Dalio on Debt

Review of Ray Dalio's "How Countries Go Broke". 

It is difficult to focus on important policy issues, as the national media is led around by the president's revolving fixations like a cat by a laser pointer. But focus we must, if we are not going to decline faster than we already are due to incompetent and corrupt leadership. One looming area is the federal budget. As a card-carrying acolyte of MMT economics, it is hard to say this, but there are limits to federal borrowing. 

A recent book by super-investor Ray Dalio lays out a set of patterns, which he calls the big cycle, that tracks government solvency over roughly eighty year cycles, which typically start out tight and solvent, using relatively hard money, and end up overextended and in crises that are resolved by some mix of inflation, depreciation, and restructuring / reneging on debts. It is a perpetual and international set of cycles. As an investor, he is not much of a writer or economist, so the book is repetitive, poorly written, and markedly incurious about the origins of the patterns he finds. But still, it makes some significant points. 

First is that the cycle happens for all monetary systems, whether fiat and borrowing domestically, or hard currency and borrowing in foreign currencies. But the consequences are far more severe for the latter than the former. Having your own currency, as MMT economists well know, is a blessing when you want to borrow and manage a domestic economy. Second is that even with a fiat currency, the limits are different, but there still are limits to government borrowing, which we are gradually running into. 

Trajectory of US government debt.

Trajectory of interest compared to other US government spending.

At the beginning of a big cycle, the foregoing crisis has scared everyone into hard currencies, like gold, or some properly revalued local currency backed by a solvent government. Probity is everything. Later on in the cycle, the money is softened up due to increased borrowing and laxer standards. Eventually, there are private debt crises, where the central bank is obliged to take on a large part of the private debt and expand its balance sheet. Eventually, the central bank no longer bothers to unwind its balance sheet after such crises, and holds on to both private debts and government debt that it monetizes. And at the far end of the cycle, the debt service paid by the government threatens to become so onerous that a crisis develops- investors flee, interest rates go up, inflation goes up, and the debts, fiat though they are, become unsustainable. There is "restructuring".

This is a big cycle because it is superimposed on the regular business cycle that takes much shorter time- something like five to ten years. And it concerns the government's management of the money, not the private sector's vacillating enthusiasm about business conditions. Turkey is currently in the far end of such a cycle, plunged into high inflation and struggling to find a way to put itself back on a sound basis after massive mismanagement. And obviously the US is somewhere late in the same continuum. The issue is not the size of the federal debt, or its relation to GDP, but the amount we have to pay in interest from the annual budget. That is heading towards one trillion dollars, and if interest rates remain where they are, (given the inflationary pressures from the current administration's bad policies such as tariffs, oil shortages, and tax cuts), there is danger of a growing spiral of higher revenues going to interest, and less money available for government functions, increased monetization by the central bank, and ultimately, loss of faith in the currency. 

A fascinating case is that of Japan, which both Dalio and MMT economists focus on for its unique approach to monetary policy. Since its debt bubble in the 90's, Japan has shifted lots of private debt and public debt to the central bank's balance sheet, which stands at about three times GDP- far beyond what other countries would deem acceptable. This can be sustained because the bank of Japan has kept interest rates very low- in the zero to one percent range. Thus the cost of all this debt is manageable, and will remain so unless and until interest rates go up. But this also means that the bank can not use interest rates to manage the economy and foreign exchange. In consequence, Japan's currency has weakened enormously on the international currency markets, making imports (such as of oil, significantly) much more expensive, while improving the competitive position of Japanese export manufacturers. Additionally, Japanese banks and businesses have been reluctant to unwind bad debts, which leads to the stagnation and lack of overheating that the low interest rates would otherwise foster. Everyone kicks the can down the road, waiting for either a crisis, or a resolution, neither of which seem in the offing. 

But more interesting than the economic drama is the larger cultural cycle which Dalio alludes to as well. For this is not just an economic big cycle, but something deeper. For the US, Dalio starts with the civil war, but I think it is much more instructive to include the cycle before, which started with the Revolutionary War. These wars, plus World War 2, mark the three big cycles that the US has been through. Each started with war, and with currency disruption. The Continental Congress issued reams of Continental currency that had, by the end of the war, become worthless. So, one big objective of the ensuing constitutional order was to put the newly minted dollar on a sound footing, as also the finances of the federal government. This led to decades of growth, prosperity, and (the war of 1812, and various Native American extermination campaigns aside) peace. The middle of this period also saw a progressive cultural flowering, with the transcendentalists, various experimental communes like Brook Farm, and the Great Awakening. All this stability allowed people to envision a better society. However, what happened instead was increased division and conflict, leading to the Civil War. 

Here again, paper money was issued and resulted in significant inflation, as the accumulated hatred tore the country apart. But in its wake, prosperity again reigned, with rapid technological advancement, peace, and, eventually, and progressive movements for women's suffrage, temperance, anti-corruption and anti-monopoly, and the Settlement movement. All this was reset in the Depression and ensuing world war, which then began a new cycle of conflict avoidance enshrined by the US role in the UN, NATO, and a very sedate and conventional media environment. As peace and stability took hold, a new progressive movement rose- the hippies, the anti-war, civil rights, and feminist movements. Did these foster peace and togetherness? Not exactly. One can sense that the culture was eager for truth, for not sugar-coating things anymore, for honesty and, indeed, for conflict. Humor shows became more cutting, movies more biting, tinged with horror and apocalypse. And here we are, in a country where the two parties can't stand each other and are headed towards something that smells distinctly martial.

All this conflict has smothered discussions of actual policy, which anyway has gone to the dogs in the new administration. For example, a high level of federal borrowing is more defensible if it builds US productive capacity, through investments in future-oriented technology and education. But the current adminstration is spending billions to cancel renewable energy contracts that had already been entered into. This is money not just down the drain, but subtracted from future productive capacity. 

Is Dalio sanguine about our prospects? Not particularly. But nor does he view them as terribly dire. In the first place, the gulf between sovereign, fiat-issuing countries and others comes out starkly in his many graphs and analyses. The latter get into much more difficult straits when they borrow too much of someone else's money. Secondly, rather modest adjustments now, to federal spending, to taxation, and to interest rate policy, can change the trajectory we are on, from spiraling to sustainable. I would focus particularly on the tax side, which has so egregiously been attacked by the current administration, in its contempt for making the rich pay anything. Dalio mentions, however, that the most consequential lever is that of interest rates, which, as Japan shows, can, if low enough, make eye-watering debts quite easy to carry. But given a system where we want to retain the interest rate as a lever of macro-economic policy, (and capitalist motivation), it would be best to approach rates not by fiat, as Japan has done, but by good policy on the other fronts, which will naturally lead to lower interest rates, if properly handled. 

• Are we headed into the China century?
• A pathetic spectacle of weakness and decline.

Reading the Eloquent Brain Regions

Telling the difference between inner and outer speech.

As we understand more about how the brain works, we can decode what is going on inside. But sometimes, the result is oversharing! A recent paper discussed how one lab is filtering out inner speech from intentional outer-directed speech in their BCI: brain-computer-interface. 

After a very long road of brain research, we understand a great deal of its computational mechanism. There is no soul, no mystery other than the amazingly intricate interdigitation of billions of neurons, painstakingly architected during evolution to make a rapid learning and response machine. A recent paper described progress on a brain-computer interface, whereby people with brain damage can be helped to communicate from undamaged portions. They found that unspoken thoughts were also detectable, in addition to the attempted speech they were trying to help their subjects express. This led the researchers to provide a switchable interface where the subject could turn that part off or on, at will!

Updated view of speech production areas in the brain. v stands for ventral, PrCG stands for precentral gyrus, the general motor control area. Wernicke's area is known to participate in general language construction / comprehension.

The human facility for speech is unique among animals, and while many animals vocalize and communicate with some complexity, none have been found with the richness of human speech. As a recent evolutionary innovation, there have been some rough edges, but we have quickly become utterly dependent on speech for all aspects of social life. In the brain, speech production happens in motor areas, which reside in a vertical stripe of the cortex forward of the sensory map. It had been thought that Broca's area was the main region and was purely a motor conduit, constructing from the sensory and higher regions the signals sent to innervate the larynx, tongue, lips, and other vocal apparatus. But it turns out to be more complicated. More of the pre-central gyrus (the motor cortex) is involved, and also, when one records from these regions, one gets many kinds of signals, including speech perception, not just production, and other aspects of audio perception and premotor thoughts about communication- phonological working memory, silent rehearsal, etc. Indeed, Broca's area appears to have higher-level roles more in sentence construction rather than in detailed motor control and articulation.

The current authors took off from these recent insights and placed high-density electrodes (about 60 electrodes in each of several locations) up and down the pre-central gyrus in patients that had been rendered inarticulate due to stroke or ALS. Even though this sampling is unbelievably crude compared to the brain's own density of computation, it was enough to generate recognizable speech.

"We discovered that inner speech is robustly represented and demonstrated a proof-of-concept real-time inner-speech BCI that can decode self-paced imagined sentences from a large vocabulary (125,000 words). We also found that aspects of free-form inner speech could be decoded even during tasks where participants were not explicitly instructed to use inner speech. ... To prevent unintended output during inner-speech BCI use, we also demonstrate a system where an internally spoken “keyword” can be detected with high accuracy, enabling a user to “lock” and “unlock” the system."

Outline of the experiments. Electrode micro-arrays were implanted in several place up and down the motor area, or precentral gyrus (C). The computer, using large language models to make sense of the array signals, then interpreted as the user was prompted (or not prompted) for attempted speech.

Given enough computer power, even these patchy signals from the subject's brains could be processed into something useful. The researchers found that the same algorithms that recover attempted speech also detect silent speech, reading, and even listening. This implies perhaps that we listen sympathetically, struggling in our speech production areas when a speaker struggles, and are prone to following / copying other speakers. Or else it just reiterates that these areas are not pure motor control regions, but participate in a more integrated way in the hearing/thinking/speaking circuit. Fortunately, the signals differ significantly in amplitude, so can be told apart. The accuracy of all this is not great, a shown below, but it is surely better than being locked in.

The results (C) of interpretation of inner speech, as opposed to more strongly attempted speech, are far from perfect, but give some indication of what the subject is thinking about.

• Galloping inequality.
• Corruption in Puerto Rico.
• Just because you are knocked out does not mean that your brain isn't working at a more local level.
• Gross malpractice at the NIH.
• The racism is ever louder on the right.

Peak Carbon?

Are we at peak oil, perhaps even peak burning? Thanks to Donald Trump, renewables are looking better than ever.

It turns out that using the oil weapon opens people's eyes to the alternatives. The Saudis have recognized for a long time that stability in oil pricing and supply was the way to keep the world addicted. But in the current wars, Russia has used the natural gas weapon, and Iran has used the oil weapon. Now the addicts realize what a thin needle it is that brings them the fossil fix. After two months of closure on the Strait of Hormuz, the economic responses around the world have been surprisingly muted. While Paul Krugman rang the alarm of $200/barrel oil, prices have stabilized around $110 or so. It turns out that demand is more elastic than anticipated, at least it has been while supplies are still in transit. However, as physical shortages begin to hit, prices may rise again.

As a matter of strategy, the US administration is clearly flailing, unwilling to recognize a loss, and callous about the worldwide harms being imposed by its fruitless dithering. Is a blockade of Iran going to break its government? That is highly unlikely. They have been through much worse, such as during their war with Iraq. Trump's attacks and insults have rallied the population, entirely contrary to the administration's intention, but entirely foreseeably. Iran's sensitivity to economic pain is much lower than ours. And, as the administration was already doing on an ongoing basis prior to its war, it continues to make enemies of the US around the world, more so with each passing day that shipping in the Persian Gulf is stalled.

Paul Krugman bemoaned the "demand destruction" that continued shortages and high prices would cause, which may lead to economic slowdowns, perhaps recession. However I welcome it. It represents conservation of this precious resource, and, one might say, more realistic pricing that brings in, at least to a small degree, the widespread harms of fossil fuels. When one adds volatility and geostrategic dependencies, on top of the gross environmental harms, and what is now an economic disadvantage of fossil fuels when compared with renewable energy, the solution is clear, if not easy. The transition to renewable energy is going to accelerate.

Trend of world-wide carbon emissions.

Currently, the world is at the cusp of still-rising carbon emissions. This means that, even after all the climate conferences, and the reports, the activism, and the technological development, humanity as a whole is still burning more fossil carbon every year than the year before, and thus increasing the CO2 concentration in the atmosphere ever faster, and driving the climate crisis to ever-accelerating harms and disasters. Is it possible that this strategic-economic crisis, brought on by the blundering of a demented US administration- one that has done all in its power to deny climate change and scuttle the energy transition- will finally turn the tide? Could we be at peak carbon? And if so, will the downslope of emissions be faster than the upslope, in this slow-motion catastrophe? One can see that the US is already past peak carbon, and the state of California stands at 75% of the peak carbon emissions, which happened back in 2004. The upslope has been driven by highly uneven, and gradual, technological development and increased population. The downslope will be driven by the much more globally integrated rise of renewable technologies, so it has a chance of happening at a faster pace, despite the challenges of transitioning difficult economic sectors like trucking and aviation.

With the economic tailwinds of cheaper energy storage technologies, coupled with other advances in geothermal, solar, and wind power collection, the transition is inevitable. But public policy can make it faster or slower. The Biden administration worked towards the future, while the current administration works against it. Outside the US, China is enabling both its own transition and those of all other countries by leading extremely efficient solar and storage manufacturing. Those economics are going to eliminate new coal plant construction, and eventually use of all fossil fuels. China now sells more EV than fossil-based automobiles. While it has a prodigious fleet of coal-burning power plants, and is still building new ones, the overall level of coal power generation has leveled off, as it closes plants close to reduce pollution in sensitive urban areas.

While ironies abound, the important part of the story is that the biosphere is baking and needs help as fast as possible. If that help comes through the narcissism of small-minded tyrants, so be it. 

• Caesar, King, tomato, tomahto.
• Coding is toast.
• Renewable energy has beaten methane in the US electricity generation.
• Krugman chimes in.