on Sunday, May 29, 2011

Why Markets Can't Cure Healthcare Auto Repair

Paul Krugman explains why markets can't solve any of the world's problems:

"Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our automotive repair problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory.

Not so. One of the most influential economic papers of the postwar era was Kenneth Arrow’s Uncertainty and the welfare economics of auto repair, which demonstrated — decisively, I and many others believe — that auto repairs and auto collision services can’t be marketed like bread or TVs. Let me offer my own version of Arrow’s argument.

There are two strongly distinctive aspects of automotive service. One is that you don’t know when or whether you’ll need service — but if you do, the repair can be extremely expensive. The big bucks are in frame straightening and engine or transmission rebuilding, not routine oil changes; and very, very few people can afford to pay major automotive repair costs out of pocket.

This tells you right away that auto repairs can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the car's owner ends up making decisions about what to buy. Consumer choice is nonsense when it comes to cars. And you can’t just trust auto insurance companies like GEICO.

This problem is made worse by the fact that actually paying for your engine rebuild is a loss from an insurers’ point of view — they actually refer to it as “auto repair costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering cars that are actually likely to need repairs. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs compared to communist auto repair and insurance systems. And since there’s a widespread sense that our fellow citizens should get the auto repairs we need — not everyone agrees, but most do — this means that private auto insurance basically spends a lot of money on socially destructive activities.

The second thing about auto repairs is that it’s complicated, and you can’t rely on experience or comparison shopping. (“I hear they’ve got a great deal on tie-rod ends over at the Ford dealership!”) That’s why mechanics are supposed to be honest, why we expect more from them than from bakers or grocery store owners.

You could rely on a aftermarket auto repair insurance to make the hard choices and do the cost management, and to some extent we do. But insurance companies have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your auto repair is their cost. Between those two factors, auto repair just doesn’t work as a standard market story.

All of this doesn’t necessarily mean that socialized auto repairs, or even single-payer, is the only way to go. There are a number of successful auto repair systems, at least as measured by pretty good repairs much cheaper than here, and they are quite different from each other. There are, however, no examples of successful auto shops based on the principles of the free market, for one simple reason: in auto services, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence."

Stimulus Spending and Quantitative Easing

on Saturday, May 28, 2011

If you consider the ways that money is "printed," both by the Fed with QE and by banks making loans against houses and cars, you might notice that one is inflationary and the other is not.

And because "Stimulus" spending does not involve the creation of new money, it is probably not inflationary. It may raise the demand for money because of its temporarily higher "velocity," but should have no real inflationary effect. It simply moves assets from very productive people to others who are probably much less efficient, who will produce something that no one really wants.

Fed spending (quantitative easing) is certainly inflationary, and creates misallocation of resources, but bank lending (also a method for creating new currency) is also probably not inflationary, even at reduced interest rates, because each loan effectively trades ownership of a real asset (like a home) for new assets called dollars.

Because the process of issuing a bank loan effectively shifts ownership of the house to the new dollars, and those new dollars can always be traded for the house that the bank used as collateral (by paying off the loan with dollars), the new dollars generated by new bank loans are unlikely to be inflationary. Bank loans create new money that matches real assets. QE on the other hand, is inflationary because it does not match assets up for sale in the real world. The Fed simply spends new money and holds what it buys on its balance sheet, away from the market, which is a completely different process than taking a house as collateral and issuing new currency to match its value. The bank loan process creates money that chases existing assets in tandem. Fed spending increases the money supply relative to existing assets.

A bank loan can always be paid off with inflated dollars to acquire real assets, but the assets that the Fed holds on its balance sheet cannot be accessed by anyone. Because of this, the dollars the Fed spends are chasing assets that are no longer available for purchase, and this is inflationary.

With this understanding, low interest rates on bank loans can be regarded as a genuine discount on the process of currency creation. Banks are offering a sale, which does not create misallocation of resources. When a bank issues a bank loan with new dollars, it is effectively taking the house in exchange for its new dollars printed from thin air, and loaning the house (that it owns via the collateral agreement) back to the "homeowner," at a certain rate, which we look at in the wrong way. We see it as the bank loaning dollars at interest. More accurate would be that it is loaning the use of its asset, the house, for a fee.

"Stimulus" spending does create misallocation, because it moves wealth from productive people (successful businesses who are taxed) to other, probably less productive people (government contractors), making things that people probably don't want. But stimulus spending is not inflationary either; it creates no new dollars. It may increase the "velocity of money," which will create a temporary amount of inflation and a subsequent deflation when all the spending stops (higher amounts of trade raise demand for a medium of exchange), but no long term change will occur in the value of the currency.

One caveat is that the Fed will not print and spend new dollars unless it feels that the dollar is deflating (rising in value). The only purpose of QE is to correct a movement in the value of dollars. Similarly, if inflation slips too high, it will liquidate some of its balance sheet, selling treasuries or MBS on the open market for dollars, and destroying the dollars it receives. We hear a lot of complaining about QE, but not so much as a peep when the Fed does the opposite. This is quite strange, and seems to indicate that either people are not thinking clearly about why the Fed does anything, or they believe The Bernanke when he babbles on TV. The Fed's business is the creation of currency. It happens to hold a government enforced monopoly on the business in the United States, but it still does its job fairly well. The only difference is that it makes more money than it would with other banks competing in the same business.

The Fed still has every incentive to avoid rampant inflation or deflation, for two reasons. If it allows high inflation to happen, it ruins the profit generated by its bank loans, many of which are 30 year contracts. If people are paying back loans with worthless dollars, member banks are not making much money.  Ultimately, this is not an issue, because member banks all own part of the Fed's balance sheet. But the problem is still there on the face of it. Inflation lowers the profit generated by long term loans, because the loans were signed with a set amount of expected inflation.

Second, if it allows rampant deflation, the economy grinds to a halt because people have more of an incentive to hoard dollars and are now forced to pay back dollars that are worth more than expected. So the incentive to save is raised, trade is reduced because people are less willing to part with dollars and use them as a medium of exchange, and anyone with a long term bank loan is becoming poorer by being forced to repay dollars with more value than expected. Paying off loans early (deleveraging) exacerbates the problem and removes more dollars from circulation. And deflation ultimately hurts the Fed and its member banks by reducing the amount of wealth being generated by the citizens of the United States. If people are generating less wealth, banks have less business. For these reasons they desperately try to keep the dollar stable, and have been fairly good at keeping inflation between two and five percent since it was freed from its gold-standard shackles around 1970.

The Fed realizes that a small amount of predictable inflation is best for their business. They get no deflation, constant growth, and the losses from inflation are not ultimately damaging to them. The only losers with a small and consistent amount of inflation are people with no bank loans who hold cash. (This is one way that the Fed "steals" from the poor, who mostly hold no loans and most of their wealth in cash.) There is no reason to suspect that the Fed will fail to keep inflation in its "zone of reasonableness" at this point. It has the power to keep inflation where it wants.

The gold standard is a topic for another day. Its removal was a huge plus both for the Fed and the United States, because it gave the Fed much greater freedom to control the value of the dollar without worrying about both the supply of dollars relative to assets, but also the value of gold relative to assets. The dual standard, which allowed dollars to be converted to gold and the homes or cars held as collateral, created a nightmare for the Fed. Freeing it from the government imposed obligation to redeem in gold and its collateral assets at a fixed rate created huge headaches, and huge swings in the value of the dollar.  If you take a look at the stability of the dollar post 1970, there is no deflation and after a few years the dollar stabilized at 2-5% inflation for the last 20 years or so.

Greed is Impossible

on Tuesday, May 17, 2011

This man quit his job working as a software engineer after September 11, and now spends his days cleaning a river that has been accumulating trash near an auto repair shop. I don't think there is a difference between the work he did as a software engineer and the work he does now, except that his previous work was much more beneficial to mankind.

A company used to be trading money (wealth) for this man's highly skilled labor, and now he is doing work that a person with no skills, education, or intelligence can do. If you don't include this man's personal enjoyment of the cleaning process, which job is probably better for the world? I think it is obvious, if this man's own feelings are removed, that the previous work was much more likely to make the world a better place.

And I think that the reason he is performing unskilled labor instead of using his mind, education and skills is that he does not understand that his previous work was good for mankind; he perceived it to be shameful pursuit of money; of personal greed. This an unfortunate gap in understanding among educated adults in the world. Most of us fail to realize that using our abilities to create wealth is beneficial to everyone.

When wealth comes into the world, be it a clean river or new software, it is usually very beneficial to those who create it, but even more beneficial to society. The person who creates the first computer becomes very wealthy, but the total value provided to the world is worth many times more than the inventor receives. To pay everyone on earth to destroy their computer and forget how they are built would take perhaps more wealth than exists on earth! Innovation and new wealth benefits not only the first man, but also the entire world, and its accidental influence is worth so much that all of us should be encouraged as much as possible to create wealth for ourselves. Each of us, weather we intend to or not, help the world with every moment we spend trying to help ourselves.

How much would you have to be paid to agree to never use a computer again? To never use a phone, the internet, a car, or most of the things in your home, like dishwashers and laundry machines and so forth... You would have to find machines from 60 years ago (and they would cost more to run) and use those, and your central air conditioning would not be allowed, and you would have to use cash and pay everything by check. No more movies unless you use actual film, etc. This is impossible because computers are used to process checks, currency, and send anything by mail, so we would have to imagine that we are penalized for the speed and reliability computers provide. Perhaps you could have your mail held for two extra days and be forced to randomly destroy some of it, and it would be like this for everything, and you would be forced to work for a company that does not use computers, which would be a tremendous task in and of itself. How much would that cost? How much do you personally benefit from even this single invention?

I would need to be paid many millions of dollars to avoid computers for the rest of my life, and even then I may not accept. Perhaps one billion dollars might convince me, but I can imagine an amazing future, where computers are billions of times faster and more useful than now, and that is worth a tremendous amount to me. And all of this was created by one man's greed. One man's passionate desire to create a computing machine for the home, and to become wealthy doing it. His personal desire to help himself has accidentally helped the world to be a billion times richer than before.

If computers are worth even just $1 million to each person in the united states, the total value provided to just one nation is over 300 trillion dollars, and the united states is only "worth" about 200 trillion (total estimated value of all assets owned by Americans and the US government). Intangible wealth, the stuff that is not traded but still exists among us, is unimaginably large. And it is the intangible wealth that is really, truly valued by human beings, and much of it comes into existence when people greedily pursue their own personal fortunes. We should not fault any of them, but imagine a world where everyone tries to help themselves in order to create the intangible benefits that all of us don't realize are always created when people work to create, think, and innovate, for any reason at all.

If this man is cleaning a river because he thinks pursuing money in an office building is not helping anyone but himself, that is a grand shame. His goals are admirable, but his ignorance is stopping him from living the truly purposeful life he desires.

To teach our children to be greedy is not my suggestion. We should teach our children how the world works, and encourage them to work not only for themselves, but to pursue the creation of wealth, the acquisition of money in legal and moral ways, with the full knowledge and pride that comes with knowing that every small action, every tiny piece of useful work they do, is helping future generations to live better than we can even imagine. It is impossible to be "greedy" if you know that your success is the world's succes too, many times over. It is impossible to become wealthy without helping the world more than you have helped yourself.

The Curious Nature of Wealth and Ownership

on Sunday, May 15, 2011

How do we know that we own anything? Because we have it in our immediate possession? We know that can’t be true, because we can borrow a car, or wheel of cheese we do not own. We hold them in our hands and control them only temporarily; we do not own them. Shipping companies transport goods they do not own, we live in homes we do not own, and we even make use of digital movies that we hold for 24 hours, and “return” them to iTunes, or Netflix. So if holding and controlling an asset does not an owner make, what does? What is this thing we call ownership?

Wealth is anything valued that can be exchanged, and a wealthy man owns wealth. It is the ownership that makes him wealthy, and it is the ownership that he trades when he exchanges his wealth for another man’s wealth. We do not buy and sell wealth, we buy and sell the rights of ownership. People are only wealthy when they own, and it is the ownership that is what we exchange in markets. We do not trade the use of a tool, we trade the right to use the tool. I don't trade the cheese to you, I trade the right to eat the cheese. It is the ownership that is traded, and the ownership is the only thing that can be considered to make a man wealthy. Even if I hand you the physical cheese, it is a meaningless act until I transfer ownership. Your wealth does not increase until I transfer ownership of it to you in whatever method is defined by our legal system.

When I sell my house to you, I do not pick up the house and give you the physical asset. It is not the “real” or physical wealth that is transferred in economic transactions. It is the ownership that is traded in the marketplace, not the assets themselves. There is a strange fuzzy line between "real" and "financial" assets, but the reality is that we are always trading ownership; we are always trading financial assets weather they are written on paper or not. The ownership is all we can ever exchange, and is therefore the only tradable wealth on earth -- the rights to control items that we value.

Sometimes we are fooled into believing that when we trade physical objects we are trading wealth. That is not the case. If we go to a friend’s house and I take a book off the shelf and give it to you, and say “here, this is a gift from me, it's yours now,” you might respond by asking if I own the book. This would be an example of me giving you a physical asset without giving you its ownership, and we can see that trading the physical asset is irrelevant. In order to give you the book it does not matter its physical location. All that matters is the location of its ownership, which still rests with the homeowner. The ownership (and its method of enforcement) is all the matters.

Land deed from 1636
Without government, one enforces the ownership of their assets by personal force. With a government that does this job for us, we are able to own without being in the immediate possession of the asset. Without a system of property rights, the value of assets is always contained in their physical form, and whoever has immediate control is the owner. Previously, to exchange the ownership of wealth, we would exchange the physical wealth, but the ownership is what we were really trading -- it’s what we really value. The ownership is like the soul of the wealth, and it is the collection of souls that makes men wealthy. If a man uses wealth that he does not own, he is not wealthy. The man who flies a multimillion dollar airplane is not necessarily wealthy. It is the man who owns the plane that is wealthy.

Ownership is today determined by the state. Without the state, each man is his own government, and uses his own force in order to own; in modern economies, the state decides who owns. A man who uses wealth is not rich. Only the man that owns wealth is rich. So it is more important to look to ownership and not to the physical location of wealth in analyzing specific economic transactions.

Modern legal systems allow us to own wealth that is not in our immediate possession. The system allows us to hold “title” or “deed” or other paperwork that specifies who owns certain pieces of wealth. These are legal documents that spell out in not-so-plain english exactly who is owns the the car or home. Ownership may be divided between a few people, or one person may own the entire asset. The legal documents point to the owners.

The modern system gets us into trouble when thinking about wealth and ownership, however. We do not intuitively understand a system that is able to transfer the ownership of an asset through time and space. We are now literally able to move ownership anywhere in the world, and move ownership into the future as well, with contracts that specify that ownership will be transferred on a certain date. We can transfer ownership before we even have it, by selling short. All of this is very confusing for our primitive minds, so I have found it more reasonable to think about wealth and ownership in a way that human beings are more easily able to consider; we should think of wealth in the same way that we think of a human being, and think of ownership in the same way that we think of human souls.

With the modern legal system enforcing and regulating property rights, we are able to rip the soul from a home in California, put it in a jar, and keep in in a desk in New York. The soul of any asset is the ownership of that asset. When we move souls through time and space, and store them for later, nothing happens to the “bodies” that used to contain ownership. They continue on as if nothing has changed, but we know better. In the system of law and order that we enjoy today, if you find a house in the woods, you cannot take possession of it, because you do not know where its soul resides. Today we do not own a piece of wealth unless we control its soul, and souls are regulated by the government. We can certainly make use of a house we find in the woods. We can even destroy its zombie body, but we do not own the home in the woods. To own it, we must find its soul.

The process of creating financial (paper) assets is to delineate who will control an asset’s soul. When we create new stock in a company and sell shares to investors, we are selling pieces of the company’s soul to many people. When we create a currency we are dividing a home’s soul (its ownership) into many smaller pieces, each of which we call a dollar, kroner or yen. Those dollars entitle the holder to a piece of an asset’s soul. This entire process of moving and dividing souls is a process that creates liquidity and stability. With the ability to own assets at any point in space or time, we are able to do things that our ancestors only dreamed about, and it is a big reason that our wealth is growing so quickly. The ability to own at a distance, and move assets so easily through time and space allows the most productive among us to produce very efficiently, and to produce in vastly larger amounts than would be possible if he were forced to personally protect each of his factories and assets, or hire armies to defend them.

All of this is made possible through the careful use and threat of force. If you begin living in the house in the woods without owning it, the person that controls the home’s soul has the power to force you out of the house using police. If you refuse to leave, they’ll physically remove you, and if that isn’t possible, they’ll kill you. Similarly, if a burglar enters your home and is trying to take ownership of assets in your home, you are permitted to use force to stop him, and our laws will not punish you for defending ownership. Note that you are not defending wealth, per se, but its ownership. If he takes a car, he does not own it until he can change its serial numbers, and convince the government that he owns the car's soul. If he takes jewelry, the ownership is transferred because there is no way to prevent the soul from following the "body" of the asset. There is no way to stop the ownership from leaving the house with the thief.

If you don't have the legal right to the asset, you don't own it. The only way to own wealth in our modern society is to own its soul (legal right). Souls sometimes remain in the asset and sometimes they are legally moved in space and time, but the only thing that matters is ownership. Without legal ownership we do not control an asset, and without control we do not own. Legal ownership is all that matters in modern economies. You cannot own anything without the blessing of the legal system, and you cannot be wealthy unless the legal system says you are. The rule of law makes the physical asset irrelevant when we are trading with others. We trade papers that show the government who owns, we don't trade the assets themselves. The ownership is all that matters.

Our Tribal Minds

on Saturday, May 14, 2011

"Economic growth" is synonymous with "increasing standard of living." To understand why, we have to understand what GDP is, and what wealth really is.

Wealth, for human beings, is anything that makes our lives better. If we are alone on an island we can still improve our life by making a shelter, storing food, farming, collecting salt and spices, making tools, finding herbal medicines and storing them, hunting and preserving meat, making and storing wine, writing songs and making musical instruments, writing poems and making books and so on and so forth. All of our actions are designed to improve our life, alone, on the island, and as we do so we are creating new wealth.

Wealth isn't fixed. It is created by people when they manipulate their environment to make their life easier and more enjoyable, and we call this manipulation "wealth." Trees are valuable to human beings because they are pretty, block out the sun, harbor animals, etc, but a house built from a few of those trees holds more value to us than the original trees, because it can keep us warm and protect us from wild animals, and protect our food stores as well. So we make a personal decision to transform the tree into something we value more -- a house.

And every person on earth is making the same personal decisions with what they own. Each person owns a little bit of something, and he decides what is the best way to improve what he owns. He may decide that a piece of paper is valuable, but that a book or poem written on the page is a beneficial transformation of a blank white page into something more valued, something worth more, something we call "wealth."

Another person who owns grapes may decide that they are tasty, but that wine is more valuable to him, and so he allows them to rot and stores them as wine. To him, that is a more valued resource than the grapes. It lasts longer, it makes him feel good, he decides it is best to make wine.

Another man may decide that his cow is best for making milk and cheese. Another may decide to breed a few cows and kill them, because he has decided that meat is better than cheese.

As we go along, it should become obvious that all of these people are making personal decisions about "wealth" that is personal, and may conflict with what their neighbors consider to be the best use for each natural resource. This conflict is solved in two ways. We can either find a god-like person or god-like council to decide what is the best use of each raw material, and analyze each person's desires and needs over the long run, and then tell everyone how to use their trees and paper and grapes and cows... or we can allow each person to make their own choices.

Allowing everyone to make their own choices is scary, because no one else is making choices that we think are correct. We think it would be more efficient if those grapes were used as food, and we think destroying a forest is a sad waste of trees, and that the man should have built a smaller house, or a house from clay or straw or stone.

I think we have an innate desire to plan and organize as a group, to meet and decide what is best for the tribe, and how everyone should operate to insure our collective survival. Unfortunately, this only works in small groups of people who all know and respect each other, and share the same beliefs about what is right and wrong. Today we have billions of people who don't know each other and share wildly different ideas about what is right and wrong. There is no way to have a group meeting and have us all agree on what is best for our group, or the forest in which we live (the earth). We must find another solution.
$1,564 for 40kg.
We must find a way to allow all of these people, some who want to make a house and others who want to live in a tent to live together in harmony with the forest. The answer that modern man has developed is private property. Because we cannot organize billions of people into a cohesive group (without force or perhaps thousands of years of homogenization), we have decided to allow each person to be their own group, and make their own decisions about the best way to manipulate their possessions, land, trees, grapes and animals. This allows everyone to do what they think is best. The trouble is that some people might feel it is best to destroy their land and their things, but there is not much we can do about that if we want to live peacefully with billions of others. Almost everyone on earth will be doing something with their life and their little piece of the world (their possessions) that we think is inefficient, wrong, useless, or wasteful. We still have a strong tendency to pull people together to operate as a cohesive whole, show them why killing animals is wrong, or show them why trees are so beautiful, and to make them stop doing what we personally think is wrong. We tend to forget that all of the ideas and opinions floating around in our own heads are only our own opinions, which are not always the "right" for everyone else.

Many of us want to pull others together so strongly that we are willing to force other people to do what we think is right. Many of us feel so strongly that others are being inefficient or immoral with their actions, that we think it is moral to point a gun at them (pass laws) telling them how they can use their trees, or if they can make wine from grapes, or if they can kill their cows or must only make cheese.
The trouble is that we have forgotten how we got here; we have forgotten why we have private property. We have forgotten that in order for a group to act as one, it must share goals and a world view, and there are now too many people with too many different ideas, even in one small town, to have them all act in unison, and have them all share ideologies.

Wealth is simply what makes life better for us. Each of us tries to create wealth by making our own lives better, but we don’t all agree on exactly what “better” really is. To solve this problem, we allow each person enough personal space to make their own decisions, as long as they don’t hurt other people (including pollution). When many people are allowed to make their own decisions about the best way to make their lives better, we get a bunch of people who are really happy about their own decisions, but we also get a lot of people who forget how we got here and want to tell other people to be just like them, and most of us feel this way because our brains evolved living in small groups of friends and family that shared common goals and a common religion and a common morality and common ideas about the best use of the resources available to the group. Our minds did not evolve with private property rights, and it seems intuitively unnatural, selfish, and unfair.

And this is where the huge push to collective governments comes from.  Our intuitive sense, that we should act as if we are a small tribe living in huts, sharing everything, and working for the common good of the group. It is unfortunate that history lessons are so superficial and irrelevant today. Perhaps if people understood that what they intuit is not always “correct,” they would be more willing to respect the desires of other human beings, and allow them to be productive and create wealth in their own way (as long as they don’t hurt others or destroy/pollute their land).

A great side-effect of allowing everyone to make their own decisions about how to make stuff that improves their life is that many of us become very good at some aspect of improving human life on earth. Some may be very good at making cheese, and another becomes very good at making wine, and when they get together and trade with each other, they both enjoy the perfection of the other man’s labor -- they both have better quality food and drink than they would if they lived alone on their land. It is for this reason that “free-trade” improves life for humans on earth. It allows billions of people to perfect something and trade it for other very high quality things that they might not otherwise have.

And this is the best of both worlds. We allow each person to make personal decisions about their things, improve his own world as he thinks is best, and trade with other people for the things that they think are really good for making life better. In this way we all have an ability to live many times better than we would if we lived alone, and in this way, through private property rules and the ability to exchange with other people that we “accidentally” act as if we are one large group, with common goals and a common view about what is a good use of resources or a poor use. Because wealth is simply what we call anything with value and we value things that we think make our life better, we can say that improving life on earth is synonymous with increasing the amount of wealth on earth. Wealth is simply an improved life! 

If you and I live on separate islands near each other, and I become very good at making butter and cheese, and you become very good at making strong houses and great wine, but you suck at making dairy products and I can’t figure out how to make a strong house, we have two ways to help each other live better lives (have more wealth). We can become friends and help each other out. I can make butter and cheese for you, and you can build me a house and make wine for me. This is what feels intuitively moral to most of us. Being friendly and offering to help others seems like the right thing to do. 

Negotiating in crude terms, demanding payment for the wine and housing, seems wrong; greedy. A friendly exchange would work if the men are close to each other and are able to become friends. But what if the men live far apart, and what if they have such wildly different world-views and moral values that they would hate each other were they to ever meet? How can these two ever be expected to cooperate without forcing one of them to change... without forcing one to suffer or hide his beliefs and values?

We must find some way to formalize the exchange between friends in order to allow non-friends to cooperate as if they were friends. To formalize the exchange, we use prices to decide what we think the value of what we have created (wine and cheese) might be. If we think that a bottle of our wine is worth one pound of cheese, we put a price on the bottle, but we don’t use money. We don’t need it and we don’t have it yet. We put prices in barter on our wine:

Wine / 1 lb cheese, 2 lbs salt.
House / 1,000 lbs cheese, 100 cows, or 1,000 bottles of wine.

Both of them would create a similar “price list.” They would specify what they think the trade value of each piece of wealth they have created might be, in their opinion. If another person creates a new medicine or finds a new spice or wants to trade a horse for any of these things, they would both decide what they think a horse is worth in terms of what the other man holds. If one has a lot of wine and the other has a horse, one might decide he is willing to give up 100 bottles, and the other may decide his horse is worth 200 bottles, and if they both compromise, they might trade it for 150 bottles. If either of them decides that they don’t want to compromise, the sale does not happen. The man with the wine keeps his wealth and the man with the horse keeps his. Buying and selling (trading) does not ever happen unless both of them think that it’s a good idea. Trades won’t occur unless I think that your wine is better than mine, and you think my cheese is better than yours, and we both agree that trading them is a great idea. There can be no losers when both of them are free to make decisions about what they will or will not trade.

Today we use money, but the process is the same. Money is simply a uniform and easy-to-use form of wealth, that makes it easier to trade horses and wine.  If a man has a horse that trades for 150 bottles of wine, and wants to trade some of his horse for ten bottles of wine, that is impossible without destroying the horse. In order to solve this problem, money is invented as a method for spending part of the horse’s trade value. (more on this later). 

So, in order to have a modern world cooperating and making life better for themselves, and trading good wine for good cheese, and figuring out how to make better and better things that make our lives easier and more fun, we must have the ability to place trade-values (prices) on everything we make. This allows strangers, who may not ever meet, to exchange the stuff they have created, which makes both strangers live better lives, because they now both enjoy great wine and great cheese, even though they are not friends. Even strangers can improve each other’s lives with a pricing system. When we place a value on our own things, and make personal decisions about how much of our wine we are willing to giver up, and match our opinions of the value of our wine with the opinions of others, sometimes we find a common ground, and when that happens a trade occurs, and each trade makes both people better off.

So prices and trading seems crude and greedy because it doesn’t fit with our tribal brain, that wants to help everyone around us and in turn have everyone help us. It wants us to be a family and protect and love each other and each other’s possessions as if they were our own. It’s a beautiful desire, and perhaps it is sad that we cannot live that way with a billion other people, but such is the world today.

A side-effect of implementing a pricing and trading and private property system is that all of us end up accidentally working for the good of other people. All of us, by making really good wine or cheese and trading it with others are improving everyone else’s life. Imagine a man alone on an island. He makes mediocre everything but figures out how to make really tasty beer. His life might improve slowly as he creates more and more stuff that he thinks is valuable, but it won’t improve as fast as if another man arrives and does the same thing. If the second man is able to make anything  better than the first man, and they trade, both of them are better off. The first man has only good beer. If the second man makes very good cheese, and they trade beer for cheese, now both of them have really good beer and cheese (but mediocre everything else).

When a third person arrives life gets even better. Perhaps he is lucky to be very good at making knives, and trades them for beer and cheese. Now all of the men have really good knives, cheese, and beer, and none of them has to work any harder than if they were alone. The ability to trade with each other makes them all better off! Now imagine that we continue this exercise until there are seven billion people on the island, and all of them are getting better and better at making wine and music and tools and tomatoes. And all of them are setting prices on their things and offering them for sale (for trade) with everyone else on earth. The growth of the population, the addition of each new person improves the lives of every other person already on the planet. Even if each person cannot do anything better than the people already there, there is some probability that each new person will become the best, or figure out some way to improve something, and if that is not the case, each new person can help others to make what is already very good, and with his help more and more excellent cheese is created, more and more wealth is brought into the world and offered in trade for all the other new wealth being manifested from nothing all over the planet.

Government Spending vs Unemployment

on Thursday, May 12, 2011

The more government spends, the more unemployment we have.

What is Money?

on Sunday, May 8, 2011

Is money wealth?

Yes. It is an IOU from a bank, which is wealth in the same way that an IOU from your neighbor is wealth.

Except your neighbor doesn’t pay the IOU with another IOU he can print in unlimited supply....

The government can’t print IOUs (dollars), only the federally protected bank-monopoly (Federal Reserve) can do that. Dollars are backed by real wealth because each IOU comes into existence in exchange for homes, cars, businesses, and government securities. The IOUs are "paid" in those assets when bank loans are repaid.

What is the IOU for? I brought a dollar to the Federal Reserve, and they wouldn’t give me anything in exchange!

The dollars are backed by the assets the bank takes in exchange for its IOUs. If I go to a bank and take a loan against my $10K car for 10K IOUs, the bank takes ownership of the car (holds the title), and agrees to return the ownership of the car to me in exchange for the 10,000 IOUs at any time. Dollars are backed by the cars (and houses and businesses) of which banks take ownership when they issue new loans.

Not all loans are collateralized – revolving credit card debt, for example and unsecured loans for another. So, not every loan is backed by real assets. The value of underlying collateral changes. When house values drop, the mortgage lender finds that he essentially owns an only partially collateralized loan.

Financial or “paper” assets are wealth, as per the economic definition of wealth, which is “anything valuable that can be exchanged.” Revolving debt and unsecured loans are a promise to pay, and are issued to people who have a good reputation (credit rating). Their debt can be bought and sold making their promise a form of wealth. Bank loans issued for revolving and unsecured loans are “backed” by the assets and promise of the borrower. They have pledged their assets even if it is not a formal arrangement. If the promise to repay is broken, the bank can still sue or lay claim to his assets in bankruptcy court.

If banks loan recklessly to people unlikely to repay the debt, they devalue the currency issued to make the loans. They fail to take an equivalent asset in exchange for new dollars, which inflates the currency. A responsible bank, making a loan to a credit worthy borrower, is issuing new dollars backed by the promise of a credit worthy person and the assets he owns. That person’s IOU (a form of real, exchangeable wealth) backs the new dollars.

When housing values drop, the debt of that credit-worthy borrower still backs the dollars issued. Because one of the borrower’s assets declined in value does not release him from the IOU to the bank, and does not remove his other assets from possible seizure by the bank.

When banks make responsible issues of new currency to trustworthy people, inflation is not a problem, and the dollars issued are backed by real wealth. The Fed holds a monopoly on currency creation, and its member banks are routinely reckless issuing currency and judging the credit worthiness of borrowers. If any entrepreneur were permitted to issue currency, the best bankers would rise to the top, and eventually there would be a few stable currencies with very low inflation, all backed by real assets in the same way. There is no need to “abolish the Fed,” per se. We need only return the business of creating currency to the free market.

What about when the Federal Reserve purposely purchases an asset from a failing bank at high above its “real” value? In that case, you are being given an IOU for, let’s say, $100k that is only redeemable for an asset that is worth $50k.

Issuing loans for overvalued assets, or to people who have poor credit is one cause of inflation. It devalues the dollars issued. This is why the Fed monopoly is harmful. It can get away with inflating because it has no competition.

You are confusing checks with dollars. If I hold Federal Reserve notes, nobody owes me anything. And no one is obligated to trade for my notes. Federal Reserve notes are not IOUs. That is why it is called “fiat money.”

The Federal Reserve Notes are an obligation to return your home to you if you return the notes to the bank. They could easily say “The Fed owes you 1/100,000th of your home” on each note. They owe you the house. You owe them 100,000 of their notes, called “dollars.”

Put another way, if you returned with 100,000 notes, the bank would be willing to offer you one note stating “The Fed owes you one house.” When you return that note to the bank in payment on the loan (not deposited to a checking or savings account), you own the house again.

This is an absurd contrivance. A debt always stipulates repayment. If a debt stipulated repayment with one million bushels of flax, that does not mean that the flax I grow and store for repayment are IOUs.

A paper silver certificate “dollar” (dollar was an imaginary term, like unicorns) was in 1792 an IOU from the mint for 24.056 grams of silver. If you held one million “dollars,” the mint owed you 24.056 million grams of silver. If you pulled more silver out of the ground and stored it, that new silver would not be an IOU any more than new bushels of flax.

The mint issued paper “dollars” if you brought raw silver to the mint for coining. It would take the silver and give you paper IOUs in return, in exactly the same way that a bank takes ownership of your assets (homes and cars) and returns paper dollars.

The silver certificate, when returned to the mint, yielded a specific amount of wealth (silver) in the same way that US dollars today yield a specific amount of wealth (a house) when returned to the bank.
There are two ways that currency comes into the world. Most of it comes into existence via bank lending, but some comes into the world because of “quantitative easing,” which is analogous to the US mint printing up “fake” silver certificate dollars and spending them. They are still IOUs (they can still be used to get silver at a fixed rate from the mint), but they are not backed by wealth and they lower the value of existing dollars. When the Fed creates new dollars “out of thin air” and buys treasuries, they are still IOUs, because they can be used to take ownership of a house at a fixed rate from the bank.

If we put you and a friend on a deserted island with just a sack of money, where would you spend it?

If I hold an IOU from my neighbor and you move me to a desert island (without the neighbor) the IOU would become worthless as well. Holding an IOU carries risk, but an IOU from a trustworthy person or company is valuable in the same way as other paper assets: loan agreements, stock certificates, bonds, etc.

The Federal Reserve is not inherently trustworthy. We are all forced to use dollars and using anything else if forbidden, thus creating an artificially high valuation of the dollars themselves, which would be worthless if they weren’t backed up by force.

They are trustworthy in as much as they have not ever defaulted on their promise to return an asset as agreed when its notes have been repaid. And it has a giant thug on its shoulder (the government), who has agreed to support it and its monopoly, which does not create an artificially high valuation of the currency, per se, but allows them to inflate dollars without worrying about losing customers. In a free market people would be free to choose from myriad currencies, judging each bank’s trustworthiness and its inflationary history.

The dollars would hold value without government force. For example, say I forget my wallet one day and walk into your store. I say “I forgot my wallet, will you accept this IOU for a bottle of whiskey?” If you accept, you now hold currency issued by me, backed and denominated in whiskey. (You could presumably trade that IOU with others who trust me.) I take ownership of your whiskey and you take ownership of my IOU in the same way that a bank issues IOUs in exchange for your house.

My whiskey IOU holds value without the use of force, and it is backed by my assets and credit worthiness. I may not even hold whiskey in my house, but because I promised to pay, that IOU continues to be worth a bottle of whiskey and would fluctuate in tandem with my wealth, credit history, and how much people in town trust me.

Later, if I come to your store with a bottle and offer to repay you, you might say “I forgot the IOU at home.” And I would say, that’s fine, keep the IOU and the bottle, but pay me a little interest until you find that IOU. If this were to happen, the exchange would be similar to a bank issuing new dollars for a home, and then allowing you to live in the home if you pay interest until you return all the dollars. They have agreed to return the home to you when you return the IOUs to them in exactly the same way that I agree to return that bottle of whiskey to you when you return the whiskey-IOU to me.

Your goal in trade is obtain wealth. Some goods are called “intermediate goods” because they do not satisfy that goal. Money is a universal intermediate good, with the possible exception of currency collectors.

The term “intermediate good” is only useful in discussing the calculation of macroeconomic numbers, like the GDP, and are useful in avoiding double counting inputs to manufacturing. The term is not useful in deciding weather or not money is a form of wealth. Dollars are not inputs to a final product. They are debt obligations that can be owned, held and traded by people who consider them valuable. Wealth is anything of value that can be owned and exchanged. Money is valuable and can be owned and exchanged. Therefore, money is wealth.

The only value anyone has for money is in its ability to trade for something else. Everything else has some value to someone other than its trade value. Money was invented to obtain those things. It has no other value to anyone.

If I borrow a pound of sugar from you and give you an IOU in exchange, what is the value of that IOU? It has three purposes for you. You can trade it with someone other than me, using it as currency, or you can turn it in and get your pound of sugar back, or you can keep it  indefinitely as a low-cost method for storing wealth. There is no fundamental difference between money and goods that are useless to you and valuable to others, like raw mineral ore. You can use mineral ore for its trade value, turn it in to the mineral extraction factory, or keep it as a store of wealth, but you would not use it for any other purpose because the factory will pay a lot for it. To you, there is no difference between mineral ore and gold coins. Both are useless to you but can be used as money.

A Federal Reserve Note is an IOU promising another IOU from the Treasury.

Federal Reserve Notes are a promise from a bank that agrees to accept the notes in trade for the loans on its books. The note does not promise treasury securities. The people that hold loans against their homes, cars, and businesses can always pay back the loans using the notes. If you take a loan against a $100K home, you can always take ownership of the home for 100 thousand Federal Reserve Notes. If rampant inflation makes the notes worthless, you are still permitted to take ownership of that home with the same (now worthless) notes.

The notes are also a promise by the state to remove its gun from your head; if you earn 100,000 notes per year you can always have the gun removed by paying about half the notes in taxes. Even if the notes become worthless before April 15th, you can still remove the gun by paying with worthless notes.
If you do not owe the state any taxes, and you do not hold any outstanding loans from any US bank, you are accepting the notes in the same way that I might trade an IOU issued by my neighbor. If my neighbor borrows a case of wine from me and writes an IOU, and I offer to trade that IOU for an ounce of gold, you would accept the IOU only because you trust my neighbor to keep his promise. In the same way, you only accept Fed Notes because you trust the US government and banks to keep their promises.

USD have value because people before you accepted them in trade, and people before you accepted them for trade because they were redeemable in gold or silver. Stating that “money is debt” is quackery. Dollars are not exchangeable for wealth anymore, they are a fiat currency that only holds value because people believe in them.

The first step to creating a paper currency is creating wealth (homes, cars). The second step is trading that wealth with another person in exchange for an IOU which can now be traded as currency. Dollars hold value because they can release you from a bank loan. No matter how badly the dollar is inflated, you will still be able to take possession of your home by paying off the loan at face value.

USD today serve the same purpose as gold coins to the ancients. They are not in any way whatsoever IOUs. I ask you again, what does the Federal Reserve owe you?

The Federal Reserve does not owe; its member banks owe. When member banks issue loans, they create currency “out of thin air,” and promise to trade collateral (homes, cars) for the new dollars. When the Fed purchases treasuries it creates currency as well, but does not make any promises. Dollars spent by the Fed are alway inflationary. Dollars created by member banks are not.

The IOU arrangements that you describe are not how USD work or get their value. New USD enter circulation when the Fed prints money from thin air and buys US Treasury debt. You have it backwards; the Treasuries that the Fed holds are the IOUs. A Treasury is a paper that says: “the government owes you US dollars.”

There are two ways that USD enter the world. One way is via bank lending, which involves taking an asset in exchange for new USD, in the same way that the US mint used to take an asset (silver) and return paper US dollars. The old dollars could be returned to the mint for silver, and new dollars can be returned to the bank to take ownership of a house. When dollars are created in this way, they are backed by wealth, and they are IOUs from any bank that issued a loan.

The second way new dollars enter the world is via quantitative easing, where the Fed spends new dollars and buys Treasuries or other forms of wealth on the open market. When new dollars enter the world in this way they are not backed by wealth, but are still IOUs, because they can be returned to a bank in exchange for a house. When the Fed does this it is analogous to the old US mint printing up “fake” silver certificates and spending them. They are still IOUs that can be turned into the mint for silver, but they are inflationary.

If the old US mint, in the 19th century, purchased silver on the open market with silver certificate dollars (IOUs for silver), there would be no harm done. All the IOUs could still be honored for silver held at the mint.

Today, when the Fed purchases assets on the open market, it is analogous to the old mint purchasing silver, because modern USD are backed by myriad assets, but some trouble arrives when we realize that USD cannot be returned to the Fed in exchange for those assets, which are held by the Fed. All profits derived from them goes back to the US Treasury each year, so those assets are effectively owned by the US government and cannot be recovered by citizens holding modern US dollars. In 1792, the silver in the US mint was still owned by the US government, but all of the silver was “spoken for.” All of it could be recovered by people holding silver certificate US dollars.

The Fed will later sell its assets back to the open market in exchange for US dollars, which is done to “raise interest rates” by selling treasuries. In reality, this lowers the supply of “fake” US dollars in circulation (dollars are paid back to the Fed, removing them from the money supply) and has nothing to do with interest rate manipulation. It deflates the currency by removing some of the IOUs from circulation.

Whenever the Fed holds a large amount of assets, there are extra inflationary “fake” IOUs in circulation, and when the Fed holds little or no assets (treasuries) there are little or no “fake” IOUs in circulation that are generated by the Fed. However, there can still be effectively fake IOUs in circulation if banks are careless in estimating the value of the assets that they accept in exchange for the new dollars they create (each time they issue a loan).

If banks suddenly begin issuing million dollar loans for lumps of coal, tulip bulbs, and tremendously overvalued homes and educations, this will also cause inflation because the supply of new dollars will begin to outpace the supply of new wealth. Issuing loans to extremely poor credit risks is another inflationary activity, because new dollars are backed not only by existing wealth, like homes and cars, but the good credit of the people borrowing the new dollars. If the people can be expected to repay the loan even if their lump of coal turns out to be worthless tomorrow, there is little harm done. If the person cannot be reasonably expected to repay, the new money is not matched by appropriate wealth or credit, and is inflationary.

Wealth is not the mere possession of goods and services, it is the ability to command and control goods and services.

Wealth is anything valuable to human beings that can be owned, controlled, or exchanged. A wealthy person owns or controls a lot of things, valued by humans, that can be exchanged. There is no fundamental difference between a “paper” asset and a “physical” asset. Both are valuable, and can be owned and exchanged.

Why is money designated by a different term if it is not a different concept? If it is a distinct concept, then what is the distinction? 

It doesn’t matter what we call an asset. We could call money many other things, but money is the word we choose. Because we call some foot coverings “sneakers” and others “boots,” does not mean they are fundamentally different. They are both shoes, in the same way that money and wine are both “wealth.”

Each person has his own purposes for the goods he acquires. But of all goods, money is unique in that each and every one of us has only one and the same use for money – trade.

Goods have two values: they can be traded and they can also be consumed. Currency can also be traded and consumed.

If I borrow a case of wine from you and write an IOU on a piece of paper, and hand it to you, you now hold a piece of paper that has the same two functions as any other “good.” When you return to my home next week, hand me the paper and I hand you a case of wine, what do I do with that IOU? I destroy it. The IOU has been consumed. The same thing happens to the IOUs (Federal Reserve Notes) when I return them to the bank to make a mortgage payment. The bank destroys the dollars I use to pay down the debt. The dollars I pay not longer exist, until new loans are issued by the bank.

You held an IOU denominated in wine, but I could just as easily handed you an IOU denominated in anything else. We could have agreed to write the IOU in gold, pigs, dollars, or even unicorns. It would not matter. I could have agreed to pay you one cow for your case of wine, and written you an IOU for one cow. When you turn in the IOU, I burn it and give you a cow. The IOU is a good that has been consumed. 

The wine IOU has two purposes. It can be “turned in” at face-value for a case of wine, which I would argue is the note’s “purpose.” It can also be traded to someone else, in which case the note finds use as “currency.” Money is the “most liquid” asset; a financial asset like any other. It is as valuable as stocks, bonds or loan agreements, and finds use as “money” only because it is the most liquid asset available. (In early times, the Chinese expressed their notions of money by a term meaning literally “current merchandise.”p55 Hayek, Denationalization)

Even if we accept the conclusion that US dollars are only valuable because government says they are, and that USD are not IOUs, they would will be defined as “wealth,” by any reasonable interpretation of the definition. Wealth is anything valued that can be exchanged. Money, any way you look at it, fits that definition. To think of money as anything but wealth leads to confusion, and is the main reason that most are so confused regarding inflation, world trade, local economies, taxation and so forth. If money is considered to be wealth, much of the confusion falls away.

Financial assets are not “real” assets. Financial assets are fungible. Most real assets are not. Financial assets are easy to store. Real assets require physical accommodations and insurance. Financial assets are liquid. Real assets usually aren’t. Money itself is not wealth. Wealth is what money can be exchanged for – goods. Stuff.

The line between financial and “real” wealth is very blurry. Financial assets require maintenance, storage, and insurance costs in the same way that “real” assets do, but many of those costs are paid for by government when it creates rule of law, property rights, courts and police. I would have to pay to have my paper assets protected were it not for the protection of government and rule of law. The costs are socialized, but they still exist.

I would have to purchase insurance on my neighbor’s life if he made a verbal IOU large enough, and I would need to pay to have the insurance documents protected from fire and theft in the same way that I might have to pay for the protection of my wine collection or brick of gold.

Financial assets are now incredibly easy to protect from damage and theft because they are digital, but it isn’t as if there is a black and white line between “financial” and “real” assets. It is a gradual change from large illiquid assets like factories to ultra-liquid assets like currency. Wine, gold and a handshake IOU all fall somewhere in the middle. Currency is simply the most liquid asset available.

It’s true that “wealth” is an ambiguous term, but the ambiguity is shattered by the phrase “Money is not wealth.” Money is only valued for its ability to acquire other things.

Money is valued for its ability to pay bank loans tax debts denominated in dollars. Banks and the US government accept only US dollars, and it is fundamentally for this reason that they are valued.
Dollars are also valuable as a store of wealth and as a “universal” unit of wealth, useful in trade, but they remain valuable only because banks accept only dollars if you wish to pay off your mortgage, and because the government accepts only dollars for tax debts.

Mortgage Backed Securities are Like Diseased Cows

on Friday, May 6, 2011


on Thursday, May 5, 2011

I promised to look after a friends cat for the week. My place has a glass atrium that goes through two levels, I have put the cat in there with enough food and water to last the week. I am looking forward to the end of the week. It is just sitting there glaring at me, it doesn't do anything else. I can tell it would like to kill me. If I knew I could get a perfect replacement cat, I would kill this one now and replace it Friday afternoon. As we sit here glaring at each other I have already worked out several ways to kill it.


Public School Funding vs Performance


Public schools are over-funded and the money spent on public schools does not correlate to the educations provided. Here is a graph showing test scores vs spending:

Spending is about $26,000 for each student signed up at a DC public school, and $28,000 for each student who actually attended. The cost of the average private school is only $6,620. So they cost a quarter of what public schools do, but still they do better.

If we imagine that supermarkets were run by the government in the same way that public schools are managed and funded today, the average monthly food cost for people choosing to shop at private supermarkets would be $550/month ($6,620/year), and public supermarkets would be spending $2,350 per month to feed its patrons, people being fed by public supermarkets would not have a choice about the foods they received, and the public markets would be providing rotten foods with little nutritional value (failing to teach people to read). Administrators of public markets would insist that the reason they cannot provide a variety of fresh and nutritious foods is that they lack funding, and about half of America would agree with them.

Penis Remote

on Wednesday, May 4, 2011

When not in use, this Panasonic concept remote is said to slumber peacefully, its limp body pulsating with light not so differently than a gently sleeping MacBook. But when touched, the remote wakes and becomes rigid...ready to be wielded and fulfilling pretty much any adolescent metaphor....

Panasonic executive #1 "We need a new product."
Panasonic executive #2 "Let's make a remote that behaves like a penis."
Panasonic executive #1 "Okay."


Spelling is Important

on Tuesday, May 3, 2011

Most Intimidating Police on Earth


Lightning Strikes Map


Lightning strikes are not evenly distributed. Some parts of the world have little or no lightning, central Africa has the most -- 200 strikes per sq km per year.

For an American, the chance of being struck by lightning is approximately 1 in 576,000 and the chance of actually being killed by lightning is approximately 1 in 2,320,000. This is misleading -- living in Florida is much more lightning risky than San Francisco.

How lightning initially forms is still a matter of debate: Scientists have studied root causes ranging from atmospheric perturbations (wind, humidity, friction, and atmospheric pressure) to the impact of solar wind and accumulation of charged solar particles.

The Empire State Building is struck by lightning on average 23 times each year.

Roy Sullivan held a Guinness World Record after surviving 7 different lightning strikes across 35 years, surviving all of them. He eventually killed himself at 71 yrs old. The seven lightning strikes:

1. 1942: Sullivan was hit for the first time when he was in a fire lookout tower. The lightning bolt struck him in the leg and he lost a nail on his big toe.
2. 1969: The second bolt hit him in his truck when he was driving on a mountain road. It knocked him unconscious and burned his eyebrows.
3. 1970: The third strike burned his left shoulder while in his front yard.
4. 1972: The next hit happened in a ranger station. The strike set his hair on fire. After that, he began to carry a pitcher of water with him.
5. August 7, 1973: A lightning bolt hit Sullivan on the head, blasted him out of his car, and again set his hair on fire.
6. June 5, 1976: Sullivan was struck by the sixth bolt in a campground, injuring his ankle. It was reported that he saw a cloud, thought that it was following him, tried to run away, but was still struck.
7. June 25, 1977: The seventh and final lightning bolt hit him when he was fishing. Sullivan was hospitalized for burns on his chest and stomach.


Coke Light

on Monday, May 2, 2011

Diet Coke in the United States is sweetened with aspartame only. Coke light in Mexico uses aspartame and acesulfame potassium (Ace-K). For me, the Mexican sweetener combo makes Coke Light taste almost like real Coke without the nasty mouthfeel and sticky teeth side effects, and much better tasting than USA Diet Coke.

This is interesting that Coke, Pepsi, and Red Bull all choose to sweeten beverages differently in each country. Apparently Mexicans have different tastes, as every blog post or message board I have seen contains posts from Americans and UK residents searching for Diet Coke because they find Coke Light to be undrinkable.

Interestingly, Red Bull is exactly the opposite. They choose to sweeten Mexican Red Bull with sucralose and aspartame instead of using the American combo of aspartame and Ace-K, which makes Mexican Red Bull Light taste sickly sweet to me.

PS After writing this, I learned that Coke Zero in the US uses the same sweeteners as Coke Light and tastes fantastic.

Make Methyl Iodide in Your Backyard

on Sunday, May 1, 2011

Methyl Iodide has recently been approved for use on strawberries, tomatoes, peppers and other crops. It replaces methyl bromide, which was recently banned by the EPA because of its ozone-depleting effects. Many people I know are afraid of this chemical, and I thought it might be fun to show how the stuff is made from seaweed, wood, and urine, and can be manufactured easily without a laboratory.

First we will need some sulfur, referenced in the Bible as brimstone.  Elemental sulfur can be found in nearly pure form in the ground, and is an essential element for all life on earth. It's the oldest known pesticide in use. Homer described its "pest averting" qualities 3,000 years ago. It's pretty cool stuff; it can be used as an insecticide and fungicide, is responsible for the smell of skunk and garlic, is part of gunpowder, and burns with a blue flame and melts into a blood-red pool of fluid. If we can't find any pure sulfur, we can always find some fools gold (pyrite), abundant in Iowa, and allow it to rust. The rust will be sulfate, a form of sulfur.

Now we need some saltpeter (potassium nitrate), which was described by an Arab chemist in the year 1270. To make our saltpeter, we'll create a compost pile using campfire ashes and straw, which we will cover from the rain and keep moist with urine. We'll mix it up often and after a few months we'll wash the resulting chemical salts off of the straw, filter the water through more ashes, and air dry in the sun. Congratulations! You've just manufactured a wonderful fertilizer that is not permitted for use in organic farming! If you want to use bat poop or scrape the walls of a saltpeter cave in Chile, then you can use it. But if you made it like this in your backyard and fertilize your garden, your garden is no longer "organic."

Now we will make some sulfuric acid, which has been studied for over two thousand years and used to be called vitriol.  To make vitriol, we need to burn our sulfur and our saltpeter, collect the smoke and combine it with steam. This was the method used in 1736 London to begin the first large-scale production of the acid. Alternatively, you could chop up a bunch of onions and collect their fumes (propanethiol S-oxide) and mix that with steam. Congratulations! You've just manufactured another chemical that is not permissible in organic farming!

Now that we have sulfuric acid, let's make some pure iodine. First, we'll collect a pile of seaweed and burn it. We'll repeat this a few times until our fire pit is coated with a residue. To remove the residue, we'll dump a bunch of our sulfuric acid on it, and watch a giant purple cloud of iodine vapor appear, and begin to crystalize on everything around us. We'll collect these crystals, which are pure iodine, discovered in the same way in 1811.

Next we'll need to make up a quick batch of methanol (wood alcohol), used by ancient Egyptians in the embalming process. Pure methanol was first produced in 1611 using the wood of the boxwood tree. To make the stuff, we need to bake some wood and collect the vapors.  A clay and bamboo distillation setup should work very well. If you spray plants with methanol, it will protect them on hot days and increase yields. But be careful, methanol is poisonous. Drink a little (10 ml) and you'll go blind. Drink a bit more (30 ml) and you'll die. It is found in small amounts in fruit juices, beer and wine. It is toxic via ingestion, skin contact, or inhalation. Congratulations! You've just made a toxic poison that is allowed for organic farming! Spray away to your heart's content, just don't breathe the vapors!

Next we'll need red phosphorus, discovered in 1669.  First, to make white phosphorus, we'll need to evaporate a bunch our urine and collect the residue, which will be a white, flammable, waxy substance that glows in the dark. At this point it's pretty volatile, nasty stuff. If burned and inhaled over time, it will make your jaw fall off. To stabilize it into red phosphorus, which is mostly harmless, we need to either bake the stuff at over 482 °F, or simply expose it to sunlight until it turns red. We'll choose the sunlight method. This is another element that is essential to all known forms of life; no animal or plant can live without it, and a normal person excretes about 1-3 grams of phosphorus daily. Red phosphorus is used to make matches and methamphetamine, and is not permitted in organic farming, even though it is another lovely fertilizer.

To make our final product, we need to mix three of our basic ingredients: iodine, methanol, and red phosphorus, which will produce a chemical reaction yielding methyl iodide. To extract the it from the mixture, we'll throw it back into our clay distillation apparatus and heat gently, collecting the steam and allowing it to condense into a colorless liquid. Methyl iodide is also naturally produced and emitted by rice plantations in small amounts, so if wanted to get really creative we could try to collect it from that source. Obviously, this stuff is not permitted in organic farming either.  By now I hope it is becoming somewhat obvious that "organic" farming is a somewhat arbitrary term, and the "chemicals" that it bans have been around for centuries and don't seem so scary when you know how to make them.

Now when we want to grow strawberries or other fruits that are easily attacked by diseases and bugs and pests, we first mix some of our colorless fluid into the soil.  It won't hurt the strawberries, but it will stop those pests from eating all the fruit and starving the village. Just don't drink the stuff, about six grams of it will kill you, but as you can see, it's a natural product that can be produced in my backyard with simple tools from rocks, trees and urine.