Tuesday, August 30, 2016

On balance of trade- it's surplus and deficit still being a concern for most countries

Balance of trade is an often talked about subject by countries. US whines about a negative balance of trade with China, China whines about a negative balance of trade with South Korea, etc. etc. This was covered by Smith-but maybe needs a new look in the present context.

Rule: The net balance of trade of a country with all other countries is always zero.

Let us remember that money (dollars, yuans, Gold or Silver) is just a way to facilitate the exchange of goods (and services) between countries. It simplifies barter; but in the end, all trade is barter. What Chile imports annually from the world, is necessarily equal in value to what it exports annually (the major exports of Chile are Copper, wines, fruits, and salmon. The major imports are construction materials, cars, electronic goods, machinery). Everything which Chile sends out in the form of exports, comes back in the form of imports. There might be some delay obviously in the accounting and there may be a month to month variation where a surplus or deficit might run because of not receiving the money in the same month, but over a long period of time, say of 1 year (assuming payments in 30 to 90 days max.), the net exports should be equal to net imports. Chile is not sending it's good anywhere for free; and neither is any country giving away their stuff to it for free. Therefore, the equality of exports to imports is a necessary condition for trade.

It follows that if you export more, you import more. Similarly, if you export less, you have to import less.

Some allowance must be made for credit and foreign currency accumulation-for Chile might export stuff and instead of exchanging them for other goods right away, maybe hold US dollar reserves in the form of loans to the US Government, to buy something later on in the international markets. These are small corrections to the rule (dollar reserves are a small part of the net value of goods exported or imported), but the general rule of Exports=Imports holds for all countries at an individual country level. What goes out (as exports), must come back in (as imports).

Note that this is for a country with all the rest of the world. However, Chile may run surpluses or deficits with any one country for a long period of time, without this rule being violated. That's because countries are trading with each other, and surpluses with country A cancel out a deficit with country B. Let me explain this with an example.

Let us imagine a world with only three countries-Chile, USA and China. The numbers are just for example purposes, and are not real.

Chile exports 10 million dollars worth of wine to USA.
Chile exports 5 million dollars worth of Salmon to China.
Chile receives 15 million dollars worth of machinery and automobiles from China.
Therefore, against USA, Chile is always running a surplus in trade balance, because it is only exporting, but importing nothing from it.

But the surplus against USA must be exactly equal to the deficit against China, as you can see, to make sure that the net exports are the same in value as net imports.

There must be some form of trade between USA and China, where USA must be exporting something to China and running a surplus with China for exactly 10 million dollars.

So an example might be

USA exports 500 million dollars of airplanes to China
USA imports 490 million dollars worth of computers from China

and adding what we said before
Chile exports 10 million dollars worth of wine to USA.
Chile exports 5 million dollars worth of Salmon to China.
Chile receives 15 million dollars worth of machinery and automobiles from China.

Makes every country's exports exactly equal to it's imports.

Even if Chile is forever running a surplus against USA and a deficit against China, it all needs to balance in the end for it, where all exports come back as imports, directly or indirectly.

Note that in this example, the US must always run a surplus against China.

This example can be extended to 4, 5 and hundreds of countries, with similar results.

I have heard of people talking about the net exports of a country to the world being less than it's imports, and that the country is running a deficit. This can't be true. It may manifest that way because of measuring the value of exports and imports incorrectly, delay in payments, etc. but in the end, if you are a country X, your total deficit or surplus with the rest of the world is exactly zero, in real terms.

Hopefully you can see with this explanation that there's no fuss to be made about a country running a deficit with a particular country. It is just the nature of trade. For every surplus, there must be a deficit with a different country somewhere.

Note that you can extend this example to smaller divisions within a country (to States), to counties and ultimately to even to the individual level.

Therefore, Texas has a net trade balance of zero with the rest of the USA+other countries. What goes out of Texas, must come back into it, either from other States in the US or from other countries directly to Texas.

For an individual-what you produce, you must eventually exchange for what others produce. You eventually exchange all what you produce with the productions of others.  You must discount for savings and the part of the savings you invest for further returns-but it still means that overall, what you produce will always be exchanged for the same real value of what others produce.

Sunday, August 28, 2016

How technological development helps economies and society

We have come a long way from inventing stone tools to axes to hacksaws, but there are still people who believe that technological developments lead to loss of jobs, and are somehow bad for society. I just came across this article by Economist Robert Schiller where he starts out with "Innovations in robotics and artificial intelligence, which are already making many jobs un-competitive, could lead us into a world in which basic work with decent pay becomes impossible to find." For all his accolades, Mr. Schiller doesn't seem to have much clue about how Economics really works-you would think he is a luddite from his comments.

When we make a tool to simplify our job, whether it is a sharp stone to cut wood fast or an axe to remove trees faster, as our ancestors did, or an electric hacksaw which we use today to make chopping of trees even faster than an axe, we make our jobs simpler. The same holds for all inventions-software, robotics, computers, etc. We invent tools to make our jobs simpler, to produce more for the same hours worked. Both capital owners and workers benefit by these improvements in the productive powers of labor, by the employment of new tools, technologies, etc.

Let me give you an example to clarify this: assume you have several wood cutting factories which were employing workers uses axes. Then the owners of these factories buy electric hacksaws. Assume electric hacksaws are 10 times more efficient and you need only 20 minutes to cut a tree, instead of 200 minutes using an axe.

Once an electric hacksaw is employed, the same work can be done in 1/10 of the time, so you need to pay the worker only 1/10 of what they earned before. The output is the same, but the worker now has 9/10 of his time free-he or she can find other jobs. Even if he doesn't find another job, you can employ him to do 10 times the work, because now he can chop 10x the number of trees for the same hours worked.  Since the output of each factory can go up by 10x by this operation of replacing axes with hacksaws, it increases the competition for labor-and the net result is that the worker can demand more wages per hour, because he can find jobs with other wood cutting facilities. Maybe the factory owners and the workers will settle for something in the middle- in the extra 9x chopped trees by this operation, maybe 6x will be kept by the factory owners, and the 3x chopped trees (or their wages in dollars) will be kept by the workers, whose real value of labor is increased by this operation.

All parties-capital owners and the workers, benefit by the introduction of hacksaws instead of axes for chopping wood. The same holds for all improvements in technology and tools which simplify our jobs-they benefit the workers as much as they benefit the capital owners.

What happens to all the jobs which are eliminated by computerizing the paper ledgers, by employing all these machines in the fabrication of things? They are lost, but those workers find other jobs! Our predecessors were doing entirely different jobs than us-there was no NASA or Boeing or Mitsubishi in 1500AD- clearly jobs shift, and that's the nature of things. But it is nothing to worry about.

Semiconductors, software, robots internet, telephone, etc. are just an extension (over centuries) of stone age tools, chisels, axes, matchsticks, paper, watches, etc...technological advancement is continuous, and we are constantly improving our productive powers by inventing new tools. We produce more for the same work with these tools, which is what human progress is all about.

Sunday, August 7, 2016

Bad Science behind introduction of genetically modified Zika mosquitos to control their population

Zika is spreading a little bit outside Brazil and Colombia, and a company called Oxitec is proposing a solution. In all likelihood they are twisting their data to fit their needs-to make it look like the mosquitoes they introduce really cause a decrease in the overall mosquito population.

News stories Here and Here for a sum-up of what they are proposing.

"Trials of the modified mosquitoes in Brazil, Panama and the Cayman Islands suggest they reduced local populations of Aedes aegypti mosquitoes by more than 90 per cent," Oxitec says.

Here's the problem from an evolutionary point of view-just because you have created this male Aedes aegypti mosquito which transmits the gene so that  the offspring are killed before they reach adulthood doesn't mean that the females will mate with them. Even if the sexual selection be random, you will just eliminate the offspring of these males; but the other males, who are a large part of the population, will continue producing offspring. This is the best case scenario.

Sexual selection is not random-it is not like that females will mate with any mosquito-and if the mosquito population realize that the offspring of these genetically modified males are not reaching adulthood, they will probably weed them out by sexual selection even faster. Sexual selection by females will accelerate de demise of these traits.

From what Darwin explained in his Domestication of plants and animals and a little bit in the Origin of Species, it is clear that introducing new strains in a plant or animal is the easy part, the hard part is to make sure that their offspring survive the selection pressures of the others who are the more "stable" varieties. In his words, hybrids are easy to create-but will tend to revert to the stable varieties after a few generation, even if they can reproduce. Hybrids most likely will not even reproduce-and the reason was unclear to him-but the evidence is very strong that hybrids are difficult to breed, and even if they do breed, even more difficult is to ensure that their offspring survive and don't revert back to the parent varieties used to create the hybrid.

This thing about Zika males is very similar-and my bet is that introduction of these males has no effect whatsoever on the mosquito population of Zika.

Regarding the data from Brazil, Panama and Cayman Island-I  think the data has been fudged to give them what they want to prove. And doing it in a lab setting may have nothing to do with how this turns out in real life-with loads of other selection pressures on the mosquitoes, both from within and outside their species. This is similar to the myth of antibiotic resistance in many ways.


Thursday, March 10, 2016

The foolishness of inflation measurements

A lot of garbage statistics is used to collect inflation data and to calculate stuff like CPI (Consumer price index). Your mortgage and other interest rates and sometimes your rent are adjusted to this number; and this statistical trickery of taking data to find out the value of money and how it varies over time has a bearing on your everyday life.

Problems with how inflation is measured

Can you give a precise value for money (dollars) by measuring the value of all other things the way the Index with the inflation basket does? I don't think so.

1. It does not consider the statistical deviation in prices. Whenever an inflation data is published, I would like to know the standard deviation of the data. No mention is made; to hide the fact that the prices vary all the time! For the basket used to measure this data, what is the standard deviation of the prices?   The Index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents-all kinds of variable things, and you just can't add the means and come up with a value without talking about the variability or standard deviation of these things!

2. The choice of basket is arbitrary, and even if the data for the basket was statistically reliable, one can't say that the basket can be used to measure the general value of money over all things for all human beings (thousands of things and millions of human beings consuming them in different ways). It is a measure of money for that basket only, and any conclusions about the general spending habits of people in so many other ways they spend money from that basket is outright silly. The inflation data, strictly speaking, is valid just for that basket.

Any changes in the basket composition will give you altogether different values of inflation (which shows there's nothing real behind the data-what you are measuring is all noise, or in Nassim Taleb's terms-randomness).

3. Measuring the value of a basket in money terms, or a bunch of items in money terms, does not give you the value of money. The demand of money varies just like of other things (potatoes, electricity, whatever) and you cannot just average it out over a bunch of things and come up with "one value" of money, as a CPI calcuation does. The natural variation of prices of everything, and of money (cash) in itself, is not considered at all.  It also assumes that the reason the value of money is what it is is because of increase or decrease in supply of money; and does not consider that the demand of money, just like of any other commodity, is itself variable.

To explain this further-let's say we started measuring things in potatoes, and we could control the production of potatoes so that every year we would increase the potato supply by 2%. Can this be captured by measuring everything else in potatoes and coming up with something like "the supply of potatoes increased 2% in 1 year"? I believe it is impossible. With all things valued in potatoes, and because their value is itself very variable depending on the supply and demand, you will end up with a very noisy idea of the value of things in terms of potatoes. It is very unlikely that you will hit the mark of 2%. So even in a controlled enviroment, when you simply increase the supply of potatoes by 2% in a year, you will not be able to come up with the exact value by your statistical data taking of market prices. The same holds if you measure it in dollars or pesos.

4. It also assumes that the sellers of the goods run their businesses at constant profit percentage. In practice, businesses play with prices all the time, and often times will lower profit margins to get more volume. Such a strategy is not considered by inflation measurement fanatics-who assume that all variation in price is because of the variation in supply of money.

The basic idea of measuring things to get the value of money is not bad-you can get an idea, a very rough idea about inflation, if EVERYTHING in your basket goes up in price by a significant amount (at least 10%). This happens in Argentina and Venezuela, for example. Then you are able to see inflation-but even then to give an exact number to it like 20% per year or 50% per year is foolish. For small variation in prices, less than 5%, you cannot conclude that the price of things increased because you printed more money, or because of simply that the demand of money went down in relation to other things, etc.

If there was something real in measuring the value of money using things in the inflation basket-ALL items would go up with a very similar amount e.g. 5%. Then you can say with confidence that it is the price of money which is changing and it is not the statistical variation in it which you are capturing.

My experience in Argentina and Venezuela, where there is inflation

Having lived in Argentina myself, and being quite familiar with how things are going on in Venezuela and having been there as well, I can testify that yes, there is a  problem of inflation in these two countries. But it is not because the money is being increased-it is a real decrease in the quantity of goods in the country, which is pushing down the value of the money in these countries. Note that if the goods were a constant and we pump more money, inflation would increase; but the same happens if money is a constant and the number of goods decreases. The same money chases less goods; and the prices of goods in the domestic currency, Argentine Peso or Venezuelan Bolivar, increases. But this is not because of the central banks (it is hard to imagine central banks giving millions of pesos in free loans to Governments, even in disorderly countries like Argentina and Venezuela), but because the businesses really do produce less of the goods. The annual production of goods (GDP measures it, albeit imperfectly) goes down. The real annual produce of goods in Venezuela has gone down in the last 15 years-as anyone can see when they go to a supermarket (well stocked vs. less number of goods), the types of cars people drive (old cars, vs. news cars), etc. The inflation you are seeing is not because of more money in the Venezuelan society; it is because there are less goods being produced in the society.

If it were the real increase in money supply of bolivares or pesos, you would see a lot of new currency notes in these countries. I can assure you that you do not see freshly minted currency notes there. You would also see new coins-and that also is not observed. The bills and currency notes circulating are not increasing in quantity. The real production of society is falling apart because of bad government-who interfere in production by increasing taxes, random factory closings, bribes, etc. Capital owners withdraw their capitals when there's no certainty that they will reap the rewards of their labor-when you have a tyrannical government like in Venezuela restricting everything and wanting a share of everything. The net output of society goes down considerably due to this, and that is the real cause of inflation in Venezuela and Argentina.

The point is-the Venezuelan central bank doesn't do anything, except for the currency it prints and gives away to the Government on easy loans, etc. or even  just gifts it to them (Governments control the printing press of money; and can print a lot of bills if they want-but that would show in an increasing larger number of freshly minted bills in the country, which is not the case in Venezuela and Argentina). The goods are becoming scarce in these countries, and that's what is pushing the money price of these goods in Pesos and Bolivares higher.

Except in Argentina and Venezuela, for all other countries in South America, North America, Europe and many in Asia, I don't believe there is an inflation problem. They are measuring whatever to come up with numbers; but it is just noise.  I have heard of inflation problems in some countries in Africa, and my bet is that they are in the same situation as Argentina and Venezuela-the real quantity of goods in these countries is going down because of bad Government policies, etc. but no country is creating inflation by printing more currency and maintaining the amount of goods they produce annually a constant.

The case of Panama and Ecuador

The futility of inflation measurements is best illustrated by countries like Panama and Ecuador, which use the US dollar as their currency. Since they have no influence or control over how US dollars, a foreign currency there, is valued, or is brought into their country, their inflation measurements are nothing but noise-in the sense that there can't be regular pattern to it. Amazingly, they do have inflation measurement departments...where dozens of statisticians and bureaucrats are employed to come up with this data. Link for Panama here   and Here for Ecuador. Since they can't do anything if the inflation is high or low, why measure it at all!

In Ecuador, the reported annual cumulative inflation was 3.38% in 2015, and 3.67% in 2014. The geniuses in Ecuador and Panama who are reporting these numbers, massage the data to make it look like a nice number, instead of saying it is statistical noise. They publish this number to keep the banking community and financial guys happy. As long as it is between 0 and 5%, everyone is happy. Data which will make it go beyond these is readily discarded.

Digression 1-As a general comment, I think most people, including Scientists, will make up or polish data to prove what they want to prove-because their jobs, their funding, etc. depends on it. In the end, for most people, it is just a job; and a bit of data jugglery is a part of their job, just as it is for people who work in Sales and Marketing-who will make up data to sell their products. Not more than 5% will publish the data as it is, and agree that it might just be noise (and this is in all walks of life, not just Economics, Medicine and Global Warming; subjects I have covered in this blog to show you how a lot of what you see is noise disguised or polished as data).

Digression 2-As I grow older, I realize that a lot of data we have around is is just noise, and a large amount of foolishness of humanity is to confuse this random data as relevant. This is how stuff like the existence of God and astrology was born. Even though Science has advanced greatly in the times since we invented the idea of God and planetary movement affecting our daily lives, I still find that a lot of humanity still confuses noise with data. Wherever people see patterns, I generally see noise. And as Nassim Taleb said so well in one of his books-good data shouts at you, you don't need to look for it or justify it by long arguments.

There are a lot of holes in the basket measurement of inflation. Any number which is less than 5% and is quoted as inflation is but noise-and they are careful to hide the noise by not publishing the standard deviation of data.

Other holes in the measurement of inflation: a) they invented something called "core inflation" to remove the volatile parts of the inflation basket, food and energy. A real statistician never discards any data, here it is being discarded on purpose to remove the deviations and noise in the data, to make the inflation numbers "smooth" and b) a small change in the composition of the inflation basket will lead to an entirely different number for inflation. If the real value of money was being measured, a change in just the composition of the inflation basket should make no difference.

Inflation measurements which are increasing steadily at say 2 or 4% per year are in reality a clever way of defrauding the persons who borrow-who almost always see their interest payment go up with time, because they measure the index in a peculiar way to make it increase slightly almost every year. The noise of the measurements is removed carefully to always come up with a slightly positive number  between 0% and 5%, to give the banks a license to increase interest payments on the borrowers. Or rent payments, which are also adjusted to inflation in most big cities. The inflation data publishers meet the needs of the market well-the massage the data to come up with a number of between 0 and 5%, and get to keep their jobs. But the real value of all this data is zero, for the reasons mentioned above.

Inflation feedback loops

The most ridiculous use of inflation data is by utilities  (electricity, telecom companies, etc.) and essential services companies. Utilities use this data to justify increasing rates. They say that because of inflation, they be allowed to raise rates. Since their own products form a part of the basket of things used to measure inflation, they basically go into a feedback loop-the basic necessities companies raise rates because of inflation data, and since the raise rates, next year inflation data shows even more inflation, and they raise rates even more. Imagine if every product or service in the inflation basket started raising rates, the next year's inflation would go through the roof! Here in Chile where I live, this is why gas and electricity prices are the highest in the Americas (North and South)..and the Government lets these utility companies increase rates , who use the excuse of higher inflation.

Here's what Smith said about increase of paper money possibly causing inflation (which seemed to be a theory in 1760 as much as it now!) in Book 2 of the Wealth of Nations, chapter on "Money Considered as a particular Branch of the General Stock of the Society"

"The increase of paper money, it has been said, by augmenting the quantity, and consequently diminishing the value of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759, though, from the circulation of ten and five shilling bank notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England is the same now as before the great multiplication of banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France; though there is a great deal of paper money in England, and scarce any in France. In 1751 and in 1752, when Mr. Hume published his Political Discourses,*36 and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions, owing, probably, to the badness of the seasons, and not to the multiplication of paper money."

Related post: Central banks have no influence in jobs creation, unemployment or real interest rates. Here's the post explaining this.


Saturday, January 23, 2016

Understanding evolution-zebra article today

Some biologists today published a study on why they think zebra stripes are not for camouflage, etc. They do not seem to understand evolution quite right.

The winner in evolution transmits all their characteristics to the offspring. But  you can't say that the characteristic (e.g. stripes) was the cause of the individual being a winner.

A particular human being might be a survivor in a difficult situation because of their excellent intelligence. They may have a mole on their right chin, or have a hairy back, etc. All these characteristics will be passed on to their progeny; but it is not because of their hairy back or the mole on their right chin that they are a winner.

Or instead of intelligence, it might be just luck; maybe the individual just hid in a cave while the rest of the pack was eaten by a predator. Since this individual now reproduces, all his characteristics will be transmitted to his offspring.
This can be extended to all animals, I chose human being as an example animal, that's all.

The characteristics you see in a species like a zebra are just that; they are not there because somehow that characteristic lead the species to win out.

Even for sexual selection this is the same. The characteristic is not a cause of victory; it is a by product of already being victorious.

The same intelligent human being might be able to get more mates; but the females are not selecting the individual for their mole on the right chin or his hairy back.

This is a common problem I see in evolution related publications; essentially they do not get the causality right. The causes of why an individual survives are not known; the characteristics you see in an individual are the effects of them being winners.