary unit they felt like and can be stolen, frozen or blocked at the whim of the centralised service operator.

Bitcoin is not like this. It is decentralised. Decentralising anything is hard; decentralising a trusted money service is extra hard.

A node in the network runs a Bitcoin client and connects to N other nodes, ideally randomly dispersed through the network. N is arbitrary, and the client can choose for itself how many connections to maintain/allow (more being better, but more costly of their local resources).

As a brand new Bitcoin node, I connect to some peer nodes (how I find them is not relevant to Bitcoin technology, IRC is used at present if you care). My first job is to download the so-called Bitcoin block chain. The block chain is (unsurprisingly) a chain of blocks. Each block holds information about itself, and a 'payload'. Think of it as like an email; the email has a header and a body, the header tells you about the email (to, from, subject), the body is the email. A block has a header which describes the block, and a payload (which is actually a list of transactions, but we'll come back to them later).

A chain is formed because each block names the block it considers "previous" or "parent" to itself, by including a cryptographic hash of the contents of that parent block in itself. Of course that previous block includes the hash of the block it considers its parent in itself, and so on and so on. That means that the hash of the last block in the chain is dependent on the hash of every previous block in the chain, with that single (long) number, it is therefore possible to validate the entire chain. As a mathematical function, we might describe the hash of, say BLOCK5, like this:

 blockhash( BLOCK5
   + blockhash( BLOCK4
     + blockhash( BLOCK3
       + blockhash( BLOCK2
         + ... etc ...
         )
       )
     )
  )

If two parties agree that the hash of that final block has not been faked, then they agree that every other block in the chain has not been faked. It is this property that makes it impossible to edit any block in the chain without it being detected -- to do so would invalidate every subsequent block.

[The assumption is that a cryptographic hash cannot be predetermined; it is impossible, without a brute force search, to find a block with a chosen hash. That means you can't make up an arbitrary new block (say one that gives you a load of cash) that would replace an existing block, already in the chain. The hashes (at present) are 256 bits long (SHA-256 is used), that's enough resolution (nearly) to count the number of atoms in the universe. You can see why brute force isn't considered a viable option for faking a block.]

Back to the plot: the block chain ensures that if two parties agree on any particular block hash in the chain, they agree on all the blocks previous to that hash. There is one special case: the first block in the chain. In Bitcoin this is called the genesis block. This block has no parent (technically this state is encoded by having its parent hash set to the one invalid hash, all zeroes). This genesis block is hard-coded into every Bitcoin client, and so is a known point. Each client can therefore backtrack from any block they are told is on the chain by a peer node, to the genesis block, which they explicitly trust; hence verifying that the claimed chain really is a chain.

A block chain, as described, is the work of a moment. I could make arbitrary block content ("pay me lots of cash"), list the genesis block as its parent, then that block would become the basis for my next block; all appearing as part of a valid chain, with a trusted root. The solution that Bitcoin uses is to ensure that creating a block chain is not the work of a moment.

We'll come to how that is done, in part II, when we discuss proof of work.

Money Supply

2011-11-25T16:48:00.000Z

I've done [fraction reserve] stuff before, so won't rehash that.

However, it occurred to me recently that there is another source of money supply inflation in the world. Now, this is not an original thought -- I certainly knew the idea before, but never really thought of what it meant in reality.

The M0 supply of money is that which the treasury prints. Then there is M1, M2, M3, etc, etc. Each of these includes its predecessor; so, if you'll allow me my own nomenclature:

M1 = m1 + M0
M2 = m2 + M1
M3 = m3 + M2
M4 = m4 + M3

The capital M being the sum of the amount added at that stage, and the previous stage. The actual definitions of these are too obscure for the likes of me; but the concept is that the money supply increases thanks to a number of behaviours of actors in the economy. One of these increases is due to fractional reserve banking.

Here's another:

Imagine one bank with total £100 in. Alice wants to pay Bob for painting her wall. Alice chooses to write Bob a cheque. Bob is now carrying around a promise to pay £100. Nothing has changed at the Bank. The total money supply must therefore be £200. (Yes, yes, Mark, before you start: I know that there are equal and opposite liabilities to balance the assets).

Imagine we still live in the days when you could sign a cheque over to a third party. What is to stop Bob from going to Charlie's bar, and paying his tab by signing that £100 over to Charlie?

That cheque represents money at work in the economy. It didn't exist before Alice wrote it and yet there it is, buying stuff.

The money supply has manifestly increased.

We all know that banks cheekily wait three days to clear a cheque so that they can earn three days worth of interest on it. It's more than that though isn't it? Before that cheque clears, it can be lent out in the world, that lent money is working. There must be a constant flux of uncleared cheques hovering around in the banking system, all working away as money does.

I wonder what will happen when they discontinue cheques?