How to understand Greece’s negotiations with its creditors, part 1

Greece: We can’t pay the interest on our debt because the principal is high, the rate of interest is high, and our income is much too low thanks to the income-reducing austerity measures imposed by our creditors.

Creditors line so far: Prioritize paying creditors above anything else. We don’t care about the cumulative damage it does to your economy.

Greece with Syriza: We refuse to do that any more. Besides, can’t you see it’s pointless? We have less and less income to possibly pay you with.

Creditors after election: Well we can’t remove the debt principal from the books because debt is money and European nations’ money would have to disappear.

OK, these are good opening positions for negotiation. Greece is asserting you can’t collect from a business you’re running into the ground. Central bankers are asserting that “Europe’s money is our balance sheet” and you can’t remove debt from the assets side of the balance sheet without something bad happening to the liabilities (money) side.

What next? Compromise I expect. Either central bankers accept that balance sheets with liabilities exceeding assets are OK for central banks, or they’ll figure out a way to make old debt a token asset that generates little or no current account obligations. The first would be easiest, but the economic Zeitgeist is against it so I expect the latter. Some sort of indefinite near-zero real interest rollover as is the case with US or Japanese debt.

To clarify for the concerns of northern European folk:
No-one really expects a nation to pay back its debt. It’s not a project to build a highway, or little of national debt is like that. Nations borrow more or less indefinitely and the amount of debt may rise and fall but that’s an investment concern like the stock market rising and falling in valuation. Generally debt is supposed to rise slowly, and to pay it all back is a bad thing because it removes bonds from the investment market. Neither is Greece expected to pay back northern Europe nor are northern European taxpayers on the hook to pay Greece’s bill to someone. Sovereign debts are not like auto loans.

Rather, sovereign debts are like stocks or mortgages. They’re assets in the banking system. Greece essentially borrowed into a bubble and in 2010 was revealed to be a bad asset. Greece’s economy is worth less than it’s mortgage, so to speak. Bad call, maybe reckless, but it’s the truth. Since then the bad asset that’s Greece’s debt has been passed around until it ended up in Europe’s central banks, the way bad assets in the US ended un in the Fed. That’s OK, it’s partly what central banks are for. No one is going to liquidate a central bank because its liabilities exceed its assets. Except the ECB, if they decide to. But that would be dumb.

So what the negotiation is about is seeking one of two outcomes: Either agree in banking circles that having big holes in the balance sheets of central banks is OK, in which case they can write off a big chunk of debt and put the remaining amount back on the investment market on a sound footing, or figure out a clever way to keep the debt on the books so the books look neat but the debt generates no real interest or pressure on the real economy. The first is emotionally cleaner and revives the economy, and it’s what Syriza wants. The latter buries the problem until it dies of old age and is the Japanese approach. I like Japan…

Why is there an oil price?

Why is the oil price well-behaved? I mean why is it settling in a range around $50 a barrel instead of being stuck at a few dollars per barrel, the marginal cost of the cheapest producers? Or for that matter why isn’t it much higher, at several hundred or thousands of dollars? These questions are not as trivial as they appear.

I know that different producers face different costs of extraction and shipment, with Saudi Arabia bing the cheapest and US fracking the most costly. If producers also face scaling limits on production, that would create a sloping supply curve. But do they? What’s stopping Saudi Arabia from pumping the oil out of the ground much faster and meeting the entire world demand until its oil fields run out? It could then charge a price just below the amortised extraction cost of the next cheapest producer.

Is there a technical or geological limit on how fast you can drain an oil field? Faster extraction of course requires more rigs, but the capital requirement is moot. If one rig is profitable at a given oil price so are 100 rigs, assuming the oil field and the market last longer than the capital amortization period.

A fully competitive market with zero foresight, in other words concerned only with present returns and assuming oil reserves and world demand lasting indefinitely, would suggest an oil price close to the lower bound. That we’re not seeing that suggests producers are factoring some aspect of future or total expected returns into their supply decisions. In other words they set the NPV of future returns above zero. Hold that thought.

What’s at the other extreme? What if some really far-sighted people, say Norwegians, value future returns on par with the present? Then they should say “Hang on, this oil belongs not just to us but to our children and our children’s children. All future generations need to be compensated for losing their finite resource, so we’re keeping it in the ground until it’s the last oil in the World and prices are many times higher than thy are now”.

If a producer can wait, assuming oil stock is finite but world demand persists indefinitely, you’d expect them to sit on the oil until production collapses, there are acute shortages, and they can extract punitive prices. That’s the way to maximize total returns if you set the NPV multiplier of future income at 1, that is you value the future as much as the present. Nobody does that, not even the Norwegians.

So what determines the price of oil? Is it the intersection of a textbook competitive supply and demand curve, where supply means marginal production cost and capital amortization? Is Saudi Arabia simply trying to drive US shale (fracking) out of the business? That’s the theory that prevails in the business press. Or is there something more subtle going on?

If producers are basing their supply decisions not just on spot supply and demand but on some sort of future returns calculation, they have three factors to balance:

An NPV curve (Net Present Value) or how they value money today vs. money in the future. This is subjective. War or fear of losing power may make the current leadership of an oil producer unusually short-termist. Oh look, ISIL, Yemen, the Saudi king just died…

Finite stock considerations, in other words recognizing that the stock of oil that each producer has is not infinite. Neither is the world total. Peak oil looked like an overriding concern a few years ago, but with the exploitation of shale and other expensive reservoirs the concern has abated. Oil is still not infinite though, and it’s finite within one or two human lifetimes meaning that producers should care.

The uncertainly of future demand. Sure, demand fluctuates but it’s rising indefinitely or at last not falling, is it? Well that assumption may be dramatically wrong. Oil demand may well drop abruptly because of climate limitations, or because of a technology shift to a superior form of energy such as solar. If you’re an oil producer with foresight you might want to get your money now before that happens.

I find these price-influencing factors at least as plausible as the naive assumption that there’s a price war going on against shale. If they apply, low prices may persist much longer than analysts are expecting, or may revert quickly. Prices may also move much lower or much higher than the cutoff point for shale which appears to be near current levels. We’ll see. But if a lot of volatility happens, and price turns out not to be driven by shale costs, don’t be surprised.

Here’s why I’m voting SYRIZA

I’m in Greece, partly so I can vote in the upcoming Greek elections where the leftist euro-reform party SYRIZA is expected to win. SYRIZA would probably win without me, but I felt it was important to come and vote for this important event. From the tone of the media inside or outside Greece you get the impression that a SYRIZA victory represents some kind of Euro disaster. On the contrary, I feel a SYRIZA government in Greece (or another one like it in Spain or Italy, this is about policy not people) is a bold step towards the solution. I regard it with optimism, even jubilation. Let me tell you why.

Disclaimer: I’m close to some SYRIZA candidates, policy thinkers, or MPs so I may be biased.

First why am I voting in Greece? I don’t live there. It would make more sense for me to vote in the UK where I live and pay taxes, but I don’t get the privilege. I guess native Britons are afraid I might vote for someone worse than David Cameron. Our concept of EU citizenship is still half-baked compared to America so we vote for national elections in our country of origin. We’ll fix it, but until then we have EasyJet democracy. In any case, I don’t feel strongly about voting on Greek affairs. I feel it’s important to vote, via Greece since that’s where I have a vote, for changes in Europe.

At a basic level I feel a duty to avert a bad outcome and push for a good one. If you recall, two elections ago the extreme right scored well in parliamentary elections in Greece. A surprising result that showed rising intolerance, fear, and naive insularity in Greek society. I find it abhorrent. At the same time you saw the Front National in France and Britain’s UKIP, which I see as equally negative but better at hiding behind a veil of respectability, gaining ground. SYRIZA is the polar opposite of these parties. In a climate of extreme right-wing euroskepticism, I feel it’s imperative to vote for leftist euro reform in Greece, Spain, or elsewhere. So that’s a defensive reason to turn up and vote.

The other reason, and the main one, is I don’t want an EU president and finance minister elected only by Germans, running the EU in a way that only suits Germany. Ms Merkel is our de-facto EU president. It’s clearly not Mr Hollande or Mr Juncker. Mr Schäuble is Europe’s finance minister. Whether German citizens like it or not, these officers set policy for the Eurozone, not just for Germany. They run the Eurozone in a way that serves the interests of narrow or short-sighted mostly German capital while driving real economies especially in the south into depression. This is wrong, and we need to use the democratic process to change it. Because of institutional inertia we non-Germans can’t vote for the Eurozone’s de-facto president and finance minister. Eventually these will be elected EU-wide but now, urgently, we must force our German-elected EU leaders to change their policies.

The way to do this is for the governments of peripheral countries to confront Ms Merkel and Mr Schäuble with the failure of their policies. This is what SYRIZA intends to do. It’s not an anti-Europe or anti-Euro party but it has to say, realistically, that current EU policy towards the periphery is not working. Greece’s economy is in depression and it’s debt is unsustainable, as it has been since 2010. Debt restructuring and expansionary monetary policy are needed to end the crisis. A growing consensus of economists agree, so we witness establishment papers like the FT urging the same policies that SYRIZA favors, for pragmatic economic reasons.

What will happen if SYRIZA is elected and starts renegotiating debt and austerity measures with Berlin? I think mainly compromise. EU institutions will have to accept balance sheet losses, which can easily be covered by monetary expansion. Greece will have to live within its means day to day, which given the big drop in incomes since 2010 is now possible. SYRIZA is new so it can enact better tax policy, touching previously untouchable classes, and in return can reasonably ask the EU for welfare assistance towards the poorest citizens. On election night the markets will jitter and possibly overreact, but forcing a Grexit is in nobody’s interest. In the long run markets agree with SYRIZA’s program and EU-wide policies such as quantitative easing that it aligns with.

A win for SYRIZA will be an important event for Europe, not because Greece is important but because some peripheral country needs to stand up for a change in EU policy. It could be Spain or Ireland, but looks like it’ll be Greece. Far from that being a disaster or some new chapter in the Euro crisis, I think it’ll be a triumph of the democratic process and post-crisis Europe’s finest hour.

Insulting the prophet

Presumed Muslim militants (remember, they could very well be provocateurs) have attacked a satirical paper in Paris killing 12 people, including legendary cartoonist Wolinski. How is the West supposed to react? Tolerating these rare events is an option. But if we think there’s a problem to solve, what is the right thing to do?

There are only two ways. One is to convince the overwhelming majority of Muslims that insulting Muhammad is OK. Convince them that no harm is done, or that whatever non-Muslims say in their societies is not worth taking a life over. If the overwhelming majority of spiritual leaders accept that, then you treat a fatwa as an act of war from the few who don’t. It’s a small act of war so you don’t snd the bombs in, but an act of war nonetheless. That was the stance taken by Margaret Thatcher on the Salman Rushdie fatwa, without so much emphasis on the soft convincing part. Typically the West tells Muslims: These are our principles, press freedom first, respect to you on your terms a very distant second or not something we entertain.

The alternative is for the West to censor depicting and insulting Muhammad and treating deviations as hate speech. It’s a revolutionary idea, but perhaps we could agree that antagonising 1.6 billion people is counterproductive. The West does not have sacrosanct freedom of speech. There’s plenty of precedent for censorship, some to protect minorities, most to support government and corporate agendas including copyright. A specific ban on depicting and insulting the prophet is not a slippery slope and certainly falls at the benign end of the spectrum, unless we dislike Muslims or think they’re crazy to take offence. Neither do we have to really eradicate the offending satire. The West just has to say we respect Islam, we make this illegal and will prosecute offenders.

I’m a humanist, mostly utilitarian atheist. To me respect and censorship looks like the option that reduces harm.

It depends if you think Muslim anger is genuine and widespread or the work or oppressors and agitators. Also whether you consider the question open or closed. Free speech exists to resolve open questions. When society reaches a consensus the question is closed, until the consensus is no longer current and it is reopened. The West wants to open a question that Muslims may want closed.

What Scottish independence ought to look like

A real bid for Scottish independence needs to have a manifesto, an emotional statement of values that the new country stands for. It might go something like this:What Scottish independence ought to look like“We the Scots want to end all association with the United Kingdom and the British Empire. Scotland will be a democracy and the queen of England will be regarded as a foreign diplomat in our country. We will nationalise crown estates and lease the palaces to the UK government as embassies, with a view to returning them to Scotland as monuments. Scotland will remove all symbolism relating to Britain or the crown from its institutions and replace it with a Scottish identity.

We recognise and wish to undo the damage done in the worst periods of our history, including the clearances. Following independence there will be a reform of large land holdings in Scotland, which will return the land of large estates to local communities and encourage people to settle in areas that are presently sparse.

We assert that the culture of Scotland is predominantly celtic. We will revive and nurture our celtic heritage and seek to form the strongest cultural ties with Ireland, Brittany, Wales, Cornwall and the isle of Man. We feel European as well as Scottish and will pursue a vision of a strong federal Europe composed of regions rather than nation-states.

Our culture is joyful, and the purpose of culture and the state is to allow all people to thrive and enjoy life to the fullest. We reject puritan repression and all forms of discrimination and control over people. We embrace personal freedom, the pursuit of pleasure, inquiry, and industry, responsible participation in society, and democracy as the means to settle all social affairs.

We believe that people are the same one the the other and the world over, and that a good society is defined by its values. Our borders will be open to all who wish to settle in Scotland and live by those value, as long as can be supported by our small country.”

That’s what an inspired call for independence might look like. I’d vote for that. Or people might vote against it for deeply felt reasons. Either way, when setting out on independence you need to nail your colours to the mast like this. It’s not hard to do, you just have to say it.

That’s what I feel is lacking from tomorrow’s bid. Friends who vote yes for these reasons, or who think we’ll get there post-independence, I hear you but I’m not as optimistic.

Marginal contribution nonsense


Consider two imaginary artists, Jay and Ani. Jay raps about problems not created by women and Ani sings ballads about problems created by men.

Unequivocally Jay is more popular. At almost any time and place more people want to listen to Jay than Ani. Of course popularity is not the only measure of worth. We could make qualitative arguments as to why Ani’s work should be more prominent, and these ultimately translate to predictions about hidden preferences: Maybe everyone will value her more in the future, or some people value her really strongly, or would value her if it weren’t for marketing. We’ll return to these concepts later.  But for now let us concede that the market has ranked Jay’s contribution higher than Ani’s.

How much higher is Jay’s contribution relative to Ani’s? Today, Jay is 50 times richer. Does this mean his contribution to the world through music is 50 times greater? Not so fast!

Suppose our wonderful artists stated their careers in the 1900’s. There’s no amplification and no recording, so all they can do is acoustic concerts in relatively small halls. Jay is still more popular and manages to book 3 times as many gigs. In these circumstances where the artist’s product scales with their labor we can say that yes, Jay’s contribution is 3 times Ani’s or close enough.

Then it’s 1950 and we have amplification. Now people can gather to really big concerts in stadiums. Jay can pull in the big crowd and earns 10 times as much as Ani who’s still doing small gigs. Did Jay just expand his contribution, or did the work of engineers and athletes and builders do that?

Fast forward to 1980 and someone invents CDs. Imagine at first there’s only two CDs on the market, Jay’s work and Ani’s work, and they’re very expensive. Let’s say they’re $100 so consumers can only afford one. Forced to choose, the vast majority of people go for Jay’s CD and he ends up selling 100 times as much as Ani. Is his contribution now 100 times greater? Why? What changed since the acoustic days?

A few years later in the 1990s publishers have figured out how to make CDs cheaply and price them properly, so now they’re $10. Suddenly consumers can afford to buy both Jay’s and Ani’s work, and Jay is now making 50 times Ani’s sales. Did their relative contribution actually change?

Now it’s 2010 and some geeks invented streaming music. They charge $10 a month and let you listen to whatever you like, distributing money to artists according to how often each song is played. Now people have access to both Jay’s and Ani’s work and it turns out that Jay’s work gets played 200 times more than Ani’s. Wait, what happened? Jay now earns 200 times as much as Ani. Does that reflect his contribution, or is his music more everyday entertainment compared to Ani’s deep stuff?

Now let’s revisit the qualitative questions about worth that we parked at the start. Is it correct to reward artists according to how many times their songs get played? What if people value listening to Ani’s songs occasionally, or just having the option to listen? Remember people don’t pay per listen, they pay a flat fee. What if artists were rewarded progressively, say by the log or square root of play counts? What if the money was apportioned by listener ratings, or an even more direct listener choice to support specific artists? Changing the model of what’s essentially interpretation of the subscriber’s preferences completely changes the valuation of each artist’s work.

The moral for economists is that marginal contribution is nonsense. A meritocratic market can rank contributions with plausible veracity but says nothing about the magnitude of contributions. Earnings are an emergent result of technology, ownership, legal structures, trust, marketing, and other factors. These factors determine the shape of the earnings curve – how much winners win and losers lose. A meritocracy, at best, defines who the winners are.

23 better things than Right to be Forgotten

The recent EU legislation called “Right to be Forgotten” is idiotic. The legislators who drafted it are clueless about digital matters, and this as well as the previous “cookie alert” fiasco reduces the EUs standing in any substantial debate. Who is even going to listen to the EU negotiator’s arguments if we’ve just passed such farcical laws. Just to put this in perspective, here’s 23 better things the EU could be legislating in the digital domain. There’s probably many more but 23 was a good number to think of.

Consumer rights:

  • One copyright region: Treat the EU as one region with respect to book, music, movie, etc. rights so that buying across member states is allowed, all products are available everywhere, and people can keep their purchases and subscriptions when they move.
  • One communications region: Treat the EU as one with respect to mobile, land phone, and internet providers. No roaming charges, no long distance pricing per country, no other per-country differentiation.
  • Net neutrality: Treat all data equally irrespective of content or source. The same principle that has long been held in the US, and is currently under threat, should be legally guaranteed also in the EU.
  • Open data standards: Products that achieve significant market share in consumer markets (such as office, photo management, etc) must allow import and export of the customer’s data in a format not controlled by any vendor.
  • Own your data: Online services, including ones that are provided free, must allow each user to delete or migrate (download, upload) their data in a format not controlled by any vendor.
  • Buy means buy: Vendors of digital rights such as books, music, movies etc. must use words such as “rent” or “subscription” to indicate rights that are time limited. Words like “buy” or “own” must apply only to permanent and transferrable rights. The selling of other kinds of rights such as “lifetime subscription” must be approved by regulators and labelled on a case by case basis.
  • Commitment for loyalty: Providers of online services that achieve broad market share (such as gmail, facebook, online games, music streaming etc.) must at any time provide a public guarantee that the service will remain available for a minimum of 5 years, or must set a binding date for termination of the service within 5 years.
  • After we’re gone: Providers or permanent, lifetime, or other long-term digital rights (such as iTunes, Google Play, Kindle, Steam) must provide a transition plan in case of service termination, where a customer’s rights either become DRM-free data or are transferred to an equivalent provider free of charge.

Identity, anonymity, and pseudonymity:

  • Open identity: Services that provide a digital identity to the general public (such as facebook, google+, twitter, etc.) must interoperate so that a person can use the identity provided by one service to participate fully in any other service. Log in to facebook with google+ and vice versa, merge feeds, post across services, etc.
  • Pseudonymity: Services that provide an online identity must allow members to register without revealing their true identity to the provider. Services must display whether an identity is verified but otherwise the service treats identities equally (what google+ does).
  • Straight privacy: Online services must display prominently in plain language and less than 1000 words whether the service provides the following guarantees: No revealing the member’s identity; no tolerance for “outing” by a third party; a mechanism to stop impersonation; a means to block unwanted contact; and no revealing a member’s identity or contact details indirectly through pictures, location, social links, etc. Once set, privacy guarantees may never be reduced, even after the service is discontinued.
  • Proper names: Services that provide an online identity must accept member’s names according to the same criteria, if any, accepted by society and must not impose length, word number, format, or other arbitrary restrictions.

Transparency and data security:

  • No back doors: Vendors of digital equipment such as computers, system software, mobile devices etc. guarantee the equipment is free of back doors that would allow a vendor, government authority, or other party to gain access to the user’s data. Vendors must offer return and refund of all affected equipment regardless of age, and may be liable to damages.
  • No recording: Vendors of consumer equipment that can record or transmit audio, video, location, or other data in its vicinity must include physical switches, visual signals, or simple software controls to ensure any recording has the consent of the owner and people nearby.
  • Know your spy: Providers of online services such as cloud computing, social networks, etc. must clearly indicate one country or jurisdiction that a particular user’s data is legally subject to. Surveillance, censorship, etc. may be carried out by that country only. Providers must publish a quantitative anonymised report of such incidents within 31 days.
  • Competent security: Vendors of digital equipment and providers of communication or online services must exercise competent care to ensure that user data is not intercepted by personnel other than those with a technical need to know, by other users of the service, or by outsiders. Providers must inform the public of any data breaches within 3 days and publish a record of all past breaches.

Public service education, self-help, and awareness of limitations:

  • Encrypt it: Governments and telecommunications providers must inform the public that communications, especially email, may be under surveillance and allow and encourage the use of encryption for all communications. Public authorities should educate people, especially young adults, on basic encryption and password discipline.
  • Do not track: Authorities, employers, ISPs, and system software vendors must inform the public that web activity is typically tracked and provide opt-outs such as private browsing. The limitations of these opt outs must be made clear (like Google does).
  • Insecurity questions: Banks and online services must not use demographic information (such as date of birth, mother’s maiden name) or non-secret personal information (such as pet’s name, first school) to unlock customer accounts. Such information is easily captured by attackers. In-person identification with government-issued ID, or strong passwords must be used.
  • Smell the fish: Corporations,and other entities that deal with the public must publish, within one link of their front page, a complete list of web addresses (domains), phone numbers, brand names, or any other channels through which they interact with the public. Authorities must educate the public to check all communications against this list to recognise phishing attempts.
  • Sharing is forever: Authorities and online services such as facebook, blogs, forums, etc. must educate the public, especially young people, that any material posted online is effectively permanent and may be seen by people beyond the intended audience. Everyone has a moral right to renounce their past opinions or behaviour and a legal right to be protected from discrimination on that basis, but people have no right to erase their past from the public record.
  • No suppression: Governments and online services must inform the public that once data such as pictures, recordings, facts, etc. is published online, rightly or wrongly, there is no way to suppress such data. Authorities may pursue a few criminal or politically significant cases, and individuals and rights holders may have civic recourse to “take down” data from specific sites, but there isn’t and there should not be a mechanism of total suppression.
  • Delete is not enough: Vendors of digital devices such as computers, mobile devices, cameras, etc. must provide a simple and usable method to erase unwanted data from the device securely (like Macs do). Authorities and device vendors must educate the public that “delete” is not enough and they must use the secure erase option whenever dealing with sensitive or embarrassing data.

Legislators, in the EU or elsewhere, could perhaps concentrate on a modern and realistic set of digital principles like these instead of retrograde efforts such as fearing cookies and abetting the “reputation management” industry.